**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM 10-Q/A**


**(Amendment
      No. 1)**




**(Mark
      One)**




**x**
            **Quarterly
                Report pursuant to Section 13 or 15(d) of the Securities
                Exchange Act of 1934**




**For
      the quarterly period ended December 31, 2007**




**or**




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




**For
      the transition period
      from             
to**




**Commission
      file number 000-23039**




**CHINA
      PRECISION STEEL, INC.**


(Exact
      name of registrant as specified in charter)





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




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


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


(Address
      of principal executive offices)




**+852-2543-8223**


Registrant’s
      telephone number, including area code:






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




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the registrant
      was required to file such reports), and (2) has been subject to such filing
      requirements for the past 90 days.




Yes x No o




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




Large
      accelerated filer o Accelerated
      filer o Non-accelerated
      filer o Smaller
      reporting company x




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




Yes o No x




As
      of
      February 14, 2008, there were 45,896,288 shares of the Company’s common
      stock outstanding.








**EXPLANATORY
      NOTE**




**RESTATEMENT
      OF FINANCIAL STATEMENTS**




This
      Amendment No. 1 to our Quarterly Report on Form 10-Q for the fiscal quarter
      ended December 31, 2007, originally filed on February 14, 2008 (the “Original
      Filing”), is being filed to correct the items identified below.




**RESTATEMENTS**




As
      described in the current report on Form 8-K filed by the Company with the SEC
      on
      May 16, 2008, the Company announced that it would restate its financial
      statements for the quarterly periods ended September 30, 2007 and December
      31,
      2007. The restatements are primarily related to an incorrect deduction of VAT
      from net sales and an overstatement of deferred tax liability. The Company’s
      financial statements for the three and six months ended December 31, 2007 are
      being restated to reflect the changes to the consolidated balance sheet,
      consolidated statement of operations, and consolidated statement of cash flows
      summarized as follows:




·
            to
                restate the other receivables, current income taxes payableand deferred income taxsections on the Condensed Consolidated Balance Sheets due to
                understatement of other receivables and current income taxes,
                and overstatement of deferred income tax;




·
            to
                restate the sales revenues, gross profit, current income tax,deferred
                income tax,net
                income, diluted earnings per share and comprehensive income sections
                on
                the Condensed Consolidated Statements of Operations and Comprehensive
                Income due to understatement of sales revenues, gross profit,current
                income tax,net
                income, diluted earnings per share, comprehensive income and overstatement
                ofdeferredincome
                tax; and




·
            to
                restate the net income, account receivables, net and current income
                taxes
                due to understatement of net income, cash outflows from account
                receivables, net and understatement of cash inflows from current
                income
                taxes on the Condensed Consolidated Statements of Cash
                Flows.


The
        relevant sections in Item 2, Management’s Discussion and Analysis of Financial
        Condition and Results of Operations, of this Form 10-Q/A has also been amended
        to reflect the restated financial statements. The management of the Company
        worked with the Company’s independent registered public accounting firm to
        correct the matters disclosed herein.
  In
        addition,
        Item 4,
        Controls and Procedures, of this Form 10-Q/A has been amended to disclose
        that
        based on management’s evaluation as of December 31, 2007, the Company’s
        disclosure controls and procedures were not effective due to restatements
        referenced above. However, as stated in the Company’s annual report on Form
        10-K for the fiscal year ended June 30, 2008, management determined that
        the
        Company’s disclosure controls and procedures were again effective as of June 30,
        2008.





Except
      for the amended and restated information, this Form 10-Q/A continues to describe
      conditions as of the date of the Original Filing, and the disclosures contained
      herein have not been updated to reflect events, results or developments that
      have occurred after the Original Filing, or to modify or update those
      disclosures affected by subsequent events. Among other things, forward-looking
      statements made in the Original Filing have not been revised to reflect events,
      results or developments that have occurred or facts that have become known
      to us
      after the date of the Original Filing (other than this restatement), and such
      forward-looking statements should be read in their historical context. This
      Form
      10-Q/A should be read in conjunction with the Company’s filings made with the
      SEC subsequent to the Original Filing, including any amendments to those
      filings.


2


**China
      Precision Steel, Inc.**


**Index
      to Quarterly Report**


**on
      Form 10-Q**




**Quarter
      Ended December 31, 2007**




**Part I
                - Financial Information**Item
                1.
            Financial
                Statements
            4Condensed
                Consolidated Balance Sheets at, December 31, 2007 (unaudited) and
                June 30, 2007 (audited)
            4Unaudited
                Condensed Consolidated Statements of Operations for the three and six
                months ended December 31, 2007 and 2006
            5Unaudited Condensed
                Consolidated Statements of Cash Flows for the six months ended
                December 31, 2007 and 2006
            6Condensed
                Consolidated Statements of Changes in Stockholders’ Equity for the year
                ended June 30, 2007 (audited) and the six months ended
                December 31, 2007 (unaudited)
            7Notes
                to Condensed Consolidated Financial Statements
            8Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            21Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            30Item
                4.
            Controls
                and Procedures
            31**Part II
                - Other Information**Item
                1.
            Legal
                Proceedings
            32Item
                1A.
            Risk
                Factors
            32Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            43Item
                3.
            Defaults
                Upon Senior Securities
            44Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            44Item
                5.
            Other
                Information
            44Item
                6.
            Exhibits
            45Signatures
            
            46




3


**ITEM
      1. FINANCIAL STATEMENTS.**




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


**Condensed
      Consolidated Balance Sheets**





**(Unaudited)****December 31,**
            
            **June 30,****Notes**
            
            **2007**
            
            **2007**(Restated –see
              Note 19)**Assets****Current assets**Cash
                and equivalents
            
            
            
            
            $
            40,205,111
            
            $
            5,504,862Accounts
                receivableTrade,
                net of allowances of $955,086 and $273,461 at December 31, and June
                30,
                2007, respectively
            
            
            
            
            
            19,888,272
            
            
            8,242,044Bank
                acceptance notes
            
            
            
            
            
            15,383,562
            
            
            -Other
            
            
            
            
            
            3,746,438
            
            
            85,708Inventories
            
            
            5
            
            
            10,671,635
            
            
            15,723,704Deposits
            
            
            
            
            
            68,493
            
            
            82,758Prepaid
                expenses
            
            
            
            
            
            326,065
            
            
            -Advances
                to suppliers, net of allowance of $2,368,805 and $3,502,184 at December
                31, and June 30, 2007, respectively
            
            
            
            
            
            10,256,715
            
            
            11,699,918**Total
                current assets**
            
            
            
            
            
            100,546,291
            
            
            41,338,994**Property
                and equipment**Land
                use rights
            
            
            
            
            
            1,795,461
            
            
            1,124,583Property
                and equipment, net
            
            
            6
            
            
            32,305,573
            
            
            29,238,227Construction-in-progress
            
            
            7
            
            
            11,503,835
            
            
            10,355,76345,604,869
            
            
            40,718,573**Goodwill**
            
            
            
            
            
            99,999
            
            
            99,999**Total
                assets**
            
            
            
            
            $
            146,251,159
            
            $
            82,157,566**Liabilities
                and Stockholders' Equity****Current
                liabilities**Accounts
                payable and accrued liabilities
            
            
            
            
            $
            6,196,315
            
            $
            4,855,932Advances
                from customers
            
            
            8
            
            
            3,807,354
            
            
            1,720,812Other
                taxes payables
            
            
            
            
            
            3,571,039
            
            
            816,553Current
                income taxes payable
            
            
            
            
            
            3,658,571
            
            
            1,892,866Deferred
                income taxes payable
            
            
            
            
            
            -
            
            
            1,064,028Amounts
                due to directors
            
            
            9
            
            
            2,543,019
            
            
            408,620Current
                portion of long-term debt
            
            
            
            
            
            3,086,758
            
            
            6,163,445Notes
                payable
            
            
            10
            
            
            16,713,720
            
            
            9,842,520**Total
                current liabilities**
            
            
            
            
            
            39,576,776
            
            
            26,764,776**Long-term
                debt, net of current portion shown above**
            
            
            11
            
            
            2,315,069
            
            
            6,878,714**Stockholders'
                equity:**Preferred
                stock: $0.001 par value, 8,000,000 shares authorized, no shares
                outstanding at December 31, and June 30, 2007;
            
            
            14Common
                stock: $0.001 par value, 62,000,000 shares authorized, 45,896,288
                and
                37,378,143 issued and outstanding December 31, and June 30,
                2007
            
            
            14
            
            
            45,896
            
            
            37,378Additional
                paid-in capital
            
            
            14
            
            
            73,701,004
            
            
            31,867,063Accumulated
                other comprehensive income
            
            
            
            
            
            4,277,019
            
            
            2,192,160Retained
                earnings
            
            
            
            
            
            26,335,395
            
            
            17,008,238**Total
                stockholders' equity**
            
            
            
            
            
            104,359,314
            
            
            51,104,839**Amounts
                due from directors**
            
            
            9
            
            
            -
            
            
            (2,590,763
            )**Total
                liabilities and stockholders' equity**
            
            
            
            
            $
            146,251,159
            
            $
            82,157,566





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


4




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


**Condensed
      Consolidated Statements of Operations**


**For
      the Three and Six Months Ended December 31. 2007 and 2006**


**(Unaudited)**





**Three Months Ended**
            
            **Six Months Ended****December 31,**
            
            **December 31,**
            
            **December 31,**
            
            **December 31,****Notes**
            
            **2007**
            
            **2006**
            
            **2007**
            
            **2006**(Restated –
              see Note 19)
            
            
            
            (Restated –
              see Note 19)**Revenues**Sales
                revenues
            
            
            
            
            $
            13,228,321
            
            $
            15,007,582
            
            $
            40,415,556
            
            $
            25,510,930Cost
                of goods sold
            
            
            
            
            
            8,528,852
            
            
            11,594,852
            
            
            28,773,987
            
            
            18,394,950**Gross
                profit**
            
            
            
            
            
            4,699,469
            
            
            3,412,730
            
            
            11,641,569
            
            
            7,115,980**Operating
                expenses**Selling
                expenses
            
            
            
            
            
            180,744
            
            
            64,693
            
            
            281,449
            
            
            104,390Administrative
                expenses
            
            
            
            
            
            846,220
            
            
            498,737
            
            
            1,332,596
            
            
            684,925Provision
                for bad debts
            
            
            
            
            
            25,782
            
            
            -
            
            
            651,780
            
            
            -Depreciation
                and amortization expense
            
            
            
            
            
            15,798
            
            
            10,845
            
            
            29,430
            
            
            21,262**Total
                operating expenses**
            
            
            
            
            
            1,068,544
            
            
            574,275
            
            
            2,295,255
            
            
            810,577**Income
                from continuing operations**
            
            
            
            
            
            3,630,925
            
            
            2,838,455
            
            
            9,346,314
            
            
            6,305,403**Other
                income (expense)**Other
                revenues
            
            
            
            
            
            783,255
            
            
            -
            
            
            792,410
            
            
            -Interest
                and finance costs
            
            
            
            
            
            (316,860
            )
            
            (114,743
            )
            
            (759,001
            )
            
            (318,082
            )**Total
                other income (expense)**
            
            
            
            
            
            466,395
            
            
            (114,743
            )
            
            33,409
            
            
            (318,082
            )**Income
                from continuing operations before income tax**
            
            
            
            
            
            4,097,320
            
            
            2,723,712
            
            
            9,379,723
            
            
            5,987,321**Provision
                for (benefit from) income tax**
            
            
            12Current
            
            
            
            
            
            610,869
            
            
            (34,057
            )
            
            1,116,594
            
            
            895,313Deferred
            
            
            
            
            
            -
            
            
            389,604
            
            
            (1,064,028
            )
            
            (85,405
            )Total
                income tax expense (benefit)
            
            
            
            
            
            610,869
            
            
            355,547
            
            
            52,566
            
            
            809,908**Net
                income before discontinued operations**
            
            3,486,451
            
            
            2,368,165
            
            
            9,327,157
            
            
            5,177,413**Net
                income from discontinued operations**
            
            
            16
            
            
            -
            
            
            519,879
            
            
            -
            
            
            639,072**Net
                income**
            
            
            
            
            $
            3,486,451
            
            $
            2,888,044
            
            $
            9,327,157
            
            $
            5,816,485**Basic
                earnings per share**
            
            
            15From
                continuing operations
            
            
            
            
            $
            0.08
            
            $
            0.09
            
            $
            0.23
            
            $
            0.19From
                discontinued operations
            
            
            
            
            $
            -
            
            $
            0.02
            
            $
            -
            
            $
            0.03Total
            
            
            
            
            $
            0.08
            
            $
            0.11
            
            $
            0.23
            
            $
            0.22**Basic
                weighted average shares outstanding**
            
            43,031,346
            
            
            26,981,916
            
            
            40,204,745
            
            
            26,981,916**Diluted
                earnings per share**
            
            
            15From
                continuing operations
            
            
            
            
            $
            0.08
            
            $
            0.09
            
            $
            0.23
            
            $
            0.19From
                discontinued operations
            
            
            
            
            $
            -
            
            $
            0.02
            
            $
            -
            
            $
            0.03Total
            
            
            
            
            $
            0.08
            
            $
            0.11
            
            $
            0.23
            
            $
            0.22**Diluted
                weighted average shares outstanding**
            
            43,639,342
            
            
            26,981,916
            
            
            40,809,437
            
            
            26,981,916**The
                Components of comprehensive income:**Net
                income
            
            
            
            
            $
            3,486,451
            
            $
            2,888,044
            
            $
            9,327,157
            
            $
            5,816,485Foreign
                currency translation adjustment
            
            
            
            
            
            1,179,322
            
            
            557,213
            
            
            2,084,859
            
            
            654,985**Comprehensive
                income**
            
            
            
            
            $
            4,665,773
            
            $
            3,445,257
            
            $
            11,412,016
            
            $
            6,471,470





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




5


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


**Condensed
      Consolidated Statements of Cash Flows**


**For
      the Six Months Ended December 31, 2007 and 2006**


**(Unaudited)**





**2007**
            
            **2006**(Restated –
              see Note 19)**Cash
                flows from operating activities****Net
                Income**
            
            $
            9,327,157
            
            $
            5,816,485**Adjustments
                to reconcile net income to net cash provided by****(used
                in) operating activities**Depreciation
            
            
            992,570
            
            
            617,405Less
                income from discontinued operations - Oralabs, Inc
            
            
            -
            
            
            (639,072
            )Allowance
                for bad and doubtful debts
            
            
            651,780
            
            
            -**Net
                changes in assets and liabilities:**Accounts
                receivable, net
            
            
            (31,266,517
            )
            
            4,059,814Inventories
            
            
            5,195,155
            
            
            (8,207,665
            )Deposits
            
            
            15,018
            
            
            (3,661
            )Prepayments
            
            
            (326,065
            )
            
            -Advances
                to suppliers
            
            
            1,549,672
            
            
            (4,410,823
            )Accounts
                payable and accrued expenses
            
            
            1,296,194
            
            
            4,622,396Advances
                from customers
            
            
            2,070,883
            
            
            2,919,124Other
                taxes payable
            
            
            2,747,055
            
            
            (152,086
            )Current
                income taxes
            
            
            1,748,480
            
            
            937,307Deferred
                income taxes
            
            
            (1,064,028
            )
            
            (85,405
            )**Net
                cash (used in) provided by operating activities**
            
            
            (7,062,646
            )
            
            5,473,819**Cash
                flows from investing activities**Purchases
                of property and equipment including construction in
                progress
            
            
            (5,508,327
            )
            
            (10,212,328
            )**Net
                cash (used in) investing activities**
            
            
            (5,508,327
            )
            
            (10,212,328
            )**Cash
                flows from financing activities**Sale
                of common stock
            
            
            44,433,222
            
            
            -Capital
                and restructuring contributions
            
            
            -
            
            
            558,797Advances
                from directors, net
            
            
            2,154,257
            
            
            (3,237,243
            )Notes
                payable proceeds
            
            
            16,446,667
            
            
            7,748,990Repayments
                of notes payable
            
            
            (17,424,050
            )
            
            -**Net
                cash provided by financing activities**
            
            
            45,610,096
            
            
            5,070,544**Effect
                of exchange rate**
            
            
            1,661,126
            
            
            654,985**Net
                increase in cash**
            
            
            34,700,249
            
            
            987,020**Cash
                and cash equivalents, beginning of period**
            
            
            5,504,862
            
            
            186,955**Cash
                and cash equivalents, end of period**
            
            $
            40,205,111
            
            $
            1,173,975**Supplemental
                disclosure of cash flow information**Interest
                paid
            
            $
            759,001
            
            $
            318,082Taxes
                paid
            
            $
            -
            
            $
            -





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


6


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


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


**For
      the Year Ended June 30, 2007 and the Six Months Ended December 31,
      2007**





**Accumulated****Additional**
            
            **Other**
            
            
            
            **Total****Ordinary
                Shares**
            
            **Paid-in**
            
            **Comprehensive**
            
            **Retained**
            
            **Stockholders'****Share**
            
            **Amount**
            
            **Capital**
            
            **Income**
            
            **Earnings**
            
            **Equity**Balance
                at June 30, 2006
            
            
            24,283,725
            
            
            24,284
            
            
            1,375,716
            
            
            745,583
            
            
            9,535,577
            
            
            11,681,160Sale
                of common stock
            
            
            7,451,665
            
            
            7,451
            
            
            22,347,543
            
            
            -
            
            
            -
            
            
            22,354,994Syndication
                fees
            
            
            -
            
            
            -
            
            
            (3,028,116
            )
            
            -
            
            
            -
            
            
            (3,028,116
            )Stock
                issued for syndication fees
            
            
            2,798,191
            
            
            2,798
            
            
            (2,798
            )
            
            -
            
            
            -
            
            
            -Anti-dilution
                rights stock
            
            
            827,962
            
            
            828
            
            
            (828
            )
            
            -
            
            
            -
            
            
            -Conversion
                of debt to stock
            
            
            2,016,600
            
            
            2,017
            
            
            6,773,759
            
            
            
            
            
            
            
            
            6,775,776Warrants
                issued for consulting
            
            
            -
            
            
            -
            
            
            447,993
            
            
            -
            
            
            -
            
            
            447,993Capital
                contribution from waiver of dividend
            
            
            -
            
            
            -
            
            
            3,953,794
            
            
            
            
            
            
            
            
            3,953,794Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            1,446,577
            
            
            -
            
            
            1,446,577Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            8,304,109
            
            
            8,304,109Less
                discontinued operations sold to former shareholder
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (831,448
            )
            
            (831,448
            )Balance
                at June 30, 2007
            
            
            37,378,143
            
            
            37,378
            
            
            31,867,063
            
            
            2,192,160
            
            
            17,008,238
            
            
            51,104,839Sale
                of common stock
            
            
            7,100,000
            
            
            7,100
            
            
            44,498,650
            
            
            -
            
            
            -
            
            
            44,505,750Syndication
                fees
            
            
            -
            
            
            -
            
            
            (72,528
            )
            
            -
            
            
            -
            
            
            (72,528
            )Make
                good shares
            
            
            2,000,000
            
            
            2,000
            
            
            (2,000
            )
            
            -
            
            
            -
            
            
            -Exercise
                of warrants
            
            
            189,205
            
            
            189
            
            
            (189
            )
            
            -
            
            
            -
            
            
            -Cancellation
                of stock
            
            
            (771,060
            )
            
            (771
            )
            
            (2,589,992
            )
            
            -
            
            
            -
            
            
            (2,590,763
            )Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            2,084,859
            
            
            -
            
            
            2,084,859Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            9,327,157
            
            
            9,327,157Balance
                at December 31, 2007
              (Unaudited
                and Restated)
            
            
            45,896,288
            
            $
            45,896
            
            $
            73,701,004
            
            $
            4,277,019
            
            $
            26,335,395
            
            $
            104,359,314





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


7





**China
      Precision Steel, Inc.**


Notes
      to
      the Condensed Consolidated Financial Statements




**1.
      Description of Business**




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




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




PSHL,
      registered on April 30, 2002 in the Territory of the British Virgin
      Islands, had registered capital of $50,000 as of June 30, 2007 and 2006. It
      has three wholly-owned subsidiaries, Shanghai Chengtong Precision Strip Company
      Limited (“Chengtong”), Shanghai Tuorong Precision Strip Co., Limited
      (“Tuorong”), and Blessford International Limited (“Blessford”).




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




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




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




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




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




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




In
      the
      opinion of management, the accompanying unaudited condensed consolidated
      financial statements contain all adjustments (which include only normal
      recurring adjustments) necessary to present fairly the balance sheets of China
      Precision Steel, Inc. and subsidiaries as of December 31, 2007 and
      June 30, 2007 and the results of their operations for the three and six
      months ended December 31, 2007 and 2006, and cash flows for the six months
      ended December 31, 2007 and 2006. The results of operations for the three
      and six months ended December 31, 2007 and 2006 are not necessarily
      indicative of the results to be expected for the entire year.




8


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




The
      following is a summary of significant accounting policies:




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




**Accounts
      Receivable -** The
      Company provides an allowance for doubtful accounts equal to the estimated
      uncollectible amounts. It is reasonably possible that the Company’s estimate of
      the allowance will change. At December 31, 2007 and June 30, 2007, the
      Company had $955,086 and $273,461 of allowances for doubtful accounts,
      respectively.




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




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




**Advances
      to Suppliers -** In
      order
      to insure a steady supply of raw materials, the Company is required from time
      to
      time to make cash advances when placing its purchase orders. Cash advances
      are
      shown net of allowances for unrecoverable advances of $2,368,805 and $3,502,184
      at, December 31, 2007 and June 30, 2007, respectively.




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




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




Buildings
            
            25
                yearsOffice
                equipment
            
            5
                yearsMotor
                vehicles
            
            5
                yearsMachineries
            
            10
                years




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




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




**Capitalized
      Interest -** The
      Company capitalizes interest cost on borrowings incurred during the new
      construction or upgrade of qualified assets. Capitalized interest is added
      to
      the cost of the underlying assets and is amortized over the useful lives of
      the
      assets. During the six months ended December 31, 2007 and 2006, the Company
      capitalized $0 and $497,686, respectively, of interest to
      construction-in-progress.




**Construction-in-Progress** -
      Properties 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 properties
      held for sale.




Construction-in-progress
      is valued at the lower of cost or market. Management evaluates the market value
      of its properties on a quarterly basis by comparing selling prices of its
      properties with those of other equivalent properties in the vicinity offered
      by
      other developers reduced by anticipated selling costs and associated taxes.
      In
      the case of construction-in-progress, management takes into consideration the
      estimated cost to complete the project when making the lower of cost or market
      calculation.




**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.


9


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




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




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




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




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




**Foreign
      Currencies** - The
      Company’s principal country of operations is in the PRC. The financial position
      and results of operations of the Company are determined using the local currency
      (“Renminbi” or “Yuan”) as the functional currency. The results of operations
      denominated in foreign currencies are translated at the average rate of exchange
      during the reporting period. Assets and liabilities denominated in foreign
      currencies at the balance sheet date are translated at the market rate of
      exchange ruling at that date. The registered equity capital denominated in
      the
      functional currency is translated at the historical rate of exchange at the
      time
      of capital contribution. All translation adjustments resulting from the
      translation of the financial statements into the reporting currency (“US
      Dollars”) are dealt with as an exchange fluctuation reserve in shareholders’
equity.




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




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




*Enterprise
      income tax*




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




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




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




10


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




Based
      on
      all known facts and circumstances and current tax law, the Company believes
      that
      the total amounts of unrecognized tax benefits as of December 31 and
      June 30, 2007, are not material to its results of operations, financial
      condition or cash flows. The Company also believes that the total amounts of
      unrecognized tax benefits as of December 31 and June 30, 2007, 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.




*Value
      added tax*




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




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




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




For
      the
      three and six months ended December 31, 2007, the Company’s pension cost
      charged to the statements of operations under the plan amounted to $72,059
      and
      $132,658, respectively, all of which have been paid to the State Pension Fund
      (2006: $39,466 and $74,163, respectively).




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




**Adjustments** -
      In the
      opinion of management, all adjustments that are necessary for a fair
      presentation for the periods presented have been reflected as required by
      Regulation S-X, Rule 10-01. All such adjustments are of a normal, recurring
      nature.




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




**Recent
      Accounting Pronouncements**




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




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




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


11


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




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




In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
      Combinations” (“SFAS 141(R)”). SFAS 141(R) will change the accounting for
      business combinations. Under SFAS No. 141(R), an acquiring entity will be
      required to recognize all the assets acquired and liabilities assumed in a
      transaction at the acquisition-date fair value with limited exceptions. SFAS
      No. 141(R) will change the accounting treatment and disclosure for
      certain specific items in a business combination. SFAS
      No. 141(R) applies prospectively to business combinations for which
      the acquisition date is on or after the beginning of the first annual reporting
      period beginning on or after December 15, 2008. SFAS 141(R) will
      impact the Company in the event of any future acquisition.




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




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




The
      Company provides credit in the normal course of business. The Company performs
      ongoing credit evaluations of its customers and clients and maintains allowances
      for doubtful accounts based on factors surrounding the credit risk of specific
      customers and clients, historical trends, and other information. Trade accounts
      receivable totaled $19,888,272 and $8,242,044 as of December 31, 2007 and
      June 30, 2007, respectively.




The
      Company’s list of customers whose purchases exceeded 10% of total sales during
      the six months ended December 31, 2007 and 2006 is as follows:




**Customers**
            
            **December 31,**
              **2007**
            
            **% to**
              **sales**
            
            **December 31,**
              **2006**
            
            **% to**
              **sales**Shanghai Changshuo Steel Company, Ltd
            
            
            11,076,780
            
            
            27Shanghai
                Shengdejia Metal Products Limited
            
            
            6,492,562
            
            
            16Shanghai
                Ruixuefeng Metals Co., Limited
            
            
            
            
            
            
            
            
            9,254,127
            
            
            36Sinosteel
                Company Limited
            
            
            
            
            
            
            
            
            3,219,796
            
            
            13




**5.** **Inventories**




Inventory
      consisted of the following:




**December 31,**
              **2007**
            
            **June 30,**
              **2007**Raw materials
            
            $
            3,560,539
            
            $
            13,026,530Work in
                progress
            
            
            2,403,644
            
            
            —Finished
                goods
            
            
            4,707,452
            
            
            2,697,174$
            10,671,635
            
            $
            15,723,704




12


**6.** **Property
      and Equipment**




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




**December 31,**
              **2007**
            
            **June 30,**
              **2007**Plant
                and machinery
            
            $
            19,053,914
            
            $
            21,087,245Buildings
            
            
            17,568,240
            
            
            11,361,207Motor
                vehicles
            
            
            345,350
            
            
            283,534Office
                equipment
            
            
            66,268
            
            
            85,56037,033,772
            
            
            32,817,546Less:
                Accumulated depreciation
            
            
            (4,728,199
            )
            
            (3,579,319
            )$
            32,305,573
            
            $
            29,238,227




Depreciation
      expense related to manufacturing is included as a component of cost of goods
      sold. During the three and six months ended December 31, 2007, depreciation
      totaling $483,482 and $961,462, respectively, was included as a component of
      cost of goods sold (2006: $345,669 and $596,143, respectively).




**7.   Construction-In-Progress**




Construction-in-progress
      consisted of the following:




**December 31,**
              **2007**
            
            **June 30,**
              **2007**Construction
                costs of plant and machinery
            
            $
            11,503,835
            
            $
            10,355,763




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




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




Advances
      from customers represent advance cash receipts from new customers and for which
      goods have not been delivered or services rendered as of the balance sheets
      dates. Advances from customers for goods to be delivered or services to be
      rendered in the subsequent period are carried forward as deferred revenue.
      As of
      December 31, 2007 and June 30, 2007, there were advances from
      customers of $3,807,354 and $1,720,812, respectively.




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




Amounts
      due to (from) directors are as follows:




**Name**
            
            **December 31, 2007**
            
            **June 30, 2007**Wo
                Hing Li
            
            $
            2,120,596
            
            $
            (2,590,763
            )Hai
                Sheng Chen
            
            
            422,423
            
            
            408,619$
            2,543,019
            
            $
            (2,182,144
            )




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




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




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




13




**10.  Short-Term
      Loans**




Short-term
      loans consisted of the following:




**December 31,**
              **2007**
            
            **June 30,**
              **2007**Bank
                loan dated September 22, 2005, due December 31, 2007 with a
                interest rate of 15% over the standard market rate set by the People’s
                Bank of China for Renminbi loans, secured by land, buildings and
                machinery
            
            $
            —
            
            $
            9,842,520Bank
                loan dated August 1, 2007, due in one year with a interest rate of
                the Singapore Interbank Offered Rate (SIBOR) plus 3% (7.73% at
                December 31, 2007)
            
            
            5,300,000
            
            
            —Bank
                loan dated August 1, 2007, due in one year with a interest rate of
                13% over the standard market rate set by the People’s Bank of China for
                Renminbi loans, secured by land, buildings, plant and machinery (8.24%
                at
                December 31, 2007)
            
            
            2,701,391
            
            
            —Bank
                loan dated July 26, 2007, due in one year with a interest rate of 15%
                over the standard market rate set by the People’s Bank of China for
                Renminbi loans, secured by land, buildings, plant and machinery (8.38%
                at
                December 31, 2007)
            
            
            8,712,329
            
            
            —$
            16,713,720
            
            $
            9,842,520




The
      weighted average interest rate on short-term loans at December 31, 2007 was
      8.15%.




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




**December 31,**
                **2007**
              
              **June 30,**
                **2007**Long-term
                  debts:Bank
                  loan dated October 14, 2004, due July 31, 2007, at an interest
                  rate of 3% over the 10% of the standard market rate set by the
                  People’s
                  Bank of China for Renminbi loans, secured by land, buildings and
                  machinery
              
              $
              —
              
              $
              6,163,445Bank
                  loan dated September 22, 2005, due August 31, 2009, at an
                  interest rate of 15% the standard market rate set by the People’s Bank of
                  China for Renminbi loans, secured by land, buildings and machinery
                  (8.38%
                  at December 31, 2007)
              
              
              5,401,827
              
              
              6,878,714Total
                  long-term debt
              
              
              5,401,827
              
              
              13,042,159Less:
                  Current portion of long-term debts
              
              
              3,086,758
              
              
              6,163,445Long-term
                  debts
              
              $
              2,315,069
              
              $
              6,878,714




Maturities
      on long-term debt for each of the next five years and thereafter are as
      follows:




2008
            
            $
            3,086,7582009
            
            
            2,315,0692010201120122013
                and after$
            5,401,827




**12.   Income
      Tax**




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




No
      accrual for deferred taxes was required for the fiscal year ended June 30,
      2005 as the Group benefited from Chengtong’s 100% tax holiday during the two
      fiscal years ended June 30, 2006 and all material timing differences would
      reverse within one year with the exception of depreciation which resulted in
      a
      small deferred tax asset which was deemed to be immaterial by the Company and
      was not recorded at that time.




As
      of
      June 30, 2006, Chengtong had utilized all of its 100% tax holiday,
      therefore any timing differences reversing within the next three years would
      be
      taxed at 50% of the statutory rate of 27%.




14




The
      tax
      holiday resulted in tax savings as follows:




**Three months ended December 31,**
            
            **Six months ended December 31****2007**
            
            **2006**
            
            **2007**
            
            **2006**Tax
                savings
            
            $
            668,444
            
            $
            367,701
            
            $
            1,345,100
            
            $
            806,669Benefit
                per shareBasic
            
            $
            0.01
            
            $
            0.01
            
            $
            0.07
            
            $
            0.03Diluted
            
            $
            0.01
            
            $
            0.01
            
            $
            0.07
            
            $
            0.03




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




**Deferred tax liabilities:**
            
            **December 31,**
              **2007**
            
            **June 30,**
              **2007**Book
                depreciation in excess of tax depreciation
            
            $
            63,831
            
            $
            39,918Temporary
                differences resulting from cash basis reporting for tax
                purposes
            
            
            448,725
            
            
            (1,103,946
            )Valuation
                allowance
            
            
            (512,556
            )
            
            —Net
                deferred income tax (liability)
            
            $
            —
            
            $
            (1,064,028
            )




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


****
              **Three months ended**
                **December 31,**
              ****
              **Six months ended**
                **December 31,**
              ********
              ****
              **2007**
              ****
              **2006**
              ****
              **2007**
              ****
              **2006**Computed
                  tax at the federal statutory rate of 34%
              
              $
              1,393,089
              
              $
              926,062
              
              $
              3,189,106
              
              $
              2,035,689Less
                  adjustment to EIT statutory rate of 27%
              
              
              (244,051
              )
              
              (190,660
              )
              
              (613,819
              )
              
              (419,112
              )Tax
                  effect of US losses not deductible in PRC
              
              
              130,275
              
              
              -
              
              
              216,768
              
              
              -Income
                  not subject to tax
              
              
              -
              
              
              -
              
              
              (330,361
              )
              
              -Deferred
                  taxes
              
              
              -
              
              
              -
              
              
              (1,064,028
              )
              
              -Benefit
                  of tax holiday
              
              
              (668,444
              )
              
              (379,855
              )
              
              (1,345,100
              )
              
              (806,669
              )Income
                  tax expense per books
              
              $
              610,689
              
              $
              355,547
              
              $
              52,566
              
              $
              809,908




Income
      tax expense (benefit) consists of:




**Three months ended**
              **December 31,**
            
            **Six months ended**
              **December 31,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Income
                tax expense (benefit) for the current year - PRC
            
            $
            610,869
            
            $
            (34,057
            )
            $
            1,116,594
            
            $
            895,313Deferred
                income tax expense (benefit) - PRC
            
            
            
            
            
            389,604
            
            
            (1,064,028
            )
            
            (85,405
            )Income
                tax expense (benefit) per books
            
            $
            610,869
            
            $
            355,547
            
            $
            52,566
            
            $
            809,908




**13.  Blessford
      International Limited**




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




**14.  Equity**




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




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




15




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




Information
      with respect to stock warrants outstanding is as follows:




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




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




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




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




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




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




**15.  Earnings
      Per Share**




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




For
      the
      six months ended December 31, 2007 , dilutive shares include outstanding
      warrants to purchase 1,025,059 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.
      There
      were no dilutive shares outstanding at December 31, 2006.




16




The
      following reconciles the components of the EPS computation:




****
            
            **Income**
            
            **Shares**
            
            **Per Share******
            
            **(Numerator)**
            
            **(Denominator)**
            
            **Amount**For
                the three months ended December 31, 2007:Net
                income
            
            $
            3,486,451Less
                Net income from discontinued operations
            
            $
            —Basic
                EPS income available to common shareholders
            
            $
            3,486,451
            
            
            43,031,346
            
            $
            0.08Effect
                of dilutive securities:Warrants
            
            
            
            
            
            607,996Diluted
                EPS income available to common shareholders
            
            $
            3,486,451
            
            
            43,639,342
            
            $
            0.08For
                the three months ended December 31, 2006:Net
                income
            
            $
            2,888,044Less
                net income from discontinued operations
            
            $
            (519,879
            )Basic
                EPS income available to common shareholders
            
            $
            2,368,165
            
            
            26,981,916
            
            $
            0.09Effect
                of dilutive securities:Warrants
            
            
            
            
            
            —Diluted
                EPS income available to common shareholders
            
            $
            2,368,165
            
            
            26,981,916
            
            $
            0.09




****
                
                **Income**
                
                **Shares**
                
                **Per Share******
                
                **(Numerator)**
                
                **(Denominator)**
                
                **Amount**For
                    the six months ended December 31, 2007:Net
                    income
                
                $
                9,327,157Less
                    Net income from discontinued operations
                
                $
                —Basic
                    EPS income available to common shareholders
                
                $
                9,327,157
                
                
                40,204,745
                
                $
                0.23Effect
                    of dilutive securities:Warrants
                
                
                
                
                
                604,692Diluted
                    EPS income available to common shareholders
                
                $
                9,327,157
                
                
                40,809,437
                
                $
                0.23For
                    the six months ended December 31, 2006:Net
                    income
                
                $
                5,816,485Less
                    net income from discontinued operations
                
                $
                (639,072
                )Basic
                    EPS income available to common shareholders
                
                $
                5,177,413
                
                
                26,981,916
                
                $
                0.19Effect
                    of dilutive securities:Warrants
                
                
                
                
                
                —Diluted
                    EPS income available to common shareholders
                
                $
                5,177,413
                
                
                26,981,916
                
                $
                0.19




**16.  Discontinued
      Operations**




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




Summarized
      selected financial information for discontinued operations for the three and
      six
      months ended December 31, 2007, and 2006 is as follows:




****
            
            **Three months ended**
            
            **Six months ended******
            
            **December 31,**
            
            **December 31******
            
            **2007**
            
            **2006**
            
            **2007**
            
            **2006****($ ‘000)**
            
            **($ ‘000)**
            
            **($ ‘000)**
            
            **($ ‘000)**Revenues
            
            $
            -0-
            
            $
            5,019
            
            $
            -0-
            
            $
            9,404Income
                before tax
            
            
            -0-
            
            
            676
            
            
            -0-
            
            
            831Income
                taxes
            
            
            -0-
            
            
            156
            
            
            -0-
            
            
            192Income
                from discontinued operations
            
            $
            -0-
            
            $
            520
            
            $
            -0-
            
            $
            639




As
      of
      December 31, 2007, there were no assets or liabilities associated with
      OraLabs, Inc.




**17.  Commitments**




As
      of,
      December 31, 2007, the Company had $4,235,722 in commitments for capital
      expenditures for contractual commitments of the construction projects related
      to
      expansion of Chengtong’s production facilities.




**18.**  **Other
      Events**




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





**19.  Restatement**





On
      May
      14, 2008, the Company’s management determined that the Company’s financial
      statements for the three and six months ended December 31, 2007 contained
      certain errors that are primarily related to incorrect deduction of VAT from
      net
      sales and overstatement of deferred tax liability. Form 8-K was filed with
      the
      Securities and Exchange Commission on May 16, 2008 describing these errors
      in
      detail. The
      adjustments to the consolidated balance sheet, consolidated statement of
      operations, and consolidated statement of cash flows are summarized as
      follows:




17




**China
                Precision Steel, Inc. and Subsidiaries****Condensed
                Consolidated Balance
                Sheets**




**December
                31,**
            
            **December
                31,**
            
            **December
                31,****2007**
            
            **2007**
            
            **2007****Initial
                Filing**
            
            **Restatement**
            
            **Restated****Assets****Current
                assets**Cash
                and equivalents
            
            $
            40,205,111
            
            $
            -
            
            $
            40,205,111Accounts
                receivableTrade,
                net of allowances of $955,086 and $273,461at
                December 31, and June 30, 2007, respectively
            
            
            19,888,272
            
            
            -
            
            
            19,888,272Bank
                acceptance notes
            
            
            15,383,562
            
            
            -
            
            
            15,383,562Other
            
            
            469,925
            
            
            3,276,513
            
            
            3,746,438Inventories
            
            
            10,671,635
            
            
            -
            
            
            10,671,635Deposits
            
            
            68,493
            
            
            -
            
            
            68,493Prepaid
                expenses
            
            
            326,065
            
            
            -
            
            
            326,065Advances
                to suppliers, net of allowance of $2,368,805 and$3,502,184
                at December 31, and June 30, 2007,respectively
            
            
            10,256,715
            
            
            -
            
            
            10,256,715**Total
                current assets**
            
            
            97,269,778
            
            
            3,276,513
            
            
            100,546,291**Property
                and equipment**Land
                use rights
            
            
            1,795,461
            
            
            -
            
            
            1,795,461Property
                and equipment, net
            
            
            32,305,573
            
            
            -
            
            
            32,305,573Construction-in-progress
            
            
            11,503,835
            
            
            -
            
            
            11,503,83545,604,869
            
            
            -
            
            
            45,604,869**Goodwill**
            
            
            99,999
            
            
            -
            
            
            99,999**Total
                assets**
            
            $
            142,974,646
            
            $
            3,276,513
            
            $
            146,251,159**Liabilities
                and Stockholders' Equity****Current
                liabilities**Accounts
                payable and accrued liabilities
            
            $
            6,196,315
            
            $
            -
            
            $
            6,196,315Advances
                from customers
            
            
            3,807,354
            
            
            -
            
            
            3,807,354Other
                taxes payables
            
            
            2,946,169
            
            
            624,870
            
            
            3,571,039Current
                income taxes payable
            
            
            3,171,889
            
            
            486,682
            
            
            3,658,571Deferred
                income taxes payable
            
            
            1,981,121
            
            
            (1,981,121
            )
            
            -Amounts
                due to directors
            
            
            2,543,019
            
            
            -
            
            
            2,543,019Current
                portion of long-term debt
            
            
            3,086,758
            
            
            -
            
            
            3,086,758Notes
                payable
            
            
            16,713,720
            
            
            -
            
            
            16,713,720**Total
                current liabilities**
            
            
            40,446,345
            
            
            (869,569
            )
            
            39,576,776**Long-term
                debt, net of current portion shown above**
            
            
            2,315,069
            
            
            -
            
            
            2,315,069**Stockholders'
                equity:**Preferred
                stock: $0.001 per value, 8,000,000 sharesauthorized,
                no shares outstanding at December 31, andJune
                30, 2007;Common
                stock: $0.001 par value, 62,000,000 sharesauthorized,
                45,896,288 and 37,378,143 issued andoutstanding
                December 31, and June 30, 2007
            
            
            45,896
            
            
            -
            
            
            45,896Additional
                paid-in capital
            
            
            73,701,004
            
            
            -
            
            
            73,701,004Accumulated
                other comprehensive income
            
            
            4,196,499
            
            
            80,520
            
            
            4,277,019Retained
                earnings
            
            
            22,269,833
            
            
            4,065,562
            
            
            26,335,395**Total
                stockholders' equity**
            
            
            100,213,232
            
            
            4,146,082
            
            
            104,359,314**Amounts
                due from directors**
            
            
            -
            
            
            -
            
            
            -**Total
                liabilities and stockholders' equity**
            
            $
            142,974,646
            
            $
            3,276,513
            
            $
            146,251,159




18




**Unaudited
                Condensed Consolidated Statements of
                Operations****For
                the Three Months Ended December 31,
                2007**




**Three
                Months Ended December 31, 2007**
            
            **Six
                Months Ended December 31, 2007****Initial
                Filing**
            
            **Restatement**
            
            **Restated**
            
            **Initial
                Filing**
            
            **Restatement**
            
            **Restated****Revenues**Sales
                revenues
            
            $
            11,913,718
            
            $
            1,314,603
            
            $
            13,228,321
            
            $
            37,226,416
            
            $
            3,189,140
            
            $
            40,415,556Cost
                of goods sold
            
            
            8,528,852
            
            
            -
            
            
            8,528,852
            
            
            28,773,987
            
            
            -
            
            
            28,773,987**Gross
                profit**
            
            
            3,384,866
            
            
            1,314,603
            
            
            4,699,469
            
            
            8,452,429
            
            
            3,189,140
            
            
            11,641,569**Operating
                expenses**Selling
                expenses
            
            
            180,744
            
            
            -
            
            
            180,744
            
            
            281,449
            
            
            -
            
            
            281,449Administrative
                expenses
            
            
            846,218
            
            
            2
            
            
            846,220
            
            
            1,332,595
            
            
            1
            
            
            1,332,596Provision
                for bad debts
            
            
            25,782
            
            
            -
            
            
            25,782
            
            
            651,780
            
            
            -
            
            
            651,780Depreciation
                and amortization expense
            
            
            15,798
            
            
            -
            
            
            15,798
            
            
            29,430
            
            
            -
            
            
            29,430**Total
                operating expenses**
            
            
            1,068,542
            
            
            2
            
            
            1,068,544
            
            
            2,295,254
            
            
            1
            
            
            2,295,255**Income
                from continuing operations**
            
            
            2,316,324
            
            
            1,314,601
            
            
            3,630,925
            
            
            6,157,175
            
            
            3,189,139
            
            
            9,346,314**Other
                income (expense)**Other
                revenues
            
            
            783,255
            
            
            -
            
            
            783,255
            
            
            792,410
            
            
            -
            
            
            792,410Interest
                and finance costs
            
            
            (316,860
            )
            
            -
            
            
            (316,860
            )
            
            (759,001
            )
            
            -
            
            
            (759,001
            )**Total
                other income (expense)**
            
            
            466,395
            
            
            -
            
            
            466,395
            
            
            33,409
            
            
            -
            
            
            33,409**Income
                from continuing operations****before
                income tax**
            
            
            2,782,719
            
            
            1,314,601
            
            
            4,097,320
            
            
            6,190,584
            
            
            3,189,139
            
            
            9,379,723**Provision
                for (benefit from) income tax**Current
            
            
            194,873
            
            
            415,996
            
            
            610,869
            
            
            11,896
            
            
            1,104,698
            
            
            1,116,594Deferred
            
            
            226,977
            
            
            (226,977
            )
            
            -
            
            
            917,093
            
            
            (1,981,121
            )
            
            (1,064,028
            )Total
                income tax expense (benefit)
            
            
            421,850
            
            
            189,019
            
            
            610,869
            
            
            928,989
            
            
            (876,423
            )
            
            52,566**Net
                income before discontinued operations**
            
            
            2,360,869
            
            
            1,125,582
            
            
            3,486,451
            
            
            5,261,595
            
            
            4,065,562
            
            
            9,327,157**Net
                income from discontinued operations****Net
                income**
            
            $
            2,360,869
            
            $
            1,125,582
            
            $
            3,486,451
            
            $
            5,261,595
            
            $
            4,065,562
            
            $
            9,327,157**Basic
                earnings per share**From
                continuing operations
            
            $
            0.05
            
            $
            0.03
            
            $
            0.08
            
            $
            0.13
            
            $
            0.10
            
            $
            0.23From
                discontinued operations
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Total
            
            $
            0.05
            
            $
            0.03
            
            $
            0.08
            
            $
            0.13
            
            $
            0.10
            
            $
            0.23**Basic
                weighted average shares outstanding**
            
            
            43,031,346
            
            
            -
            
            
            43,031,346
            
            
            40,204,745
            
            
            -
            
            
            40,204,745**Diluted
                earnings per share**From
                continuing operations
            
            $
            0.05
            
            $
            0.03
            
            $
            0.08
            
            $
            0.13
            
            $
            0.10
            
            $
            0.23From
                discontinued operations
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Total
            
            $
            0.05
            
            $
            0.03
            
            $
            0.08
            
            $
            0.13
            
            $
            0.10
            
            $
            0.23**Diluted
                weighted average shares outstanding**
            
            
            43,639,342
            
            
            -
            
            
            43,639,342
            
            
            40,809,437
            
            
            -
            
            
            40,809,437**The
                Components of comprehensive income:**Net
                income
            
            $
            2,360,869
            
            $
            1,125,582
            
            $
            3,486,451
            
            $
            5,261,595
            
            $
            4,065,562
            
            $
            9,327,157Foreign
                currency translation adjustment
            
            
            557,213
            
            
            622,109
            
            
            1,179,322
            
            
            2,004,339
            
            
            80,520
            
            
            2,084,859**Comprehensive
                income**
            
            $
            2,918,082
            
            $
            1,747,691
            
            $
            4,665,773
            
            $
            7,265,934
            
            $
            4,146,082
            
            $
            11,412,016




19




19.  Restatement
      (continued)





**Unaudited
                Condensed Consolidated Statements of Cash
                Flows****For
                the Three Months Ended December 31,
                2007**




**Initial
                Filing**
            
            **Restatement**
            
            **Restated****Cash
                flows from operating activities****Net
                Income**
            
            $
            5,261,595
            
            $
            4,065,562
            
            $
            9,327,157**Adjustments
                to reconcile net income to net cash provided by****(used
                in) operating activities**Depreciation
            
            
            992,570
            
            
            -
            
            
            992,570Less
                income from discontinued operations - Oralabs, Inc
            
            
            -
            
            
            -
            
            
            -Allowance
                for bad and doubtful debts
            
            
            651,780
            
            
            -
            
            
            651,780**Net
                changes in assets and liabilities:**Accounts
                receivable, net
            
            
            (27,990,004
            )
            
            (3,276,513
            )
            
            (31,266,517
            )Inventories
            
            
            5,195,155
            
            
            -
            
            
            5,195,155Deposits
            
            
            15,018
            
            
            -
            
            
            15,018Prepayments
            
            
            (326,065
            )
            
            -
            
            
            (326,065
            )Advances
                to suppliers
            
            
            1,549,672
            
            
            -
            
            
            1,549,672Accounts
                payable and accrued expenses
            
            
            1,296,194
            
            
            -
            
            
            1,296,194Advances
                from customers
            
            
            2,070,883
            
            
            -
            
            
            2,070,883Other
                taxes payable
            
            
            2,223,094
            
            
            523,961
            
            
            2,747,055Current
                income taxes
            
            
            1,261,798
            
            
            486,682
            
            
            1,748,480Deferred
                income taxes
            
            
            907,410
            
            
            (1,971,438
            )
            
            (1,064,028
            )**Net
                cash (used in) provided by operating activities**
            
            
            (6,890,900
            )
            
            (171,746
            )
            
            (7,062,646
            )**Cash
                flows from investing activities**Purchases
                of property and equipment including construction in
                progress
            
            
            (5,508,327
            )
            
            -
            
            
            (5,508,327
            )**Net
                cash (used in) investing activities**
            
            
            (5,508,327
            )
            
            -
            
            
            (5,508,327
            )**Cash
                flows from financing activities**Sale
                of common stock
            
            
            44,433,222
            
            
            -
            
            
            44,433,222Capital
                and restructuring contributions
            
            
            -
            
            
            -
            
            
            -Advances
                from directors, net
            
            
            2,053,348
            
            
            100,909
            
            
            2,154,257Notes
                payable proceeds
            
            
            16,446,667
            
            
            -
            
            
            16,446,667Repayments
                of notes payable
            
            
            (17,424,050
            )
            
            -
            
            
            (17,424,050
            )**Net
                cash provided by financing activities**
            
            
            45,509,187
            
            
            100,909
            
            
            45,610,096**Effect
                of exchange rate**
            
            
            1,590,289
            
            
            70,837
            
            
            1,661,126**Net
                increase in cash**
            
            
            34,700,249
            
            
            -
            
            
            34,700,249**Cash
                and cash equivalents, beginning of period**
            
            
            5,504,862
            
            
            -
            
            
            5,504,862**Cash
                and cash equivalents, end of period**
            
            $
            40,205,111
            
            $
            -
            
            $
            40,205,111**Supplemental
                disclosure of cash flow information**Interest
                paid
            
            $
            759,001
            
            $
            -
            
            $
            759,001Taxes
                paid
            
            $
            -
            
            $
            -
            
            $
            -




20




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




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




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




The
      following discussion should be read in conjunction with our unaudited
      consolidated financial statements and the related notes that appear in
      Part I, Item 1, “Financial Statements,” of this Quarterly Report. Our
      unaudited consolidated financial statements are stated in United States Dollars
      and are prepared in accordance with United States Generally Accepted Accounting
      Principles. The following discussion and analysis covers the Company’s
      consolidated financial condition at December 31, 2007 (unaudited) and
      June 30, 2007, the end of its prior fiscal year, and its unaudited
      consolidated results of operation for the three and six month periods ended
      December 31, 2007 and 2006.




**Introduction**




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




·    **Overview
      of the Company’s Business** - This
      section provides a general description of the Group’s business, as well as
      recent developments that have either occurred during the six months ended
      December 31, 2007 and are important in understanding the results of
      operations and financial condition or disclose known trends.




·    **Results
      of Operations** - This
      section provides an analysis of our results of operations for the three and
      six
      months ended December 31, 2007 and 2006. This discussion includes a brief
      description of significant transactions and events that have an impact on the
      comparability of the results being analyzed.




·    **Liquidity
      and Capital Resources** - This
      section provides an analysis of the Group’s cash flows for the six months ended
      December 31, 2007 and 2006. Included in this section is a discussion of the
      Group’s outstanding debt and the financial capacity available to fund the
      Group’s future commitments and obligations.




**Overview
      of the Company’s Business**




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




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




21




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




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




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




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




**Results
      of Operations**




***Three
      Months Ended December 31, 2007 Compared to Three Months Ended
      December 31, 2006***




Income
      from continuing operations before income tax increased by $1,373,608, or 50.4%,
      period-on-period to $4,097,320 for the three months ended December 31, 2007
      from $2,723,712 for the three months ended December 31, 2006 and gross
      profit increased by $1,286,739, or 37.7%, period-on-period.




***Gross
      Profit*** . Gross
      profits in absolute terms increased by $1,286,739, or 37.7%, period-on-period
      to
      $4,699,469 for the three months ended December 31, 2007 from $3,412,730 for
      the three months ended December 31, 2006, while gross profit margin
      increased to 35.5% for the three months ended December 31, 2007 from 22.7%
      for the three months ended December 31, 2006. The increase in gross profit
      margin principally resulted from production of higher quality products with
      more
      complexity and higher margins, which is also associated with longer production
      times and thus a lower volume.




***Sales
      Revenues.*** Sales
      volume decreased by 5,624 metric tons, or 28.6%, period-on-period to 14,010
      metric tons for the three months ended December 31, 2007 from 19,634 tons
      for the three months ended December 31, 2006.  As a result, sales
      revenues decreased by $1,779,261, or 11.9%, period-on-period to $13,228,321
      for
      the three months ended December 31, 2007 from $15,007,582 for the three
      months ended December 31, 2006. We believe that the decreases in sales and
      sales revenues are a direct result of changes in our sales mix during the
      quarter to focus on high quality high margin products, and thus less volume
      was
      produced due to the complexity and longer production times required for the
      higher margin products.




Average
      cost of production per ton increased to $609 for the three months ended
      December 31, 2007 compared to an average cost of production per ton of $591
      for the three months ended December 31, 2006, representing an increase of
      $18 per ton, or 3%, period-on-period. The 1400 mm cold-roll mill which became
      operational at the beginning of October 2006 is now operating at
      approximately 50% of design capacity and will likely take two to three years
      to
      reach its maximum production capacity.




Sales
      by Product Line .
      A
      break-down of our sales by product line for the three months ended
      December 31, 2007 and 2006 is as follows:




22





**Three Months Ended December 31,**
            
            ********
            
            **2007**
            
            **2006**
            
            **Period-on-**period******Product category**
            
            **Quantity**
              **(tons)**
            
            **$  Amount**
            
            **% of sales**
            
            **Quantity**
              **(tons)**
            
            **$** **Amount**
            
            **% of**
              **sales**
            
            **Qty.**
                **Variance**Low
                carbon cold-rolled
            
            
            3,442
            
            
            2,791,741
            
            
            21.1
            
            
            11,836
            
            
            7,146,805
            
            
            47.6
            
            
            (8,394
            )Low
                carbon hard rolled
            
            
            4,897
            
            
            3,503,082
            
            
            26.5
            
            
            1,724
            
            
            18,721
            
            
            0.1
            
            
            3,173High-carbon
                cold-rolled
            
            
            3,520
            
            
            4,174,255
            
            
            31.6
            
            
            936
            
            
            4,759,443
            
            
            31.8
            
            
            2,584High-carbon
                hot-rolled
            
            
            1,171
            
            
            917,057
            
            
            6.9
            
            
            5,138
            
            
            3,082,613
            
            
            20.5
            
            
            (3,967
            )Sales
                of Scrap Metal
            
            
            —
            
            
            251,146
            
            
            1.9
            
            
            —
            
            
            —
            
            
            —
            
            
            —Subcontracting
                income
            
            
            980
            
            
            1,591,040
            
            
            12.0
            
            
            —
            
            
            —
            
            
            —
            
            
            980Total
            
            
            14,010
            
            
            13,228,321
            
            
            100.0
            
            
            19,634
            
            
            15,007,582
            
            
            100




There
      were various changes in the break-down of sales among our product lines over
      the
      three months ended December 31, 2007 as we are now operating an additional
      mill and are in the process of developing new products and new markets.
      High-carbon hot-rolled steel products only accounted for 6.9% of the current
      sales mix at an average selling price of $783 per ton for the three months
      ended
      December 31, 2007 compared to 20.5 % of the sales mix at an average selling
      price per ton of $600 for the three months ended December 31, 2006. The
      lower priced low-carbon cold-rolled steel products accounted for 21.1 % of
      the
      current sales mix at an average selling price of $811 per ton for the three
      months ended December 31, 2007 compared to  47.6% of the sales mix at
      an average selling price per ton of $604 for the three months ended
      December 31, 2006. Low carbon hard-rolled steel, which is also our exported
      precision steel products, was 26.5% of sales during the three months ended
      December 31, 2006, accounted for $ 3,503,082, or 26.5%, of the current
      sales mix at an average selling price of $715 per ton for the three months
      ended
      December 31, 2007.




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





**Three Months Ended**
              **December 31,****Average selling prices**
            
            **2007**
            
            **2006**
            
            **Variance**$
            
            $
            
            $
            
            %Low-carbon
                cold-rolled
            
            
            811
            
            
            604
            
            
            207
            
            
            34.3Low-carbon
                hard rolled
            
            
            715
            
            
            11
            
            
            704
            
            
            >
                100High-carbon
                cold-rolled
            
            
            1,186
            
            
            5,085
            
            
            (3,899
            )
            
            (76.7
            )High-carbon
                hot-rolled
            
            
            783
            
            
            600
            
            
            183
            
            
            30.5Subcontracting
                income
            
            
            1,624
            
            
            —
            
            
            1,624
            
            
            100.0




The
      average unit selling price per ton generated increased to $944 per ton for
      the
      three months ended December 31, 2007 compared to the corresponding period
      in 2006 of $ 764 , representing an increase of $180, or 23.5%, period-on-period.
      This increase was due to changes in our sales mix during the quarter to focus
      on
      high quality high margin products, and thus less volume was produced due to
      the
      complexity and longer production times required for the higher margin products.
      Sales of high-carbon cold-rolled steel products have increased by 2,584 metric
      tons,or 276%, period-on-period to 3,520 metric tons for the three months ended
      December 31, 2007 compared to 936 metric tons for the three months ended
      December 31, 2006. While the volume of high-carbon cold-rolled steel
      increased, the average sales price declined $3,899, or 76.7%, to $1,186 in
      the
      three months ended December 31, 2007 as compared to an average selling of
      $5,085 in the three months ended December 31, 2006. This product accounted
      for $4,174,255, or 31.6%, of the total sales mix for the three months ended
      December 31, 2007 compared to $4,759,443, or 31.8%, of the sales mix for
      the three months ended December 31, 2006.




**Sales
      Breakdown by Major Customer.**




**Three Months Ended December 31****Customers**
              
              **2007 ($ )**
              
              **% to sales**
              
              **2006 ($ )**
              
              **% to sales**Shanghai
                  Changshuo Steel Company Ltd
              
              
              2,370,370
              
              
              18
              
              
              
              *
              
              
              *Shanghai
                  Shengdejia Metal Products Limited
              
              
              3,181,709
              
              
              24
              
              
              
              *
              
              
              *Beijing
                  Beimo Aircraft Material Technology Ltd Co
              
              
              85,468
              
              
              1
              
              
              
              *
              
              
              *Hangzhou
                  Relian Company Limited
              
              
              266,970
              
              
              2
              
              
              648,757
              
              
              4Shangdong
                  Province Boxing County Longhua Material Limited
              
              
              381,227
              
              
              3
              
              
              
              *
              
              
              *Shanghai
                  Ruixuefeng Metals Co. Ltd
              
              
              
              *
              
              
              *
              
              5,365,141
              
              
              36Nuoying
                  International (HK) Co. Limited
              
              
              
              *
              
              
              *
              
              1,582,510
              
              
              11Sinosteel
                  Company Limited
              
              
              
              *
              
              
              *
              
              2,137,467
              
              
              14Shanghai
                  Xin Zhong Da Trading Co. Limited
              
              
              
              *
              
              
              *
              
              933,762
              
              
              66,285,744
              
              
              48
              
              
              10,667,637
              
              
              71Others
              
              
              6,942,577
              
              
              52
              
              
              4,339,945
              
              
              29**Total**
              
              
              13,228,321
              
              
              100
              
              
              15,007,582
              
              
              100


**
        Not
        major customers for the relevant periods*




23




Sales
      revenues generated from the top five major customers as a percentage of total
      sales decreased to 48% for the three months ended December 31, 2007 as
      compared to 71% for the three months ended December 31, 2006. With the
      exception of Hangzhou Relian Company Limited, the top five major customers
      were
      different period-on-period. The change in customer mix reflects our shift in
      product focus during the course of the period.




***Cost
      of Sales*** .
      Cost of
      sales decreased by $3,066,000, or 26.4%, period-on-period to $8,528,852 for
      the
      three months ended December 31, 2007 from $11,594,852 for the three months
      ended December 31, 2006. Cost of sales represented 64.5% of sales revenues
      for the three months ended December 31, 2007 compared to 77.3% for the
      three months ended December 31, 2006. Average cost per ton sold increased
      by $18, or 3%, period-on-period to $609 per ton for the three months ended
      December 31, 2007 from $591 per ton for the three months ended
      December 31, 2006. Meanwhile, the average selling price per ton increased
      by $180 per ton, or 23.6%, period-on-period to $944 per ton for the three months
      ended December 31, 2007 from $764 per ton for the three months ended
      December 31, 2006.





**Three Months Ended December 31,****2007**
            
            **2006**
            
            **Variance**$
            
            $
            
            $
            
            %**Cost
                of sales**-
                Raw materials
            
            
            6,362,758
            
            
            10,618,130
            
            
            (4,255,372
            )
            
            (40.1
            )-
                Direct labor
            
            
            167,926
            
            
            184,467
            
            
            (16,541
            )
            
            (8.9
            )-
                Factory overhead
            
            
            1,998,168
            
            
            792,255
            
            
            1,205,913
            
            
            152.28,528,852
            
            
            11,594,852
            
            
            (3,066,000
            )
            
            (26.4
            )**Cost
                per units sold**
            
            
            
            
            
            
            
            
            
            
            
            (28.6
            )Total
                units sold
            
            
            14,010
            
            
            19,634
            
            
            (5,624
            )Average
                cost per unit sold
            
            
            609
            
            
            591
            
            
            18
            
            
            3.0




The
      raw
      materials cost component relative to sales revenues decreased to 48.1% for
      the
      three months ended December 31, 2007 compared to 70.7% for the three months
      ended December 31, 2006. This was attributable to production of higher
      profit margin products during the three months ended December 31, 2007 as
      compared to the same period in 2006.




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




·   significant decreases in sales of low-carbon cold-rolled steel to 3,442 metric
      tons (compared to 11,836 metric tons for the three months ended
      December 31, 2006) were generated at an average selling price of $811 per
      ton (compared to $604 for the three months ended December 31, 2006) for the
      three months ended December 31, 2007;




·   sales of
      3,520 metric tons of high-carbon cold-rolled steel (compared to 936 metric
      tons
      for the three months ended December 31, 2006) generated at an average
      selling price of $1,186 per ton (compared to $5,085 per ton for the three months
      ended December 31, 2006) for the three months ended December 31, 2007;
      and




·   sales of
      4,897 metric tons of low-carbon hard-rolled steel at (compared to 1,724 for
      the
      three months ended December 31, 2006) generated at an average selling price
      of $715 per ton for the three months ended December 31, 2007.




The
      cost
      of raw materials consumed decreased by $4,255,372, or 40.1%, period-on-period
      to
      $6,362,758 for the three months ended December 31, 2007 from $10,618,130
      for the three months ended December 31, 2006. This decrease was mainly
      attributable to decreases in sales volume by 5,624 metric tons, or 28.6%,
      period-on-period to 14,010 metric tons for the three months ended
      December 31, 2007 from 19,634 metric tons for the three months ended
      December 31, 2006 resulting in lower input of raw materials utilized in
      production. Average unit cost of raw materials per unit produced decreased
      by
      $87 per ton, or 16.1%, period-on-period to $454 per ton for the three months
      ended December 31, 2007 from $541 per ton for the three months ended
      December 31, 2006.




Manufacturing
      overhead costs increased by $1,205,913, or 152.2%, period-on-period to
      $1,998,168 for the three months ended December 31, 2007 from $792,255 for
      the three months ended December 31, 2006. The increase was mainly
      attributable to the combined effect of an increase in utilities by $190,792,
      or
      147%, period-on-period to $320,736 for the three months ended December 31,
      2007 from $129,944 for the three months ended December 31, 2006, an
      increase in consumables by $547,404, or 764%, period-on-period to $619,088
      for
      the three months ended December 31, 2007 from $71,684 for the three months
      ended December 31, 2006 and an increase in pension costs of $32,020, or
      115%, period-on-period to $59,741 for the three months ended December 31,
      2007, from $27,731 for the three months ended December 31,
      2006.




24




**Expenses**




***Selling
      Expenses*** .
      Selling
      expenses increased by $116,051, or 179%, period-on-period, to $180,744 for
      the
      three months ended December 31, 2007 compared to the corresponding period
      in 2006 of $64,693. The increase was mainly attributable to increases in
      transportation, which rose by 287% period-on-period, due to our increased
      delivery charges of precision steel resulting from a broader customer base,
      especially exports where our standard contract terms are F.O.B. and we incur
      transportation costs to the port of shipment, plus loading costs , as well
      as an
      increase in the frequency of deliveries.




***Administrative
      Expenses*** . **** Administrative expenses increased by $347,483, or 69.7%, period-on-period,
      to
      $846,220 for the three months ended December 31, 2007 compared to the
      comparable period in 2006. This increase was chiefly due to increases in costs
      associated with our NASDAQ listing and SEC compliance obligations. There were
      also increases in salaries and wages which were principally due to increases
      in
      the monthly salaries of the management staff as well as increase in average
      number of Chengtong staff.




***Finance
      Costs*** . Net
      finance cost increased 176% period-on-period as a result of the increase in
      total interest expense by $202,117 for 2007 compared to $114,743 for
      2006.




***Six
      Months Ended December 31, 2007 Compared To Six Months Ended
      December 31, 2006***




Income
      from continuing operations before income tax increased by $3,392,402, or 56.7%,
      period-on-period to $9,379,723 for the six months ended December 31, 2007
      from $5,987,321 for the six months ended December 31, 2006 and gross profit
      increased by $4,525,589, or 63.5%, period-on-period.




**Gross
      Profit**




Gross
      profits in absolute terms increased by $4,525,589, or 63.5%, period-on-period
      to
      $11,641,569 for the six months ended December 31, 2007 from $7,115,980 for
      the six months ended December 31, 2006, while gross profit margin increased
      to 28.8% for the six months ended December 31, 2007 from 27.9% for the six
      months ended December 31, 2006. The increase in gross profits is mainly
      attributable to increase in sales during the six months ended December 31,
      2007. The decrease in gross profit margin principally resulted from a change
      in
      sales mix over the six months ended December 31, 2007, which produced
      increased sales of lower margin low-carbon steel products and an increase in
      the
      cost of sales.




***Sales
      Revenues.*** Sales
      volume increased by 23,885 metric tons, or 80.9%, period-on-period to 53,378
      metric tons for the six months ended December 31, 2007 from 29,493 tons for
      the six months ended December 31, 2006.  As a result, sales revenues
      increased by $14,904,626, or 58.4%, period-on-period to $40,415,556 for the
      six
      months ended December 31, 2007 from $25,510,930 for the six months ended
      December 31, 2006. We believe that the increases in sales and sales
      revenues are a direct result of increases in our capacity and the continuous
      building of our brand both inside and outside China among users of precision
      steel products.




Average
      cost of production per ton decreased to $539 for the six months ended
      December 31, 2007 compared to an average cost of production per ton of $624
      for the six months ended December 31, 2006, representing an decrease of $85
      per ton, or 13.6%, period-on-period. The 1400 mm cold-roll mill which became
      operational in October 2006 is now operating at approximately 50% of design
      capacity. Greater production capacity and more flexibility in our sales mix
      has
      resulted in a decrease in the average cost of production  during
      the six months ended December 31, 2007.




Sales
      by Product Line .
      A
      break-down of our sales by product line for the six months ended
      December 31, 2007 and 2006 is as follows:





**2007**
            
            **2006**
            
            **Period-on-period****Product category**
            
            **Quantity**
              **(tons)**
            
            **$** **Amount**
            
            **% of sales**
            
            **Quantity**
              **(tons)**
            
            **$** **Amount**
            
            **% of**
              **sales**
            
            **Qty.**
              **Variance**Low
                carbon cold-rolled
            
            
            17,762
            
            
            11,896,272
            
            
            29.4
            
            
            17,819
            
            
            10,813,463
            
            
            42.4
            
            
            (57
            )Low
                carbon hard rolled
            
            
            7,284
            
            
            5,111,386
            
            
            12.6
            
            
            —
            
            
            —
            
            
            —
            
            
            7,284High-carbon
                cold-rolled
            
            
            12,456
            
            
            18,861,130
            
            
            46.7
            
            
            2,178
            
            
            9,625,855
            
            
            37.7
            
            
            10,278High-carbon
                hot-rolled
            
            
            5,254
            
            
            2,370,060
            
            
            5.9
            
            
            7,516
            
            
            4,892,024
            
            
            19.2
            
            
            (2,262
            )Sales
                of Scrap Metal
            
            
            —
            
            
            527,512
            
            
            1.3
            
            
            —
            
            
            —
            
            
            —
            
            
            —Subcontracting
                income
            
            
            10,622
            
            
            1,649,196
            
            
            4.1
            
            
            1,980
            
            
            179,588
            
            
            0.7
            
            
            8,642Total
            
            
            53,378
            
            
            40,415,556
            
            
            100.0
            
            
            29,493
            
            
            25,510,930
            
            
            100.0




25




There
      were various changes in the break-down of sales among our product lines over
      the
      six months ended December 31, 2007 as we are now operating an additional
      mill and are in the process of developing new markets. High-carbon hot-rolled
      steel products only accounted for 5.9% of the current sales mix at an average
      selling price of $451 per ton for the six months ended December 31, 2007
      compared to 19.2 % of the sales mix at an average selling price per ton of
      $ 651
      for the six months ended December 31, 2006. The lower priced low-carbon
      cold-rolled steel products accounted for 29.4 % of the current sales mix at
      an
      average selling price of $ 670 per ton for the six months ended
      December 31, 2007 compared to 42.4% of the sales mix at an average selling
      price per ton of $607 for the six months ended December 31, 2006. Low
      carbon hard-rolled steel, which was not sold during the six months ended
      December 31, 2006, accounted for $5,111,386, or 12.6%, of the current sales
      mix at an average selling price of $702 per ton for the six months ended
      December 31, 2007.




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





**Six Months Ended**
              **December 31,****Average selling prices**
            
            **2007**
            
            **2006**
            
            **Variance**$
            
            $
            
            $
            
            %Low-carbon
                cold-rolled
            
            
            670
            
            
            607
            
            
            63
            
            
            10.4Low-carbon
                hard rolled
            
            
            702
            
            
            —
            
            
            702
            
            
            100.0High-carbon
                cold-rolled
            
            
            1,514
            
            
            4,420
            
            
            (2,906
            )
            
            (65.7
            )High-carbon
                hot-rolled
            
            
            451
            
            
            651
            
            
            (200
            )
            
            (30.7
            )Subcontracting
                income
            
            
            155
            
            
            91
            
            
            64
            
            
            70.3




The
      average unit selling price per ton generated decreased to $757 per ton for
      the
      six months ended December 31, 2007 compared to the corresponding period in
      2006 of $865, representing a decrease of $108, or 12.5%, period-on-period.
      This decrease was due to changes in the sales mix for the six months ended
      December 31, 2007 as compared to 2006. Sales of high-carbon cold-rolled
      steel products have increased by 10,278 metric tons, or 472%, period-on-period
      to 12,456 metric tons for the six months ended December 31, 2007 compared
      to 2,178 metric tons for the six months ended December 31, 2006. While the
      volume of high-carbon cold-rolled steel increased, the average sales price
      declined $2,906, or 65.7%, to $1,514 in the six months ended December 31,
      2007 as compared to an average selling of $4,420 in the six months ended
      December 31, 2006. This product accounted for $18,861,130, or 46.7%, of the
      total sales mix for the six months ended December 31, 2007 compared to
      $9,625,855, or 37.7%, of the sales mix for the six months ended
      December 31, 2006.




Sales
      Breakdown by Major Customer





**Six Months Ended December 31****Customers**
              
              **2007 ($ )**
              
              **% to sales**
              
              **2006 ($ )**
              
              **% to sales**Shanghai
                  Changshuo Steel Company Ltd
              
              
              11,076,780
              
              
              27
              
              
              
              *
              
              
              *Shanghai
                  Shengdejia Metal Products Limited
              
              
              6,492,562
              
              
              16
              
              
              
              *
              
              
              *Beijing
                  Beimo Aircraft Material Technology Ltd Co
              
              
              1,843,650
              
              
              5
              
              
              
              *
              
              
              *Hangzhou
                  Relian Company Limited
              
              
              1,670,246
              
              
              4
              
              
              1,934,532
              
              
              7Shangdong
                  Province Boxing County Longhua Material Limited
              
              
              1,667,100
              
              
              4
              
              
              
              *
              
              
              *Shanghai
                  Ruixuefeng Metals Co. Ltd
              
              
              
              *
              
              
              *
              
              9,254,127
              
              
              36Nuoying
                  International (HK) Co. Limited
              
              
              
              *
              
              
              *
              
              1,708,265
              
              
              7Sinosteel
                  Company Limited
              
              
              
              *
              
              
              *
              
              3,219,796
              
              
              13Shanghai
                  Xin Zhong Da Trading Co. Limited
              
              
              
              *
              
              
              *
              
              1,507,757
              
              
              622,750,338
              
              
              56
              
              
              17,624,477
              
              
              69Others
              
              
              17,665,218
              
              
              44
              
              
              7,886,453
              
              
              31**Total**
              
              
              40,415,556
              
              
              100
              
              
              25,510,930
              
              
              100




**
      Not
      major customers for the relevant periods*




Sales
      revenues generated from the top five major customers as a percentage of total
      sales decreased to 56% for the six months ended December 31, 2007 as
      compared to 69% for the six months ended December 31, 2006. With the
      exception of Hangzhou Relian Company Limited, the top five major customers
      were
      different period-on-period. The change in customer mix reflects our shift in
      product focus during the course of the period.




26




***Cost
      of Sales*** .
      Cost of
      sales increased by $10,379,037, or 56.4%, period-on-period to $28,773,987 for
      the six months ended December 31, 2007 from $18,394,950 for the six months
      ended December 31, 2006. Cost of sales represented 71.2% of sales revenues
      for the six months ended December 31, 2007 compared to 72.1% for the six
      months ended December 31, 2006. Average cost per ton sold decreased by $85,
      or 13.6%, period-on-period to $539 per ton for the six months ended
      December 31, 2007 from $624 per ton for the six months ended
      December 31, 2006. Meanwhile, the average selling price per ton decreased
      by $108 per ton, or 12.5%, period-on-period to $757 per ton for the six months
      ended December 31, 2007 from $865 per ton for the six months ended
      December 31, 2006.





**Six Months Ended December 31,****2007**
            
            **2006**
            
            **Variance**$
            
            $
            
            $
            
            %**Cost
                of sales**-
                Raw materials
            
            
            24,973,918
            
            
            16,335,269
            
            
            8,638,649
            
            
            52.9-
                Direct labor
            
            
            346,011
            
            
            336,392
            
            
            9,619
            
            
            2.9-
                Factory overhead
            
            
            3,454,058
            
            
            1,723,289
            
            
            1,730,769
            
            
            100.428,773,987
            
            
            18,394,950
            
            
            10,379,037
            
            
            56.4**Cost
                per units sold**Total
                units sold
            
            
            53,378
            
            
            29,493
            
            
            23,885
            
            
            81.0Average
                cost per unit sold
            
            
            539
            
            
            624
            
            
            (85
            )
            
            (13.6
            )




The
      raw
      materials cost component relative to sales revenues increased to 61.8% for
      the
      six months ended December 31, 2007 compared to 64% for the six months ended
      December 31, 2006. This was attributable to changes in the production mix
      of products with different gross margins in the six months ended
      December 31, 2007 as compared to the six months ended December 31,
      2006.  This mix of lower margin products, primarily produced in the first
      quarter, was related to a decision by management to reduce levels of raw
      materials inventory to a more healthy level.




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




·   sales of
      12,456 metric tons of high-carbon cold-rolled steel (compared to 2,178 metric
      tons for the six months ended December 31, 2006) were generated at an
      average selling price of $1,514 per ton (compared to $4,420 per ton for the
      six
      months ended December 31, 2006) for the six months ended December 31,
      2007; and




·   sales of
      7,284 metric tons of low-carbon hard-rolled steel (compared to none for the
      six
      months ended December 31, 2006) was generated at an average selling price
      of $702 per ton for the six months ended December 31, 2007.




The
      cost
      of raw materials consumed increased by $8,638,649, or 52.9%, period-on-period
      to
      $24,973,918 for the six months ended December 31, 2007 from $16,335,269 for
      the six months ended December 31, 2006. This increase was mainly
      attributable to increases in sales volume by 23,885 metric tons, or 81%,
      period-on-period to 53,378 metric tons for the six months ended
      December 31, 2007 from 29,493 metric tons for the six months ended
      December 31, 2006 resulting in higher input of raw materials utilized in
      production. Average unit cost of raw materials per unit produced decreased
      by
      $86 per ton, or 15.5%, period-on-period to $468 per ton for the six months
      ended
      December 31, 2007 from $554 per ton for the six months ended
      December 31, 2006.




Manufacturing
      overhead costs increased by $1,730,769, or 100.4%, period-on-period to
      $3,454,058 for the six months ended December 31, 2007 from $1,723,289 for
      the six months ended December 31, 2006. The increase was mainly
      attributable to the combined effect of an increase in depreciation by $365,665,
      or 61.3%, period-on-period to $961,808 for the six months ended
      December 31, 2007 from $596,143 for the six months ended December 31,
      2006, an increase in utilities by $413,956, or 161.6%, period-on-period to
      $670,043 for the six months ended December 31, 2007 from $256,087 for the
      six months ended December 31, 2006, and an increase in consumables by
      $684,404, or 181.7%, period-on-period to $1,061,171 for the six months ended
      December 31, 2007 from $376,767 for the six months ended December 31,
      2006.




***Expenses***




Selling
      Expenses .
      Selling
      expenses increased by $177,059, or 170%, period-on-period, to $281,449 for
      the
      six months ended December 31, 2007 compared to the corresponding period in
      2006 of $104,390. The increase was mainly attributable to increases in
      transportation, which rose by 444% period-on-period, due to our increased
      delivery charges of precision steel resulting from a broader customer base,
      especially exports where our standard contract terms are F.O.B.  and we
      incur transportation costs to the port of shipment, plus loading costs , as
      well
      as an increase in the frequency of deliveries.




27




Administrative
      Expenses . **** Administrative expenses increased by $647,671, or 94.5%, period-on-period,
      to
      $1,332,596 for the six months ended December 31, 2007 compared to $684,925
      in the comparable period in 2006. This increase was chiefly due to expenses
      relating to the Company’s SEC and NASDAQ compliance obligations. There were also
      increases in salaries and wages which were principally due to increases in
      the
      monthly salaries of the management staff as well as increase in average number
      of Chengtong staff.




Finance
      Costs .
      Net
      finance cost increased 138% period-on-period as a result of increases in total
      interest expense by $440,919 to $759,001 in 2007 compared to $318,082 for
      2006.




**Liquidity
      and Capital Resources**




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




Net
      cash
      flows used in operating activities for the six months ended December 31,
      2007 was $7,062,646 as compared with $5,473,819 provided by operating activities
      for the six months ended December 31, 2006, for a net decrease of
      $12,536,465.  This increase was due primarily to an increase in bank
      acceptance notes not previously held at June 30, 2007.




Net
      cash
      flows used in investing activities for the six months ended December 31,
      2007 was $5,508,327 as compared with $10,212,328 for the six months ended
      December 31, 2006.  The decrease in investing activity was due to
      reduced construction during the six months ended December 31, 2007 as
      compared to the same period in 2006.




Net
      cash
      flows provided by financing activities for the six months ended
      December 31, 2007, was $45,610,096 as compared with $5,070,544 provided by
      financing activities for the six months ended December 31, 2006. The six
      months ended December 31, 2006 reflect borrowings which were incurred for
      expansion of the operations and to finance the construction-in-progress on
      new
      facilities. Repayments on advances from directors in 2006 partially offset
      the
      bank borrowings. During the six months ended December 31, 2007, the Company
      received $44 million in net proceeds from the sale of its equity securities,
      which will be used for repayment of certain bank debt, capital expenditures
      relating to the new facilities and working capital. Also during the six months
      ended December 31, 2007, a director cancelled stock in the amount
      of $2 million which was applied against amounts owed by the director at
      June 30, 20007.




Current
      Assets .
      Current
      assets increased significantly by $59,207,297, or 143%, period-on-period to
      $100,546,291 as of December 31, 2007 from $41,338,994 as of June 30,
      2007, principally as a result of increases in cash and equivalents by
      $34,700,249, or 630%, period-on-period , as we raised gross proceeds of $44
      million in November 2007 through the offering of our equity securities.
      Accounts receivable increased by $30,690,520, or 369%, period-on-period, offset
      by a decline in inventories of $5,052,069, or 32%, period-on-period. We also
      raised gross proceeds of $44 million in November of 2007 through offering of
      our
      equity securities.




Current
      Liabilities .
      Current
      liabilities increased by $13,444,157, or 50.2%, period-on-period to $39,576,776
      as of December 31, 2007 from $26,764,776 as of June 30, 2007. The
      increase was due to increases in advances from customers, tax payables,
      provision for taxation and amounts due to directors and was mitigated by
      decreases in current portion of long-term debt.




As
      of
      December 31, 2007, we had $16,713,720 in short term bank debt. We expect to
      refinance such debt during the current year, 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 three months ended December 31, 2007, we invested $5,508,327 in
      property, production plants and equipment. We believe these capital investments
      increase our capacity, expand our product line, and reduce risks related to
      occupancy costs, thereby creating new opportunities to grow sales and control
      expenses.




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




**Off-Balance
      Sheet Arrangements**




For
      the
      three and six months ended December 31, 2007, we did not have any
      off-balance sheet arrangements.




28




**Contractual
      Obligations**





**At December 31, 2007**
              **Payments Due By Period****(in thousands)**
            
            **Total**
            
            **Fiscal Year**
              **2008**
            
            **Fiscal**
              **Years**
              **2009-2010**
            
            **Fiscal**
              **Years**
              **2011-2012**
            
            **Fiscal Year**
              **2013 and**
              **Beyond**Contractual
                obligations:Debt
                Obligations
            
            $
            23,078,655
            
            $
            20,601,531
            
            $
            2,477,124
            
            $
            —
            
            $
            —Construction
                Commitments
            
            4,270,236
            
            4,270,236
            
            —
            
            —
            
            —$
            27,348,891
            
            $
            24,871,767
            
            $
            2,477,124
            
            $
            —
            
            $
            —




**Loans**




Bank
      and
      other loans decreased by $769,132, or 3.3% period-on-period to $22,115,547
      as of
      December 31, 2007 from $22,884,679 as of June 30, 2007. The decrease
      was attributable to the partial payoff of outstanding loans.




***Short-term
      bank loans***




Short-term
      bank loans increased by $6,871,200 or 69.8%, period on period to $16,713,720
      as
      of December 31, 2007 compared to $9,842,520 as of June 30,
      2007.




***Long-term
      bank loans***




The
      current portion of long-term debt decreased 49.9% from $6,163,445 at
      June 30, 2007 to $3,086,758 at December 31, 2007.  Long-term
      portion of bank loans decreased by $4,563,645, or 66.3%, period-on-period to
      $2,315,069 as of December 31, 2007 compared to $6,878,714 as of
      June 30, 2007.




**Land
      Use Rights**




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




**Inflation**




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




**Critical
      Accounting Policies and Estimates**




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




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




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




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




29







**Recent
      Accounting Pronouncements**




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




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




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




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




In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
      Combinations” (“SFAS 141(R)”). SFAS 141(R) will change the accounting for
      business combinations. Under SFAS No. 141(R), an acquiring entity will be
      required to recognize all the assets acquired and liabilities assumed in a
      transaction at the acquisition-date fair value with limited exceptions. SFAS
      No. 141(R) will change the accounting treatment and disclosure for
      certain specific items in a business combination. SFAS
      No. 141(R) applies prospectively to business combinations for which
      the acquisition date is on or after the beginning of the first annual reporting
      period beginning on or after December 15, 2008. SFAS 141(R) will
      impact the Company in the event of any future acquisition.




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





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




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




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




**Foreign
      Currency Exchange Rates**




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


30


The
      Chinese Renminbi had remained stable against the U.S. Dollar at approximately
      8.28 Yuan to 1.00 U.S. Dollar for several years and it was not until
      July 21, 2005 that the Chinese currency regime was altered, with a 2.1%
      revaluation versus the United States Dollar. This move initially valued the
      Renminbi at 8.11 per United States Dollar. In addition, the Renminbi is no
      longer linked to the U.S. currency but rather to a basket of currencies with
      a
      0.3% margin of fluctuation. However, there remains international pressure on
      the
      Chinese government to adopt an even more flexible currency policy and as of
      December 31, 2007 the exchange rate was 7.2946 Yuan to 1.00 U.S. Dollar.
      The exchange rate of Renminbi is subject to changes in China’s government
      policies which are, to a large extent, dependent on the economic and political
      development both internationally and locally and the demand and supply of
      Renminbi in the domestic market. There can be no assurance that such exchange
      rate will continue to remain stable in the future amongst the volatility of
      currencies, globalization and the unstable economies in recent years. Since
      (i) our income and profit are mainly denominated in Renminbi, and
      (ii) the payment of dividends will be in U.S. dollars, if any, any exchange
      fluctuation of the Renminbi against other foreign currencies would adversely
      affect the value of the shares and dividends payable to shareholders, in foreign
      currency terms.





At
      December 31, 2007, the Group’s outstanding financial instruments with
      foreign currency exchange rate risk exposure had an aggregate fair value of
      $5
      million (including the Group’s non-U.S. dollar denominated debt). The potential
      increase in the fair values of these instruments resulting from a 10% adverse
      change in quoted foreign currency exchange rates would be approximately $0.5
      million at December 31, 2007.




**Interest
      Rates**




The
      Group
      is subject to interest rate risk on its non-derivative financial instruments.
      The Group does not hedge its interest rate risk. At December 31, 2007, the
      Group’s total bank debt outstanding was $ 22,115,547 , all of which was
      interest-bearing. Substantially all of the bank debt was floating-rate debt
      with
      interest rates which vary with changes in the standard rate set by the People’s
      Bank of China. A change in the interest rate or yield of fixed rate debt will
      only impact the fair value of such debt, while a change in the interest rate
      of
      floating rate, or variable rate, debt will impact interest expense as well
      as
      the amount of cash required to service such debt. To the extent interest rates
      increase, we will be liable for higher interest payments to its lenders. For
      the
      current financial year, annual interest on loans is anticipated to be
      approximately $1.6 million. The impact of a 1% increase in interest rates will
      increase interest expense by approximately $ 220,000 . As our short-term
      borrowings mature, it will be required to either repay or refinance these
      borrowings. An increase in short-term interest rates at the time that we seek
      to
      refinance short-term borrowings may increase the cost of borrowings, which
      may
      adversely affect our earnings and cash available for distribution to its
      shareholders.




At
      December 31, 2007, the aggregate fair value of the Group’s financial
      instruments with exposure to interest rate risk was approximately $22 million.
      The potential change in fair value for these financial instruments from an
      adverse 10% change in quoted interest rates across all maturities, often
      referred to as a parallel shift in the yield curve, would be approximately
      $ 0.1
      million at December 31, 2007.




**Commodity
      Prices**




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




The
      Group
      has no open derivative commodity instruments as of December 31, 2007 and
      does not currently hedge its exposure to price fluctuations in the raw materials
      and energy required for the manufacture of its products.





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





(a) **Disclosure
      Controls and Procedures.**




An
      evaluation was performed, under the supervision and with the participation
      of
      Company management, including the Chief Executive Officer (CEO) and the Chief
      Financial Officer (CFO), of the effectiveness of the design and operation of
      the
      Company’s disclosure controls and procedures (as defined in
      Rules 13a-14(c) and 15d-14(c) under the Exchange Act). Based on
      that evaluation, management, including the CEO and CFO, has concluded that,
      as
      of December 31, 2007, the Company’s disclosure controls and procedures were
      not effective due to restatement of the financial statements for the quarterly
      period ended December 31, 2007 represented by this amended Form 10-Q/A, as
      described in the current report on Form 8-K filed by the Company with the SEC
      on
      May 16, 2008.




As
      the
      revisions to the financial statements involved complicated income tax matters
      as
      the Company reports in accordance to the generally accepted accounting
      principles of the U.S. but its operating subsidiaries are located in China
      and
      subject to a different income tax system, a thorough discussion was necessary
      before a conclusion on such matters could be reached. The delay was also
      partially caused by discontinuity as there had been a change of the Company's
      independent registered public accounting firm during the year. Management has
      been working diligently with both the Company's current and former independent
      registered public accounting firms to have the restatement filed as soon as
      practical. As stated in the Company's annual report on Form 10-K for the fiscal
      year ended June 30, 2008, management has considered the effect on the adequacy
      of the Company's disclosure controls and procedures in light of the restatements
      mentioned above and has determined that the Company's disclosure controls and
      procedures are effective as of June 30, 2008.


31


As
        described in the Original Filing, management also concluded that although
        no
        significant deficiencies or material weaknesses were found at December 31,
        2007,
        additional controls and procedures were required to improve our recordkeeping
        systems to ensure timely and effective reporting of information. In addition,
        management also concluded that additional financial personnel were required,
        particularly at the executive level, with experience with U.S. public companies
        and an appropriate level of knowledge, experience and training in the
        application of generally accepted accounting principles in the United States.
        To
        address these concerns, we engaged an outside management consultant to review
        the Company’s overall financial and accounting systems, and to document and
        implement an accounting manual that would strengthen and improve the systems
        of
        controls, reconciliations, procedures, books and records. In addition, we
        are
        continuing our search for a senior financial executive with experience in
        U.S.
        GAAP and U.S. public company reporting and compliance obligations.  We have
        also added additional resources to the accounting department that was still
        understaffed at December 31, 2007.


T he
        disclosures controls and procedures contained herein have not been updated
        to
        reflect events, results or developments that have occurred after the Original
        Filing except for the amended disclosure contained in the second paragraph
        of
        Item 4(a) above.


(b) **Changes
      in Internal Control over Financial Reporting** .
      There
      were no changes in our internal controls over financial reporting (as such
      term
      is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange
      Act) during the period under review that materially affected, or are reasonably
      likely to material affect, our internal control over financial
      reporting.




This
      Quarterly Report does not include a report of management’s assessment regarding
      internal control over financial reporting or an attestation report by our
      registered public accounting firm due to a transition period established by
      the
      rules of the SEC.





**PART II
      - OTHER INFORMATION**





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




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




**ITEM
      1A. RISK FACTORS.**




***We
      operate in a highly competitive environment in which there are numerous factors
      which can influence our business, financial position or results of operations
      and which can also cause the market value of our common stock to decline. Many
      of these factors are beyond our control and therefore, are difficult to predict.
      The following section sets forth what we believe to be the principal risks
      that
      could affect us, our business or our industry, and which could result in a
      material adverse impact on our financial results or cause the market price
      of
      our common stock to fluctuate or decline.***




**Risks
      Relating to the Company’s Business**




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




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




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




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


32


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




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




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




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




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




We
      are
      one of a few manufacturers of specialty precision steel products in China.
      Differences in the type and nature of the specialty precision steel products
      in
      China’s steel industry are relatively small, and, coupled with intense
      competition from international and local suppliers, to a limited extent,
      consumers’ demand can be price sensitive. Competitors may increase their market
      share through pricing strategies that adversely impact our business. Our
      business is in an industry that is becoming increasingly competitive and capital
      intensive, and competition comes from manufacturers located in China as well
      as
      from international competition. Our competitors may have financial resources,
      staff and facilities substantially greater than ours and we may be at a
      competitive disadvantage compared with larger companies.




***We
      produce a limited number of products and may not be able to respond quickly
      to
      significant changes in the market or new market
      entrants.***




Cold-rolled
      specialty precision steel is a relatively new industry in China; Chinese
      manufacturers of durable goods previously relied solely on imports from Japan,
      Korea, the European Union and the United States. We believe the average quality
      and standards of products of China’s high precision steel industry lags behind
      the international norm. During the last three years, we have developed a
      nationally recognizable brand, however, we are not yet an internationally
      recognizable brand for our specialty steel products. Although we offer more
      than
      40 high precision steel products, there are many other specialty precision
      steel
      products of similar nature in the market, even though none currently compete
      directly with our products. If there are significant changes in market demands
      and/or competitive forces, we may not be able to change our product mix or
      adapt
      our production equipment quickly enough to meet customers’ needs. Under such
      circumstances, our narrow band of precision steel products and/or new market
      entrants may negatively impact our financial performance.




***Increased
      imports of steel products into China could negatively affect domestic steel
      prices and demand levels and reduce profitability of
      domestic***  ***producers***  ***,
      including Chengtong.***




Through
      June 2007, China’s total production of cold-rolled steel sheets increased
      approximately 54% over the comparable period in 2006. However, domestic
      production continues to be insufficient to meet demand. As a result, China
      continues to import a significant portion of its steel products. Foreign
      competitors may have lower labor costs, and are often owned, controlled or
      subsidized by their governments, which allows their production and pricing
      decisions to be influenced by political and economic policy considerations
      as
      well as prevailing market conditions. Import levels may also be impacted by
      decisions of government agencies, under trade laws. Increases in future levels
      of imported steel could negatively impact future market prices and demand levels
      for our precision steel products.




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




Our
      current manufacturing operations are located in China, our administrative
      offices are in Hong Kong and we have additional establishments in the British
      Virgin Islands. The geographical distances between these facilities create
      a
      number of logistical and communications challenges, including time differences
      and differences in the cultures in each location, which makes communication
      and
      effective cooperation more difficult.  In addition, because of the location
      of the manufacturing facilities in China, our operations in China could be
      affected by, among other things:




·   economic
      and political instability in China, including problems related to labor
      unrest,




·   lack of
      developed infrastructure,




33


·   variances in payment cycles,




·   currency
      fluctuations,




·   overlapping taxes and multiple taxation issues,




·   employment and severance taxes,




·   compliance with local laws and regulatory requirements,




·   greater
      difficulty in collecting accounts receivable, and




·   the
      burdens of cost and compliance with a variety of foreign laws.




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




***Our
      operations are international and we are subject to significant worldwide
      political, economic, legal and other uncertainties that may make it difficult
      or
      costly to collect amounts owed to us or to conduct operations should materials
      needed from certain places be unavailable for an indefinite or extended period
      of time.***




We
      have
      subsidiaries in the British Virgin Islands and China. We manufacture all of
      our
      products in China and substantially all of the net book value of our total
      fixed
      assets is located there. However, we sell our products to customers outside
      of
      China as well as domestically. As a result, we have receivables from and goods
      in transit to locations outside of China. Protectionist trade legislation in
      the
      United States or other countries, such as a change in export or import
      legislation, tariff or duty structures, or other trade policies, could adversely
      affect our ability to sell products in these markets, or even to purchase raw
      materials or equipment from foreign suppliers. Moreover, we are subject to
      a
      variety of United States laws and regulations, changes to which may affect
      our
      ability to transact business with certain customers or in certain product
      categories.




In
      China,
      Chengtong is subject to numerous national, provincial and local governmental
      regulations, all of which can limit our ability to react to market pressures
      in
      a timely or effective way, thus causing us to lose business or miss
      opportunities to expand our business. These include, among others, regulations
      governing:




·   environmental and waste management,




·   our
      relationship with our employees, including: wage and hour requirements, working
      and safety conditions, citizenship requirements, work permits and travel
      restrictions,




·   property
      ownership and use in connection with our leased facilities in China,
      and




·   import
      restrictions, currency restrictions and restrictions on the volume of domestic
      sales.




***The
      end-use markets for certain of our products are highly competitive and customers
      are willing to accept substitutes for our products which could reduce our
      results of operations.***




Buyers
      of
      certain cold-rolled steel products are in highly competitive markets.
      Cold-rolled precision steel competes with other materials, such as aluminum,
      plastics, composite materials and glass, among others, for industrial and
      commercial applications. Customers have demonstrated a willingness to substitute
      other materials for cold-rolled steel. The willingness of our customers to
      accept substitutes for cold-rolled steel products could have a material adverse
      effect on our financial results.




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




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




34


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




We
      rely
      on several suppliers to provide us with the raw materials used in our
      operations, although a substantial portion of our raw material requirements
      is
      met by BaoSteel Trading Co., Ltd. We do not currently have long-term supply
      contracts with any particular supplier, including BaoSteel Trading Co., Ltd.,
      to
      assure a continued supply of the raw materials we need. While we maintain good
      relationships with these suppliers, the supply of raw materials may nevertheless
      be interrupted on account of events outside our control, which will negatively
      impact our operations.




***We
      have substantial indebtedness with floating interest rates and the cost of
      our
      borrowings may increase.***




We
      are
      subject to interest rate risk on our non-derivative financial instruments.
      We do
      not hedge our interest rate risk. At December 31, 2007, our total bank debt
      outstanding was $22.1 million, all of which was interest-bearing. Substantially
      all of the bank debt was floating-rate debt with interest rates which vary
      with
      changes in the standard rate set by the People’s Bank of China. A change in the
      interest rate or yield of fixed rate debt will only impact the fair value of
      such debt, while a change in the interest rate of floating rate, or variable
      rate, debt will impact interest expense as well as the amount of cash required
      to service such debt. To the extent interest rates increase, we will be liable
      for higher interest payments to its lenders. For the current financial year,
      annual interest on loans is anticipated to be approximately $1.6 million. The
      impact of a 1% increase in interest rates will increase interest expense by
      approximately $220,000. As our short-term borrowings mature, we will be required
      to either repay or refinance these borrowings. An increase in short-term
      interest rates at the time that we seek to refinance short-term borrowings
      may
      increase the cost of borrowings, which may adversely affect our earnings and
      cash available for distribution to our stockholders.




At
      December 31, 2007, the aggregate fair value of our financial instruments
      with exposure to interest rate risk was approximately


$22
      million. The potential change in fair value for these financial instruments
      from
      an adverse 10% change in quoted interest rates across all maturities, often
      referred to as a parallel shift in the yield curve, would be approximately
      $0.1
      million at December 31, 2007.




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




The
      loss
      or failure to attract and retain key personnel could significantly impede our
      future performance, including product development, strategic plans, marketing
      and other objectives. Our success depends to a substantial extent not only
      on
      the ability and experience of our senior management, but particularly upon
      our
      Chairman, Wo Hing Li; the General Manager of Chengtong, Hai Sheng Chen; and
      Chief Financial Officer, Leada Tak Tai Li. We do not currently have in place
      key
      man life insurance on Wo Hing Li, Hai Sheng Chen or Leada Tak Tai Li. To the
      extent that the services of these officers and directors would be unavailable
      to
      us, we would be required to recruit other persons to perform the duties
      performed by Wo Hing Li, Hai Sheng Chen and Leada Tak Tai Li. We may be unable
      to employ other qualified persons with the appropriate background and expertise
      to replace these officers and directors on terms suitable to us.




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




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




***We
      may not be able to protect adequately our intellectual property from
      infringement or unauthorized use by third parties.***




Except
      for a patent on the Environment-Conscious Mill Bearing with Inner Circular
      Lubrication, we have no patents or licenses that protect our intellectual
      property. Unauthorized parties may attempt to copy aspects of our processes
      and
      know-how or to obtain and use information that we regard as proprietary.
      Policing unauthorized use of our processes and know-how is difficult. Our
      experienced key engineers and management staff are extensively involved in
      all facets of research, design, craftwork, styling and development of the
      specialty precision products. Potential risks on the divulgence of skills and
      the development of new products increase should these employees resign, as
      we
      rely heavily on them. Chengtong has elected to protect internally developed
      know-how and production processes (such as system pressure, cleanliness of
      the
      lubrication, temperature control, appropriate allocation of oil supply and
      retrieving, which are vital in providing a radical solution to the difficulties
      associated with lubricating rolling mills’ backing bearing) by requiring all key
      personnel (production engineers and management staff) to sign non-disclosure
      and
      confidentiality contracts. However, this means of protecting our proprietary
      rights may not be adequate. In addition, the laws of some foreign countries
      do
      not protect our proprietary rights as extensively as do U.S. laws. Our failure
      to protect adequately our proprietary rights may allow third parties to
      duplicate our products, production processes or develop functionally equivalent
      or superior technology. In addition, our competitors may independently develop
      similar technologies or design around our proprietary intellectual
      property.




35


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




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




·   quality,




·   price
      competitiveness,




·   technical expertise and development capability,




·   innovation,




·   reliability and timeliness of delivery,




·   product
      design capability,




·   operational flexibility,




·   customer
      service, and




·   overall
      management.




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




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




We
      currently supply high precision steel products to 12 major customers in the
      Chinese domestic market. For the three months ended December 31, 2007 and
      2006, sales revenues generated from the top five major customers amounted to
      52%
      and 71% of total sales revenues, respectively; sales to the largest single
      customer for the same periods amounted to 24% and 36% of total sales revenues,
      respectively. We do not enter into long-term contracts with our customers,
      and
      therefore cannot be certain that sales to these customers will continue. The
      loss of any of our largest customers would likely have a material negative
      impact on our sales revenues and business.




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




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




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




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




·   accurately forecasting demand,




·   predicting volatility,




·   timing
      volume sales to our customers,




36


·   balancing our productive resources with product mix, and




·   planning
      manufacturing services for new or other products that we intend to
      produce.




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




·   utilization rates of manufacturing lines,




·   downtime
      due to product changeover,





·   impurities in raw materials causing shutdowns, and




·   maintenance of contaminant-free operations.




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




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




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




Many
      cities and provinces in China have suffered serious power shortages since the
      second quarter of 2004. Many of the regional grids do not have sufficient power
      generating capacity to fully satisfy the increased demand for electricity driven
      by continual economic growth and persistent hot weather. Local governments
      have
      occasionally required local factories to temporarily shut down their operations
      or reduce their daily operational hours in order to reduce local power
      consumption levels. To date, our operations have not been affected by those
      administrative measures. However, there is a risk that our operations may be
      affected by those administrative measures in the future, thereby causing
      material production disruption and delay in delivery schedule. In such event,
      our business, results of operation and financial conditions could be materially
      adversely affected. We do not have any back-up power generation system. Although
      we have not experienced any power outages in the past, we may be adversely
      affected by power outages in the future.




***Unexpected
      equipment failures may lead to production curtailments or
      shutdowns.***




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




***Our
      insurance may not be adequate if our production facilities were destroyed or
      significantly damaged as a result of fire or some other natural
      disaster.***




All
      of
      our products are currently manufactured at our existing facilities located
      in
      the Jiading District in Shanghai, China. Fire fighting and disaster relief
      or
      assistance in China may not be as developed as in Western countries. While
      we
      maintain property damage insurance aggregating approximately $18.5 million
      covering our raw materials, finished goods, equipment and buildings and another
      $10.5 million insurance against equipment breakdown, we do not maintain business
      interruption insurance. Material damage to, or the loss of, our production
      facilities due to fire, severe weather, flood or other act of God or cause,
      even
      if insured, could have a material adverse effect on our financial condition,
      results of operations, business and prospects.




***Our
      limited operating history may not serve as an adequate basis to judge our future
      prospects and results of operations.***




Our
      limited operating history may not provide a meaningful basis on which to
      evaluate our business. Although our revenues have grown rapidly since inception,
      we might not be able to maintain our profitability or we may incur net losses
      in
      the future. We expect that our operating expenses will increase as we expand.
      Any significant failure to realize anticipated revenue growth could result
      in
      significant operating losses. We will continue to encounter risks and
      difficulties frequently experienced by companies at a similar stage of
      development, including our potential failure to:




37


·   Implement our business model and strategy and adapt and modify them as
      needed;




·   Manage
      our expanding operations and product offerings;




·   Maintain
      adequate control of our expenses;




·   Anticipate and adapt to changing conditions in the precision steel markets
      in
      which we operate as well as the impact of any changes in government regulation;
      and




·   Anticipate mergers and acquisitions involving our competitors, technological
      developments and other significant competitive and market dynamics.





Our
      business, business prospects and results of operations will be affected if
      we
      are not successful in addressing any or all of these risks and
      difficulties.




***Failure
      to comply with the U.S. Foreign Corrupt Practices Act could subject us to
      penalties and other adverse consequences.***




We
      are
      subject to the U.S. Foreign Corrupt Practices Act, which generally prohibits
      United States companies from engaging in bribery or other prohibited payments
      to
      foreign officials for the purpose of obtaining or retaining business. In
      addition, we are required to maintain records that accurately and fairly
      represent our transactions and have an adequate system of internal accounting
      controls. Foreign companies, including some that may compete with us, are not
      subject to these prohibitions, and therefore may have a competitive advantage
      over us. Corruption, extortion, bribery, pay-offs, theft and other fraudulent
      practices occur from time-to-time in the PRC, and our executive officers and
      employees have not been subject to the U.S. Foreign Corrupt Practices Act prior
      to the completion of the Stock Exchange Agreement in December 2006. We can
      make no assurance that our employees or other agents will not engage in such
      conduct for which we might be held responsible. If our employees or other agents
      are found to have engaged in such practices, we could suffer severe penalties
      and other consequences that may have a material adverse effect on our business,
      financial condition and results of operations.




***You
      may experience difficulties in effecting service of legal process, enforcing
      foreign judgments or bringing original actions in China based upon U.S. laws,
      including the federal securities laws or other foreign laws against us or our
      management.***




Substantially
      all of our current operations are conducted in China. Moreover, all but one
      of
      our directors and all of our officers are nationals and residents of China
      or
      Hong Kong. All or substantially all of the assets of these persons are located
      outside the United States. As a result, it may not be possible to effect service
      of process within the United States or elsewhere outside of China or Hong Kong
      upon these persons. In addition, uncertainty exists as to whether the courts
      of
      China or Hong Kong would recognize or enforce judgments of U.S. courts obtained
      against us or our officers and/or directors predicated upon the civil liability
      provisions of the securities law of the United States or any state thereof,
      or
      be competent to hear original actions brought in China or Hong Kong against
      us
      or such persons predicated upon the securities laws of the United States or
      any
      state thereof.




**Risks
      Relating to China**




***We
      face significant risks if the Chinese government changes its policies, laws,
      regulations, tax structure or its current interpretations of its laws,
      rules and regulations relating to our operations in
      China.***




Chengtong’s
      manufacturing facility is located in Shanghai, China. As of December 31,
      2007, substantially all of our assets are located in China and, except for
      a
      small volume of exports, all of our sales revenues are generated in China.
      Our
      results of operations, financial state of affairs and future growth are, to
      a
      significant degree, subject to China’s economic, political and legal development
      and related uncertainties. Our operations and results could be materially
      affected by a number of factors, including, but not limited to:




·   changes
      in policies by the Chinese government resulting in changes in laws or
      regulations or the interpretation of laws or regulations,




·   confiscatory taxation,




·   freezes
      on commercial bank lending,




·   changes
      in employment restrictions,




·   restrictions on imports and sources of supply,




·   import
      duties,




38


·   corruption,




·   currency
      revaluation, and




·   the
      expropriation of private enterprise.




Over
      the
      past several years, the Chinese government has pursued economic reform policies
      including the encouragement of private economic activities and greater economic
      decentralization. If the Chinese government does not continue to pursue its
      present policies that encourage foreign investment and operations in China,
      or
      if these policies are either not successful or are significantly altered, then
      our business could be adversely affected. Chengtong could even be subject to
      the
      risk of nationalization, which could result in the total loss of our
      stockholders’ investment. Following the Chinese government’s policy of
      privatizing many state-owned enterprises,  the
      Chinese government has attempted to augment its revenues through increased
      tax
      collection. Continued efforts to increase tax revenues could result in increased
      taxation expenses being incurred by us. Economic development may be limited
      as
      well by the imposition of austerity measures intended to reduce inflation,
      the
      inadequate development of infrastructure and the potential unavailability of
      adequate power and water supplies, transportation and
      communications.




***Chinese
      laws and regulations governing our current business operations are sometimes
      vague and uncertain. Any changes in such Chinese laws and regulations may have
      a
      material and adverse effect on our business.***




China’s
      legal system is a civil law system based on written statutes, in which system
      decided legal cases have little value as precedents unlike the common law system
      prevalent in the United States. There are substantial uncertainties regarding
      the interpretation and application of Chinese laws and regulations, including
      but not limited to the laws and regulations governing our business, or the
      enforcement and performance of our arrangements with customers in the event
      of
      the imposition of statutory liens, death, bankruptcy and criminal proceedings.
      The Chinese government has been developing a comprehensive system of commercial
      laws, and considerable progress has been made in introducing laws and
      regulations dealing with economic matters such as foreign investment, corporate
      organization and governance, commerce, taxation and trade. However, because
      these laws and regulations are relatively new, and because of the limited volume
      of published cases and judicial interpretation and their lack of force as
      precedents, interpretation and enforcement of these laws and regulations involve
      significant uncertainties. New laws and regulations that affect existing and
      proposed future businesses may also be applied retroactively. We are considered
      a foreign person or foreign funded enterprise under Chinese laws, and as a
      result, we are required to comply with Chinese laws and regulations. We cannot
      predict what effect the interpretation of existing or new Chinese laws or
      regulations may have on our businesses. If the relevant authorities find us
      in
      violation of Chinese laws or regulations, they would have broad discretion
      in
      dealing with such a violation, including, without limitation:




·   levying
      fines;




·   revoking
      our business and other licenses;




·   requiring that we restructure our ownership or operations; and




·   requiring that we discontinue any portion or all of our business.




***Our
      business, results of operations and overall profitability are linked to the
      economic, political and social conditions in China.***




Substantially
      all of our business, assets and operations are located in China. The economy
      of
      China differs from the economies of most developed countries in many respects,
      including government involvement, level of development, growth rate, control
      of
      foreign exchange, and allocation of resources. The economy of China has been
      transitioning from a planned economy to a more market-oriented economy. Although
      the Chinese government has implemented measures recently emphasizing the
      utilization of market forces for economic reform, the reduction of state
      ownership of productive assets and the establishment of sound corporate
      governance in business enterprises, a substantial portion of productive assets
      in China is still owned by the Chinese government. In addition, the Chinese
      government continues to play a significant role in regulating industry by
      imposing industrial policies. It also exercises significant control over China’s
      economic growth through the allocation of resources, controlling payment of
      foreign currency-denominated obligations, setting monetary policy and providing
      preferential treatment to particular industries or companies. Therefore, the
      Chinese government’s involvement in the economy may affect our business
      operations, results of operations and our financial condition.




***A
      slowdown or other adverse developments in the Chinese economy may materially
      and
      adversely affect our customers, demand for our services and our
      business.***




All
      of
      our operations are conducted in China and substantially all of our revenues
      are
      generated from sales to businesses operating in China. Although the Chinese
      economy has grown significantly in recent years, such growth may not continue.
      We do not know how sensitive we are to a slowdown in economic growth or other
      adverse changes in Chinese economy which may affect demand for precision steel
      products. A slowdown in overall economic growth, an economic downturn or
      recession or other adverse economic developments in China may materially reduce
      the demand for our products and in turn reduce our results of operations and our
      productivity.




39


***Inflation
      in China could negatively affect our profitability and
      growth.***




While
      the
      Chinese economy has experienced rapid growth, such growth has been uneven among
      various sectors of the economy and in different geographical areas of the
      country. Rapid economic growth can lead to growth in the money supply and rising
      inflation. If prices for our products rise at a rate that is insufficient to
      compensate for the rise in the costs of raw materials, it may have an adverse
      effect on our profitability. In order to control inflation in the past, the
      Chinese government has imposed controls on bank credits, limits on loans for
      fixed assets and restrictions on state bank lending. Such an austerity policy
      can lead to a slowing of economic growth. In October 2004, the People’s
      Bank of China, China’s central bank, raised interest rates for the first time in
      nearly a decade and indicated in a statement that the measure was prompted
      by
      inflationary concerns in the Chinese economy. Repeated increases in interest
      rates by the central bank will likely slow economic activity in China which
      could, in turn, materially increase our costs and also reduce demand for our
      products.




***Controversies
      affecting China’s trade with the United States could depress our stock
      price.***




While
      China has been granted permanent most favored nation trade status in the United
      States through its entry into the World Trade Organization, controversies and
      trade disagreements between the United States and China may arise that have
      a
      material adverse effect upon our stock price. Political or trade friction
      between the United States and China, whether or not actually affecting its
      business, could also materially and adversely affect the prevailing market
      price
      of our common stock.




***We
      may have difficulty establishing adequate management, legal and financial
      controls in China, which could impair our planning processes and make it
      difficult to provide accurate reports of our operating
      results.***




China
      historically has not followed Western style management and financial reporting
      concepts and practices, and its access to modern banking, computer and other
      control systems has been limited.  We may have difficulty in hiring and
      retaining a sufficient number of qualified employees to work in China in these
      areas. As a result of these factors, we may experience difficulty in
      establishing management, legal and financial controls, collecting financial
      data
      and preparing financial statements, books of account and corporate records
      and
      instituting business practices that meet Western standards, making it difficult
      for management to forecast its needs and to present the results of our
      operations accurately at all times.




***Imposition
      of trade barriers and taxes may reduce our ability to do business
      internationally, and the resulting loss of revenue could harm our
      profitability.***




We
      may
      experience barriers to conducting business and trade in our targeted emerging
      markets in the form of delayed customs clearances, customs duties and tariffs.
      In addition, we may be subject to repatriation taxes levied upon the exchange
      of
      income from local currency into foreign currency, substantial taxes of profits,
      revenues, assets and payroll, as well as value-added tax. The markets in
      which we plan to operate may impose onerous and unpredictable duties, tariffs
      and taxes on our business and products, and there can be no assurance that
      this
      will not reduce the level of sales that we achieve in such markets, which would
      reduce our revenues and profits.




***There
      can be no guarantee that China will comply with the membership requirements
      of
      the World Trade Organization, which could leave us subject to retaliatory
      actions by other governments and reduce our ability to sell our products
      internationally.***




China
      has
      agreed that foreign companies will be allowed to import most products into
      any
      part of China.  In the sensitive area of intellectual property rights,
      China has agreed to implement the trade-related intellectual property agreement
      of the Uruguay Round. There can be no assurances that China will implement
      any
      or all of the requirements of its membership in the World Trade Organization
      in
      a timely manner, if at all.  If China does not fulfill its obligations to
      the World Trade Organization, we may be subject to retaliatory actions by the
      governments of the countries into which we sell our products, which could render
      our products less attractive, thus reducing our revenues and
      profits.




***Our
      labor costs are likely to increase as a result of changes in Chinese labor
      laws.***




We
      have
      recently experienced an increase in the cost of labor. Recent changes in Chinese
      labor laws effective January 1, 2008 are likely to increase costs further
      and impose restrictions on our relationship with our employees. There can be
      no
      assurance that the labor laws will not change further or that their
      interpretation and implementation will vary, which may have a material adverse
      effect upon our business and results of operations.




***We
      currently receive preferential tax treatment under Chinese law which will expire
      in 2008 and may negatively impact our profitability.***




Prior
      to
      the adoption of the PRC Enterprise Income Tax Law on March 16, 2007 (the
“EIT Law”), Chinese income tax law provided that any foreign-invested enterprise
      engaged in manufacturing and scheduled to operate for not less than 10 years
      was
      entitled to receive an exemption from the entire central government income
      tax
      for the two years beginning with its first profitable year and receive a 50%
      reduced income tax in the third through fifth years. As a wholly foreign owned
      enterprise, Chengtong has been entitled to such preferential tax treatment.
      The
      full tax exemption for the enterprise income tax expired on December 31,
      2005 and the one-half reduction on the enterprise profit tax to 13.5% will
      expire on December 31, 2008. After such tax holidays, our profits will be
      subject to the full tax rate of 25%, effective as of January 1, 2008 in
      accordance with the EIT Law passed in 2007. If we are unable to
      increase  gross
      income by an amount greater than that needed to offset the loss of this
      preferential tax treatment, such a condition could have a material adverse
      effect on the results of its operations.




40


Under
      the
      EIT Law, a uniform tax rate of 25.0% has been adopted for all enterprises
      (including foreign-invested enterprises) and several tax incentives enjoyed
      by
      foreign-invested enterprises have been cancelled. However, for foreign-invested
      enterprises established before the promulgation of the EIT Law, a five-year
      transition period is provided during which reduced rates will apply but
      gradually be phased out. Since the PRC government has not announced
      implementation measures for the transitional policy with regards to such
      preferential tax rates, we cannot reasonably estimate the financial impact
      of
      the new tax law to us at this time. Further, any future increase in the
      enterprise income tax rate applicable to us or other adverse tax treatments
      would have a material adverse effect on our results of operations and financial
      condition.




***Fluctuations
      in exchange rates of the Renminbi, or RMB, could adversely affect the value
      of
      and dividends, if any, payable on shares of our common stock or otherwise impact
      our operations and profitability.***




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




The
      Chinese Renminbi remained stable against the U.S. Dollar at approximately 8.28
      RMB to 1.00 U.S. Dollar for several years until July 21, 2005 when the
      Chinese currency regime was altered, with a 2.1% revaluation versus the U.S.
      Dollar. This move initially valued the Renminbi at 8.11 per U.S. Dollar. The
      Renminbi is no longer linked to the U.S. currency but rather to a basket of
      currencies with a 0.3% margin of fluctuation. However, there remains
      international pressure on the Chinese government to adopt an even more flexible
      currency policy. As of December 31, 2007, the exchange rate was 7.2946 RMB
      to 1.00 U.S. Dollar. The exchange rate of Renminbi is subject to changes in
      China’s government policies which are, to a large extent, dependent on the
      economic and political development both internationally and locally and the
      demand and supply of Renminbi in the domestic market. There can be no assurance
      that such exchange rate will continue to remain stable in the future amongst
      the
      volatility of currencies, globalization and the unstable economies in recent
      years.




Since
      (i) our income and profit are mainly denominated in Renminbi, and
      (ii) the payment of dividends, if any, will be in U.S. Dollars, any
      exchange fluctuation of the Renminbi against other foreign currencies would
      adversely affect the value of the shares and dividends payable to shareholders,
      in foreign currency terms. For example, to the extent that we need to convert
      U.S. Dollars we receive from an offering of our securities into Renminbi for
      our
      operations, if the Renminbi appreciates against the U.S. Dollar, the Renminbi
      equivalent of the US Dollar we convert would be reduced. Conversely, if we
      decide to convert our Renminbi into U.S. Dollars for the purpose of making
      payments for dividends on our common stock or for other business purposes and
      the U.S. Dollar appreciates against the Renminbi, the U.S. Dollar equivalent
      of
      the Renminbi we convert would be reduced. In addition, appreciation of the
      Renminbi could make our products more expensive relative to those of our
      competitors or increase our profitability in U.S. Dollar terms.




At
      December 31, 2007, our outstanding financial instruments with foreign
      currency exchange rate risk exposure had an aggregate fair value of $5 million
      (including our non-U.S. Dollar denominated debt). The potential increase in
      the
      fair values of these instruments resulting from a 10% adverse change in quoted
      foreign currency exchange rates would be approximately $0.5 million at
      December 31, 2007.




***The
      ability of our Chinese operating subsidiary to pay certain foreign currency
      obligations, including dividends, may be restricted due to foreign exchange
      control regulations of China.***




The
      ability of Chengtong to pay dividends may be restricted due to the foreign
      exchange control policies and availability of cash balances. Since substantially
      all of our operations are conducted in China and a majority of our revenues
      are
      generated in China, a significant portion of our revenue earned and currency
      received are denominated in Renminbi.




The
      Chinese government imposes controls on the convertibility of Renminbi into
      foreign currencies and, in certain cases, the remittance of currency out of
      China. Renminbi is currently not a freely convertible currency. Shortages in
      the
      availability of foreign currency may restrict our ability to remit sufficient
      foreign currency to pay dividends, if any, on our common stock or otherwise
      satisfy foreign currency denominated obligations. Under existing Chinese foreign
      exchange regulations, payments of current account items, including profit
      distributions, interest payments and expenditures from the transaction, can
      be
      made in foreign currencies without prior approval from the State Administration
      of Foreign Exchange by complying with certain procedural
      requirements.




However,
      approval from appropriate governmental authorities is required where Renminbi
      is
      to be converted into foreign currency and remitted out of China to pay capital
      expenses such as the repayment of bank loans denominated in foreign
      currencies.




41


The
      Chinese government may also at its discretion restrict access in the future
      to
      foreign currencies for current account transactions. If the foreign exchange
      control system prevents us from obtaining sufficient foreign currency to satisfy
      our currency demands, we may not be able to pay certain of our expenses as
      they
      come due.




**Risks
      Relating to Our Common Stock**




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




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




·   our
      ability to obtain additional financing and, if available, the terms and
      conditions of the financing;




·   our
      financial position and results of operations;




·   period-to-period fluctuations in our operating results;





·   changes
      in estimates of our performance by any securities analysts;




·   substantial sales of our common stock pursuant to Rule 144 or
      otherwise;




·   new
      regulatory requirements and changes in the existing regulatory
      environment;




·   the
      issuance of new equity securities in a future offering;




·   changes
      in interest rates; and




·   general
      economic, monetary and other national conditions, particularly in the U.S.
      and
      China.




***The
      trading market in our common stock is limited and illiquid and may cause
      volatility in the market price.***




As
      of
      December 31 2007, 50.7% or 23,254,088 shares, of our issued and outstanding
      common stock was not owned by affiliates, of which 18,519,651 were unrestricted
      and free to trade. The market price for our common stock is subject to
      volatility and holders of common stock may be unable to resell their shares
      at
      or near their original purchase price or at any price. In the absence of an
      active trading market:




·   investors may have difficulty buying and selling;




·   market
      visibility for our common stock may be limited; and




·   a lack
      of visibility for our common stock may have a depressive effect on the market
      for our common stock.




***Shares
      eligible for future sale may adversely affect the market price of our common
      stock, as the future sale of a substantial amount of outstanding stock in the
      public marketplace could reduce the price of our common
      stock.***




From
      time
      to time, certain of our stockholders may be eligible to sell all or some of
      their shares of common stock by means of ordinary brokerage transactions in
      the
      open market, pursuant to Rule 144 promulgated under the Securities Act,
      subject to certain limitations or otherwise. In general, pursuant to
      Rule 144, a stockholder (or stockholders whose shares are aggregated) who
      has satisfied a one-year holding period may, under certain circumstances, sell
      within any three-month period a number of securities which does not exceed
      the
      greater of 1% of the then outstanding shares of common stock or the average
      weekly trading volume of the class during the four calendar weeks prior to
      such
      sale. Rule 144 also permits, under certain circumstances, the sale of
      securities, without any limitations, by a non-affiliate of our company that
      has
      satisfied a two-year holding period. Any substantial sale of common stock
      pursuant to Rule 144 or pursuant to a resale prospectus may have an adverse
      effect on the market price of our common stock.  Recent rule changes
      adopted by the SEC will substantially reduce the holding period for restricted
      securities held by non-affiliates of SEC-reporting companies, such as us. 
The holding period for such securities will be reduced to six months when the
      rule changes become effective on February 15, 2008.




42


***One
      stockholder, who is our Chief Executive Officer, exercises significant control
      over matters requiring shareholder approval.***




Wo
      Hing
      Li, our Chief Executive Officer, had voting power as of December 31, 2007
      equal to approximately 46.6% of our voting securities. As a result, Wo Hing
      Li,
      through such stock ownership, exercises significant control over all matters
      requiring shareholder approval, including the election of directors and approval
      of significant corporate transactions. This concentration of ownership in Wo
      Hing Li may also have the effect of delaying or preventing a change in control
      or other transactions that may otherwise be viewed as beneficial by
      shareholders other than Wo Hing Li.




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




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




***We
      may incur significant costs to ensure compliance with U.S. corporate governance
      and accounting requirements.***




We
      may
      incur significant costs associated with our public company reporting
      requirements, costs associated with applicable corporate governance
      requirements, including requirements under the Sarbanes-Oxley Act of 2002 and
      other rules implemented by the SEC and requirements in connection with the
      listing of our common stock on The NASDAQ Capital Market. We expect all of
      these
      applicable rules and regulations to increase our legal and financial
      compliance costs and to make some activities more time-consuming and costly.
      We
      also expect that these applicable rules and regulations may make it more
      difficult and more expensive for us to obtain director and officer liability
      insurance and we may be required to accept reduced policy limits and coverage
      or
      incur substantially higher costs to obtain the same or similar coverage. As
      a
      result, it may be more difficult for us to attract and retain qualified
      individuals to serve on our board of directors or as executive
      officers.




***Our
      officers and directors have limited experience with the regulatory requirements
      for U.S. public companies, which could impair our ability to satisfy public
      company filing requirements and could increase our securities compliance
      costs.***




All
      of
      our officers and most of our directors do not have any prior experience as
      officers and directors of a U.S. publicly traded company, or in complying with
      the regulatory requirements applicable to a U.S. public company. As a result,
      we
      could have difficulty satisfying the regulatory requirements applicable to
      U.S.
      public companies, which could adversely affect the market for our common stock.
      At present, we rely upon outside experts to advise us on matters relating to
      financial accounting and public company reporting. While we believe that it
      will
      be possible to satisfy our public company reporting requirements through the
      use
      of third party experts, our general and administrative costs will remain higher
      until we have developed or acquired internal expertise in these
      matters




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




Rules adopted
      by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
      require annual assessment of our internal control over financial reporting,
      and
      attestation of our assessment by our independent registered public accountants.
      The standards that must be met for management to assess the internal control
      over financial reporting as effective are complex, and require significant
      documentation, testing and possible remediation to meet the detailed standards
      and impose significant additional expenses on us. We may encounter problems
      or
      delays in completing activities necessary to make an assessment of our internal
      control over financial reporting. In addition, the attestation process required
      of our independent registered public accountants is new, and we may encounter
      problems or delays in completing the implementation of any requested
      improvements and receiving an attestation of our assessment by our independent
      registered public accountants. If we cannot assess our internal control over
      financial reporting as effective, or our independent registered public
      accountants are unable to provide an unqualified attestation report on such
      assessment, investor confidence and share value may be negatively
      impacted.




***We
      do not foresee paying cash dividends in the foreseeable
      future.***




We
      have
      not paid cash dividends on our stock, and we do not plan to pay cash dividends
      on our stock in the foreseeable future.




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




Pursuant
      to Section 5.1 of the Stock Purchase Agreement, dated February 16,
      2007, the Company agreed to reserve for issuance to investors in the private
      placement an aggregate of 2,000,000 shares of Common Stock if the Company’s net
      income for the fiscal year ending June 30, 2007 was less than US$10.4
      million, as set forth in the Company’s audited financial statements as filed
      with the SEC in the Company’s Annual Report on Form 10-K for the fiscal
      year ended June 30, 2007. As the Company’s net income as set forth in its
      audited financial statements for the year ended June 30, 2007 was less than
      US$10.4 million, the Company was required to issue the 2,000,000 shares of
      Common Stock to such investors.  Such issuance was effected on
      October 15, 2007.  No additional consideration was received by the
      Company in connection with this issuance of such shares of Common
      Stock.


43


Pursuant
      to a Placement Agency Agreement, dated October 31, 2007, between the
      Company and Roth Capital Partners LLC, in connection with the registered direct
      sale of the Company’s Common Stock and warrants, Roth Capital received, as
      partial compensation for its services, warrants to purchase an amount of Common
      Stock equal to 3.0% of the total number of shares of Common Stock sold in the
      Offering (the “Placement Warrants”), or 225,600 shares of Common Stock. 
Such Placement Warrants have an exercise price per share of 120% of the closing
      price per share of the Company’s Common Stock on the Closing Date, or $7.38, and
      are not exercisable prior to May 6, 2008.  Thereafter, the Placement
      Warrants are exercisable at any time until the third anniversary of the date
      of
      issue. The net proceeds of the Offering were approximately $44 million, after
      deducting underwriting commissions and discounts and other fees and expenses
      relating to the Offering.  The Company intends to use the net proceeds for
      repayment of certain existing bank debt, capital expenditures related to the
      completion of the second reverse rolling mill and annealing furnace and
      construction of the third reverse rolling mill and related capital expenditures
      in the amount of approximately $18 million, and the balance for general
      corporate purposes.




The
      above
      issuances of securities was made in reliance upon exemptions from the
      registration requirements of the Securities Act of 1933 in accordance with
      Section 4(2) and Regulation D thereunder.





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




None.





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




The
      Company submitted matters to a vote of its security holders through the
      solicitation of proxies. The content of these matters may be found in the
      Company’s Definitive Proxy Statement issued pursuant to
      Section 14(a) of the Securities Exchange Act of 1934, filed with the
      SEC on October 16, 2007 and incorporated herein by reference.




The
      annual meeting of the stockholders of the Company was held November 12,
      2007 at the offices of Kirkpatrick & Lockhart Preston Gates Ellis LLP,
      599 Lexington Avenue, New York, New York.  All proposals submitted to
      shareholders were approved. The results of the voting were as
      follows:




**Proposal
      1** :
      Election of Directors




**Name**
            
            **For**
            
            **Against**Wo
                Hing Li
            
            
            29,593,064
            
            
            146,600Hai
                Sheng Chen
            
            
            29,553,563
            
            
            186,101Tung
                Kuen Tsui
            
            
            29,552,862
            
            
            186,802Che
                Kin Lui
            
            
            29,553,365
            
            
            186,299David
                Peter Wong
            
            
            29,553,621
            
            
            186,043




**Proposal
      2** : 
Approval of change in state of incorporation from Colorado to Delaware by
      approving and adopting an Agreement and Plan of Merger providing for the merger
      of the Company into its wholly-owned subsidiary, China Precision
      Steel, Inc., a Delaware corporation:





**For**
            
            **Against**
            
            **Abstain**24,171,529
            
            
            27,986
            
            
            4,272




**Proposal
      3** : 
Authority to issue an undetermined number of shares of Company Common Stock,
      shares of preferred stock convertible into Company Common Stock or warrants
      to
      purchase Company Common Stock, in an aggregate amount of up to 11,213,443 shares
      of Common Stock, in connection with capital raising activities over the next
      12
      months and prior to the next annual meeting of the Company’s Stockholders, at a
      price and on the terms to be determined by the Company’s Board of
      Directors:





**For**
            
            **Against**
            
            **Abstain**23,948,330
            
            
            229,672
            
            
            25,785





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




None.


44


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




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




**Exhibit No.**
            
            **Exhibit:**2.1
            
            Certificate
                of Ownership and Merger (incorporated by reference to the Company’s
                Form 10-Q for the quarter ended September 30, 2007,
                Exhibit 2.1)2.2
            
            Agreement
                and Plan of Merger (incorporated by reference to the Company’s
                Form 10-Q for the quarter ended September 30, 2007,
                Exhibit 2.2)3.1
            
            Certificate
                of Incorporation (incorporated by reference to the Company’s
                Form 10-Q for the quarter ended September 30, 2007,
                Exhibit 3.1)3.2
            
            Bylaws
                (incorporated by reference to the Company’s Form 10-Q for the quarter
                ended September 30, 2007, Exhibit 3.2)4.1
            
            Specimen
                Certificate for Common Stock4.2
            
            Form of
                Warrant (incorporated herein by reference to the Company’s Form 8-K,
                dated February 16, 2007, Exhibit 4.2)4.3
            
            Warrant,
                dated February 22, 2007, to Belmont Capital Group Limited
                (incorporated herein by reference to the Company’s Form 8-K, dated
                February 16, 2007, Exhibit 4.3)4.4
            
            Warrant,
                dated February 22, 2007, to CCG Elite Investor Relations
                (incorporated herein by reference to the Company’s Form 8-K, dated
                February 16, 2007, Exhibit 4.4)4.5
            
            Form of
                Warrant, dated November 6, 2007 (incorporated by reference to the
                Company’s Form 8-K, dated November 1, 2007,
                Exhibit 4.5)4.6
            
            Form of
                Placement Warrant to Roth Capital Partners, LLC, dated November 6,
                2007 (incorporated by reference to the Company’s Form 8-K, dated
                November 1, 2007, Exhibit 4.6)10.1
            
            Form of
                Subscription Agreement, dated November 1, 2007, among the Company and
                the Buyers (incorporated by reference to the Company’s Form 8-K,
                dated November 1, 2007, Exhibit 10.1)21
            
            List
                of Subsidiaries of the Company (incorporated herein by reference
                to the
                Company’s Form 10-K for the year ended June 30,
                2007)31.1*
            
            Certification
                of President pursuant to Rule 13a-14(a)/15d-14(a) of the
                Securities Exchange Act31.2*
            
            Certification
                of Chief Financial Officer pursuant to
                Rule 13a-14(a)/15d-14(a) of the Securities Exchange
                Act32*
            
            Certification
                of President and Chief Financial Officer Pursuant to 18 U.S.C.
                Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 200299.1
            
            Report
                and Certification of Inspector of Elections, dated November 12,
                2007







*
      Filed
      herewith


45





SIGNATURES




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





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




46





EXHIBIT
      INDEX




**Exhibit No.**
            
            **Exhibits**2.1
            
            Certificate
                of Ownership and Merger (incorporated by reference to the Company’s
                Form 10-Q for the quarter ended September 30, 2007,
                Exhibit 2.1)2.2
            
            Agreement
                and Plan of Merger (incorporated by reference to the Company’s
                Form 10-Q for the quarter ended September 30, 2007,
                Exhibit 2.2)3.1
            
            Certificate
                of Incorporation (incorporated by reference to the Company’s
                Form 10-Q for the quarter ended September 30, 2007,
                Exhibit 3.1)3.2
            
            Bylaws
                (incorporated by reference to the Company’s Form 10-Q for the quarter
                ended September 30, 2007, Exhibit 3.2)4.1
            
            Specimen
                Certificate for Common Stock (incorporated by reference to the Company’s
                Form 10-Q for the quarter ended December 31, 2007,
                Exhibit 4.1)4.2
            
            Form of
                Warrant (incorporated herein by reference to the Company’s Form 8-K,
                dated February 16, 2007, Exhibit 4.2)4.3
            
            Warrant,
                dated February 22, 2007, to Belmont Capital Group Limited
                (incorporated herein by reference to the Company’s Form 8-K, dated
                February 16, 2007, Exhibit 4.3)4.4
            
            Warrant,
                dated February 22, 2007, to CCG Elite Investor Relations
                (incorporated herein by reference to the Company’s Form 8-K, dated
                February 16, 2007, Exhibit 4.4)4.5
            
            Form of
                Warrant, dated November 6, 2007 (incorporated by reference to the
                Company’s Form 8-K, dated November 1, 2007,
                Exhibit 4.5)4.6
            
            Form of
                Placement Warrant to Roth Capital Partners, LLC, dated November 6,
                2007 (incorporated by reference to the Company’s Form 8-K, dated
                November 1, 2007, Exhibit 4.6)10.1
            
            Form of
                Subscription Agreement, dated November 1, 2007, among the Company and
                the Buyers (incorporated by reference to the Company’s Form 8-K,
                dated November 1, 2007, Exhibit 10.1)21
            
            List
                of Subsidiaries of the Company (incorporated herein by reference
                to the
                Company’s Form 10-K for the year ended June 30,
                2007)31.1*
            
            Certification
                of President pursuant to Rule 13a-14(a)/15d-14(a) of the
                Securities Exchange Act31.2*
            
            Certification
                of Chief Financial Officer pursuant to
                Rule 13a-14(a)/15d-14(a) of the Securities Exchange
                Act32*
            
            Certification
                of President and Chief Financial Officer Pursuant to 18 U.S.C.
                Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 200299.1
            
            Report
                and Certification of Inspector of Elections, dated November 12, 2007
                (incorporated by reference to the Company’s Form 10-Q for the quarter
                ended December 31, 2007,
                Exhibit 99.1)





*
      Filed
      herewith


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