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:
September 30, 2010




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 Its Charter)








Delaware
            
            14-1623047(State or other jurisdiction of
      incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)





18th
Floor, Teda Building


87 Wing Lok Street, Sheungwan, Hong
Kong


People’s Republic of China


(Address of principal executive offices,
Zip Code)




852-2543-2290


(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 theSecuritiesExchange
Actof 1934during the preceding12 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. YesxNo ̈





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





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





Large accelerated filer   ̈                                                                                                Accelerated
filer   ̈


Non-accelerated filer   ̈(Do not check if a
smaller reporting
company)             Smaller
reporting company  x





Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).  Yes ̈Nox





The number of shares outstanding of each
of the issuer’s classes of commonstock, as ofNovember 11, 2010is as follows:





Class of
      Securities
            
            Shares
      OutstandingCommon Stock, $0.001 par
      value
            
            46,562,955












CHINA
PRECISION STEEL, INC.







Quarterly
Report on Form 10-Q


Three
Months Ended September 30, 2010








TABLE
OF CONTENTS




PART
I
 FINANCIAL
INFORMATION
 
 Item
      1.
                Financial
      Statements
                1Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                18Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                27Item
      4.
                Controls
      and Procedures
                27
 
 PART
II
 OTHER
INFORMATION
 
 Item
      1.
                Legal
      Proceedings
                28Item
      1A.
                Risk
      Factors
                28Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                28Item
      3.
                Defaults
      Upon Senior Securities
                28Item
      4.
                (Removed
      and Reserved)
                28Item
      5.
                Other
      Information
                28Item
      6.
                Exhibits
                28










PART
I


FINANCIAL
INFORMATION




ITEM
      1.
            FINANCIAL
      STATEMENTS.











CHINA
PRECISION STEEL, INC.


CONSOLIDATED FINANCIAL
STATEMENTS


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009





INDEX
TO FINANCIAL STATEMENTS











Financial
Statements





Page(s)Consolidated
      Balance Sheets (unaudited) 2
            1Consolidated
      Statements of Operations and Comprehensive Income
      (unaudited) 3
            2Consolidated
      Statements of Changes in Stockholders’ Equity (unaudited) 4
            3Consolidated
      Statements of Cash Flows (unaudited) 5
            4Notes
      to Consolidated Financial Statements (unaudited) 6-18
            5










China
      Precision Steel, Inc. and SubsidiariesConsolidated
      Balance Sheets




September
      30,
            
            
            June
      30,Notes
            
            
            2010
            
            
            2010Assets
            
            (Unaudited)Current
      assetsCash
      and cash equivalents
            
            
            
            
            $
            12,653,057
            
            
            $
            29,036,706Accounts
      receivableTrade,
      net of allowances of $1,027,410 and $1,013,744at
      September 30, 2010 and June 30, 2010, respectively
            
            5
            
            
            
            33,814,865
            
            
            
            39,598,845Bills
      receivable
            
            
            
            
            
            
            4,789,873
            
            
            
            4,760,816Other
            
            
            
            
            
            
            1,146,468
            
            
            
            1,369,219Inventories
            
            6
            
            
            
            31,392,194
            
            
            
            28,522,198Prepaid
      expenses
            
            
            
            
            
            
            570,650
            
            
            
            534,882Advances
      to suppliers, net of allowance of $1,665,573 and$1,643,419
      at September 30, 2010 and June 30, 2010, respectively
            
            7
            
            
            
            26,762,160
            
            
            
            13,959,206Total
      current assets
            
            
            
            
            
            
            111,129,267
            
            
            
            117,781,872Property,
      plant and equipmentProperty,
      plant and equipment, net
            
            8
            
            
            
            75,802,793
            
            
            
            69,907,194Construction-in-progress
            
            9
            
            
            
            3,772,151
            
            
            
            3,983,45079,574,944
            
            
            
            73,890,644Intangible
      assets, net
            
            10
            
            
            
            1,859,332
            
            
            
            1,844,995Goodwill
            
            
            
            
            
            
            99,999
            
            
            
            99,999Total
      assets
            
            
            
            
            
            $
            192,663,542
            
            
            $
            193,617,510Liabilities
      and Stockholders' EquityCurrent
      liabilitiesShort-term
      loans
            
            11
            
            
            $
            26,263,965
            
            
            $
            25,965,421Accounts
      payable and accrued liabilities
            
            
            
            
            
            
            6,197,537
            
            
            
            9,952,109Advances
      from customers
            
            
            
            
            
            
            2,811,901
            
            
            
            3,266,377Other
      taxes payables
            
            
            
            
            
            
            3,974,265
            
            
            
            3,868,220Current
      income taxes payable
            
            
            
            
            
            
            5,657,572
            
            
            
            5,393,000Total
      current liabilities
            
            
            
            
            
            
            44,905,240
            
            
            
            48,445,127Long-term
      loans
            
            12
            
            
            
            18,319,584
            
            
            
            18,075,914Stockholders'
      equity:Preferred
      stock: $0.001 per value, 8,000,000 sharesauthorized,
      no shares issued and outstandingat
      September 30, 2010 and June 30, 2010, respectivelyCommon
      stock: $0.001 par value, 62,000,000 sharesauthorized,
      46,562,955 and 46,562,955 issued and outstandingat
      September 30, 2010 and June 30, 2010, respectively
            
            
            
            
            
            
            46,563
            
            
            
            46,563Additional
      paid-in capital
            
            
            
            
            
            
            75,642,383
            
            
            
            75,642,383Accumulated
      other comprehensive income
            
            
            
            
            
            
            12,328,713
            
            
            
            10,630,975Retained
      earnings
            
            
            
            
            
            
            41,421,059
            
            
            
            40,776,548Total
      stockholders' equity
            
            
            
            
            
            
            129,438,718
            
            
            
            127,096,469Total
      liabilities and stockholders' equity
            
            
            
            
            
            $
            192,663,542
            
            
            $
            193,617,510




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




1






China
      Precision Steel, Inc. and SubsidiariesConsolidated
      Statements of OperationsFor
      the Three Months Ended September 30, 2010 and 2009(Unaudited)




Notes
            
            
            2010
            
            
            2009Sales
      revenues
            
            
            
            
            $
            33,896,455
            
            
            $
            17,041,989Cost
      of goods sold
            
            
            
            
            
            31,512,370
            
            
            
            16,338,630Gross
      profit
            
            
            
            
            
            2,384,085
            
            
            
            703,359Operating
      expensesSelling
      expenses
            
            
            
            
            
            110,205
            
            
            
            31,809Administrative
      expenses
            
            
            
            
            
            871,470
            
            
            
            578,698Allowance
      for bad and doubtful debts
            
            
            
            
            
            -
            
            
            
            117,117Depreciation
      and amortization expense
            
            
            
            
            
            44,160
            
            
            
            43,738Total
      operating expenses
            
            
            
            
            
            1,025,835
            
            
            
            771,362Income/(loss)
      from operations
            
            
            
            
            
            1,358,250
            
            
            
            (68,003
            )Other
      income/(expense)Other
      revenues
            
            
            
            
            
            1,518
            
            
            
            19,922Interest
      and finance costs
            
            
            
            
            
            (465,113
            )
            
            
            (228,343
            )Total
      other expense
            
            
            
            
            
            (463,595
            )
            
            
            (208,421
            )Income/(loss)
      from operations  before income tax
            
            
            
            
            
            894,655
            
            
            
            (276,424
            )Provision/(benefit)
      for income tax
            
            14Current
            
            
            
            
            
            
            250,144
            
            
            
            (1,233
            )Total
      income tax expense/(benefit)
            
            
            
            
            
            
            250,144
            
            
            
            (1,233
            )Net
      income/(loss)
            
            
            
            
            
            $
            644,511
            
            
            $
            (275,191
            )Basic
      earnings/(loss) per share
            
            15
            
            
            $
            0.01
            
            
            $
            (0.01
            )Basic
      weighted average shares outstanding
            
            
            
            
            
            
            46,562,955
            
            
            
            46,562,955Diluted
      earnings/(loss) per share
            
            15
            
            
            $
            0.01
            
            
            $
            (0.01
            )Diluted
      weighted average shares outstanding
            
            
            
            
            
            
            46,562,955
            
            
            
            46,562,955Components
      of comprehensive income/(loss):Net
      income/(loss)
            
            
            
            
            
            $
            644,511
            
            
            $
            (275,191
            )Foreign
      currency translation adjustment
            
            
            
            
            
            
            1,697,739
            
            
            
            75,192Comprehensive
      income/(loss)
            
            
            
            
            
            $
            2,342,249
            
            
            $
            (199,999
            )




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




2




China
      Precision Steel, Inc. and SubsidiariesConsolidated
      Statements of Changes in Stockholders' EquityFor
      the Three Months Ended September 30, 2010AccumulatedAdditional
            
            
            Other
            
            
            
            
            
            TotalOrdinary
      Shares
            
            
            Paid-in
            
            
            Comprehensive
            
            
            Retained
            
            
            Stockholders'Share
            
            
            Amount
            
            
            Capital
            
            
            Income
            
            
            Earnings
            
            
            EquityBalance
      at June 30, 2010
            
            
            -
            
            
            
            46,563
            
            
            
            75,642,383
            
            
            
            10,630,975
            
            
            
            40,776,548
            
            
            
            127,096,469Foreign
      currency translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,697,738
            
            
            
            -
            
            
            
            1,697,738Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            644,511
            
            
            
            644,511Balance
      at September 30, 2010 (Unaudited)
            
            
            -
            
            
            $
            46,563
            
            
            $
            75,642,383
            
            
            $
            12,328,713
            
            
            $
            41,421,059
            
            
            $
            129,438,718




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




3




China Precision Steel, Inc. and
      SubsidiariesConsolidated
      Statements of Cash FlowsFor
      the Three Months Ended September 30, 2010 and 2009(Unaudited)2010
            
            
            2009Cash
      flows from operating activitiesNet
      income/(loss)
            
            $
            644,511
            
            
            $
            (275,191
            )Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
      and amortization
            
            
            1,918,682
            
            
            
            1,210,759Allowance
      for bad and doubtful debts
            
            
            -
            
            
            
            117,117Inventory
      provision
            
            
            -
            
            
            
            42,534Net
      changes in assets and liabilities:Accounts
      receivable, net
            
            
            6,594,117
            
            
            
            661,741Inventories
            
            
            (2,485,506
            )
            
            
            (3,229,520
            )Prepaid
      expenses
            
            
            (33,514
            )
            
            
            16,231Advances
      to suppliers
            
            
            (12,614,539
            )
            
            
            723,173Accounts
      payable and accrued expenses
            
            
            (3,886,917
            )
            
            
            2,149,699Advances
      from customers
            
            
            (498,508
            )
            
            
            432,425Other
      taxes payable
            
            
            53,900
            
            
            
            (2,151,427
            )Income
      taxes payable
            
            
            191,872
            
            
            
            -Net
      cash (used in) operating activities
            
            
            (10,115,902
            )
            
            
            (302,459
            )Cash
      flows from investing activitiesDeposit
      for plant and machinery
            
            
            -
            
            
            
            (2,197,384
            )Purchase
      of property, plant and equipment, including construction
      in  progress
            
            
            (6,542,428
            )
            
            
            (749,049
            )Net
      cash (used in) investing activities
            
            
            (6,542,428
            )
            
            
            (2,946,433
            )Cash
      flows from financing activitiesLoan
      proceeds
            
            
            -
            
            
            
            3,735,552Repayments
      of short-term loans
            
            
            (51,479
            )
            
            
            (439,477
            )Net
      cash (used in)/provided by financing activities
            
            
            (51,479
            )
            
            
            3,296,075Effect
      of exchange rate
            
            
            326,160
            
            
            
            6,641Net
      (decrease)/increase in cash
            
            
            (16,383,649
            )
            
            
            53,824Cash
      and cash equivalents, beginning of period
            
            
            29,036,706
            
            
            
            13,649,587Cash
      and cash equivalents, end of period
            
            $
            12,653,057
            
            
            $
            13,703,411




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




4





China Precision Steel,
Inc.


Notes to the
Consolidated Financial Statements


(Unaudited)





1.   Description of
Business





On December 28, 2006, China Precision
Steel, Inc. (the “Company”, “CPSL” 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 spinoff 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 spinoff 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, 2010 and 2009. It has three wholly-owned subsidiaries, Shanghai
Chengtong Precision Strip Company Limited (“Chengtong”), Shanghai Tuorong
Precision Strip Company Limited (“Tuorong”), and Blessford International Limited
(“Blessford International”).





Chengtong was registered on July 2, 2002
in Shanghai, the People’s Republic of China (the “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 liability. On August 22, 2005, the authorized registered
capital of Chengtong was increased to $15,220,000 and on December 11, 2007, it
was further increased to $42,440,000. Pursuant to a 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 were approved and the transformation of Chengtong from a Sino-foreign
joint investment enterprise to a wholly foreign owned enterprise (WFOE) was
granted.





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 Company 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 the entire equity interest in Blessford International Limited, a
British Virgin Islands company, for a cash consideration of $100,000. Blessford
International does not conduct any business, but it owns a single subsidiary,
Shanghai Blessford Alloy Company Limited (“Shanghai Blessford”), that is a
wholly-foreign owned enterprise with limited liability. Shanghai Blessford was
registered on February 24, 2006 in Shanghai, the PRC, with a registered capital
of $12,000,000 and a defined period of existence of 50 years from February 24,
2006 to February 23, 2056. On May 27, 2008, the authorized registered capital
was increased to $22,000,000. We intend to hold Blessford International as a
shell subsidiary. As used herein, the “Group” refers to the Company, PSHL,
Chengtong, Tuorong, Blessford International and Shanghai Blessford on a
consolidated basis.





The Company’s principal activities are
conducted through its two operating subsidiaries, Chengtong and Shanghai
Blessford. Chengtong and Shanghai Blessford are niche precision steel processing
companies principally engaged in the manufacture and sale of cold-rolled and
hot-rolled precision steel products and plates for downstream 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.




5




2.     Basis of
Preparation of Financial Statements





The financial statements have been
prepared in order to present the consolidated financial position and
consolidated results of operations in accordance with accounting principles
generally accepted in the United States of America (“US GAAP”) and are expressed
in terms of US dollars (see Note 3 “Foreign Currencies”
below).





The accompanying unaudited consolidated
financial statements as of September 30 and June 30, 2010and for the periods ended September 30,
2010and 2009have been prepared in accordance with
US GAAP and with the instructions to Form 10-Q and Regulation S-X applicable to
smaller reporting companies. In the opinion of management, these unaudited
consolidated financial statements include all adjustments considered necessary
to make the financial statements not misleading. The results of operations for
the three months ended September 30, 2010are not necessarily indicative of the
results to be expected for the full year ending June 30, 2011.





3.Summary of
Significant Accounting Policies





The following is a summary of
significant accounting policies:





Accounting Standards
Codifications -In
June 2009, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Codifications (“ASC”) 105 “Generally Accepted Accounting
Principles”. This section designates ASC as the source of authoritative
U.S. GAAP.  ASC 105 is effective for interim or fiscal periods ending
after September 15, 2009.  We have used the new guidelines and
numbering system when referring to GAAP inthe accompanying financial
statements. The adoption of
ASC 105 did not have a material impact on our financial position, results of
operation or cash flows.





Cash and Cash
Equivalents -TheCompany 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 sheets for cash and cash equivalents approximate their fair
value.





Accounts
Receivable– Credit
periods vary substantially across industries, segments, types and size of
companies in the PRC where we operate our business. Because of the niche
products that we process, our customers are usually also niche players in their
own respective segment, who then sell their products to end product
manufacturers. The business cycle is relatively long, as well as the credit
periods. The Company offers credit to its customers for periods of 60 days,
90 days, 120 days and 180 days. We generally offer longer credit terms to
long-standing recurring customers with good payment histories and sizable
operations.  Accounts receivable are recorded at the time revenue is
recognized and are stated net of allowance for doubtful
accounts.





Allowance for
Doubtful Accounts -The Company maintains an allowance for
doubtful accounts based on its assessment of the collectability of the accounts
receivable. Management determines the collectability of outstanding accounts by
maintaining regular communication with such customers and obtaining confirmation
of their intent to fulfill their obligations to the Company. Management also
considers past collection experience, our relationship with customers and the
impact of current economic conditions on our industry and market. However, we
note that the continuation or intensification of the current global economic
crisis may have negative consequences on the business operations of our
customers and adversely impact their ability to meet their financial
obligations.  To reserve for potentially uncollectible accounts
receivable, management has made a 50% provision for all accounts receivable that
are over 180 days past due and full provision for all accounts receivable over 1
year past due.  From time to time, we will review these credit
periods, along with our collection experience and the other factors discussed
above, to evaluate the adequacy of our allowance for doubtful accounts, and to
make changes to the allowance, if necessary.  If our actual collection
experience or other conditions change, revisions to our allowances may be
required, including a further provision which could adversely affect our
operating income, or write back of provision when estimated uncollectible
accounts are actually collected.  AtSeptember 30, 2010 andJune 30, 2010, the Company had
$1,027,410and $1,013,744of allowances for doubtful accounts,
respectively.





Bad debts are written off for past due
balances over two years or when it becomes known to management that such amount
is uncollectible.  Provision for bad debts recognized for thethree monthsendedSeptember30, 2010 and 2009 wereniland $117,117, respectively. Theprioryear charge reflects a provision for
doubtful accounts based on our policy described above. Our management is
continually working to ensure that any known uncollectible amounts are
immediately written off as bad debt against outstanding
balances.




6




Inventories
-Inventories are
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.





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. Costs of conversion of
inventories include fixed and variable production overheads, taking into account
the stage of completion.





Intangible Assets and
Amortization– Intangible assets represent land use
rights in China acquired by the Company and are stated at cost less
amortization. Amortization of land-use rights is calculated on the straight-line
method, based on the period over which the right is granted by the relevant
authorities in China.





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
to its suppliers when placing purchase orders, for a guaranteed minimum delivery
quantity at future times when raw materials are required. The advance is seen as
a deposit to suppliers and guarantees our access to raw materials during periods
of shortages and market volatility, and is therefore considered an important
component of our operations. Contracted raw materials are priced at prevailing
market rates agreed by us with the suppliers prior to each delivery date.
Advances to suppliers are shown net of an allowance which represents potentially
unrecoverable cash advances at each balance sheet date. Such allowances are
based on an analysis of past raw materials receipt experience and the
credibility of each supplier according to its size and background. In general,
we do not provide allowances against advances paid to those PRC state-owned
companies as there is minimal risk of default. Our allowances for advances to
suppliers are subjective critical estimates that have a direct impact on
reported net earnings, and are reviewed quarterly at a minimum to reflect
changes from our historic raw materials receipt experience and to ensure the
appropriateness of the allowance in light of the circumstances present at the
time of the review. It is reasonably possible that the Company’s estimate of the
allowance will change, such as in the case when the Company becomes aware of a
supplier’s inability to deliver the contracted raw materials or meet its
financial obligations. As ofSeptember 30, 2010 andJune 30, 2010, the Company had
allowances of advances to suppliers of $1,665,573and $1,643,419, respectively.





Allowances for advances to suppliers are
written off when all efforts to collect the materials or recover the cash
advances have been unsuccessful, or when it has become known to the management
that there is no intention by the suppliers to deliver the contracted raw
materials or refund the cash advances. To date, we have not written off any
advances to suppliers.





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:





Plant
      and machinery
            10 yearsBuildings
            10 yearsMotor
      vehicles
            5 yearsOffice
      equipment
            5 years





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





Impairment of
Long-Lived Assets -The Company accounts for impairment of
property, plant and equipment and amortizable intangible assets in accordance
with ASC 360, which requires the Company to evaluate a long-lived asset for
recoverability when there is an event or circumstance that indicates the
carrying value of the asset may not be recoverable. An impairment loss is
recognized when the carrying amount of a long-lived asset or asset group is not
recoverable (when carrying amount exceeds the gross, undiscounted cash flows
from use and disposition) and is measured as the excess of the carrying amount
over the asset’s (or asset group’s) fair value.





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 overthe useful
lives of the assets. During the three months ended September 30, 2010 and 2009,
the Company capitalized $135,313and $123,551, respectively, of interest to
construction-in-progress.




7





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 property, plant and
equipment.





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-Advances from customers represent
advance cash receipts from customers and for which goods have not been delivered
or services have not been rendered at each balance sheet date. Advances from
customers for goods to be delivered or services to be rendered in the 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. Revenue
is reported net of all VAT taxes. Other income is recognized when it is
earned.





Functional Currency
and Translating Financial Statements–The Company’s principal country of
operations is the PRC. Our functional currency is Chinese Renminbi; however, the
accompanying consolidated financial statements have been expressed in United
States Dollars (“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. 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 are dealt with as other
comprehensive income in stockholders’ equity.





Accumulated Other
Comprehensive Income– Accumulated other comprehensive income
represents the change in equity of the Company during the periods presented from
foreign currency translation adjustments.





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





United
States





China Precision Steel, Inc. is subject
to United States federal income tax at a tax rate of 34%. No provision for
income taxes in the United States has been made as China Precision Steel, Inc.
had no taxable income inthe2010 and 2009periods.





BVI





PSHL and Blessford International were
incorporated in the British Virgin Islands and, under the current laws of the
British Virgin Islands, are not subject to income taxes.




8





PRC





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





On March 16, 2007, the National People’s
Congress of China passed The Enterprise Income Tax Law (the “New EIT Law”), and
on December 6, 2007, the State Council of China passed the Implementing Rules
for the EIT Law (“Implementing Rules”) which took effect on January 1, 2008. The
New EIT Law and Implementing Rules impose a unified enterprise income tax
(“EIT”) of 25% on all domestic-invested enterprises and foreign invested
entities (“FIEs”), unless they qualify under certain limited exceptions.
Therefore, nearly all FIEs are subject to the new tax rate alongside other
domestic businesses rather than benefiting from the old FIE tax laws, and its
associated preferential tax treatments, beginning January 1,
2008.





Despite these changes, the EIT Law gives
the FIEs established before March 16, 2007 (“Old FIEs”) a five-year grandfather
period during which they can continue to enjoy their existing preferential tax
treatments, commonly referred to as “tax holidays”, until these holidays expire.
As an Old FIE, Chengtong’s tax holiday of a 50% reduction in the 25% statutory
rates expired on December 31, 2008 and it is currently subject to the 25%
statutory rates since January 1, 2009; Shanghai Blessford’s full tax exemption
from the enterprise income tax expired on December 31, 2009, and it is subject
to a 50% reduction for the three subsequent years expiring on December 31, 2012.
Subsequent to the expiry of their tax holidays, Chengtong and Shanghai Blessford
will be subject to enterprise income taxes at 25% or the prevailing statutory
rates. The discontinuation of any such special or preferential tax treatment or
other incentives would have an adverse effect on any organization’s business,
fiscal condition and current operations in China.





Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statements 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.





Effective January 1, 2007, the Company
adopted the provisions of the ASC Topic No. 740 “Accounting for Income Taxes”
and “Accounting for Uncertainty in Income Taxes – an interpretation of FASB
Statement No. 109” (“ASC 740”). ASC 740 requires the recognition of tax benefits
or expenses based on the estimated future tax effects of temporary differences
between the financial statements and tax bases of its assets and liabilities.
Deferred tax assets and liabilities primarily relate to tax basis differences on
unrealized gains on corporate equities, stock-based compensation, amortization
periods of certain intangible assets and differences between the financial
statements and tax bases of assets acquired.





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 in the PRC. However, the Company cannot reasonably
quantify political risk factors and thus must depend on guidance issued by
current officials in the PRC.





Based on all known facts and
circumstances and current tax law, the Company believes that the total amount of
unrecognized tax benefits as ofSeptember30, 2010 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 ofSeptember30, 2010, 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.




9




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.





The revised People’s Republic of China
Tentative Regulations on Value Added Tax became effective on January 1, 2009
with the issuance of Order of the State Council No. 538. With the implementation
of this VAT reform, input VAT associated with the purchase of fixed assets is
now deductible against output VAT.





Retirement Benefit
Costs- According to the PRC regulations on
pension, Chengtong and Shanghai Blessford contribute to a defined contribution
retirement scheme organized by municipal government in the province in which
Chengtong and Shanghai Blessford were 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 and Shanghai Blessford
contribute the balance contribution of 15.5% to 21.5%. The Group has no other
material obligation for the payment of retirement benefits beyond the annual
contributions under this scheme.





For thethree monthsendedSeptember30, 2010 and 2009, the Company’s
pension cost charged to the statements of operations under the plan amounted to
$55,935 and$82,666, respectively, all of which have been
paid to the National Social Security Fund.







Fair Value of
Financial Instruments -The carrying amounts of certain
financial instruments, including cash, accounts receivable, other receivables,short-term loans,accounts payable, accrued
expenses, and other payables approximate their fair values as atSeptember 30, 2010 andJune 30, 2010 because of the relatively
short-term maturity of these instruments.The Company considers the carrying amount of
long-term loans to
approximate their fair values based on the interest rates of the instruments and
the current market rate of interest.







Use of
Estimates-The preparation of financial statements
in accordance with generally accepted accounting principles requires 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.





4.  Concentrations of Business
and Credit Risk





The Company’s list of customers whose
purchases from us were 10% or more of total sales duringthethree monthsendedSeptember30, 2010 and 2009 is as
follows:




a.     Customers
            
            2010
            
            
            % to
              sales
            
            
            2009
            
            
            % to
              salesShanghai
      Shengdejia Metal Co. Ltd
            
            
            9,097,037
            
            
            
            27
            
            
            
            -*
            
            
            
            -*Shanghai
      Changshuo Steel Company, Ltd
            
            
            5,825,690
            
            
            
            17
            
            
            
            3,848,354
            
            
            
            23Zhangjiagang
      Gangxing Innovative Construction Material Co., Ltd.
            
            
            -*
            
            
            
            -*
            
            
            
            1,735,287
            
            
            
            10Shaoxing
      Wancheng Metal Plate Co., Ltd
            
            
            -*
            
            
            
            -*
            
            
            
            1,768,383
            
            
            
            10





* Not 10% customers for therelevant period




10





The Company’s list of suppliers whose
sales to us exceeded 10% of our total purchases during thethree monthsendedSeptember30, 2010 and 2009 is as
follows:





b.      Suppliers
            
            2010
            
            
            % to
              consumption
            
            
            2009
            
            
            % to
              consumptionDachang
      Huizu Baosheng Steel Products Co., Ltd.
            
            
            8,767,582
            
            
            
            24
            
            
            
            -*
            
            
            
            -*Zhejinag
      Wuchan Metal Group Co., Ltd.
            
            
            8,209,383
            
            
            
            22
            
            
            
            -*
            
            
            
            -*Hangzhou
      Steel Materials Co., Ltd.
            
            
            7,576,264
            
            
            
            21
            
            
            
            -*
            
            
            
            -*Guangzhou
      Zhujiang Steel Co., Ltd.
            
            
            -*
            
            
            
            -*
            
            
            
            4,679,267
            
            
            
            31Wuxi
      Hangda Trading Co., Ltd.
            
            
            -*
            
            
            
            -*
            
            
            
            2,876,549
            
            
            
            19BaoSteel
      Steel Products Trading Co. Ltd
            
            
            -*
            
            
            
            -*
            
            
            
            2,654,920
            
            
            
            17





* Not 10% suppliers for therelevant period





Our management continues to take
appropriate actions to perform ongoing business and credit reviews of our
customers to reduce our exposure to new and recurring customers who have been
deemed to pose a high credit risk to our business based on their commercial
credit reports, our collection history, and our perception of the risk posed by
their geographic location.





5.  Accounts
Receivable





The Company provides credit in the
normal course of business. The Company performs ongoing credit evaluations of
its domestic and international customers and clients and maintains allowances
for bad and doubtful accounts based on factors surrounding the credit risk of
specific customers and clients, historical trends, and other information. Trade
accounts receivable, net totaled $33,814,865and $39,598,845as ofSeptember30, 2010 andJune 30,2010, respectively.





From time to time, accounts receivable
are reviewed for changes from the historic collection experience to ensure the
appropriateness of the allowances. These estimates have been relatively accurate
in the past and currently there is no need to revise such estimates. However, we
will review such estimates more frequently when needed, and make revisions if
necessary. The continuation or intensification of the current global economic
crisis and turmoil in the global financial markets may have negative
consequences for the business operations of our customers and adversely impact
their ability to meet their obligations to us. A significant change in our
collection experience, deterioration in the aging of receivables and collection
difficulties could require that we increase our estimate of the allowance for
doubtful accounts. Any such additional bad debt charges could materially and
adversely affect our future operating results.





6.Inventories





The Company was required under GAAP to
write down the value ofourinventories to their net realizable
values (average selling prices less reasonable costs to convert the inventories
into completed form) in the amount of $42,816 for the year ended June 30,
2010.





As ofSeptember 30, 2010 and June 30,
2010, inventories consisted
of the following:





At cost:
            
            September 30,
              2010
            
            
            June 30,
              2010Raw materials
            
            $
            7,097,739
            
            
            $
            5,551,003Work
      in progress
            
            
            12,092,822
            
            
            
            15,443,410Finished
      goods
            
            
            9,238,055
            
            
            
            4,291,384Consumable
      items
            
            
            2,963,578
            
            
            
            3,279,21731,392,194
            
            
            
            28,565,014Less:
      provision
            
            
            -
            
            
            
            (42,816
            )$
            31,392,194
            
            
            $
            28,522,198





Costs of finished goods include direct
labor, direct materials, and production overhead before the goods are ready for
sale.





Consumable items represent parts used in
our cold rolling mills and other equipment that need to be replaced from time to
time when necessary to ensure optimal operating results, such as bearings and
rollers.





Inventories amounting to$7,068,379(June 30, 2010: $6,588,535) were pledged for short-term loans
totaling$18,382,353(June 30, 2010: $18,137,848) atSeptember30, 2010.




11





7.  Advances to
Suppliers





Cash advances are shown net of
allowances of $1,665,573and $1,643,419atSeptember 30, 2010 andJune 30, 2010,
respectively.





The majority of our advances to
suppliers greater than 180 days as ofSeptember30, 2010 is attributable to our
advances to a single supplier, a subsidiary of a state-owned company in the PRC.
We believe that advances paid to state-owned companies are ultimately
collectible because they are backed by the full faith and credit of the PRC
government. As such, we generally do not provide allowances against such
advances.





8.  Property, Plant and
Equipment





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





September 30,
              2010
            
            
            June 30,
              2010Plant
      and machinery
            
            $
            70,078,172
            
            
            $
            62,486,750Buildings
            
            
            22,260,841
            
            
            
            21,964,748Motor
      vehicles
            
            
            675,425
            
            
            
            554,368Office
      equipment
            
            
            500,002
            
            
            
            472,53793,514,440
            
            
            
            85,478,403Less:
      Accumulated depreciation
            
            
            (17,711,647
            )
            
            
            (15,571,209
            )$
            75,802,793
            
            
            $
            69,607,194





Depreciation expense related to
manufacturing is included as a component of cost of goods sold. During thethree monthsendedSeptember30, 2010 and 2009, depreciation
totaling $1,217,525and $733,899, respectively, was included as a
component of cost of goods sold.





Plant and machinery amounting to$40,046,619(June 30, 2010: $40,543,231) and
$22,856,501 (June 30, 2010:$23,161,753) were pledged for
short-term loans totaling
$26,263,965and long-term loans totaling
$18,319,584, respectively,atSeptember30, 2010.





9.  Construction-In-Progress





As ofSeptember 30, 2010 andJune 30, 2010, construction-in-progress
consisted of the following:





September 30,
              2010
            
            
            June 30,
              2010Construction
      costs
            
            $
            3,772,151
            
            
            $
            3,983,450





Construction-in-progress represents
construction and installations of annealing furnaces.





10.  Intangible
Assets





Land use rights amountingto $1,852,050(June 30, 2010: $1,837,140) were pledged for short-term loans
totaling $26,263,965(June 30, 2010: $25,965,421).





The Company acquired land use rights in
August 2004 and December 2006 for 50 years that expire in August 2054 and
December 2056,respectively. The land use rights are
amortized over a fifty-year term. An amortization amount of approximately
$37,000 is to be recorded each year starting from the financial year ended June
30, 2009 for the remaining lease period.





Amortizable intangible assets of the
Company are reviewed when there are triggering events to determine whether their
carrying value has become impaired, in conformity with ASC 360. The Company also
re-evaluates the periods of amortization to determine whether subsequent events
and circumstances warrant revised estimates of useful lives.




12





11.  Short-Term
Loans





Short-term loans consisted of the
following:





September 30,
              2010
            
            
            June 30,
              2010Bank
      loan dated June 18, 2010, due July 31, 2011 with an interest rate at 115%
      of the standard market rate set by the People’s Bank of China for Renminbi
      loans (6.11% at September 30, 2010) (Notes 8 and 10)
            
            
            7,881,612
            
            
            
            5,300,000Bank
      loan dated July 23, 2009, due July 31, 2010 with an interest rate at 115%
      of the standard market rate set by the People’s Bank of China for Renminbi
      loans (6.11% at September 30, 2010) (Notes 8 and 10)
            
            
            -
            
            
            
            2,527,573Bank
      loan dated June 18, 2010, due July 31, 2011 with an interest rate at 115%
      of the standard market rate set by the People’s Bank of China for Renminbi
      loans (6.11% at September 30, 2010) (Notes 6, 8 and 10)
            
            
            18,382,353
            
            
            
            18,137,848$
            26,263,965
            
            
            $
            25,965,421





The above bank loans outstanding as atSeptember30, 2010 carry an interest rate of 1.15
times of the standard market rate set by the People's Bank of China for Renminbi
loans, due on July 31, 2010, and are secured by inventories, land use rights,
buildings and plant and machinery, and guaranteed by PSHL and our Chairman, Mr.
Wo Hing Li. In addition, pursuant to a bank loan agreement entered into between
the Company and Raiffeisen Zentralbank Osterreich AG ("RZB"), Mr. Li undertakes
to maintain a shareholding percentage in the Company of not less than 33.4%
unless otherwise agreed to with RZB.





The weighted-average interest rate on
short-term loans atSeptember 30, 2010 andJune 30, 2010 was6.11% and 5.59%, respectively.





12.  Long-Term
Loan





September 30,
              2010
            
            
            June 30,
              2010Bank
      loan dated June 23, 2010, due June 22, 2017 with an interest rate of the
      London Interbank Offered Rate (“LIBOR”) plus 4.5% (5.27775% at September
      30, 2010) (Note 8)
            
            $
            18,319,584
            
            
            $
            18,075,914





On January 29, 2010, Shanghai Blessford
entered into a Senior Loan Agreement with DEG-Deutsche Investitions-Und
Entwicklungsgesellschaft Mbh (“DEG”) for a loan amount up to $18,000,000 at an
annual interest rate of 4.5% above the six-month USD LIBOR rate. The loan is to
be repaid semi-annually over five years starting on December 15, 2011and is
secured by a mortgage on the new cold rolling line and annealing furnaces at
Shanghai Blessford’s facilities.





Maturities of long-term loan for the
years endingJune30:





2011
            
            $
            -2012
            
            $
            3,663,9172013
            
            $
            3,663,9172014
            
            $
            3,663,9172015
            
            $
            3,663,9172016
            
            $
            3,663,916Total
            
            $
            18,319,584







13.  Stock
Warrants





In connection with a Stock Purchase
Agreement dated February 16, 2007 for the Company’s private placement offerings
(the “Private Placement”), 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. 851,667 of
these warrants were exercised during the year ended June 30,
2008.




13





On February 22, 2007, the Company issued
warrants to purchase up to 100,000 shares of Common Stock to the Company's then
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. These warrants were not exercised and
expired on February 22, 2010.




On November 6, 2007, in connection with
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, and Roth Capital Partners, LLC, as placement agent,
received warrants to purchase 225,600 shares of Common Stock valued at $887,504.
These amounts were recorded as syndication fees offsetting additional paid-in
capital.





Information with respect to stock
warrants outstanding is as follows:





Exercise
              Price
            
            
            Outstanding
              June 30, 2010
            
            
            Granted
            
            
            Expired or
              Exercised
            
            
            Outstanding
              September 30,
              2010
            
            Expiration Date$
            7.38
            
            
            
            225,600
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            225,600
            
            November 5, 2010$
            3.00
            
            
            
            358,392
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            358,392
            
            February 22, 2011$
            8.45
            
            
            
            1,420,000
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            1,420,000
            
            May 5, 2013





14.  Income
Taxes





For PRC enterprise income tax reporting
purposes, the Company is required to compute a 10% salvage value when computing
depreciation expense and add back the allowance for doubtful debts. For
financial reporting purposes, the Company does not take into account a 10%
salvage value when computing depreciation expenses.





The tax holiday resulted in tax savings
as follows:





Three
      months ended September 30,2010
            
            
            2009Tax
      savings
            
            $
            50,295
            
            
            $
            197,198Benefit
      per shareBasic
            
            $
            0.00
            
            
            $
            0.00Diluted
            
            $
            0.00
            
            
            $
            0.00





Significant components of the Group’s
deferred tax assets and liabilities as ofSeptember 30, 2010 and June 30, 2010are as
follows:








Deferred tax assets and liabilities:
            
            September 30,
              2010
            
            
            June 30,
              2010Net
      operating loss carried forward
            
            $
            2,031,538
            
            
            $
            1,938,915Temporary
      differences resulting from allowances
            
            
            1,945,180
            
            
            
            1,906,348Net
      deferred income tax asset
            
            
            3,976,718
            
            
            
            3,845,263Valuation
      allowance
            
            
            (3,976,718
            )
            
            
            (3,845,263
            )$
            -
            
            
            $
            -





The Company has not recognized a
deferred tax liability in respect of the undistributed earnings of its foreign
subsidiaries of approximately US$19,086,541as ofSeptember30, 2010 because the Company currently
plans to reinvest those unremitted earnings such that the remittance of the
undistributed earnings of those foreign subsidiaries to the Company will be
postponed indefinitely. A deferred tax liability will be recognized when the
Company no longer plans to permanently reinvest undistributed
earnings.




14





A reconciliation of the provision for
income taxes with amounts determined by the PRC income tax rate to income tax
expense per books is as follows.




Three
      months ended September 30,2010
            
            
            2009Computed tax at
      the PRC statutory rate of 25%
            
            $
            197,611
            
            
            $
            (93,565
            )Valuation
      allowance
            
            
            92,637
            
            
            
            290,897Income
      not subject to tax
            
            
            -
            
            
            
            (134
            )Overprovision
            
            
            10,191
            
            
            
            (1,233
            )Benefit
      of tax holiday
            
            
            (50,295
            )
            
            
            (197,198
            )Income
      tax expense per books
            
            $
            250,144
            
            
            
            (1,233
            )





Income tax expense consists
of:





Three
      months ended September 30,2010
            
            2009Income
      tax expense for the year - PRC
            
            $
            250,144
            
            
            $
            (1,233
            )Deferred
      income tax benefit - PRC
            
            
            -
            
            
            
            -Income
      tax expense/(benefit) per books
            
            $
            250,144
            
            
            $
            (1,233
            )





15.  Earnings/(loss) Per
Share





ASC 260-10 requires a reconciliation of
the numerator and denominator of the basic and diluted earnings/(loss) per share
(EPS) computations.





For thethree monthsendedSeptember30, 2010, warrants to purchase 358,392
shares of common stock at an exercise price of $3.00, 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, however, these
securities could potentially dilute basic earnings per share in the
future.





For the three months ended September 30,
2009, warrants to purchase 358,392 shares of common stock at an exercise price
of $3.00; 100,000 shares at an exercise price of $3.60; 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, however, these
securities could potentially dilute basic earnings per share in the
future.





The following reconciles the components
of the EPS computation:





Income/(loss)
            
            Shares
            
            Per Share(Numerator)
            
            (Denominator)
            
            AmountFor
      the three months ended September 30, 2010:Net
      income
            
            $
            644,511Basic
      EPS income available to common shareholders
            
            $
            644,511
            
            46,562,955
            
            $
            0.01Effect
      of dilutive securities:Warrants
            
            
            
            
            -Diluted
      EPS income available to common shareholders
            
            $
            644,511
            
            46,562,955
            
            $
            0.01For
      the three months ended September 30, 2009:Net
      loss
            
            $
            (275,191
            )Basic
      EPS loss available to common shareholders
            
            $
            (275,191
            )
            46,562,955
            
            $
            (0.01
            )Effect
      of dilutive securities:Warrants
            
            
            
            
            --Diluted
      EPS loss available to common shareholders
            
            $
            (275,191
            )
            46,562,955
            
            $
            (0.01
            )




15




16.  Capital
Commitments





As ofSeptember30, 2010, the Company had contractual
commitments of$4,728,012(June 30, 2010: $4,556,039) for interest relating to its
short-term and long-term loans and share capital injection commitment related to
Shanghai Blessford.





17.  Impairment





We determine impairment of long-lived
assets, including property, plant and equipment and amortizable intangible
assets, by measuring the estimated undiscounted future cash flows generated by
these assets, comparing the result to the assets’ carrying values and adjust the
assets to the lower of its carrying value or fair value and charging current
operations for the measured impairment. The determination of the undiscounted
future cash flows and fair value of these assets are subject to significant
judgment.





The recent decline in our market
capitalization and stock price has triggered an impairmenttest under ASC 360 for the three
monthsendedSeptember30, 2010 and no impairment charges were
recognized for the relevant period. As ofSeptember30, 2010, the Company expects these
assets to be fully recoverable based on the result of the impairment
test. Goodwill amounting to $99,999 as atSeptember30, 2010 was considered immaterial and
not tested for impairment in accordance with ASC 350.





18.  Recent Accounting
Pronouncements





In June 2009, the FASB issued guidance
now codified as ASC 810, “Amendments to FASB Interpretation No. 46(R)” (“ASC
810”), which amends FASB Interpretation No. 46 (revised December 2003), now
codified as ASC 810-10, to address the elimination of the concept of a
qualifying special purpose entity. ASC 810 also replaces the quantitative-based
risks and rewards calculation for determining which enterprise has a controlling
financial interest in a variable interest entity with an approach focused on
identifying which enterprise has the power to direct the activities of a
variable interest entity and the obligation to absorb losses of the entity or
the right to receive benefits from the entity. Additionally, ASC 810 provides
more timely and useful information about an enterprise’s involvement with a
variable interest entity. ASC 810 will become effective in July 2010. We do not
expect that the adoption of ASC 810 will have a material impact on our financial
statements.





In August 2009, the FASB issued
Accounting Standards Update No. 2009-05, “Measuring Liabilities at Fair Value”
(“ASU 2009-05”). ASU 2009-05 amends ASC 820, “Fair Value Measurements” (“ASC
820”). Specifically, ASU 2009-05 provides clarification that in circumstances in
which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or
more of the following methods: 1) a valuation technique that uses a) the quoted
price of the identical liability when traded as an asset or b) quoted prices for
similar liabilities or similar liabilities when traded as assets and/or 2) a
valuation technique that is consistent with the principles of ASC 820 (e.g. an
income approach or market approach). ASU 2009-05 also clarifies that when
estimating the fair value of a liability, a reporting entity is not required to
adjust to include inputs relating to the existence of transfer restrictions on
that liability. The adoption of this standard did not have an impact on the
Company’s financial position or results of operations.





In October 2009, the FASB issued ASU No.
2009-13 on ASC 605, “Revenue Recognition” (“ASC 605”), regarding
multiple-deliverable revenue arrangements. This ASU provides amendments to the
existing criteria for separating consideration in multiple-deliverable
arrangements.  The amendments establish a selling price hierarchy for
determining the selling price of a deliverable, eliminate the residual method of
allocation of arrangement consideration to all deliverables and require the use
of the relative selling price method in allocation of arrangement consideration
to all deliverables, require the determination of the best estimate of a selling
price in a consistent manner, and significantly expand the disclosures related
to the multiple-deliverable revenue arrangements. The amendments will be
effective in fiscal years beginning on or after June 15, 2010, and early
adoption is permitted. We do not expect that the adoption of ASU 2009-13 will
have a material impact on our financial statements.




In October 2009, the FASB issued ASU No.
2009-15, “Accounting for Own-Share Lending Arrangements in Contemplation of
Convertible Debt Issuance or Other Financing” (“ASU 2009-15”).  ASU
2009-15 amends ASC 470, “Debt with Conversion and Other Options” (“ASC 470”),
and ASC 260, “Earnings Per Share” (“ASC 260”).  Specifically, ASU
2009-15 requires companies to mark stock loan agreements at fair value and
recognize the cost of the agreements by reducing the amount of additional
paid-in capital on their financial statements.  The amendments will be
effective for fiscal years beginning on or after December 15,
2009.  We do not expect that the adoption of ASU 2009-15 will have a
material impact on our financial statements.




16





In December 2009, the FASB issued ASU
2009-17, “Improvements to Financial Reporting by Enterprises Involved with
Variable Interest Entities” (“ASU 2009-17”).  ASU 2009-17 details the
amendments to ASC 810, “Consolidation”, which are the result of FASB Statement
No. 167, “Amendments to FASB Interpretation No. 46(R)”.  That
statement was issued by the FASB in June 2009.  ASU 2009-17 amends the
variable-interest entity guidance in ASC 810 to clarify the accounting treatment
for legal entities in which equity investors do not have sufficient equity at
risk for the entity to finance its activities without financial
support. ASU 2009-17 is effective at the start of the first fiscal year
beginning after November 15, 2009. We do not expect that the adoption of ASU
2009-17 will have a material impact on our financial
statements.





In January 2010, the FASB issued ASU
2010-06, “Fair Value Measurements and Disclosures (Topic 820) – Improving
Disclosures about Fair Value Measurements” (“ASU 2010-06”).  ASU
2010-06 requires reporting entities to provide information about movements of
assets among Levels 1 and 2 of the three-tier fair value hierarchy established
by ASC 820.  The guidance is effective for any fiscal year that begins
after December 15, 2010 and should be used for quarterly and annual
filings.  We are currently evaluating the impact on our financial
statements of adopting the amendments in ASU 2010-06 and cannot estimate the
impact of adoption at this time.




17








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





Special
Note Regarding Forward Looking Statements





In addition to historical
information, this report contains forward-looking statements within the meaning
of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. We use words such as “believe,” “expect,” “anticipate,”
“project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar
expressions which are intended to identify forward-looking statements. Such
statements include, among others, those concerning market and industry segment
growth and demand and acceptance of new and existing products; any projections
of sales, earnings, revenue, margins or other financial items; any statements of
the plans, strategies and objectives of management for future operations; and
any statements regarding future economic conditions or performance, as well as
all assumptions, expectations, predictions, intentions or beliefs about future
events. You are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, as well as
assumptions, which, if they were to ever materialize or prove incorrect, could
cause the results of the Company to differ materially from those expressed or
implied by such forward-looking statements. Potential risks and uncertainties
include, among other things, factors such as: plans to expand our exports
outside of China; plans to increase our production capacity and the anticipated
dates that such facilities may commence operations; our ability to obtain
additional funding for our continuing operations and to fund our expansion; our
ability to meet our financial projections for any financial year; our ability to
retain our key executives and to hire additional senior management; continued
growth of the Chinese economy and industries demanding our products; our ability
to secure at acceptable prices the raw materials we need to produce our
products; political changes in China that may impact our ability to produce and
sell our products in our target markets; general business conditions and
competitive factors, including pricing pressures and product development; and
changes in our relationships with customers and suppliers. You should carefully
review the risk factors described in other documents we file from time to time
with the U.S. Securities and Exchange Commission, including our Annual Report on
Form 10-K for our fiscal year ended June 30, 2010.





Because
the factors discussed in this report could cause actual results or outcomes to
differ materially from those expressed in any forward-looking statement made by
us or on our behalf, you should not place undue reliance on any such
forward-looking statement. Further, any forward-looking statement speaks only as
of the date on which it is made, and we undertake no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events, except as required by law. New factors emerge from time to
time, and it is not possible for us to predict which will arise. In addition, we
cannot assess the impact of each factor on our business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statement.





Use
of Terms





Except as
otherwise indicated by the context, all references in this report
to:







·
            “CPSL,”
      “Company,” “Group,” “we,” “us” or “our” are to China Precision Steel,
      Inc., a Delaware corporation, and its direct and indirect
      subsidiaries;·
            “PSHL”
      are to our subsidiary Partner Success Holdings Limited, a BVI
      company;


·
            “Blessford
      International” are to our subsidiary Blessford International Limited, a
      BVI company;




·
            “Shanghai
      Blessford” are to our subsidiary Shanghai Blessford Alloy Company Limited,
      a PRC company;·
            “Chengtong”
      are to our subsidiary Shanghai Chengtong Precision Strip Company Limited,
      a PRC company;


·
            “Tuorong”
      are to our subsidiary Shanghai Tuorong Precision Strip Company Limited, a
      PRC company;


·
            “SEC”
      are to the United States Securities and Exchange
    Commission;


·
            “Securities
      Act” are to the Securities Act of 1933, as
  amended;


·
            “Exchange
      Act” are to the Securities Exchange Act of 1934, as
    amended;


·
            “RMB”
      are to Renminbi, the legal currency of
China;


·
            “U.S.
      dollar,” “USD,” “US$” and “$” are to the legal currency of the United
      States;


·
            “China,”
      “Chinese” and “PRC” are to the People’s Republic of China;
    and


·
            “BVI”
      are to the British Virgin Islands.




18




Overview
of our 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 and
slitting of medium and high-carbon hot-rolled steel strips. We use commodity
steel to create a high value-added specialty premium steel. 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 and slitting of medium and high-carbon hot-rolled steel strips not
exceeding 7.5 mm thickness. 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, steel roofing, plane friction discs, appliances, food
packaging materials, saw blades, textile needles, and
microelectronics.





We
conduct our operations principally in China through our wholly-owned operating
subsidiaries, Chengtong and Shanghai Blessford, which are wholly owned
subsidiaries of our direct subsidiary, PSHL. Most of our sales are made
domestically in China; however, we began exporting during fiscal 2007
and our overseas market currently covers Indonesia, Thailand, the Philippines,
Nigeria and Ethiopia. We intend to further expand into additional
overseas markets in the future, subject to suitable market conditions and
favorable regulatory controls.





First
Quarter Financial Performance Highlights





During the firstfiscal quarter of 2011, we saw robust growth in demand for our
cold rolled steel products as market sentiment continued to improve. We have
seen gradually increasing demand and orders from both our long term and new
customers, especially in the low-carbon cold-rolled steel segment and the
high-carbon cold-rolled steel segment, due to favorable policies and PRC
government subsidies for the home appliance industry and the auto industry,
where our products in these two segments are used in the manufacturing of
certain components. However, despite the positive growth we have seen during the
current period, general industry problems such as excess capacity, low
industrial concentration and a lack of access to natural resources that have
long plagued China’s steel sector still remain. Starting January 1, 2010,
we have commenced production from our 3rdcold rolling mill and we are operating a
total of three cold rolling mills at our facilities now, at a combined
utilization rate of approximately80% as of September 30,
2010.





During the three months endedSeptember30, 2010, we sold a total of42,513tons of products, an increase of
20,220tons from22,293tons during the same period a year ago,
due to an increase in demand in a gradually improving market as well as the
addition of our 3rdmill which increases our total annual
production capacity from 120,000 tons to 160,000 tons during its first year of
operation and ultimately to 220,000 tons when it reaches its full design
capacity in the next three to four years. We believe that such increase was
mainly caused by increases in demand fromconstruction materials andhome appliance products due to PRC
government subsidies to encourage consumer spending in these segments during the
period endedSeptember30, 2010. Increased volume and sales have
led to a gross profit of $2,384,085and a net income of $644,511for the three months endedSeptember30, 2010. Total company backlog as ofSeptember30, 2010 was$33,772,326.





We continue to take appropriate actions
to perform business and credit reviews of customers and suppliers and reduce
exposure by avoiding entry into contracts in countries or with customers with
high credit risks. We strive to optimize our product mix, prioritize higher
margin products, and strengthen collection of accounts receivable in the
existing business environment with the goal to maintain overall healthy sales
volume, margins and cash positions. We believe 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. Although we expect a
continuation of volatility in demand in both domestic and international markets,
and in steel prices which could have adverse impacts on our gross margins in the
foreseeable future, the medium to long term prospects of our niche remain highly
optimistic. We believe that our unique capabilities and know-how give us a
competitive advantage to grow sales and build a globally recognized brand as we
continue to carry out research and development (“R&D”) and expand to new
segments, customers and markets.





The following are some financial
highlights for the third fiscal quarter:





●
            Revenues:
      Our revenues were approximately $33.9 million for the first quarter, an
      increase of 98.9% from last year.




19




●
            Gross
      Margin: Gross margin was 7.0% for the first quarter, as compared to
      4.1% last year.





●
            Income/(loss)
      from operations before tax: Income from operations before tax was
      approximately $0.9 million for the first quarter, as compared to loss from
      operations before tax of $0.3 million last
year.





●
            Net
      Income/(loss): Net income was approximately $0.6 million for the
      third quarter, as compared to a net loss of approximately $0.3 million
      last year.





●
            Fully
      diluted Income/(loss) per share: Fully diluted income per share was
      $0.01 for the first quarter compared to a fully diluted loss per share of
      $0.01 last year.





Results
of Operations





The
following table sets forth key components of our results of operations for the
periods indicated, inUSDand
as a percentage of revenues.




Three
      months EndedSeptember 30, 2010
            
            
            Three
      months EndedSeptember 30, 2009Amount
            
            
            %
      of Revenues
            
            
            Amount
            
            
            %
      of RevenuesRevenues
            
            
            33,896,455
            
            
            
            100.0
            
            
            
            17,041,989
            
            
            
            100.0Cost
      of sales (including depreciation and amortization)
            
            $
            31,512,370
            
            
            
            93.0
            
            
            
            16,338,630
            
            
            
            95.9Gross
      profit
            
            
            2,384,085
            
            
            
            7.0
            
            
            
            703,359
            
            
            
            4.1Selling
      and marketing
            
            
            110,205
            
            
            
            0.3
            
            
            
            31,809
            
            
            
            0.2Administrative
      expenses
            
            
            871,470
            
            
            
            2.6
            
            
            
            578,698
            
            
            
            3.4Allowance
      for bad and doubtful debts
            
            
            -
            
            
            
            -
            
            
            
            117,117
            
            
            
            0.7Depreciation
      and amortization
            
            
            44,160
            
            
            
            0.1
            
            
            
            43,738
            
            
            
            0.3Income/(loss)
      from operations
            
            
            1,358,249
            
            
            
            4.0
            
            
            
            (68,003
            )
            
            
            (0.4
            )Total
      other expense
            
            
            (463,595
            )
            
            
            (1.4
            )
            
            
            (208,421
            )
            
            
            (1.2
            )Income/(loss)
      from operations before income tax
            
            
            894,654
            
            
            
            2.6
            
            
            
            (276,424
            )
            
            
            (1.6
            )Income
      tax expense/(benefit)
            
            
            250,144
            
            
            
            0.7
            
            
            
            (1,233
            )
            
            <0.1Net
      income/(loss)
            
            
            644,511
            
            
            
            1.9
            
            
            
            (275,191
            )
            
            
            (1.6
            )Basic earnings/(loss) per
      share
            
            $
            0.01
            
            
            
            
            
            
            
            (0.01
            )Diluted
      earnings/(loss) per share
            
            $
            0.01
            
            
            
            
            
            
            
            (0.01
            )




Comparison of Three Months
Ended September 30, 2010 and 2009





Sales Revenues.Sales volume increased by 20,220 tons, or 90.7%, period-on-period to
42,513 tons for the period ended September 30, 2010 from 22,293 tons for the
period ended September 30, 2009 and, as a result, sales revenues increased by
$16,854,466, or 98.9%, period-on-period, to $33,896,455 for the period ended
September 30, 2010 from $17,041,989 for the period ended September 30, 2009. The
increase in sales revenues is mainly attributable to an increase in demand for
low-carbon cold-rolled products
used in construction and home appliances production due to favorable government
policies and subsidies to encourage consumer spending.




Sales by Product
Line





A
break-down of our sales by product line for the three months ended
September 30, 2010 and 2009 is as follows:





2010
            
            
            2009
            
            
            Period-on-Period
      Qty.Product
      Category
            
            Quantity
      (tons)
            
            
            $
      Amount
            
            
            %
      of Sales
            
            
            Quantity
      (tons)
            
            
            $
      Amount
            
            
            %
      of Sales
            
            
            VarianceLow
      carbon hard rolled
            
            
            3,625
            
            
            
            2,800,212
            
            
            
            8
            
            
            
            4,560
            
            
            
            3,064,585
            
            
            
            18
            
            
            
            (935
            )Low
      carbon cold-rolled
            
            
            23,498
            
            
            
            21,082,008
            
            
            
            62
            
            
            
            10,633
            
            
            
            6,361,255
            
            
            
            37
            
            
            
            12,865High-carbon
      hot-rolled
            
            
            1,652
            
            
            
            1,402,884
            
            
            
            4
            
            
            
            1,981
            
            
            
            1,556,728
            
            
            
            9
            
            
            
            (329
            )High-carbon
      cold-rolled
            
            
            5,472
            
            
            
            5,136,462
            
            
            
            15
            
            
            
            2,497
            
            
            
            4,321,739
            
            
            
            25
            
            
            
            2,975Subcontracting
      income
            
            
            8,266
            
            
            
            3,145,202
            
            
            
            10
            
            
            
            2,622
            
            
            
            1,648,876
            
            
            
            10
            
            
            
            5,644Sales
      of scrap metal
            
            
            -
            
            
            
            329,687
            
            
            
            1
            
            
            
            -
            
            
            
            88,806
            
            
            
            1
            
            
            
            -Total
            
            
            42,513
            
            
            
            33,896,455
            
            
            
            100
            
            
            
            22,293
            
            
            
            17,041,989
            
            
            
            100
            
            
            
            20,220




20




There were different trends of demand
across various product categories during the three months ended September 30,
2010. High-carbon cold-rolled steel products accounted for 15% of the current
sales mix at an average selling price of $939 per ton for the period ended
September 30, 2010, compared to 25% of the sales mix at an average selling price
per ton of $1,731 for the period ended September 30, 2009. The products in this
category are mainly used in the automobile industry and the decrease in sales
volume was due to demand volatilities period-on-period, however, we are
generally optimistic about sales in this category for the remainder of the year
due to the Chinese government’s automobile stimulus policies which management
expects to increase demand.





Low-carbon cold-rolled steel products
accounted for 62% of the current sales mix at an average selling price of $897
per ton for the three months ended September 30, 2010, compared to 37% of the
sales mix at an average selling price per ton of $598 for the three months ended
September 30, 2009. The increase in demand in this category during the period
was a result of increased orders of steel used in the production of construction
and home appliances due to subsidies granted by the Chinese government to
encourage consumer spending. Low-carbon hard-rolled steel products accounted for
8% of the current sales mix at an average selling price of $772 per ton for the
three months ended September 30, 2010, compared to 18% of the sales mix at an
average selling price per ton of $672 for the three months ended September 30,
2009, due to improved pricing but a decrease in demand in the international
market period-on-period.  Subcontracting income revenues accounted for
$3,145,202, or 10% of the sales mix for the three months ended September 30,
2010, as compared to $1,648,876, or 10%, of the sales mix for the three months
ended September 30, 2009.





Three
      Months Ended September 30,2010
            
            
            2009
            
            
            VarianceAverage
      Selling Prices
            
            ($)
            
            
            ($)
            
            
            ($)
            
            
            (%)Low-carbon
      hard rolled
            
            
            772
            
            
            
            672
            
            
            
            100
            
            
            
            15Low-carbon
      cold-rolled
            
            
            897
            
            
            
            598
            
            
            
            299
            
            
            
            50High-carbon
      hot-rolled
            
            
            849
            
            
            
            786
            
            
            
            63
            
            
            
            8High-carbon
      cold-rolled
            
            
            939
            
            
            
            1,731
            
            
            
            (792
            )
            
            
            (46
            )Subcontracting
      income
            
            
            380
            
            
            
            629
            
            
            
            (249
            )
            
            
            (40
            )








The average selling price per ton
increased to $797 for the three months ended September 30, 2010, compared to the
$764 in 2009, representing an increase of $33, or 4%, period-on-period.
This increase was mainly due to increases in general steel prices and therefore
our selling prices, but was offset by a higher concentration in carbon products
with lower average selling prices during the period. There were increases in
average selling prices across all product categories except high-carbon
cold-rolled and subcontracting work during the period.





Sales Breakdown by Major
Customer


Three
      Months Ended September 30,2010
            
            
            2009Customers
            
            $
            
            
            %
      of Sales
            
            
            $
            
            
            %
      of SalesShanghai
      Shengdejia Metal Products Co., Ltd.
            
            
            9,097,037
            
            
            
            27
            
            
            
            *
            
            
            
            *Shanghai
      Changshuo Steel Co., Ltd.
            
            
            5,825,690
            
            
            
            17
            
            
            
            3,848,354
            
            
            
            23SUMEC
      International Technology Co., Ltd.
            
            
            2,590,163
            
            
            
            8
            
            
            
            1,046,660
            
            
            
            6Zhangjiagang
      Gangxing Innovative Construction Materials
            
            
            2,453,522
            
            
            
            7
            
            
            
            1,735,287
            
            
            
            10Zhejiang
      Zhongwei Materials Co., Ltd.
            
            
            2,298,702
            
            
            
            7
            
            
            
            *
            
            
            
            *Shaoxing
      Wangheng Metal Plate Co., Ltd.
            
            
            *
            
            
            
            *
            
            
            
            1,768,383
            
            
            
            10Unimax
      & Far Corporation
            
            
            *
            
            
            
            *
            
            
            
            1,069,184
            
            
            
            622,265,144
            
            
            
            66
            
            
            
            9,467,868
            
            
            
            55Others
            
            
            11,631,311
            
            
            
            34
            
            
            
            7,574,121
            
            
            
            45Total
            
            
            33,896,455
            
            
            
            100
            
            
            
            17,041,989
            
            
            
            100




*
Not major customers for the relevant periods




21





Sales
revenues generated from our top five major customers as a percentage of total
sales increased to 66% for the period ended September 30, 2010, compared to 55%
for the period ended September 30, 2009. Sales to two new major customers,
Shanghai Shengdejia Metal Products Co., Ltd. and Zhejiang Zhongwei Materials
Co., Ltd. for the three months accounted for 34% of our sales revenues. The
change in customer mix reflects management’s continuous efforts in expanding our
customer base and geographical coverage during the course of the
quarter.




Cost of Goods
Sold.Cost
of sales increased by $15,173,740, or 92.9%, period-on-period, to $31,512,370
for the period ended September 30, 2010, from $16,338,630 for the period ended
September 30, 2009. Cost of sales represented 93.0% of sales revenues for the
period ended September 30, 2010 compared to 95.9% for the period ended September
30, 2009. Average cost of production per ton increased to $741 for the period
ended September 30, 2010, compared to an average cost of production per ton of
$733 for the period ended September 30, 2009,  representing an
increase of $8 per ton, or 1.1%, period-on-period.








Three
      Months Ended September 30,2010
            
            
            2009
            
            
            Variance($)
            
            
            ($)
            
            
            ($)
            
            
            (%)Cost
      of goods sold-
      Raw materials
            
            
            28,570,179
            
            
            
            14,305,303
            
            
            
            14,264,876
            
            
            
            99.7-
      Direct labor
            
            
            129,859
            
            
            
            97,832
            
            
            
            32,027
            
            
            
            32.7-
      Manufacturing overhead
            
            
            2,812,332
            
            
            
            1,935,495
            
            
            
            876,837
            
            
            
            45.331,512,370
            
            
            
            16,338,630
            
            
            
            15,173,740
            
            
            
            92.9Cost
      per unit soldTotal
      units sold (tons)
            
            
            42,513
            
            
            
            22,293
            
            
            
            20,220
            
            
            
            90.7Average
      cost per unit sold ($/ton)
            
            
            741
            
            
            
            733
            
            
            
            8
            
            
            
            1.1








The
increase in cost of sales is represented by the combined effect of:





·
            an
      increase in cost of raw materials per unit sold of $30, or 4.7%, from $642
      for the period ended September 30, 2009 compared to $672 for the
      period ended September 30, 2010;





·
            a
      decrease in direct labor per unit sold of $1, or 25.0%, from $4 for the
      period ended September 30, 2009 compared to $3 for the period ended
      September 30, 2010;





·
            a
      decrease in factory overhead per unit sold of $21, or 24.1%, from $87 for
      the period ended September 30, 2009 compared to $66 for the period ended
      September 30, 2010.





The cost
of raw materials consumed increased by $14,264,876, or 99.7%, period-on-period,
to $28,570,179 for the period ended September 30, 2010 from $14,305,303 for the
period ended September 30, 2009. This increase was mainly due to the increases
in total units sold as well as increase in the average cost per unit
sold.





Direct
labor costs increased by $32,027, or 32.7%, period-on-period, to $129,859 for
the period ended September 30, 2010, from $97,832 for the period ended September
30, 2009. The increase was due to increase in total units sold offset by
decrease in average cost per unit sold as a result of economies of scale during
the period.




Manufacturing
overhead costs increased by $876,837, or 45.3%, period-on-period, to $2,812,332
for the period ended September 30, 2010, from $1,935,495 for the period ended
September 30, 2009. The increase was mainly attributable to the combined effect
of an increase in depreciation of $483,626, or 65.9%, period-on-period, to
$1,217,525 for the period ended September 30, 2010, from $733,899 for the period
ended September 30, 2009, an increase in utilities of $451,111, or 91.2%,
period-on-period, to $945,981 for the period ended September 30, 2010, from
$494,870 for the period ended September 30, 2009 due to increased consumption of
electricity associated with the production of 20,220 additional tons of steel
period-on-period, and an increase in low consumables of $198,459, or 73.6%,
period-on-period, to $467,925 for the period ended September 30, 2010, from
$269,466 for the period ended September 30, 2009.





Gross
Profit. Gross profit in
absolute terms increased by $1,680,726, or 239.0%, period-on-period, to
$2,384,085 for the period ended September 30, 2010, from $703,359 for the period
ended September 30, 2009, while gross profit margin increased to 7.0% for the
period ended September 30, 2010, from 4.1% for the period ended September 30,
2009. The increase in gross profit is mainly attributable to a 98.9%
period-on-period increase in sales revenues, offset by a 92.9% period-on-period
increase in cost of goods sold. The increase in gross profit margin principally
resulted from an increase in average selling prices and a higher equipment
utilization rate due to the increase in prices and demand during the first
quarter.




22





Selling
Expenses. Selling expenses increased by $78,396, or 246.5%,
period-on-period, to $110,205 for the period ended September 30, 2010 compared
to the corresponding period in 2009 of $31,809. The increase was mainly
attributable to increased focus on sales and marketing efforts
period-on-period.





Administrative
Expenses.Administrative expenses
increased by $292,772, or 50.6%, period-on-period, to $871,470 for the period
ended September 30, 2010, compared to $578,698 for the period ended September
30, 2009. This increase was chiefly associated with increased travelling costs
in connection with attendance at investor and steel conferences and professional
fees during the period ended September 30, 2010.





Provision for bad
debt. Provision for bad debt decreased by $117,117, or 100.0%,
period-on-period, as no bad debt expense was recognized in the quarter ended
September 30, 2010, compared to a provision for bad debt in the amount of
$117,117 recognized during the prior year based on our policy for allowance for
doubtful accounts.





Income from
Operations. Income from operations before income tax increased by
$1,426,252, or 2,097.3%, period-on-period, to $1,358,249 for the period ended
September 30, 2010 from a loss of $68,003 for the period ended September 30,
2009, as a result of the factors discussed above.





Other
income.  Our other income decreased $18,404, or 92.4%, to
$1,518 for the period ended September 30, 2010 from $19,922 for the period ended
September 30, 2009.  As a percentage of revenues, other income
decreased to 0.0% for the period ended September 30, 2010 from 0.1% for the
period ended September 30, 2009. Such percentage decrease in other income was
primarily due to lower cash balances and decrease in interest rate
period-on-period.





Interest
Expense.  Total interest expense increased $236,770, or 103.7%,
to $465,113 for the period ended September 30, 2010, from $228,343 for the
period ended September 30, 2009 due to an increase in loan balances
period-on-period.





Income
Tax. For the period ended September 30, 2010, we recognized an income tax
expense of $250,144, compared to an income tax benefit of $1,233 for the period
ended September 30, 2009. The increase in taxes reflects a higher income from
operations period-on-period.





Net
Income(loss). Net income increased by $919,702, or 334.2%,
period-on-period, to net income of $644,511 for the period ended September 30,
2010 from a net loss of $275,191 for the period ended September 30, 2009. The increase in net income is
attributable to a combination of factors discussed above, including increase in
tons sold due to strengthening demand and increase in average selling
prices.





Liquidity
and Capital Resources




General





Our
business is capital intensive and requires substantial expenditures for, among
other things, the purchase and maintenance of plant and 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. As of September 30, 2010, we had cash and cash equivalents of
approximately $12.6 million.





The
following table provides detailed information about our net cash flow for all
financial statement periods presented in this report:





CASH
FLOW





Three
      Months Ended September 30,2010
            
            
            2009Net
      cash used in operating activities
            
            $
            (10,115,902
            )
            
            $
            (302,459
            )Net
      cash used in investing activities
            
            
            (6,542,428
            )
            
            
            (2,946,433
            )Net
      cash (used in)/provided by financing activities
            
            
            (51,479
            )
            
            
            3,296,075Net
      cash flow
            
            
            (16,383,649
            )
            
            
            53,824





Operating
Activities





Net cash
flows used in operating activities for the period ended September 30, 2010 was
$10,115,902, as compared to $302,459 for the period ended September 30, 2009,
for a net increase of $9,813,443 used. The increase during the period ended
September 30, 2010 was mainly due to a reduction in cash flows caused by an
increase in advances to suppliers of $13,337,712 due to increased orders on
hand, as well as a decrease in accounts payable and accrued expenses of
$6,036,616.





For the
period ended September 30, 2010, sales revenues generated from our top five
major customers as a percentage of total sales increased to 66%, as compared to
55% for the period ended September 30, 2009. The loss of all or portion of the
sales volume from a significant customer would have an adverse effect on our
operating cash flows. We note that
the continuation or intensification of the current economic downturn may have
negative consequences on the business operations of our customers and adversely
impact their ability to meet their financial obligations to us, resulting in
unrecoverable losses on our accounts receivable. We have been strengthening our
collection activities and will continue to closely monitor any changes in
collection experience and the credit ratings of our customers.  From time
to time we will review credit periods offered, along with our collection
experience and the other relevant factors, to evaluate the adequacy of our
allowance for doubtful accounts, and to make changes to the allowance, if
necessary. Delays or non-payment of accounts receivable would have an adverse
effect on our operating cash flows.




Investing
Activities





Our main
uses of cash for investing activities during the period ended September 30, 2010
were for the purchase of property, plant and equipment related to the addition
of the new annealing furnaces at our Shanghai Blessford
facilities.  We believe these capital investments increase our
capacity, expand our product line and improve the quality of our products,
thereby creating opportunities to grow sales, enter new markets and further
strengthen our leading position in the market for niche cold rolling
steel.





Net cash
flows used in investing activities for the period ended September 30, 2010 was
$6,542,428, as compared with $2,946,433 for the period ended September 30, 2009.
The increase in investing activity was due to payment of the construction
project related to the annealing furnaces and backup rolls used in our mills
during the period ended September 30, 2010.





As of September 30, 2010, the Company
had$4,728,012 in
commitmentsfor interest
relating to its short-term and long-term loans and a share capital injection
commitment related to Shanghai Blessford. Management believes that we currently
have sufficient capital resources to meet these contractual
commitments.





Financing
Activities




Net cash
flows used in financing activities for the period ended September 30, 2010 was
$51,479, as compared with $3,296,075 provided by financing activities for the
period ended September 30, 2009. During the period ended September 30, 2009, the
Company received short-term loans of $3,735,552, which was partially offset by
repayment of short-term loans in the amount of $439,477.





On
December 30, 2008, we filed a universal shelf registration statement with the
SEC for the issuance of securities valued at up to an aggregate of $40
million.  The shelf registration statement was declared effective on
December 10, 2009 and provides us with the flexibility to issue registered
securities, from time to time, in one or more separate offerings or other
transactions with the size, price and terms to be determined at the time of
issuance.  Although we do not have any commitments or current
intentions to sell securities under the registration statement, we believe that
it is prudent to have a shelf registration statement in place to ensure
financing flexibility should the need arise.




While we currently generate sufficient
operating cash flows to support our working capital requirements, our working
capital requirements and the cash flow provided by future operating activities
will vary from quarter to quarter, and are dependent on factors such as volume
of business and payment terms with our customers. As such, we may need to rely
on access to the financial markets to provide us with significant discretionary
funding capacity. However, the current uncertainty arising out of domestic and
global economic conditions, including the recent disruption in credit markets,
poses a risk to the economies in which we operate and may adversely impact our
potential sources of capital financing. The general unavailability of credit
could make capital financing more expensive for us or impossible
altogether.  Even if we are able to obtain credit, the incurrence of
indebtedness could result in increased debt service obligations. Our inability
to renew our short-term bank loans that are due in July 2011, and the
unavailability of additional debt financing as a result of economic pressures on
the credit and equity markets could have a material adverse effect on our
business operations.




23





Current
Assets





Current
assets decreased by $6,652,605, or 5.6%, period-on-period, to $111,129,267 as of
September 30, 2010, from $117,781,872 as of June 30, 2010, principally as a
result of a decrease in accounts receivable of $5,783,980, or 14.6%,
period-on-period, as a result of strengthened efforts in credit collection
during the period, cash by $16,383,649, or 56.4%, period-on-period, offset by an
increase in inventories of $2,869,996, or 10.1%, period-on-period, and advances
to suppliers of $12,802,954, or 91.7%.





Accounts
receivable, representing 30.4% of total current assets as of September 30, 2010,
is a significant asset of the Company. We offer credit to our customers in the
normal course of our business and accounts receivable is stated net of allowance
for doubtful accounts. Credit periods vary substantially across industries,
segments, types and size of companies in China where we operate our business.
Because of the niche products that we process, our customers are usually also
niche players in their own respective segment, who then sell their products to
the end product manufacturers. The business cycle is relatively long, as well as
the credit periods. The Company offers credit to its customers for periods of 60
days, 90 days, 120 days and 180 days. We generally offer the longer credit terms
to longstanding recurring customers with good payment histories and sizable
operations. From time to time we review these credit periods, along with our
collection experience and the other factors discussed above, to evaluate the
adequacy of our allowance for doubtful accounts, and to make changes to the
allowance, if necessary.  If our actual collection experience or other
conditions change, revisions to our allowances may be required, including a
further provision which could adversely affect our operating income, or write
back of provision when estimated uncollectible accounts are actually
collected.





Our
management determines the collectability of outstanding accounts by maintaining
quarterly communication with such customers and obtaining confirmation of their
intent to fulfill their obligations to the Company. In making this
determination, our management also considers past collection experience, our
relationship with customers and the impact of current economic conditions on our
industry and market. We note that the continuation or intensification of the
current global economic crisis may have negative consequences on the business
operations of our customers and adversely impact their ability to meet their
financial obligations. To reserve for potentially uncollectible accounts
receivable, for the period ended September 30, 2009, our management has made a
50% provision for all accounts receivable that are over 180 days past due and
full provision for all accounts receivable over one year past
due.  From time to time, we will review these credit periods, along
with our collection experience and the other factors discussed above, to
evaluate the adequacy of our allowance for doubtful accounts, and to make
changes to the allowance, if necessary. If our actual collection experience or
other conditions change, revisions to our allowances may be required, including
a further provision which could adversely affect our operating income, or write
back of provision when estimated uncollectible accounts are actually
collected.





The
following table reflects the aging of our accounts receivable September 30, 2010
and June 30, 2010:





September 30,
2010





US$
            
            Total
            
            
            Current
            
            
            1 to 30
              days
            
            
            31 to
              90 days
            
            
            91 to 180
              days
            
            
            181 to 360
              days
            
            
            over
              1 yearTOTAL
            
            
            34,842,275
            
            
            
            14,983,167
            
            
            
            2,114,872
            
            
            
            4,631,085
            
            
            
            12,009,620
            
            
            
            209,961
            
            
            
            893,570%
            
            
            100
            
            
            
            43
            
            
            
            6
            
            
            
            13
            
            
            34
            
            
            1
            
            
            3





June 30,
2010




US$
            
            Total
            
            
            Current
            
            
            1 to 30
              days
            
            
            31 to
              90 days
            
            
            91 to 180
              days
            
            
            181 to 360
              days
            
            
            over
              1 yearTOTAL
            
            
            40,612,589
            
            
            
            16,750,361
            
            
            
            1,521,900
            
            
            
            5,485,380
            
            
            
            15,398,743
            
            
            
            1,177,748
            
            
            
            278,457%
            
            
            100
            
            
            
            41
            
            
            
            4
            
            
            
            14
            
            
            
            38
            
            
            
            3
            
            
            
            <1





24




Management continues to take appropriate
actions to perform business and credit reviews of any prospective customers
(whether new or returning) to protect the Company from any who might pose a high
credit risk to our business based on their commercial credit reports, our past
collection history with them, and our perception of the risk posed by their
geographic location. Management is also of the opinion that we do not currently
have any high risk receivables on our accounts.





Current
Liabilities





Current
liabilities decreased by $3,539,888, or 7.3%, period-on-period, to $44,905,239
as of September 30, 2010, from $48,445,127 as of June 30, 2010. The decrease was
mainly attributable to a decrease in accounts payable and accrued expenses of
$3,754,572, or 37.7%, period-on-period, offset by an increase in current income
taxes payable of $264,572, or 4.9%, period-on-period.





As of
September 30, 2010, we had $26,263,965 in short term-loans. These short term
loans were renewed in June 2010 for one year and will be due on July 31, 2011.
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 period ended September 30, 2010, we invested $6,542,428 in purchases of
property, plant and equipment, and construction projects in relation to the new
annealing furnaces and backup rolls for our cold rolling mills.




Loan
Facilities





The following table illustrates our
credit facilities as ofSeptember30, 2010, providing the name of the
lender, the amount of the facility, the date of issuance and the maturity
date:





All amounts in U.S.
dollars


Lender
            
            Date of Loan
            
            Maturity
              Date
            
            Duration
            
            Interest Rate
            
            Principal
              AmountRaiffeisen
              Zentralbank
      Österreich AG
            
            June
      18, 2010
            
            July
      31, 2011
            
            1
      year
            
            1.15
      times of
              the
      PBOC rate
            
            $
            7,881,612
              (RMB
      52,737,444)Raiffeisen
              Zentralbank
      Österreich AG
            
            June
      18, 2010
            
            July
      31, 2011
            
            1
      year
            
            1.15
      times of
              the
      PBOC rate
            
            $
            18,382,353
              (RMB
      123,000,000)DEG
      – Deutsche Investitions – und Entwicklungsgesellschaft mbH
            
            June
      29, 2010
            
            June
      15, 2016
            
            6
      years
            
            6
      month USD LIBOR + 4.5%
            
            $
            18,319,584Total
            
            
            
            
            
            
            
            
            
            $
            44,583,549





As ofSeptember30, 2010, we had $26,263,965in short-term loans secured by
inventories, land use rights, buildings, plant and machinery, and
$18,319,584in long-term loans secured by plant and
machinery, as illustrated in the above table.





The short-term loans will be due and
renewable on July 31, 2011. We are not aware of any existing issues that
may lead to a withdrawal of such loan at its maturity. Our inability to renewand the unavailability of
additional debt financing as a result of economic pressures on the credit and
equity markets could have a material adverse effect on our business
operations.




We believe that our currently available
working capital and the credit facilities referred to above should be adequate
to sustain our operations at our current levels and support our contractual
commitments through the next twelve months. However, our working capital
requirements and the cash flow provided by future operating activities vary from
quarter to quarter, depending on the volume of business during the period and
payment terms with our customers. As we expect a continuation of volatility in
demand and steel prices in both domestic and international markets in the
foreseeable future, our operating cash flows might be significantly negatively
impacted by reduced sales and margins. Management has strengthened its sales and
marketing activities, and continues to be in talks with potential customers
whose past orders we had been unable to fill due to full capacity, which if
successful, could result in additional sales and mitigate the impact of the
weakened demand and margins on our operating cash flow. As ofSeptember30, 2010, the Company also had$4,728,012in contractual commitments for interest
relating to its short-term and long-term loans and share capital injection
commitment related to Shanghai Blessford. As such, we may need to rely on access
to the financial markets to provide us with significant discretionary funding
capacity. However, continued uncertainty arising out of domestic and global
economic conditions, including the recent disruption in credit markets, poses a
risk to the economies in which we operate and may adversely impact our potential
sources of capital financing. The general unavailability of credit could make
capital financing more expensive for us or impossible altogether. Even if we are
able to obtain credit, the incurrence of indebtedness could result in increased
debt service obligations and could result in operating and financing covenants
that could restrict our present and future operations.




25





Obligations under Material
Contracts





Below is a table setting forth our
material contractual obligations as ofSeptember30, 2010, debt obligations include
principal repayments and interest payments:




Payments Due By YearTotal
            
            
            Fiscal Year
              2011
            
            
            Fiscal
              Year
              2012-2013
            
            
            Fiscal
              Year
              2014-2015
            
            
            Fiscal Years
              2016 and
              BeyondContractual obligations:Short-Term
      Debt Obligations
            
            $
            29,473,422
            
            
            $
            1,604,729
            
            
            $
            27,868,693
            
            
            $
            —
            
            
            $
            —Long-Term
      Debt Obligations
            
            $
            21,950,687
            
            
            $
            972,233
            
            
            $
            8,971,499
            
            
            $
            8,198,009
            
            
            $
            3,808,946Share
      Capital Injection Commitments
            
            $
            2,151,050
            
            
            
            2,151,050
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
            
            $
            53,575,159
            
            
            $
            4,728,012
            
            
            $
            36,840,192
            
            
            $
            8,198,009
            
            
            $
            3,808,946





Critical
Accounting Policies





There
have been no changes in our critical accounting policies from those disclosed in
under Item 7, “Management's Discussion and Analysis of Results of Operations and
Financial Condition” in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2010.





Recent
Accounting Pronouncements





In June 2009, the FASB issued guidance
now codified as ASC 810, “Amendments to FASB Interpretation No. 46(R)” (“ASC
810”), which amends FASB Interpretation No. 46 (revised December 2003), now
codified as ASC 810-10, to address the elimination of the concept of a
qualifying special purpose entity. ASC 810 also replaces the quantitative-based
risks and rewards calculation for determining which enterprise has a controlling
financial interest in a variable interest entity with an approach focused on
identifying which enterprise has the power to direct the activities of a
variable interest entity and the obligation to absorb losses of the entity or
the right to receive benefits from the entity. Additionally, ASC 810 provides
more timely and useful information about an enterprise’s involvement with a
variable interest entity. ASC 810 will become effective in July 2010. We do not
expect that the adoption of ASC 810 will have a material impact on our financial
statements.





In August 2009, the FASB issued
Accounting Standards Update No. 2009-05, “Measuring Liabilities at Fair Value”
(“ASU 2009-05”). ASU 2009-05 amends ASC 820, “Fair Value Measurements” (“ASC
820”). Specifically, ASU 2009-05 provides clarification that in circumstances in
which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or
more of the following methods: 1) a valuation technique that uses a) the quoted
price of the identical liability when traded as an asset or b) quoted prices for
similar liabilities or similar liabilities when traded as assets and/or 2) a
valuation technique that is consistent with the principles of ASC 820 (e.g. an
income approach or market approach). ASU 2009-05 also clarifies that when
estimating the fair value of a liability, a reporting entity is not required to
adjust to include inputs relating to the existence of transfer restrictions on
that liability. The adoption of this standard did not have an impact on the
Company’s financial position or results of operations.





In October 2009, the FASB issued ASU No.
2009-13 on ASC 605, “Revenue Recognition” (“ASC 605”), regarding
multiple-deliverable revenue arrangements. This ASU provides amendments to the
existing criteria for separating consideration in multiple-deliverable
arrangements.  The amendments establish a selling price hierarchy for
determining the selling price of a deliverable, eliminate the residual method of
allocation of arrangement consideration to all deliverables and require the use
of the relative selling price method in allocation of arrangement consideration
to all deliverables, require the determination of the best estimate of a selling
price in a consistent manner, and significantly expand the disclosures related
to the multiple-deliverable revenue arrangements. The amendments will be
effective in fiscal years beginning on or after June 15, 2010, and early
adoption is permitted. We do not expect that the adoption of ASU 2009-13 will
have a material impact on our financial statements.




26




In October 2009, the FASB issued ASU No.
2009-15, “Accounting for Own-Share Lending Arrangements in Contemplation of
Convertible Debt Issuance or Other Financing” (“ASU 2009-15”).  ASU
2009-15 amends ASC 470, “Debt with Conversion and Other Options” (“ASC 470”),
and ASC 260, “Earnings Per Share” (“ASC 260”).  Specifically, ASU
2009-15 requires companies to mark stock loan agreements at fair value and
recognize the cost of the agreements by reducing the amount of additional
paid-in capital on their financial statements.  The amendments will be
effective for fiscal years beginning on or after December 15,
2009.  We do not expect that the adoption of ASU 2009-15 will have a
material impact on our financial statements.





In December 2009, the FASB issued ASU
2009-17, “Improvements to Financial Reporting by Enterprises Involved with
Variable Interest Entities” (“ASU 2009-17”).  ASU 2009-17 details the
amendments to ASC 810, “Consolidation”, which are the result of FASB Statement
No. 167, “Amendments to FASB Interpretation No. 46(R)”.  That
statement was issued by the FASB in June 2009.  ASU 2009-17 amends the
variable-interest entity guidance in ASC 810 to clarify the accounting treatment
for legal entities in which equity investors do not have sufficient equity at
risk for the entity to finance its activities without financial
support. ASU 2009-17 is effective at the start of the first fiscal year
beginning after November 15, 2009. We do not expect that the adoption of ASU
2009-17 will have a material impact on our financial
statements.





In January 2010, the FASB issued ASU
2010-06, “Fair Value Measurements and Disclosures (Topic 820) – Improving
Disclosures about Fair Value Measurements” (“ASU 2010-06”).  ASU
2010-06 requires reporting entities to provide information about movements of
assets among Levels 1 and 2 of the three-tier fair value hierarchy established
by ASC 820.  The guidance is effective for any fiscal year that begins
after December 15, 2010 and should be used for quarterly and annual
filings.  We are currently evaluating the impact on our financial
statements of adopting the amendments in ASU 2010-06 and cannot estimate the
impact of adoption at this time.





Seasonality





Our
operating results and operating cash flows historically have been subject to
seasonal variations. Our revenues are usually higher in the second half of the
year than in the first half of the year and the first quarter is usually the
slowest quarter because fewer projects are undertaken during and around the
Chinese New Year holidays.





Off-Balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements.





ITEM
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.





Not
Applicable.





ITEM
      4.
            CONTROLS
      AND PROCEDURES.





Disclosure
Controls and Procedures





We
maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Exchange Act) that are designed to ensure that information that would be
required to be disclosed in Exchange Act reports is recorded, processed,
summarized and reported within the time period specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to our
management, including to our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.




As
required by Rule 13a-15 under the Exchange Act, our management, including our
Chief Executive Officer, Mr. Hai Sheng Chen, and Chief Financial Officer, Ms.
Leada Tak Tai Li, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of September 30, 2010.  Based on our
assessment, Mr. Chen and Ms. Li determined that, as of September 30, 2010, and
as of the date that the evaluation of the effectiveness of our disclosure
controls and procedures was completed, our disclosure controls and procedures
were effective to satisfy the objectives for which they are
intended.




27





Changes
in Internal Controls over Financial Reporting





We
regularly review our system of internal control over financial reporting and
make changes to our processes and systems to improve controls and increase
efficiency, while ensuring that we maintain an effective internal control
environment.  Changes may include such activities as implementing new,
more efficient systems, consolidating activities, and migrating
processes.





There
were no changes in our internal control over financial reporting during the
period covered by this report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.





PART
II


OTHER
INFORMATION





ITEM
      1.
            LEGAL
      PROCEEDINGS.





From time
to time, we may become involved in various lawsuits and legal proceedings, which
arise, in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these, or other matters, may
arise from time to time that may harm our business. We are currently not aware
of any such legal proceedings or claims that we believe will have a material
adverse affect on our business, financial condition or operating
results.





ITEM
      1A.
            RISK
      FACTORS.





Not
Applicable.





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





None.





ITEM
      3.
            DEFAULTS
      UPON SENIOR SECURITIES.





None.





ITEM
      4.
            (REMOVED
      AND RESERVED).








ITEM
      5.
            OTHER
      INFORMATION.





We have
no information to disclose that was required to be in a report on Form 8-K
during the period covered by this report, but was not reported. There have been
no material changes to the procedures by which security holders may recommend
nominees to our board of directors.





ITEM
      6.
            EXHIBITS.





The
following exhibits are filed as part of this report or incorporated by
reference:





Exhibit
      No.
            
            Description31.1
            
            Certifications
      of Principal Executive Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
            
            Certifications
      of Principal Financial Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
            
            Certifications
      of Principal Executive Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
            
            Certifications
      of Principal Financial Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.





28




SIGNATURES





In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.








Date:
      November 15, 2010
            CHINA
      PRECISION STEEL, INC.By:
            /s/
      Hai Sheng ChenHai
      Sheng Chen, Chief Executive Officer(Principal
      Executive Officer)




By:
            /s/ Leada
      Tak Tai LiLeada
      Tak Tai Li, Chief Financial Officer(Principal
      Financial Officer and Principal
              Accounting
      Officer)





29