UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10−Q




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




For the
quarterly period ended: March 31, 2009




 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
transition period from ____________ to _____________




Commission
File No. 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.)




Room
B, 18th Floor, Teda Building


87 Wing Lok Street, Sheungwan, Hong
Kong,


People’s Republic of
China


(Address
of principal executive offices, Zip Code)




852-2543-2290


(Registrant’s
telephone number, including area code)





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 forsuch shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YesxNo ̈





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





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





Large
      accelerated filer   ̈
              Accelerated
      filer  xNon-accelerated
      filer   ̈(Do not check if
      a smaller reporting company)
              Smaller
      reporting company   ̈





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





The
number of shares outstanding of each of the issuer’s classes of common equity,
as of May 6, 2009 is as follows:




Class
      of Securities
            
            Shares
      OutstandingCommon
      Stock, $0.001 par value
            
            46,562,953





TABLE
OF CONTENTS





PART
      I
                  
                  FINANCIAL
      INFORMATION
                  
                  3ITEM
      1.
                  
                  FINANCIAL
      STATEMENTS.
                  
                  3ITEM
      2.
                  
                  MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.
                  
                  22ITEM
      3.
                  
                  QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
                  
                  39ITEM
      4.
                  
                  CONTROLS
      AND PROCEDURES.
                  
                  41PART
      II
                  
                  OTHER
      INFORMATION
                  
                  41ITEM
      1.
                  
                  LEGAL
      PROCEEDINGS.
                  
                  41ITEM 1A.
                  
                  RISK
      FACTORS.
                  
                  41ITEM
      2.
                  
                  UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
                  
                  41ITEM
      3.
                  
                  DEFAULTS
      UPON SENIOR SECURITIES.
                  
                  41ITEM
      4.
                  
                  SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS.
                  
                  42ITEM
      5.
                  
                  OTHER
      INFORMATION.
                  
                  42ITEM
      6.
                  
                  EXHIBITS.
                  
                  42





PART
I


FINANCIAL
INFORMATION




ITEM 1.
              FINANCIAL
      STATEMENTS.





CHINAPRECISION STEEL, INC.


INDEX TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS


FOR THENINEMONTHS ENDED MARCH 31, 2009 AND
2008




Contents
                    
                    Page(s)Condensed Consolidated Balance
      Sheets as of March 31, 2009 and June 30, 2008
                    
                    4Condensed Consolidated Statements
      ofOperations and
      ComprehensiveIncome
      for the nine months ended March 31, 2009 and 2008
                    
                    5CondensedConsolidated Statements of
      Stockholders’Equity for the nine months ended
      March 31, 2009 and 2008
                    
                    6Condensed Consolidated Statements
      of Cash Flows for the nine months ended March 31, 2009 and
      2008
                    
                    7Notes to the Condensed
      Consolidated Financial
      Statements
                    
                    8


3





China
Precision Steel, Inc. and Subsidiaries


Condensed
Consolidated Balance Sheets





(Unaudited)March 31,
                                        
                                        
                                        June 30,Notes
                                        
                                        
                                        2009
                                        
                                        
                                        2008AssetsCurrent
      assetsCash
      and equivalents
                                        
                                        
                                        
                                        
                                        $
                                        5,569,806
                                        
                                        
                                        $
                                        18,568,842Accounts
      receivable net of allowances of $1,036,609 and $1,033,479 at March 31,
      2009 and June 30, 2008, respectively
                                        
                                        
                                        5
                                        
                                        
                                        
                                        21,029,146
                                        
                                        
                                        
                                        33,783,074Bills
      receivable
                                        
                                        
                                        
                                        
                                        
                                        
                                        2,288,691
                                        
                                        
                                        
                                        4,309,703Other
      receivables
                                        
                                        
                                        
                                        
                                        
                                        
                                        259,827
                                        
                                        
                                        
                                        571,746Inventories
                                        
                                        
                                        6
                                        
                                        
                                        
                                        22,606,039
                                        
                                        
                                        
                                        17,815,087Prepaid
      expenses
                                        
                                        
                                        
                                        
                                        
                                        
                                        131,841
                                        
                                        
                                        
                                        58,105Advances
      to suppliers, net of allowances of $2,530,479 and $2,522,837 at March 31,
      2009 and June 30, 2008,respectively
                                        
                                        
                                        7
                                        
                                        
                                        
                                        25,477,855
                                        
                                        
                                        
                                        33,027,365Total
      current assets
                                        
                                        
                                        
                                        
                                        
                                        
                                        77,363,205
                                        
                                        
                                        
                                        108,133,922Property
      and equipmentProperty
      and equipment, net
                                        
                                        
                                        8
                                        
                                        
                                        
                                        39,800,096
                                        
                                        
                                        
                                        39,199,305Deposit
      for plant and machinery
                                        
                                        
                                        
                                        
                                        
                                        
                                        8,048,466
                                        
                                        
                                        
                                        -Construction-in-progress
                                        
                                        
                                        9
                                        
                                        
                                        
                                        29,949,380
                                        
                                        
                                        
                                        16,476,45477,797,942
                                        
                                        
                                        
                                        55,675,759Intangible
      assets, net
                                        
                                        
                                        10
                                        
                                        
                                        
                                        2,394,406
                                        
                                        
                                        
                                        1,625,690Goodwill
                                        
                                        
                                        
                                        
                                        
                                        
                                        99,999
                                        
                                        
                                        
                                        99,999Total
      assets
                                        
                                        
                                        
                                        
                                        
                                        $
                                        157,655,552
                                        
                                        
                                        $
                                        165,535,370Liabilities
      and Stockholders' EquityCurrent
      liabilitiesAccounts
      payable and accrued liabilities
                                        
                                        
                                        
                                        
                                        
                                        $
                                        10,023,519
                                        
                                        
                                        $
                                        12,047,981Advances
      from customers
                                        
                                        
                                        11
                                        
                                        
                                        
                                        3,581,863
                                        
                                        
                                        
                                        6,996,996Other
      taxes payables
                                        
                                        
                                        
                                        
                                        
                                        
                                        3,529,867
                                        
                                        
                                        
                                        3,976,239Current
      income taxes payable
                                        
                                        
                                        
                                        
                                        
                                        
                                        4,746,903
                                        
                                        
                                        
                                        4,742,387Short-term
      loans
                                        
                                        
                                        12
                                        
                                        
                                        
                                        17,430,904
                                        
                                        
                                        
                                        17,465,799Total
      current liabilities
                                        
                                        
                                        
                                        
                                        
                                        
                                        39,313,056
                                        
                                        
                                        
                                        45,229,402Stockholders'
      equity:Preferred
      stock: $0.001 per value, 8,000,000 shares authorized, no shares
      outstanding at  March 31, 2009 and June 30, 2008
                                        
                                        
                                        13Common
      stock: $0.001 par value, 62,000,000 shares authorized, 46,562,953 and
      46,472,953 issued and outstanding March 31, 2009 and June 30,
      2008
                                        
                                        
                                        13
                                        
                                        
                                        
                                        46,563
                                        
                                        
                                        
                                        46,473Additional
      paid-in capital
                                        
                                        
                                        13
                                        
                                        
                                        
                                        75,642,383
                                        
                                        
                                        
                                        75,372,488Accumulated
      other comprehensive income
                                        
                                        
                                        
                                        
                                        
                                        
                                        9,679,901
                                        
                                        
                                        
                                        9,295,658Retained
      earnings
                                        
                                        
                                        
                                        
                                        
                                        
                                        32,973,649
                                        
                                        
                                        
                                        35,591,349Total
      stockholders' equity
                                        
                                        
                                        
                                        
                                        
                                        
                                        118,342,496
                                        
                                        
                                        
                                        120,305,968Total
      liabilities and stockholders' equity
                                        
                                        
                                        
                                        
                                        
                                        $
                                        157,655,552
                                        
                                        
                                        $
                                        165,535,370





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 Nine Months Ended March 31, 2009 and 2008


(Unaudited)





Three Months Ended
                              
                              
                              Nine Months EndedMarch 31,
                              
                              
                              March 31,
                              
                              
                              March 31,
                              
                              
                              March 31,Notes
                              
                              
                              2009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008RevenuesSales
      revenues
                              
                              
                              
                              
                              $
                              7,623,209
                              
                              
                              $
                              18,773,504
                              
                              
                              $
                              50,547,587
                              
                              
                              $
                              59,189,060Cost
      of goods sold
                              
                              
                              
                              
                              
                              9,605,252
                              
                              
                              
                              13,399,010
                              
                              
                              
                              45,125,635
                              
                              
                              
                              42,172,997Gross
      profit/(loss)
                              
                              
                              
                              
                              
                              (1,982,043
                              )
                              
                              
                              5,374,494
                              
                              
                              
                              5,421,952
                              
                              
                              
                              17,016,063Operating
      expensesSelling
      expenses
                              
                              
                              
                              
                              
                              298,492
                              
                              
                              
                              203,477
                              
                              
                              
                              1,632,322
                              
                              
                              
                              484,926Administrative
      expenses
                              
                              
                              
                              
                              
                              541,251
                              
                              
                              
                              699,220
                              
                              
                              
                              1,581,456
                              
                              
                              
                              2,031,816Bad
      and doubtful debts
                              
                              
                              
                              
                              
                              672
                              
                              
                              
                              10,150
                              
                              
                              
                              3,830,134
                              
                              
                              
                              661,930Depreciation
      and amortization
                              
                              
                              
                              
                              
                              33,624
                              
                              
                              
                              17,155
                              
                              
                              
                              93,145
                              
                              
                              
                              46,585Total
      operating expenses
                              
                              
                              
                              
                              
                              874,039
                              
                              
                              
                              930,002
                              
                              
                              
                              7,137,057
                              
                              
                              
                              3,225,257Income/(loss)
      from operations
                              
                              
                              
                              
                              
                              (2,856,082
                              )
                              
                              
                              4,444,492
                              
                              
                              
                              (1,715,105
                              )
                              
                              
                              13,790,806Other
      income/(expense)Other
      revenues
                              
                              
                              
                              
                              
                              76,556
                              
                              
                              
                              152,894
                              
                              
                              
                              336,257
                              
                              
                              
                              945,304Interest
      and finance costs
                              
                              
                              
                              
                              
                              (257,123
                              )
                              
                              
                              (415,863
                              )
                              
                              
                              (905,305
                              )
                              
                              
                              (1,174,864
                              )Total
      other income/(expense)
                              
                              
                              
                              
                              
                              (180,567
                              )
                              
                              
                              (262,969
                              )
                              
                              
                              (569,048
                              )
                              
                              
                              (229,560
                              )Net
      income/(loss) from operations before income tax
                              
                              
                              
                              
                              
                              (3,036,649
                              )
                              
                              
                              4,181,523
                              
                              
                              
                              (2,284,153
                              )
                              
                              
                              13,561,246Income
      tax
                              
                              
                              15Current
                              
                              
                              
                              
                              
                              
                              481,804
                              
                              
                              
                              543,623
                              
                              
                              
                              333,547
                              
                              
                              
                              1,660,217Deferred
                              
                              
                              
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (1,064,028
                              )Total
      income tax
                              
                              
                              
                              
                              
                              
                              481,804
                              
                              
                              
                              543,623
                              
                              
                              
                              333,547
                              
                              
                              
                              596,189Net
      income/(loss)
                              
                              
                              
                              
                              
                              $
                              (3,518,453
                              )
                              
                              $
                              3,637,900
                              
                              
                              $
                              (2,617,700
                              )
                              
                              $
                              12,965,057Basic
      earnings/(loss) per share
                              
                              
                              16
                              
                              
                              $
                              (0.08
                              )
                              
                              $
                              0.08
                              
                              
                              $
                              (0.06
                              )
                              
                              $
                              0.31Basic
      weighted average shares outstanding
                              
                              
                              
                              
                              
                              
                              46,562,953
                              
                              
                              
                              45,896,288
                              
                              
                              
                              46,560,656
                              
                              
                              
                              42,088,128Diluted
      earnings/(loss) per share
                              
                              
                              16
                              
                              
                              $
                              (0.08
                              )
                              
                              $
                              0.08
                              
                              
                              $
                              (0.06
                              )
                              
                              $
                              0.30Diluted
      weighted average shares outstanding
                              
                              
                              
                              
                              
                              
                              46,562,953
                              
                              
                              
                              46,365,778
                              
                              
                              
                              46,560,656
                              
                              
                              
                              42,555,912The
      Components of comprehensive income/(loss):Net
      income/(loss)
                              
                              
                              
                              
                              
                              $
                              (3,518,453
                              )
                              
                              $
                              3,637,900
                              
                              
                              $
                              (2,617,700
                              )
                              
                              $
                              12,965,057Foreign
      currency translation adjustment
                              
                              
                              
                              
                              
                              
                              (366,181
                              )
                              
                              
                              3,481,498
                              
                              
                              
                              384,243
                              
                              
                              
                              5,567,813Comprehensive
      income/(loss)
                              
                              
                              
                              
                              
                              $
                              (3,884,634
                              )
                              
                              $
                              7,119,398
                              
                              
                              $
                              (2,233,457
                              )
                              
                              $
                              18,532,870





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


5





China
Precision Steel, Inc. and Subsidiaries


Condensed
Consolidated Statements of Changes in Stockholders' Equity


For
the Nine Months Ended March 31, 2009


and
the Year ended June 30, 2008





AccumulatedAdditional
                    
                    
                    Other
                    
                    
                    
                    
                    
                    TotalOrdinary Shares
                    
                    
                    Paid-in
                    
                    
                    Comprehensive
                    
                    
                    Retained
                    
                    
                    Stockholders'Share
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Income
                    
                    
                    Earnings
                    
                    
                    EquityBalance
      at June 30, 2007
                    
                    
                    37,378,141
                    
                    
                    $
                    37,378
                    
                    
                    $
                    31,867,063
                    
                    
                    $
                    2,192,160
                    
                    
                    $
                    17,008,238
                    
                    
                    $
                    51,104,839Sale
      of common stock
                    
                    
                    7,100,000
                    
                    
                    
                    7,100
                    
                    
                    
                    44,498,650
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    44,505,750Syndication
      fees
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (130,468
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (130,468
                    )Make
      good shares
                    
                    
                    2,000,000
                    
                    
                    
                    2,000
                    
                    
                    
                    (2,000
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Exercise
      of warrants
                    
                    
                    765,872
                    
                    
                    
                    766
                    
                    
                    
                    1,729,235
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,730,001Cancellation
      of stock
                    
                    
                    (771,060
                    )
                    
                    
                    (771
                    )
                    
                    
                    (2,589,992
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2,590,763
                    )Foreign
      currency translation adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,103,498
                    
                    
                    
                    -
                    
                    
                    
                    7,103,498Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    18,583,111
                    
                    
                    
                    18,583,111Balance
      at June 30, 2008
                    
                    
                    46,472,953
                    
                    
                    
                    46,473
                    
                    
                    
                    75,372,488
                    
                    
                    
                    9,295,658
                    
                    
                    
                    35,591,349
                    
                    
                    
                    120,305,968Exercise
      of warrants
                    
                    
                    90,000
                    
                    
                    
                    90
                    
                    
                    
                    269,895
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    269,985Foreign
      currency translation adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    384,243
                    
                    
                    
                    -
                    
                    
                    
                    384,243Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2,617,700
                    )
                    
                    
                    (2,617,700
                    )Balance at March 31,
      2009(unaudited)
                    
                    
                    46,562,953
                    
                    
                    $
                    46,563
                    
                    
                    $
                    75,642,383
                    
                    
                    $
                    9,679,901
                    
                    
                    $
                    32,973,649
                    
                    
                    $
                    118,342,496


6


China
Precision Steel, Inc. and Subsidiaries


Condensed
Consolidated Statements of Cash Flows


For
the Nine Months Ended March 31, 2009 and 2008


(Unaudited)





2009
                
                
                2008Cash
      flows from operating activitiesNet
      Income/(loss)
                
                $
                (2,617,700
                )
                
                $
                12,965,057Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
      and amortization
                
                
                2,746,541
                
                
                
                1,841,947Allowance
      for bad and doubtful debts
                
                
                3,830,134
                
                
                
                661,930Net
      changes in assets and liabilities:Accounts
      receivable, bills receivable and other receivables
                
                
                11,360,509
                
                
                
                (26,067,887
                )Inventories
                
                
                (4,732,832
                )
                
                
                (2,616,526
                )Deposits
                
                
                -
                
                
                
                89,361Prepaid
      expenses
                
                
                (73,753
                )
                
                
                (429,556
                )Advances
      to suppliers
                
                
                7,642,844
                
                
                
                (25,893,725
                )Accounts
      payable and accrued expenses
                
                
                (2,058,293
                )
                
                
                5,702,234Advances
      from customers
                
                
                (3,433,313
                )
                
                
                5,037,976Other
      taxes payable
                
                
                (458,015
                )
                
                
                2,220,328Current
      income taxes
                
                
                (9,841
                )
                
                
                2,365,673Deferred
      income taxes
                
                
                -
                
                
                
                (1,064,028
                )Net
      cash (used in)/provided by operating activities
                
                
                12,196,281
                
                
                
                (25,187,216
                )Cash
      flows from investing activitiesPurchases
      of property, plant and equipment
                
                
                (3,231,638
                )
                
                
                -Deposit
      for plant and machinery
                
                
                (8,048,466
                )
                
                
                -Purchases
      of land use rights
                
                
                (786,643
                )
                
                
                -Construction
      in progress
                
                
                (13,423,016
                )
                
                
                (7,512,290
                )Net
      cash (used in)/ investing activities
                
                
                (25,489,763
                )
                
                
                (7,512,290
                )Cash
      flows from financing activitiesExercise
      of common stock warrants
                
                
                269,985
                
                
                
                -Sale
      of common stock
                
                
                
                
                
                
                44,375,282Advances
      from/(to) directors, net
                
                
                -
                
                
                
                2,572,846Notes
      payable proceeds
                
                
                -
                
                
                
                16,446,667Repayments
      of short-term loan
                
                
                (87,801
                )
                
                
                (23,757,121
                )Net
      cash provided by financing activities
                
                
                182,184
                
                
                
                39,637,674Effect
      of exchange rate
                
                
                112,262
                
                
                
                1,852,473Net
      increase/(decrease) in cash
                
                
                (12,999,036
                )
                
                
                8,790,641Cash
      and cash equivalents, beginning of period
                
                
                18,568,842
                
                
                
                5,504,862Cash
      and cash equivalents, end of period
                
                $
                5,569,806
                
                
                $
                14,295,503Supplemental
      disclosure of cash flow information:Cash
      paid during the period for:Interest
      paid
                
                $
                905,305
                
                
                $
                1,174,864Taxes
      paid
                
                $
                363,493
                
                
                $
                -Fixed
      asset purchases in accounts payable
                
                $
                -
                
                
                $
                233,885





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
spinoff of OraLabs, Inc. and the supplemental payment received. The Company then
changed its name to China Precision Steel, Inc.




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





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





Chengtong
was registered on July 2, 2002 in Shanghai, 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 were approved and
the transformation of Chengtong from a Sino-foreign joint investment enterprise
to a wholly foreign owned enterprise (WFOE) was granted.





In the
year ended June 30, 2007, we added three indirect subsidiaries to our corporate
structure. On April 9, 2007, we purchased Shanghai Tuorong Precision Strip
Company Limited, or Tuorong, through PSHL. The sole activity of Tuorong is the
ownership of a land use right with respect to facilities utilized by Chengtong.
On April 10, 2007, PSHL purchased 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 with limited
liabilities. Shanghai Blessford was registered on February 24, 2006 in Shanghai
with a registered capital of $12,000,000 and a defined period of existence of 50
years from February 24, 2006 to February 23, 2056. On May 27, 2008, the
authorized registered capital was increased to $22,000,000. We intend to hold
Blessford International Limited as a shell subsidiary. As used herein, the
“Group” refers to the Company, PSHL, Chengtong, Tuorong, Blessford International
and Shanghai Blessford on a consolidated basis.





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


8




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, 2008.





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 sheet of China
Precision Steel, Inc. and subsidiaries as of March 31, 2009 and June 30, 2008,
and the results of their operations and cash flows for the three and nine months
ended March 31, 2009 and 2007. The results of operations for the three or nine
months ended March 31, 2009 are not necessarily indicative of the results to be
expected for the entire year ending June 30, 2009.





3.  Summary of Significant Accounting
Policies





The
following is a summary of significant accounting policies:





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





Allowance for Doubtful Accounts -We provide an allowance for doubtful accounts to ensure accounts
receivables are not overstated due to uncollectibility. Allowances for bad and
doubtful accounts are maintained for the Company’s domestic and international
customers and clients based on factors surrounding the credit risk of specific
customers and clients, historical trends, and other information. Our allowance
for doubtful accounts is a subjective critical estimate that has a direct impact
on reported net earnings, and it is reasonably possible that the Company’s
estimate of the allowance will change, such as in the case when the Company
becomes aware of a customer’s inability to meet its financial obligations. At
March 31, 2009 and June 30, 2008, the Company had $1,036,609 and $1,033,479 of
allowances for doubtful accounts, respectively.





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





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





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





Advances to Suppliers -In
order to secure 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. The Company created this partial reserve
against advances to suppliers for goods ordered and not received within one year
of the advance payment made.





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.


9





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




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





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





Impairment of Long-Lived Assets -The Company accounts for impairment of plant and equipment and
amortizable intangible assets in accordance with SFAS No. 142 and SFAS No. 144,
which requires the Company to evaluate a long-lived asset for recoverability
when there is event or circumstance that indicate the carrying value of the
asset may not be recoverable. An impairment loss is recognized when the carrying
amount of a long-lived asset or asset group is not recoverable (when carrying
amount exceeds the gross, undiscounted cash flows from use and disposition) and
is measured as the excess of the carrying amount over the asset’s (or asset
group’s) fair value.





Capitalized Interest - The
Company capitalizes interest cost on borrowings incurred during the new
construction or upgrade of qualified assets. Capitalized interest is added to
the cost of the underlying assets and is amortized over the useful lives of the
assets. During the nine months ended March 31, 2009 and 2008, the Company
capitalized no interest to construction-in-progress.





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





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





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





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





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





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





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


10





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.





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





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





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





United
States





China
Precision Steel, Inc. is subject to United States federal income tax at a tax
rate of 34%. No provision for income taxes in the United States has been made as
China Precision Steel, Inc. had no taxable income in fiscal years 2009 and
2008.





BVI





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





PRC





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





Enterprise
income tax





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





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


11





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 No. 109 by defining a criterion that an individual
income tax position must meet for any part of the benefit of that position to be
recognized in an enterprise’s financial statements and provides guidance on
measurement, derecognition, classification, accounting for interest and
penalties, accounting in interim periods, disclosure and transition. In
accordance with the transition provisions, the Company adopted FIN 48 effective
January 1, 2007.





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





Based on
all known facts and circumstances and current tax law, the Company believes that
the total amount of unrecognized tax benefits as of March 31, 2009, is not
material to its results of operations, financial condition or cash flows. The
Company also believes that the total amount of unrecognized tax benefits as of
March 31, 2009, 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 and Shanghai Blessford
contribute to a defined contribution retirement scheme organized by municipal
government in the province in which Chengtong and Shanghai Blessford were
registered and all qualified employees are eligible to participate in the
scheme. Contributions to the scheme are calculated at 23.5% of the employees’
salaries above a fixed threshold amount and the employees contribute 2% to 8%,
while Chengtong and Shanghai Blessford contribute the balance contribution of
15.5%% to 21.5%. The Group has no other material obligation for the payment of
retirement benefits beyond the annual contributions under this
scheme.


12





For the
three and nine months ended March 31, 2009, the Company’s pension cost charged
to the statements of operations under the plan amounted to $70,709 and $231,594,
respectively, all of which have been paid to the National Social Security Fund
(2008: $83,273 and $215,931, respectively).





Fair Value of Financial Instruments -The carrying amounts of certain financial instruments, including cash,
accounts receivable, other receivables, accounts payable, accrued expenses, and
other payables approximate their fair values as at March 31, 2009 and June 30,
2008 because of the relatively short-term maturity of these
instruments.





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





4.  Concentrations
of Business and Credit Risk





The
Company’s list of customers whose purchases exceeded 10% of total sales during
the nine months ended March 31, 2009 and 2008 is as follows:





Customers
                      
                      2009
                      
                      
                      % to
                        sales
                      
                      
                      2008
                      
                      
                      % to
                        salesSalzgitter
      Mannesmann International GMBH
                      
                      
                      13,653,466
                      
                      
                      
                      27
                      
                      
                      
                      —
                      *
                      
                      
                      —
                      *Shanghai
      Changshuo Stainless Steel Co., Ltd.
                      
                      
                      —
                      *
                      
                      
                      —
                      *
                      
                      
                      14,174,957
                      
                      
                      
                      24Shanghai
      Shengdejia Metal Products Limited
                      
                      
                      —
                      *
                      
                      
                      —
                      *
                      
                      
                      10,854,529
                      
                      
                      
                      18Sinosteel
      Company Limited
                      
                      
                      —
                      *
                      
                      
                      —
                      *
                      
                      
                      10,854,529
                      
                      
                      
                      18





The
Company’s list of suppliers whose sales to us exceeded 10% of our total
purchases during the nine months ended March 31, 2009 and 2008 is as
follows:




Suppliers
                    
                    2009
                    
                    
                    % to
                      consumption
                    
                    
                    2008
                    
                    
                    % to
                      purchaseBaoSteel
      Steel Products Trading Co. Ltd.
                    
                    
                    10,758,080
                    
                    
                    
                    31
                    
                    
                    
                    13,259,732
                    
                    
                    
                    34Shanghai
      Pinyun Steel Co., Ltd
                    
                    
                    8,486,770
                    
                    
                    
                    25
                    
                    
                    
                    8,278,110
                    
                    
                    
                    21




5.  Accounts
Receivable





The
Company provides credit in the normal course of business. The Company performs
ongoing credit evaluations of its domestic and international customers and
clients and maintains allowances for bad and doubtful accounts based on factors
surrounding the credit risk of specific customers and clients, historical
trends, and other information. Trade accounts receivable, net totaled
$21,029,146 and $33,783,074 as of March 31, 2009 and June 30, 2008,
respectively.





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


13





6.  Inventories





As of
March 31, 2009 and June 30, 2008 inventories consisted of the
following:





At cost:
                      
                      March 31,
                        2009
                      
                      
                      June 30,
                        2008Raw materials
                      
                      $
                      10,255,186
                      
                      
                      $
                      8,376,173Work
      in progress
                      
                      
                      3,206,718
                      
                      
                      
                      3,247,093Finished
      goods
                      
                      
                      7,029,177
                      
                      
                      
                      3,918,801Consumable
      items
                      
                      
                      2,114,958
                      
                      
                      
                      2,273,020$
                      22,606,039
                      
                      
                      $
                      17,815,087





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





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





7.  Advance
to Suppliers





Cash
advances are shown net of allowances of $2,530,479 and$2,522,837 at March 31,
2009 and June 30, 2008, respectively.





Two of
the Company’s major long-term suppliers, who each represent 33% and 27% of our
advances to suppliers as of March 31, 2009, respectively, have advised the
management that they are committed to delivering the contracted raw materials in
accordance with the terms of their supply contracts. Management expects to
receive these raw materials in the next 6 months.





8.  Property,
Plant and Equipment





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





March 31,
                            2009
                          
                          
                          June 30,
                            2008Plant
      and machinery
                          
                          $
                          25,839,027
                          
                          
                          $
                          22,725,528Buildings
                          
                          
                          21,763,406
                          
                          
                          
                          21,685,208Motor
      vehicles
                          
                          
                          526,552
                          
                          
                          
                          379,885Office
      equipment
                          
                          
                          214,669
                          
                          
                          
                          185,16148,343,654
                          
                          
                          
                          44,975,782Less:
      Accumulated depreciation
                          
                          
                          (8,543,558
                          )
                          
                          
                          (5,776,477
                          )$
                          39,800,096
                          
                          
                          $
                          39,199,305





Depreciation
expense related to manufacturing is included as a component of cost of goods
sold. During the three and nine months ended March 31, 2009, depreciation
totaling $1,437,115 and $3,021,547, respectively, was included as a component of
cost of goods sold (2008: $770,556 and $1,430,250, respectively).





Plant and
machinery amounting to $17,827,400 (June 30, 2008: $18,972,430) and land use
right amounting to $555,943 (June 30, 2008: $553,404) were pledged for
short-term loans totaling $17,430,904.


14





9.  Construction-In-Progress





As of
March 31, 2009 and June 30, 2008, construction-in-progress consisted of the
following:





March 31,
                          2009
                        
                        
                        June 30,
                          2008Construction
      costs
                        
                        $
                        29,949,380
                        
                        
                        $
                        16,476,454





Construction-in-progress
represents construction and installations of a cold-rolling mill and annealing
furnaces.





10.  Intangible
Assets





The
Company acquired land use rights in August 2004 and December 2006 for 50 years
that expire in August 2054 and December 2056 respectively. The land use rights
are amortized over a fifty-year term. An amortization amount of approximately
$35,000 is to be recorded each year starting from the current financial year
ending June 30, 2009 for the remaining lease period.





Intangible
assets of the Company are reviewed annually, or more frequently if there are
triggering events, to determine whether their carrying value has become
impaired, in conformity with SFAS No. 142, Goodwill and Other Intangible Assets(“SFAS No. 142”). The Company also re-evaluates the periods of
amortization to determine whether subsequent events and circumstances warrant
revised estimates of useful lives.





11. 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.





12.  Short-Term
Loans





Short-term
loans consisted of the following:





March 31,
                          2009
                        
                        
                        June 30,
                          2008Bank
      loan dated August 1, 2008, due in one year with an interest rate of the
      Singapore Interbank Offered Rate (“SIBOR”) plus 3% (4.2% at March 31,
      2009) (Note 8)
                        
                        
                        5,300,000
                        
                        
                        
                        5,300,000Bank
      loan dated August 1, 2008, due in one year with an interest rate at 115%
      of the standard market rate set by the People’s Bank of China for Renminbi
      loans (6.11% at March 31, 2009) (Note 8)
                        
                        
                        2,902,130
                        
                        
                        
                        2,886,952Bank
      loan dated July 26, 2008, due in one year with an interest rate at 115% of
      the standard market rate set by the People’s Bank of China for Renminbi
      loans (6.11% at March 31, 2009) (Note 8)
                        
                        
                        9,228,774
                        
                        
                        
                        9,278,847$
                        17,430,904
                        
                        
                        $
                        17,465,799





The above
short-term loans are secured by land use rights, buildings, plant and
machinery.





The
weighted-average interest rate on short-term loans at March 31, 2009 and June
30, 2008 was 5.53% and 7.72%, respectively.


15





13.  Equity





Pursuant
to Section 5.1 of the Stock Purchase Agreement, the Company agreed to reserve
for issuance to investors in the private placement an aggregate of 2,000,000
shares of Common Stock if the Company’s net income for the fiscal year ended
June 30, 2007 was less than US$10.4 million, as set forth in the Company’s
audited financial statements as filed with the SEC in the Company’s Annual
Report on Form 10-K for that fiscal year. 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 intended usage of the net proceeds was for
repayment of certain bank debt, capital expenditure, and general corporate
purposes. During the year ended June 30, 2008, long-term bank loans of
$13,042,159 were paid off, and a progress payment of $7,016,729 was made in
relation to the construction of the third cold rolling mill. During the nine
months ended March 31, 2009, we invested an additional $13,423,016 in
construction in progress and property, production plants and equipment in
relation to the third cold rolling mill and expansion of the Shanghai Blessford
production facilities.





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 this amount was 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 were 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.





14.  Stock
Warrants





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:


16





Exercise
                                                Price
                                              
                                              Outstanding
                                                June 30, 2008
                                              
                                              Granted
                                              
                                              Expired or
                                                Exercised
                                              
                                              Outstanding
                                                March 31,
                                                2009
                                              
                                              Expiration Date$
                                              3.00
                                              
                                              448,392
                                              
                                              -0-
                                              
                                              
                                              (90,000
                                              )
                                              358,392
                                              
                                              February 22, 2011$
                                              3.60
                                              
                                              100,000
                                              
                                              -0-
                                              
                                              
                                              -0-
                                              
                                              100,000
                                              
                                              February 22, 2010$
                                              8.45
                                              
                                              1,420,000
                                              
                                              -0-
                                              
                                              
                                              -0-
                                              
                                              1,420,000
                                              
                                              May 5, 2013$
                                              7.38
                                              
                                              225,600
                                              
                                              -0-
                                              
                                              
                                              -0-
                                              
                                              225,600
                                              
                                              November 5, 2010





15.  Income
Taxes





For
enterprise income tax reporting purposes, the Company reports income and
expenses on an accrual 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 expenses.





The tax
holiday resulted in tax savings as follows:





Three months ended March 31,
                    
                    
                    Nine months ended March 312009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Tax
      savings
                    
                    $
                    188,410
                    
                    
                    $
                    (589,520
                    )
                    
                    $
                    (223,567
                    )
                    
                    $
                    (1,935,620
                    )Benefit
      per shareBasic
                    
                    $
                    0.004
                    
                    
                    $
                    (0.01)
                    
                    
                    $
                    (0.005
                    )
                    
                    $
                    (0.04
                    )Diluted
                    
                    $
                    0.004
                    
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.005
                    )
                    
                    $
                    (0.04
                    )




Significant
components of the Group’s deferred tax assets and liabilities as of March 31,
2009 and June 30, 2008 are as follows:





Deferred tax assets and liabilities:
                          
                          March 31
                            2009
                          
                          
                          June 30,
                            2008Book
      depreciation in excess of tax depreciation
                          
                          $
                          770,458
                          
                          
                          $
                          169,962Temporary
      differences resulting from allowances
                          
                          
                          891,770
                          
                          
                          
                          573,324Net
      deferred income tax asset
                          
                          $
                          1,662,228
                          
                          
                          $
                          743,286Valuation
      allowance
                          
                          
                          (1,662,228
                          )
                          
                          
                          (743,286
                          )$
                          —
                          
                          
                          $
                          —




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





Three months ended
                        March 31,
                      
                      
                      Nine months ended
                        March 31,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Computed
      tax at federal statutory rate of 34%
                      
                      $
                      (1,032,462
                      )
                      
                      $
                      1,421,718
                      
                      
                      $
                      (776,613
                      )
                      
                      $
                      4,610,824Less
      adjustment to China Enterprise Income Tax statutory rate of 25% in 2009
      and  2008
                      
                      
                      248,556
                      
                      
                      
                      (517,760
                      )
                      
                      
                      141,784
                      
                      
                      
                      (1,131,579
                      )Tax
      effect of US losses not deductible in PRC
                      
                      
                      595,494
                      
                      
                      
                      229,185
                      
                      
                      
                      743,004
                      
                      
                      
                      446,953Income
      not subject to tax
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (330,361
                      )Deferred
      taxes
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (1,064,028
                      )Benefit
      of tax holiday
                      
                      
                      188,410
                      
                      
                      
                      (589,520
                      )
                      
                      
                      (223,567
                      )
                      
                      
                      (1,935,620
                      )Expenses
      not deductible for tax
                      
                      
                      478,767
                      
                      
                      
                      —
                      
                      
                      
                      478,767
                      
                      
                      
                      —Others
                      
                      
                      3,039
                      
                      
                      
                      —
                      
                      
                      
                      (29,828
                      )
                      
                      
                      —Income
      tax expense per books
                      
                      $
                      481,804
                      
                      
                      $
                      543,623
                      
                      
                      $
                      333,547
                      
                      
                      $
                      596,189


17





Income
tax expense consists of:





Three months ended
                        March 31,
                      
                      Nine months ended
                        March 31,2009
                      
                      2008
                      
                      2009
                      
                      2008Income
      tax expense for the current year - PRC
                      
                      $
                      481,804
                      
                      
                      $
                      543,623
                      
                      
                      $
                      333,547
                      
                      
                      $
                      1,660,217Deferred
      income tax (benefit) - PRC
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (1,064,028
                      )Income
      tax expense per books
                      
                      $
                      481,804
                      
                      
                      $
                      543,623
                      
                      
                      $
                      333,547
                      
                      
                      $
                      596,189





16.  Earnings/(loss)
Per Share





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





For the
nine months ended March 31, 2009, warrants to purchase 358,392 shares of common
stock at an exercise price of $3.00; 100,000 shares at an exercise price of
$3.60; 1,420,000 shares at an exercise price of $8.45 and 225,600 shares at an
exercise price of $7.38 were not included as their effect would have been
anti-dilutive, however, these securities could potentially dilute basic earnings
per share in the future. For the nine months ended March 31, 2008, dilutive
shares include outstanding warrants to purchase 1,025,059 shares of common stock
at an exercise price of $3.00 and 100,000 shares at an exercise price of
$3.60.  Warrants to purchase 1,420,000 shares at an exercise price of
$8.45; and 225,600 shares at an exercise price of $7.38 were not included as
their effect would have been anti-dilutive.





For the
three months ended March 31, 2009, warrants to purchase 358,392 shares of common
stock at an exercise price of $3.00; 100,000 shares at an exercise price of
$3.60; 1,420,000 shares at an exercise price of $8.45 and 225,600 shares at an
exercise price of $7.38 were not included as their effect would have been
anti-dilutive, however, these securities could potentially dilute basic earnings
per share in the future.





The
following reconciles the components of the EPS computation:





Income(Loss)
                                        
                                        Shares
                                        
                                        Per Share(Numerator)
                                        
                                        (Denominator)
                                        
                                        AmountFor
      the three months ended March 31, 2009:Net
      (loss)
                                        
                                        $
                                        (3,518,453
                                        )Basic
      EPS income/(loss) available to common shareholders
                                        
                                        $
                                        (3,518,453
                                        )
                                        46,562,953
                                        
                                        $
                                        (0.08
                                        )Effect
      of dilutive securities
                                        
                                        
                                        
                                        
                                        -Diluted
      EPS income/(loss) available to common shareholders
                                        
                                        $
                                        (3,518,453)
                                        
                                        46,562,953
                                        
                                        $
                                        (0.08
                                        )For
      the three months ended March 31, 2008:Net
      income
                                        
                                        $
                                        3,637,900Basic
      EPS income available to common shareholders
                                        
                                        $
                                        3,637,900
                                        
                                        45,896,288
                                        
                                        $
                                        0.08Effect
      of dilutive securities
                                        
                                        
                                        
                                        
                                        -Warrants
                                        
                                        
                                        
                                        
                                        469,490Diluted
      EPS income available to common shareholders
                                        
                                        $
                                        3,637,900
                                        
                                        46,562,953
                                        
                                        $
                                        0.08


18





Income
                                                      
                                                      Shares
                                                      
                                                      Per Share(Numerator)
                                                      
                                                      (Denominator)
                                                      
                                                      AmountFor
      the nine months ended March 31, 2009:Net
      income/(loss)
                                                      
                                                      $
                                                      (2,617,700
                                                      )Basic
      EPS income available to common shareholders
                                                      
                                                      $
                                                      (2,617,700
                                                      )
                                                      46,560,656
                                                      
                                                      $
                                                      (0.06
                                                      )Effect
      of dilutive securities
                                                      
                                                      
                                                      
                                                      
                                                      -Diluted
      EPS income available to common shareholders
                                                      
                                                      $
                                                      (2,617,700
                                                      )
                                                      46,560,656
                                                      
                                                      $
                                                      (0.06
                                                      )For
      the nine months ended March 31, 2008:Net
      income
                                                      
                                                      $
                                                      12,965,057Basic
      EPS income available to common shareholders
                                                      
                                                      $
                                                      12,965,057
                                                      
                                                      42,088,128
                                                      
                                                      $
                                                      0.31Effect
      of dilutive securities
                                                      
                                                      
                                                      
                                                      
                                                      -Warrants
                                                      
                                                      
                                                      
                                                      
                                                      467,784Diluted
      EPS income available to common shareholders
                                                      
                                                      $
                                                      12,965,057
                                                      
                                                      42,555,912
                                                      
                                                      $
                                                      0.30




17.  Capital
Commitments





As of
March 31, 2009, the Company had contractual commitments $2,495,610 for the
construction of a cold rolling mill and annealing furnaces.





18.  Impairment





We
determine such impairment by measuring the estimated undiscounted future cash
flow generated by the assets, comparing the result to the asset carrying value
and adjust the asset to the lower of its carrying value or fair value and
charging current operations for the measured impairment. The determination of
the asset fair value is subject to significant judgment.





The
recent decline in market cap and stock price has triggered an interim impairment
test under SFAS No. 142 and SFAS No. 144, an impairment test was performed for
the nine months ended March 31, 2009 and no impairment charges were recognized
for the relevant period. As of March 31, 2009, the Company expects these assets
to be fully recoverable.Goodwill amounting to
$99,999 as at March 31, 2009 was considered immaterial and not tested for
impairment.





19.  Recent
Accounting Pronouncements





FASB
recently issued the following standards which the Company reviewed to determine
the potential impact on our financial statements upon adoption.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141(R)”). SFAS No. 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 No. 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 No. 160”). SFAS No. 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 No. 160 will have a material impact on its consolidated financial
statements.


19


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





In April
2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of
the Useful Life of Intangible Assets” (“FAS 142-3”), which amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
“Goodwill and Other Intangible Assets” (“SFAS No. 142”).  The intent
of this FSP is to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected cash
flows used to measure the fair value of the asset under SFAS No. 141(R),
“Business Combinations,” and other U.S. generally accepted accounting
principles.  This FSP is effective for fiscal years beginning after
December 15, 2008 (the Company’s fiscal year 2010), and interim periods
within those fiscal years.  The Company does not believe the adoption
of FSP 142-3 will have a material impact on the Company’s consolidated financial
position, results of operations and cash flows.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles" (“SFAS No. 162”).  This statement identifies
the sources of accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements of
non-governmental entities that are presented in conformity with US GAAP. The
provisions of SFAS No. 162 become effective 60 days following the SEC's approval
of the amendment to AU Section 411, "The Meaning of Presents Fairly in
Conformity with Generally Accepted Accounting Principles" by the Public Company
Accounting Oversight Board.  The adoption of this statement is not
expected to have a material effect on the Company’s future reported financial
position or results of operations.





In May
2008, the FASB issued FASB Statement No. 163, “Accounting for Financial
Guarantee Insurance Contracts” (FASB No. 163”). The new standard clarifies how
FASB Statement No. 60, “Accounting and Reporting by Insurance Enterprises”,
applies to financial guarantee insurance contracts issued by insurance
enterprises, including the recognition and measurement of premium revenue and
claim liabilities. It also requires expanded disclosures about financial
guarantee insurance contracts. FASB No. 163 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and all
interim periods within those fiscal years, except for disclosures about the
insurance enterprise’s risk-management activities, which are effective the first
period (including interim periods) beginning after May 23, 2008. Except for the
required disclosures, earlier application is not permitted. The standard is not
applicable to this Company.





In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active” (“FAS 157-3”).
This FSP clarifies the application of FASB Statement No. 157, “Fair Value Measurements”, in
a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. FAS 157-3 was effective upon
issuance. The adoption of FAS 157-3 will not impact our consolidated financial
statements in any material respect.





In
December 2008, the FASB issued FSP No. FAS 132 (R) -1, Employers’
Disclosures about Postretirement Benefit Plan Assets, an amendment of FASB
Statement No. 132 (revised 2003) ("FSP No. 132 (R) -1"). It provides guidance on
an employer’s disclosures about plan assets, including: how investment
allocation decisions are made and factors that are pertinent to an understanding
of investment policies and strategies; the major categories of plan assets; the
inputs and valuation techniques used to measure the fair value of plan assets;
the effect of fair value measurements using significant unobservable inputs
(level 3) on changes in plan assets for the period, and significant
concentrations of risks within plan assets. FSP 132 (R) -1 is effective for
fiscal years ending after December 15, 2009. We are currently assessing the
potential impact that adoption of this standard may have on our financial
statements.


20





In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments. It requires the fair
value for all financial instruments within the scope of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments ("SFAS No. 107"), to be
disclosed in the interim periods as well as in annual financial
statements.  This standard is effective for the quarter ending after
June 15, 2009.  We are currently assessing the potential impact that
adoption of this standard may have on our financial statements.




In April
2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly. It clarifies the objective and
method of fair value measurement even when there has been a significant decrease
in market activity for the asset being measured. This standard is effective for
the quarter ending after June 15, 2009. We are currently assessing the
potential impact that adoption of this standard may have on our financial
statements.





In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation
of Other-Than-Temporary Impairments. The objective of an other-than-temporary
impairment analysis under existing U.S. GAAP is to determine whether the holder
of an investment in a debt or equity security for which changes in fair value
are not regularly recognized in earnings (such as securities classified as
held-to-maturity or available-for-sale) should recognize a loss in earnings when
the investment is impaired. An investment is impaired if the fair value of the
investment is less than its amortized cost basis. This FSP amends the
other-than-temporary impairment guidance in U.S. GAAP for debt securities to
make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements. This FSP does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities. We are currently assessing the potential impact that adoption of
this standard may have on our financial statements.


21


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




Forward-Looking
Statements





This
quarterly report contains forward-looking statements relating to us that are
based on the beliefs of our management as well as assumptions made by, and
information currently available to, our management. When used in this Report,
the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and
similar expressions, as they relate to us or our management, are intended to
identify forward-looking statements. These statements reflect management's
current view of us concerning future events and are subject to certain risks,
uncertainties and assumptions, including among many others: our potential
inability to raise additional capital, changes in domestic and foreign laws,
regulations and taxes, changes in economic conditions, uncertainties related to
China's legal system and economic, political and social events in China, a
general economic downturn, a downturn in the securities markets, Securities and
Exchange Commission regulations which affect trading in the securities of “penny
stocks,” and other risks and uncertainties. Should any of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described in this Report as
anticipated, estimated or expected. We undertake no obligation to publicly
release any revisions to the forward-looking statements after the date of this
document. You should carefully review the risk factors described in other
documents we file from time to time with the U.S. Securities and Exchange
Commission, including our Annual Report on Form 10-K for our fiscal year ended
June 30, 2008.





The
following discussion should be read in conjunction with our unaudited
consolidated financial statements and the related notes that appear in
Part I, Item 1, “Financial Statements,” of this Quarterly Report. Our
unaudited consolidated financial statements are stated in United States Dollars
and are prepared in accordance with United States Generally Accepted Accounting
Principles. The following discussion and analysis covers the Company’s
consolidated financial condition at March 31, 2009 (unaudited) and
June 30, 2008, the end of its prior fiscal year, and its unaudited
consolidated results of operation for the three and nine month periods ended
March 31, 2009 and 2008.





Use
of Terms





Except as
otherwise indicated by the context, all references in this Quarterly Report to:
“Blessford International” are to PSHL’s subsidiary Blessford International
Limited, a BVI company; “Chengtong” are to PSHL’s subsidiary Shanghai Chengtong
Precision Strip Co., Limited, a PRC company; “China” and “PRC” are to the
People’s Republic of China; the “Company,” the “Group,” “we,” “us” or “our” are
to China Precision Steel, Inc., a Delaware corporation, and its direct and
indirect subsidiaries; “Exchange Act” means the Securities Exchange Act of 1934,
as amended; “PSHL” are to our subsidiary Partner Success Holdings Limited, a BVI
company; “RMB” are to Renminbi, the legal currency of China; “Securities Act”
are to the Securities Act of 1933, as amended; “Shanghai Blessford” are to
Blessford International’s subsidiary Shanghai Blessford Alloy Company Limited, a
PRC company; “Tuorong” are to PSHL’s subsidiary Shanghai Tuorong Precision Strip
Company Limited, a PRC company; “U.S. dollar,” “$” and “US$” are to the legal
currency of the United States; and “BVI” are to the British Virgin
Islands.





Where
You Can Find Additional Information





We file
annual, quarterly and other reports, proxy statements and other information with
the SEC. You may obtain and copy any document we file with the SEC at the SEC’s
public reference room at 100 F Street, NE, Room 1580, Washington, D.C. 20549.
You may obtain information on the operation of the SEC’s public reference
facilities by calling the SEC at 1-800-SEC-0330. You can request copies of these
documents, upon payment of a duplicating fee, by writing to the SEC at its
principal office at 100 F Street, NE, Room 1580, Washington, D.C. 20549-1004.
The SEC maintains an Internet website at http://www.sec.gov that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC. Our SEC filings, including
exhibits filed therewith, are accessible through the Internet at that
website.





You may
also request a copy of our SEC filings, at no cost to you, by writing or
telephoning us at: China Precision Steel, Inc., Room B, 18th Floor, Teda
Building, 87 Wing Lok Street, Sheungwan, Hong Kong, People’s Republic of China,
attention Corporate Secretary, telephone 852-2543-2290. We will not send
exhibits to the documents, unless the exhibits are specifically requested and
you pay our fee for duplication and delivery.


22


Overview
of Our Business




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





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





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




Recent
Developments





We are
currently faced with multiple challenges. Excess capacity, low industrial
concentration and a lack of access to natural resources have long plagued
China's steel sector, and these problems have been exacerbated by the impact of
the global financial and economic crisis.





The
RMB400 billion economic stimulus package formulated jointly by the Chinese
government’s National Development and Reform Commission and the Ministry of
Industry and Information Technology in November 2008 is now planned to focus
mainly on nine pillar industries, which include steel, automobiles,
shipbuilding, petrochemicals, light industry, textiles, non-ferrous metals,
machinery, and information technology, all with serious production surpluses in
the whole industrial system.





Automobiles
and steel sectors have been given priority and are the two main industries out
of the nine pillars for which the government is expected to announce specific
support packages and further details. On January 14, 2009, China's State Council
approved a "rejuvenation plan" to support the steel industry, with the immediate
aim to deal with the effects of the global financial and economic crisis and to
also ease the industry's long-term structural problems. The steel industry plan
includes eliminating obsolete capacity, speeding up innovation, promoting
alliances and mergers and cutting export tariffs. The government will also
subsidize loans of about RMB15 billion to encourage technological upgrading and
product rationalization to better meet demand.





With more
specific support details yet to be announced and the global crisis and its
impact on China yet to run their full course, we expect to continue to
experience weak demands and volatilities in both domestic and international
markets in the foreseeable future.





Third
Quarter Financial Performance Highlights





During
the third fiscal quarter of 2009, we continued to see slower demands and lower
steel prices compared to same period a year ago as a result of the impacts of
the persisting global crisis. There were decreases in sales volume across all of
our product lines over the three months ended March 31, 2009 as we are faced
with multiple challenges and experiencing a difficult time with the global
economic downturn. Demand is weak in all of the end segments we sell to,
especially the high-carbon cold-rolled steel which are mainly used in auto
components manufacturing, due to excess capacity and high inventory levels in
the industry. Our two cold-rolling mills that were running at full capacity at
the end of calendar 2008 are now operating at approximately 60% utilization rate
due to reduced orders on hand.


23


For the
three months ended March 31, 2009, we sold a total of 11,000 tons of products, a
decrease of 13,273 tons from 24,273 tons same period a year ago, due to slower
demands and reduced orders on hand. Management believes that such decrease was
caused by various factors including decrease in product orders from auto
components manufacturers and from the Chinese auto industry that is experiencing
weak demand and excess capacity; decrease in low-carbon cold rolled products,
our exported products, due to the current credit crisis and the need to reduce
exposure in the exporting business, and reduced orders in subcontracting income
due to slower demand from customers during a downward economy and trending
uncertainties of the industry. Lower sales and high raw material costs have led
to a gross loss of $1,982,043 and a net loss of $3,518,453 for the three months
ended March 31, 2009.





It is
currently unclear whether and to what extent the economic stimulus measures and
other actions taken or contemplated by the Chinese government and other
governments throughout the world will mitigate the effects of the crisis on the
industries that affect our business. Furthermore, deteriorating economic
conditions, including business layoffs, downsizing, industry slowdowns and other
similar factors that affect our customers. could have further negative
consequences on our business operations.  For the foreseeable future,
we expect a continuation of weak demand and volatility in both domestic and
international markets across all product segments, and significantly adverse
impacts on our gross margin due to a decrease in sales of our high margin high
carbon cold rolled steel used mainly in auto components
manufacturing.  However, due to the nature of our niche segment and
high-end products, we have been able to keep quality customers and negotiate new
contracts with a number of new customers during the quarter, including three new
customers in the high carbon cold rolled product segment. Management continues
to be in talks with potential customers whose past orders we had been unable to
fill due to full capacity.  If these talks are successful, we could
see additional sales from a broadened customer base which would further mitigate
the impact of the current global slowdown on our business and results of
operations.





Management
also continues to take appropriate actions to perform business and credit
reviews of customers and suppliers and reduce exposure by avoiding entry into
contracts with countries or customers with high credit risks. We strive to
optimize our product mix, prioritize higher margin products, and strengthen
collection of accounts receivable in the existing business environment with the
goal to maintain overall healthy sales volume, margins and cash positions.
Management believes that there are high barriers to entry in the Chinese
domestic precision cold-rolled steel industry because of the level of technology
expertise required for operation. Although we continue to face volatilities in
demand and overall steel industry, the medium to long term prospects remain
highly optimistic and we believe that our unique capabilities and know-how give
us a competitive advantage to grow sales and build a globally recognized brand
as we continue to carry out R&D and expand to new segments, customers and
markets.





The
following are some financial highlights for the third quarter of
2009:




·
            Revenues:
      Our revenues were approximately $7.6 million for the third quarter of
      2009, a decrease of 59.4% from the same quarter of last
    year.




·
            Gross
      Margin: Gross margin was (26.0)% for the third quarter of 2009, as
      compared to 28.6% for the same period in
2008.




·
            Income/(loss)
      from operations before tax: Loss from operations before tax was
      approximately $2.9 million for the third quarter of 2009, as compared to
      income from operations before tax of $4.4 million of the same period last
      year.




·
            Net
      Income/(loss): Net loss was approximately $3.5 million for the third
      quarter of 2009, a decrease of 196.7% from a net income of approximately
      $3.6 million for the same period last
year.




·
            Fully
      diluted loss per share was $0.08 for the third quarter of 2009 compared to
      a fully diluted earnings per share of $0.08 for the same period last
      year.


24


Results of Operations





The
following table sets forth key components of our results of operations for the
periods indicated, in millions of U.S. dollars and as a percentage of
revenues.




All
amounts, other than percentages, in U.S. dollars




Three Months ended March 31,
                                                                                                                    
                                                                                                                    
                                                                                                                    Nine Months ended March 31,2009
                                                                                                                    
                                                                                                                    
                                                                                                                    2008
                                                                                                                    
                                                                                                                    
                                                                                                                    2009
                                                                                                                    
                                                                                                                    
                                                                                                                    2008Revenues
                                                                                                                    
                                                                                                                    $
                                                                                                                    7,623,209
                                                                                                                    
                                                                                                                    100.0
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    18,773,504
                                                                                                                    
                                                                                                                    100.0
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    50,547,587
                                                                                                                    
                                                                                                                    100.0
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    59,189,060
                                                                                                                    
                                                                                                                    100.00
                                                                                                                    %Cost
      of sales (including depreciation and amortization)
                                                                                                                    
                                                                                                                    
                                                                                                                    9,605,252
                                                                                                                    
                                                                                                                    126.0
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    13,399,010
                                                                                                                    
                                                                                                                    71.4
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    45,125,635
                                                                                                                    
                                                                                                                    89.3
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    42,172,997
                                                                                                                    
                                                                                                                    71.3
                                                                                                                    %Gross
      profit/(loss)
                                                                                                                    
                                                                                                                    
                                                                                                                    (1,982,043
                                                                                                                    )
                                                                                                                    (26.0
                                                                                                                    )%
                                                                                                                    
                                                                                                                    
                                                                                                                    5,374,494
                                                                                                                    
                                                                                                                    28.6
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    5,421,952
                                                                                                                    
                                                                                                                    10.7
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    17,016,063
                                                                                                                    
                                                                                                                    28.7
                                                                                                                    %Selling
      and marketing
                                                                                                                    
                                                                                                                    
                                                                                                                    298,492
                                                                                                                    
                                                                                                                    3.9
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    203,477
                                                                                                                    
                                                                                                                    1.1
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    1,632,322
                                                                                                                    
                                                                                                                    3.2
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    484,926
                                                                                                                    
                                                                                                                    0.8
                                                                                                                    %Administrative
      expenses
                                                                                                                    
                                                                                                                    
                                                                                                                    541,251
                                                                                                                    
                                                                                                                    7.1
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    699,220
                                                                                                                    
                                                                                                                    3.7
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    1,581,456
                                                                                                                    
                                                                                                                    3.1
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    2,031,816
                                                                                                                    
                                                                                                                    3.4
                                                                                                                    %Allowance
      for bad and doubtful debts
                                                                                                                    
                                                                                                                    
                                                                                                                    672
                                                                                                                    
                                                                                                                    0
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    10,150
                                                                                                                    
                                                                                                                    0.1
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    3,830,134
                                                                                                                    
                                                                                                                    7.6
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    661,930
                                                                                                                    
                                                                                                                    1.1
                                                                                                                    %Depreciation
      and amortization
                                                                                                                    
                                                                                                                    
                                                                                                                    33,624
                                                                                                                    
                                                                                                                    0.4
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    17,155
                                                                                                                    
                                                                                                                    0.1
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    93,145
                                                                                                                    
                                                                                                                    0.2
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    46,585
                                                                                                                    
                                                                                                                    0.1
                                                                                                                    %Income/(loss)
      from operations
                                                                                                                    
                                                                                                                    
                                                                                                                    (2,856,082
                                                                                                                    )
                                                                                                                    (37.5
                                                                                                                    )%
                                                                                                                    
                                                                                                                    
                                                                                                                    930,002
                                                                                                                    
                                                                                                                    23.7
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    (1,715,105
                                                                                                                    )
                                                                                                                    (3.4
                                                                                                                    )%
                                                                                                                    
                                                                                                                    
                                                                                                                    13,790,806
                                                                                                                    
                                                                                                                    23.3
                                                                                                                    %Other
      income (expense)
                                                                                                                    
                                                                                                                    
                                                                                                                    76,556
                                                                                                                    
                                                                                                                    1.0
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    152,894
                                                                                                                    
                                                                                                                    0.8
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    336,257
                                                                                                                    
                                                                                                                    0.7
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    945,304
                                                                                                                    
                                                                                                                    1.6
                                                                                                                    %Interest
      and finance costs
                                                                                                                    
                                                                                                                    
                                                                                                                    (257,123
                                                                                                                    )
                                                                                                                    (3.4
                                                                                                                    )%
                                                                                                                    
                                                                                                                    
                                                                                                                    (415,863
                                                                                                                    )
                                                                                                                    (2.2
                                                                                                                    )%
                                                                                                                    
                                                                                                                    
                                                                                                                    (905,305
                                                                                                                    )
                                                                                                                    (1.8
                                                                                                                    )%
                                                                                                                    
                                                                                                                    
                                                                                                                    (1,174,864
                                                                                                                    )
                                                                                                                    (2.0
                                                                                                                    )%Income/(loss)
      before income taxes
                                                                                                                    
                                                                                                                    
                                                                                                                    (3,036,649
                                                                                                                    )
                                                                                                                    (39.8
                                                                                                                    )%
                                                                                                                    
                                                                                                                    
                                                                                                                    4,181,523
                                                                                                                    
                                                                                                                    22.3
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    (2,284,153
                                                                                                                    )
                                                                                                                    (4.5
                                                                                                                    )%
                                                                                                                    
                                                                                                                    
                                                                                                                    13,561,246
                                                                                                                    
                                                                                                                    22.9
                                                                                                                    %Income
      taxes
                                                                                                                    
                                                                                                                    
                                                                                                                    (481,804
                                                                                                                    )
                                                                                                                    6.3
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    543,623
                                                                                                                    
                                                                                                                    2.9
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    (333,547
                                                                                                                    )
                                                                                                                    0.7
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    596,189
                                                                                                                    
                                                                                                                    1.0
                                                                                                                    %Net
      income/(loss)
                                                                                                                    
                                                                                                                    $
                                                                                                                    (3,518,453
                                                                                                                    )
                                                                                                                    (46.2
                                                                                                                    )%
                                                                                                                    
                                                                                                                    $
                                                                                                                    3,637,900
                                                                                                                    
                                                                                                                    19.4
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    (2,617,700
                                                                                                                    )
                                                                                                                    (5.2
                                                                                                                    )%
                                                                                                                    
                                                                                                                    $
                                                                                                                    12,965,057
                                                                                                                    
                                                                                                                    21.9
                                                                                                                    %Basic
      earnings/(loss) per share
                                                                                                                    
                                                                                                                    $
                                                                                                                    (0.08
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    0.08
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    (0.06
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    0.31Diluted
      earnings/(loss) per share
                                                                                                                    
                                                                                                                    $
                                                                                                                    (0.08
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    0.08
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    (0.06
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    0.30




Comparison
of Three Months Ended March 31, 2009 and March 31, 2008





Sales Revenues. Sales
volume decreased by 13,273 tons, or 54.7%, period-on-period to 11,000 tons for
the three months ended March 31, 2009 from 24,273 tons for the three months
ended March 31, 2008.  As a result, sales revenues decreased by
$11,150,295, or 59.4%, period-on-period to $7,623,209 for the three months ended
March 31, 2009 from $18,773,504 for the three months ended March 31, 2008. The
decrease in sales and sales revenues are a result of decrease in demand across
all product categories and lower average selling prices during the quarter ended
March 31, 2009 caused by the global slowdown and a downturn of the steel
industry, as discussed in third quarter financial performance highlights
above.




A
break-down of our sales by product line for the three months ended March 31,
2009 and 2008 is as follows:




Three Months Ended March 31,2009
                                            
                                            2008
                                            
                                            Period-on-periodProduct category
                                            
                                            Quantity
                                              (tons)
                                            
                                            $  Amount
                                            
                                            % of sales
                                            
                                            Quantity
                                              (tons)
                                            
                                            $ Amount
                                            
                                            % of
                                              sales
                                            
                                            Qty.
                                              VarianceLow
      carbon cold-rolled
                                            
                                            
                                            4,921
                                            
                                            2,841,892
                                            
                                            
                                            37.3
                                            
                                            7,196
                                            
                                            
                                            5,362,597
                                            
                                            28.6
                                            
                                            
                                            (2,275
                                            )Low
      carbon hard rolled (export)
                                            
                                            
                                            3,425
                                            
                                            2,093,990
                                            
                                            
                                            27.5
                                            
                                            5,178
                                            
                                            
                                            3,562,724
                                            
                                            19.0
                                            
                                            
                                            (1,753
                                            )High-carbon
      cold-rolled
                                            
                                            
                                            1,733
                                            
                                            1,783,447
                                            
                                            
                                            23.4
                                            
                                            3,270
                                            
                                            
                                            4,011,039
                                            
                                            21.4
                                            
                                            
                                            (1,537
                                            )High-carbon
      hot-rolled
                                            
                                            
                                            579
                                            
                                            605,437
                                            
                                            
                                            7.9
                                            
                                            1,592
                                            
                                            
                                            1,447,782
                                            
                                            7.7
                                            
                                            
                                            (1,013
                                            )Sales
      of scrap metal
                                            
                                            
                                            —
                                            
                                            229,701
                                            
                                            
                                            3.0
                                            
                                            —
                                            
                                            
                                            346,524
                                            
                                            1.9
                                            
                                            
                                            —Subcontracting
      income
                                            
                                            
                                            342
                                            
                                            68,742
                                            
                                            
                                            0.9
                                            
                                            7,037
                                            
                                            
                                            4,042,838
                                            
                                            21.5
                                            
                                            
                                            (6,695
                                            )Total
                                            
                                            
                                            11,000
                                            
                                            7,623,209
                                            
                                            
                                            100.0
                                            
                                            24,273
                                            
                                            
                                            18,773,504
                                            
                                            100




25


Low
carbon hard-rolled steel, which is also our exported precision steel products,
accounted for 27.5% of sales during the three months ended March 31, 2009. This
was $2,093,990, or 27.5%, of the current sales mix at an average selling price
of $611 per ton for the three months ended March 31, 2009. This was the result
of decrease in demand in our international markets, including Southeast Asia and
Africa. This was also caused by management’s move to reduce credit exposure by
avoiding entering into contracts with countries or customers with high credit
and foreign exchange risks amid the ongoing credit crunch.  The
low-carbon cold-rolled steel products accounted for 37.3% of the current sales
mix at an average selling price of $578 per ton for the three months ended March
31, 2009 compared to 28.6% of the sales mix at an average selling price per
ton of $745 for the three months ended March 31, 2008. The decrease is a result
of reduced orders in the galvanized steel plates in this category. High-carbon
cold-rolled steel products accounted for 23.4% of the current sales mix at an
average selling price of $1,029 per ton for the three months ended March 31,
2009 compared to 21.4% of the sales mix at an average selling price per ton of
$1,227 for the three months ended March 31, 2008.  The decrease in
this category is largely attributable to the slowdown of the Chinese auto
industry with its weak demand and excess capacity, as a large quantity of our
high-carbon cold-rolled steel products is sold to Chinese auto components
manufacturers. Subcontracting income decreased to 0.9% of the current sales mix
at an average selling price of $201 for the three months ended March 31, 2009
compared to 21.5% of the sales mix for the three months ended March 31, 2008 at
an average selling price of $575 during the quarter, as demand for these
products are slow while volatilities are expected and visibility is
low.




Three Months Ended
                            March 31,Average selling prices
                          
                          2009
                          
                          
                          2008
                          
                          
                          Variance$
                          
                          
                          $
                          
                          
                          $
                          
                          
                          %Low-carbon
      cold-rolled
                          
                          
                          578
                          
                          
                          
                          745
                          
                          
                          
                          (167
                          )
                          
                          
                          (22
                          )Low-carbon
      hard rolled (export)
                          
                          
                          611
                          
                          
                          
                          694
                          
                          
                          
                          (83
                          )
                          
                          
                          (12
                          )High-carbon
      cold-rolled
                          
                          
                          1,029
                          
                          
                          
                          1,227
                          
                          
                          
                          (198
                          )
                          
                          
                          (16
                          )High-carbon
      hot-rolled
                          
                          
                          1,045
                          
                          
                          
                          909
                          
                          
                          
                          136
                          
                          
                          
                          15Subcontracting
      income
                          
                          
                          201
                          
                          
                          
                          575
                          
                          
                          
                          (374
                          )
                          
                          
                          (65
                          )





The
average unit selling price per ton generated decreased to $693 per ton for the
three months ended March 31, 2009, compared to the corresponding period in 2008
of $773, representing a decrease of $80, or 10.3%, period-on-period. This
decrease was mainly due to changes in average selling prices across the product
categories due to weakened demand for steel products. Sales of low-carbon
cold-rolled steel products have decreased by 2,275 tons, or 31.6%,
period-on-period to 4,921 tons for the three months ended March 31, 2009
compared to 7,196 tons for the three months ended March 31, 2008. While the
volume of low-carbon cold-rolled steel decreased, the average sales price also
decreased $167, or 22%, to $578 in the three months ended March31, 2009, as
compared to an average selling of $745 in the three months ended March 31, 2008.
This product accounted for $2,841,892, or 37.3%, of the total sales mix for the
three months ended March 31, 2009 compared to $5,362,597, or 28.6%, of the sales
mix for the three months ended March 31, 2008.





A
break-down of our sales by major customer for the three months ended March 31,
2009 and 2008 is as follows:





Three Months Ended March 31Customers
                                    
                                    2009 ($)
                                    
                                    % to sales
                                    
                                    2008 ($)
                                    
                                    % to salesZhangjiagang
      Gangxing Innovative Construction Material Co., Ltd.
                                    
                                    
                                    1,309,743
                                    
                                    17
                                    
                                    
                                    *
                                    
                                    *Unimax
      & Far Corporation
                                    
                                    
                                    1,192,141
                                    
                                    16
                                    
                                    
                                    526,322
                                    
                                    3Changshu
      Jiacheng Steel Plate Coating Factory
                                    
                                    
                                    556,119
                                    
                                    7
                                    
                                    
                                    *
                                    
                                    *Houw
      Hing Holdings Ltd.
                                    
                                    
                                    546,723
                                    
                                    7
                                    
                                    
                                    *
                                    
                                    *Shanghai
      Wozi Jintian Saw Blade Co., Ltd.
                                    
                                    
                                    487,029
                                    
                                    6
                                    
                                    
                                    *
                                    
                                    *Shanghai
      Baosteel Stainless Processing and Distribution Co., Ltd.
                                    
                                    
                                    *
                                    
                                    *
                                    
                                    
                                    3,906,047
                                    
                                    21Shanghai
      Bayou Trading Co., Ltd
                                    
                                    
                                    *
                                    
                                    *
                                    
                                    
                                    1,628,451
                                    
                                    9Sahnghai
      Shengdejia Metal Products Co., Ltd.
                                    
                                    
                                    *
                                    
                                    *
                                    
                                    
                                    1,223,316
                                    
                                    4Shanghai
      Changshuo Stainless Steel Processing Co., Ltd.
                                    
                                    
                                    *
                                    
                                    *
                                    
                                    
                                    706,998
                                    
                                    44,091,755
                                    
                                    53
                                    
                                    
                                    7,991,134
                                    
                                    43Others
                                    
                                    
                                    3,531,454
                                    
                                    47
                                    
                                    
                                    10,782,370
                                    
                                    57Total
                                    
                                    
                                    7,623,209
                                    
                                    100
                                    
                                    
                                    18,773,504
                                    
                                    100




26


___________________


*
Not a major customer for the relevant periods




Sales
revenues generated from the top five major customers as a percentage of total
sales increased to 53% for the three months ended March 31, 2009 as compared to
43% for the three months ended March 31, 2008. The top five major customers were
different period-on-period with the exception of Unimax & Far Corporation.
The change in customer mix reflects our focus in optimizing product mix to
maximize margins supported by a broadened customer base during the course of the
period.





We expect
a continuation of weak demand and volatility in both domestic and international
markets across various product segments in the foreseeable future, especially
the higher margin low carbon cold rolled exported products and the high carbon
cold rolled products that are sold to the troubled auto industry. These will
have a significant negative impact on our sales, gross margins and results of
operations. Management’s strategy is to strengthen our marketing activities by
reaching out to potential customers whose past orders we had been unable to fill
due to full capacity and customers who are looking to switch to us from their
current higher cost imported purchases, which if successful, could result in
additional sales from a broadened customer base and mitigate the impact of the
current global slowdown.





Cost of Sales.Cost of sales decreased
by $3,793,758, or 28.3%, period-on-period to $9,605,252 for the three months
ended March 31, 2009 from $13,399,010 for the three months ended March 31, 2008.
Cost of sales represented 126.0% of sales revenues for the three months ended
March 31, 2009 compared to 71.4% for the three months ended March 31, 2008.
Average cost per ton sold increased by $321, or 58.2%, period-on-period to $873
per ton for the three months ended March 31, 2009 from $552 per ton for the
three months ended March 31, 2008. Meanwhile, the average selling price per ton
decreased by $80 per ton, or 10.3%, period-on-period to $693 per ton for the
three months ended March 31, 2009 from $773 per ton for the three months ended
March 31, 2008, as a result of overall lower steel prices
period-on-period.





Three Months Ended March 31,2009
                              
                              
                              2008
                              
                              
                              Variance$
                              
                              
                              $
                              
                              
                              $
                              
                              
                              %Cost
      of sales-
      Raw materials
                              
                              
                              5,552,803
                              
                              
                              
                              10,685,196
                              
                              
                              
                              (5,132,393
                              )
                              
                              
                              (48.0
                              )-
      Direct labor
                              
                              
                              498,968
                              
                              
                              
                              134,404
                              
                              
                              
                              364,564
                              
                              
                              
                              271.2-
      Factory overhead
                              
                              
                              3,553,481
                              
                              
                              
                              2,579,410
                              
                              
                              
                              974,071
                              
                              
                              
                              37.89,605,252
                              
                              
                              
                              13,399,010
                              
                              
                              
                              (3,793,758
                              )
                              
                              
                              28.3Cost
      per unit soldTotal
      units sold (tons)
                              
                              
                              11,000
                              
                              
                              
                              24,273
                              
                              
                              
                              (13,273
                              )
                              
                              
                              54.7Average
      cost per unit sold ($/ton)
                              
                              
                              873
                              
                              
                              
                              552
                              
                              
                              
                              321
                              
                              
                              
                              58.2




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




·
            an
      increase in cost of raw materials per unit sold of $65, or 14.8%, from
      $440 for the three months ended March 31, 2008, compared to $505 for the
      three months ended March 31, 2009;




27





·
            an
      increase in factory overhead per unit sold of $217, or 204.7%, from $106
      for three months ended March 31, 2008, compared to $323 for the three
      months ended March 31, 2009.





The cost
of raw materials consumed decreased by $5,132,393, or 48.0%, period-on-period to
$5,552,803, for the three months ended March 31, 2009 from $10,685,196 for the
three months ended March 31, 2008. This decrease was due to decreases in sales
period-on-period.




Manufacturing
overhead costs increased by $974,071, or 37.8%, period-on-period to $3,553,481
for the three months ended March 31, 2009, from $2,579,410 for the three months
ended March 31, 2008. The increase was mainly attributable to the combined
effect of an increase in utilities allocated to cost of goods sold of $530,558,
or 119%, period-on-period to $975,995 for the three months ended March 31, 2009
from $445,437 for the three months ended March 31, 2008, and an increase in
depreciation allocated to cost of goods sold of $666,559, or 87%,
period-on-period to $1,437,115 for the three months ended March 31, 2009, from
$770,556 for the three months ended March 31, 2008.





Gross Profits/(loss) and Gross
Margin/(loss). Our gross profit is equal to the difference between our
revenues and our cost of goods sold. Gross profit in absolute terms decreased by
$7,356,537, or 136.9%, period-on-period to $(1,982,043) for the three months
ended March 31, 2009, from $5,374,494 for the three months ended March 31, 2008,
while gross profit margin decreased to (26.0)% for the three months ended March
31, 2009, from 28.6% for the three months ended March 31, 2008. The gross loss
for the quarter and the decrease in gross profit margin principally resulted
from higher raw material cost and lower selling prices period-to-period, and our
inability to pass on all of our labor and overhead costs to customers during a
downturn in the economy during the three months ended March 31,
2009.




Selling
Expenses.  Selling expenses increased by $95,015, or 46.7%,
period-on-period, to $298,492 for the three months ended March 31, 2009 compared
to the corresponding period in 2008 of $203,477. The increase was mainly
attributable to the settlement of sales commission during the three months ended
March 31, 2009 for goods shipped in the previous quarter.




Administrative Expenses.
  Administrative expenses decreased by $157,969, or 22.6%,
period-on-period, to $541,251 for the three months ended March 31, 2009 compared
to the comparable period in 2008. This decrease was chiefly associated with
lower SEC compliance costs and professional fees as there was no financing
activity during the quarter and as we become more familiar with the rules and
regulations as a listed company.




Income from Operations.
Income from operations before tax decreased by $7,218,172, or 173%,
period-on-period to a loss of $3,036,649 for the three months ended March 31,
2009 from an income of $4,181,523 for the three months ended March 31,
2008, as a result of the worldwide economic downturn and slowing demands from
customers and markets we sell to as discussed above.





Other income.  Our
other income decreased $76,338, or 49.9% to $76,556 for the three months ended
March 31, 2009, from $152,894 for the same period in 2008.  Such
percentage decrease was primarily due to lower interest income earned during the
period with a lower cash balance coupled with lower interest rates.





Interest
Expense.  Total interest expense decreased $158,740, or 38.2%,
to $257,123 for the three months ended March 31, 2009, from $415,863 for the
same period in 2008 due to lower loan balances and lower interest
rates.





Income
Taxes.  China Precision Steel, Inc. is subject to United States
federal income tax at a tax rate of 34%.  No provision for income
taxes in the United States has been made as China Precision Steel, Inc. had no
United States taxable income during the three months ended March 31, 2009. Our
wholly owned subsidiaries PSHL and Blessford International were incorporated in
the BVI and, under the current laws of the BVI, are not subject to income
taxes.




28


Our PRC
subsidiaries, Chengtong and Shanghai Blessford, enjoy certain special or
preferential tax treatments regarding foreign enterprise income tax in
accordance with the “Income Tax Law of the PRC for Enterprises with Foreign
Investment and Foreign Enterprises” and its implementing
rules.  Accordingly, our PRC subsidiaries have been entitled to tax
concessions whereby the profit for their first two financial years beginning
with the first profit-making year (after setting off tax losses carried forward
from prior years) was exempt from income tax in the PRC and the profit for each
of the subsequent three financial years is taxed at 50% of the prevailing tax
rates set by the relevant tax authorities.  However, on March 16,
2007, the PRC’s National People’s Congress passed the new Enterprise Income Tax
Law, or EIT Law, and on November 28, 2007, the State Council of China passed the
Implementing Rules for the EIT Law, or Implementing Rules, which took effect on
January 1, 2008.  The EIT Law and Implementing Rules impose a
unified EIT of 25.0% on all domestic-invested enterprises and FIEs, unless they
qualify under certain limited exceptions.  Therefore, nearly all FIEs
are subject to the new tax rate alongside other domestic businesses rather than
benefiting from the FEIT, and its associated preferential tax treatments,
beginning January 1, 2008.





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





In
addition to the changes to the current tax structure, under the EIT Law, an
enterprise established outside of China with “de facto management bodies” within
China is considered a resident enterprise and will normally be subject to an EIT
of 25.0% on its global income.  The Implementing Rules define the term
“de facto management bodies” as “an establishment that exercises, in substance,
overall management and control over the production, business, personnel,
accounting, etc., of a Chinese enterprise.”  If the PRC tax
authorities subsequently determine that we should be classified as a resident
enterprise, then the organization’s global income will be subject to PRC income
tax of 25.0%.





For the
three months ended March 31, 2009, we recognized an income tax expense of
$481,804, while for the same period in 2008, we recognized an income tax expense
of $543,623. The decrease in income tax expenses mainly resulted from a net loss
for the quarter ended March 31, 2009.





Net Income.Net
income decreased by $7,156,353, or 196.7%, period-on-period to a loss of
$3,518,453 for the three months ended March 31, 2009, from net income of
$3,637,900 for the three months ended March 31, 2008, as a result of the factors
described above.





Comparison
of Nine Months Ended March 31, 2009 and March 31, 2008




Gross Profit. Gross profit in
absolute terms decreased by $11,594,111, or 68.1%, period-on-period to
$5,421,952 for the nine months ended March 31, 2009 from $17,016,063 for the
nine months ended March 31, 2008, while gross profit margin decreased to 10.7%
for the nine months ended March 31, 2009 from 28.7% for the nine months ended
March 31, 2008, as a result of lower sales revenues due to slower demand and
increased cost of sales across all cost components period-on-period. The
significantly lower gross profit and gross margin for the nine months ended
March 31, 2009 was primarily caused by weak performance as a result of downturn
of the global economy during the third quarter leading to a gross loss of
$1,982,043, as well as two direct sales transactions of raw materials in the
amount of $2,685,419, or 11% of sales revenues for the first
quarter.




Sales Revenues. Sales volume
decreased by 28,200 metric tons, or 36.3%, to 49,451 metric tons for the nine
months ended March 31, 2009 from 77,651 metric tons for the nine months ended
March 31, 2008. Sales revenues decreased by $8,641,473, or 14.6%,
period-on-period to $50,547,587 for the nine months ended March 31, 2009 from
$59,189,060 for the nine months ended March 31, 2008. The decreases in sales
volume and sales revenues are a result of reduced orders from customers due to
the slower economy.




A
break-down of our sales by product line for the nine months ended March 31, 2009
and 2008 is as follows:


29





Nine
      months Ended March 31,2009
                                            
                                            2008
                                            
                                            Period-on-periodProduct category
                                            
                                            Quantity
                                              (tons)
                                            
                                            $  Amount
                                            
                                            % of sales
                                            
                                            Quantity
                                              (tons)
                                            
                                            $ Amount
                                            
                                            % of
                                              sales
                                            
                                            Qty.
                                              VarianceLow
      carbon cold-rolled
                                            
                                            
                                            18,336
                                            
                                            15,665,169
                                            
                                            
                                            31.0
                                            
                                            24,958
                                            
                                            
                                            19,561,692
                                            
                                            33.0
                                            
                                            
                                            (6,622
                                            )Low
      carbon hard- rolled (export)
                                            
                                            
                                            21,435
                                            
                                            21,830,934
                                            
                                            
                                            43.2
                                            
                                            12,462
                                            
                                            
                                            8,235,950
                                            
                                            13.9
                                            
                                            
                                            8,973High-carbon
      cold-rolled
                                            
                                            
                                            4,925
                                            
                                            5,497,145
                                            
                                            
                                            10.9
                                            
                                            15,726
                                            
                                            
                                            21,523,894
                                            
                                            36.4
                                            
                                            
                                            (10,801
                                            )High-carbon
      hot-rolled
                                            
                                            
                                            3,105
                                            
                                            3,461,425
                                            
                                            
                                            6.8
                                            
                                            6,846
                                            
                                            
                                            3,620,677
                                            
                                            6.1
                                            
                                            
                                            (3,741
                                            )Sales
      of scrap metal
                                            
                                            
                                            —
                                            
                                            1,503,712
                                            
                                            
                                            3.0
                                            
                                            —
                                            
                                            
                                            781,238
                                            
                                            1.3
                                            
                                            
                                            —Subcontracting
      income
                                            
                                            
                                            1,650
                                            
                                            2,589,202
                                            
                                            
                                            5.1
                                            
                                            17,659
                                            
                                            
                                            5,465,609
                                            
                                            9.3
                                            
                                            
                                            (16,009
                                            )Total
                                            
                                            
                                            49,451
                                            
                                            50,547,587
                                            
                                            
                                            100.0
                                            
                                            77,651
                                            
                                            
                                            59,189,060
                                            
                                            100.0
                                            
                                            
                                            (28,200
                                            )





There was
a general trend of slowing demand for various product categories over the nine
months ended March 31, 2009 due to the global economic crisis and excess
capacity. High-carbon cold-rolled steel products only accounted for 10.9% of the
current sales mix at an average selling price of $1,116 per ton for the nine
months ended March 31, 2009, compared to 36.4 % of the sales mix at an average
selling price per ton of $1,369 for the nine months ended March 31, 2008. This
was a result of the slowing down of the auto industry as a large quantity of the
products in this category is sold to auto components manufacturers. Low-carbon
cold-rolled steel products only accounted for 31.0% of the current sales mix at
an average selling price of $854 per ton for the nine months ended March 31,
2009, compared to 33.0 % of the sales mix at an average selling price per ton of
$784 for the nine months ended March 31, 2008. This substantial decrease in
sales has been offset by increases in sales of the low carbon hard-rolled steel
during the period. Low-carbon hard-rolled steel products accounted for 43.2% of
the current sales mix at an average selling price of $1,018 per ton for the nine
months ended March 31, 2009, compared to 13.9 % of the sales mix at an average
selling price per ton of $661 for the nine months ended March 31, 2008. Low
carbon hard-rolled steel accounted for $21,830,934, or 43.2%, of the current
sales mix at an average selling price of $1,018 per ton for the nine months
ended March 31, 2009.





Nine
      months Ended
                            March
      31,Average selling prices
                          
                          2009
                          
                          
                          2008
                          
                          
                          Variance$
                          
                          
                          $
                          
                          
                          $
                          
                          
                          %Low-carbon
      cold-rolled
                          
                          
                          854
                          
                          
                          
                          784
                          
                          
                          
                          70
                          
                          
                          
                          9Low-carbon
      hard rolled (export)
                          
                          
                          1,018
                          
                          
                          
                          661
                          
                          
                          
                          357
                          
                          
                          
                          54High-carbon
      cold-rolled
                          
                          
                          1,116
                          
                          
                          
                          1,369
                          
                          
                          
                          (253
                          )
                          
                          
                          (18
                          )High-carbon
      hot-rolled
                          
                          
                          1,115
                          
                          
                          
                          529
                          
                          
                          
                          586
                          
                          
                          >100Subcontracting
      income
                          
                          
                          1,570
                          
                          
                          
                          310
                          
                          
                          
                          1,260
                          
                          
                          >100




The
average unit selling price per ton generated increased to $1,022 per ton for the
nine months ended March 31, 2009, compared to the corresponding period in 2008
of $762, representing an increase of $260, or 34.1%, period-on-period. This
increase was mainly due to increases in average raw material prices
period-on-period and therefore selling prices, and an increase in average unit
selling price of the major products sold during the period. Sales of low-carbon
hard-rolled steel products, which accounted for $21,830,934, or 43.2%, of the
total sales mix for the nine months ended March 31, 2009, increased by 8,973
metric tons, or 72.0%, period-on-period to 21,435 metric tons for the nine
months ended March 31, 2009, compared to 12,462 metric tons for the nine months
ended March 31, 2008. Meanwhile, the average unit selling price of this product
increased $357 to $1,018 for the nine months ended March 31, 2009.





A
break-down of our sales by major customer for the nine months ended March 31,
2009 and 2008 is as follows:


30





Nine
      months Ended December 31Customers
                                    
                                    2009 ($)
                                    
                                    % to sales
                                    
                                    2008 ($)
                                    
                                    % to salesSalzgitter
      Mannesmann International GMBH
                                    
                                    
                                    13,653,466
                                    
                                    27
                                    
                                    
                                    *
                                    
                                    *Shanghai
      Changshuo Stainless Steel Processing Co. Ltd.
                                    
                                    
                                    4,556,210
                                    
                                    9
                                    
                                    
                                    14,174,957
                                    
                                    24Jiangsu
      Sumec International Trading Co., Ltd.
                                    
                                    
                                    3,218,211
                                    
                                    6
                                    
                                    
                                    *
                                    
                                    *Shanghai
      Bayou Industrial Co., Ltd.
                                    
                                    
                                    2,962,163
                                    
                                    6
                                    
                                    
                                    *
                                    
                                    *Zhangjiagang
      Gangxing Innovative Construction Material Co., Ltd.
                                    
                                    
                                    1,381,937
                                    
                                    3
                                    
                                    
                                    *
                                    
                                    *Shanghai
      Shengdejia Metal Products Limited
                                    
                                    
                                    *
                                    
                                    *
                                    
                                    
                                    8,232,801
                                    
                                    14Shanghai
      Bayou Trade Co., Ltd.
                                    
                                    
                                    *
                                    
                                    *
                                    
                                    
                                    10,854,529
                                    
                                    18Shanghai
      Baosteel Stainless Steel Processing and Distribution Co.,
    Ltd
                                    
                                    
                                    *
                                    
                                    *
                                    
                                    
                                    4,113,827
                                    
                                    7Shanghai
      Wozi Jintian Saw Blade Co., Ltd.
                                    
                                    
                                    *
                                    
                                    *
                                    
                                    
                                    1,429,622
                                    
                                    225,771,987
                                    
                                    51
                                    
                                    
                                    38,805,736
                                    
                                    65Others
                                    
                                    
                                    24,775,600
                                    
                                    49
                                    
                                    
                                    20,383,324
                                    
                                    35Total
                                    
                                    
                                    50,547,587
                                    
                                    100
                                    
                                    
                                    59,189,060
                                    
                                    100


_____________________


*
Not a major customer for the relevant periods





Sales
revenues generated from the top five major customers as a percentage of total
sales decreased to 51% for the nine months ended March 31, 2009 as compared to
65% for the nine months ended March 31, 2008. With the exception of Shanghai
Changshuo Stainless Steel Processing Co. Ltd., the top five major customers were
different period-on-period. The change in customer mix reflects our broadened
customer base during the course of the period.




Cost of Sales. Cost of sales
increased by $2,952,638, or 7.0%, period-on-period to $45,125,635 for the nine
months ended March 31, 2009, from $42,172,997 for the nine months ended March
31, 2008. Cost of sales represented 89.3% of sales revenues for the nine months
ended March 31, 2009 compared to 71.3% for the nine months ended March 31, 2008.
Average cost of production per ton increased to $913 for the nine months ended
March 31, 2009 compared to an average cost of production per ton of $543 for the
nine months ended March 31, 2008,  representing an increase of $370
per ton, or 68.1%, period-on-period.





Nine
      months Ended March 31,2008
                                
                                
                                2008
                                
                                
                                Variance$
                                
                                
                                $
                                
                                
                                $
                                
                                
                                %Cost
      of sales-
      Raw materials
                                
                                
                                36,128,837
                                
                                
                                
                                35,954,929
                                
                                
                                
                                173,908
                                
                                
                                
                                0.5-
      Direct labor
                                
                                
                                887,544
                                
                                
                                
                                484,871
                                
                                
                                
                                402,673
                                
                                
                                
                                83.0-
      Factory overhead
                                
                                
                                8,109,254
                                
                                
                                
                                5,733,197
                                
                                
                                
                                2,376,057
                                
                                
                                
                                41.445,125,635
                                
                                
                                
                                42,172,997
                                
                                
                                
                                2,952,638
                                
                                
                                
                                7.0Cost
      per unit soldTotal
      units sold (tons)
                                
                                
                                49,451
                                
                                
                                
                                77,651
                                
                                
                                
                                (28,200
                                )
                                
                                
                                (36.3
                                )Average
      cost per unit sold ($/ton)
                                
                                
                                913
                                
                                
                                
                                543
                                
                                
                                
                                370
                                
                                
                                
                                68.1





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




·
              a
      significant increase in cost of raw materials per unit sold of $268, or
      57.9%, from $463 for the nine months ended March 31, 2008
      compared  to $731 for the nine months ended March 31,
      2009;





·
            an
      increase in direct labor per unit sold of $12 or 200.0%, from $6 for nine
      months ended March 31, 2008 compared to $18 for the nine months ended
      March 31, 2009.





·
            an
      increase in factory overhead per unit sold of $90 or 121.6%, from $74 for
      nine months ended March 31, 2008 compared to $164 for the nine months
      ended March 31, 2009.




31


The cost
of raw materials consumed increased by $173,908, or 0.5%, period-on-period to
$36,128,837for the nine months ended March 31, 2009 from $35,954,929 for the
nine months ended March 31, 2008. This increase was mainly due to increases in
raw material prices period-on-period.




Manufacturing
overhead costs increased by $2,376,057, or 41.4%, period-on-period to $8,109,254
for the nine months ended March 31, 2009, from $5,733,197 for the nine months
ended March 31, 2008. The increase was mainly attributable to the combined
effect of an increase in depreciation of $1,591,297, or 111.3%, period-on-period
to $3,021,547 for the nine months ended March 31, 2009, from $1,430,250 for the
nine months ended March 31, 2008, an increase in utilities by $1,191,745, or
106.5%, period-on-period to $2,310,989 for the nine months ended March 31, 2009,
from $1,119,244 for the nine months ended March 31, 2008 due to increased
consumption of natural gas associated with the production of 8,973 additional
tons of low carbon hard rolled steel period-on-period, and an increase in low
consumables by $637,853, or 41.5%, period-on-period to $2,174,897 for the nine
months ended March 31, 2009, from $1,537,044 for the nine months ended March 31,
2008.





Selling
Expenses.  Selling expenses increased by $1,147,396, or 236.6%,
period-on-period, to $1,632,322 for the nine months ended March 31, 2009
compared to the corresponding period in 2008 of $484,926. The increase was
mainly attributable to increases in sales commission paid to export agents based
on increased tonnage sold, and transportation and custom clearing charges in
relation to our expanded export sales period-on-period. Our export precision
products, the low carbon hard-rolled steel, accounted for $21,830,934, or 43.2%,
of the sales mix for the nine months ended March 31, 2009, compared to
$8,235,950, or 13.9% of sales during the nine months ended March 31,
2008.




Administrative Expenses.
 Administrative expenses decreased by $450,360, or 22.2%, period-on-period,
to $1,581,456 for the nine months ended March 31, 2009 compared to $2,031,816 in
the comparable period in 2008. This decrease was chiefly associated with lower
SEC compliance costs and professional fees as there was no financing activity
during the nine months ended March 31, 2009 and as we become more familiar with
the rules and regulations as a listed company.





Income from Operations.
Income from operations before income tax decreased by $15,845,399, or 116.8%,
period-on-period to a loss of $2,284,153 for the nine months ended March 31,
2009 from income of $13,561,246 for the nine months ended March 31, 2008, as a
result of the worldwide economic downturn and slowing demands which have
affected both sales revenue and margins. Also, the net loss for the nine months
ended March 31, 2009 included an allowance for bad and doubtful
debts in the amount of $3,830,134 due to a dispute over services
rendered by the Company.





Other income.  Our
other income decreased $609,047, or 64.4%, to $336,257 for the nine months ended
March 31, 2009 from $945,304 for the same period in 2008.  As a
percentage of revenues, other income decreased to 0.7% for the nine months ended
March 31, 2009 from 1.6% for the same period in 2008. Such percentage decrease
in interest income was primarily due to lower cash balances and a decrease of
the interest rate period-on-period.





Interest
Expense.  Total interest expense decreased $269,559, or 22.9%,
to $905,305 for the nine months ended March 31, 2009, from $1,174,864 for the
same period in 2008 due to lower loan balances and a lower weighted average
interest rate during 2009 as compared to 2008.





Income Tax. For the nine
months ended March 31, 2009, we recognized income tax expense of $333,547, while
for the same period in 2008, we recognized an income tax expense of $596,189.
The decrease in income tax expenses mainly resulted from the reversal of
provision for current income tax expense in relation to the bad debt written off
during the nine months ended March 31, 2009.





Net Income. Net income
decreased by $15,582,757, or 120.2%, period-on-period to a loss of $2,617,700
for the nine months ended March 31, 2009, from income $12,965,057 for the nine
months ended March 31, 2008, as a result of the factors above.


32


Liquidity
and Capital Resources





General





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 short-term loans. We have met
these liquidity requirements with cash provided by operations, equity financing,
and bank debt. As of March 31, 2009, we had cash and cash equivalents of
approximately $5.6 million.





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





CASH
FLOW





Nine
      Months
                      Ended March
      31,2009
                    
                    
                    2008Net
      cash provided by (used in) operating activities
                    
                    $
                    12,196,281
                    
                    
                    $
                    (25,187,216
                    )Net
      cash used in investing activities
                    
                    $
                    (25,489,763
                    )
                    
                    $
                    (7,512,290
                    )Net
      cash provided by financing activities
                    
                    $
                    182,184
                    
                    
                    $
                    39,637,674Net
      cash flow
                    
                    $
                    (12,999,036
                    )
                    
                    $
                    8,790,641





Operating
Activities.Net cash flows
provided by operating activities for the nine months ended March 31, 2009 was
$12,196,281 as compared with $25,187,216 used in operating activities for the
nine months ended March 31, 2008, for a net increase of $37,383,497. This
increase was mainly due to a substantial increase in cash flows from accounts
receivable of $37,428,396 due to strengthened collection activities during the
period and as Days Sales Outstanding decreased from 115.9 for the nine months
ended March 31, 2008 to 112.3 for the nine months ended March 31, 2009, offset
by decreases from inventories purchases, accounts payable and advances from
customers during the nine months ended March 31, 2009.





For the
nine months ended March 31, 2009, sales revenues generated from the top five
major customers as a percentage of total sales decreased to 51% as compared to
65% for the nine months ended March 31, 2008. The loss of all or portion of the
sales volume from a significant customer would have an adverse effect on our
operating cash flows.




Investing
Activities.Our main uses of cash for investing activities during the
nine months ended March 31, 2009 were for the purchase of property, plant and
equipment related to the expansion of Shanghai Blessford
facilities.  We believe these capital investments increase our
capacity, expand product line and improve product qualities, thereby creating
opportunities to grow sales, enter new markets and further strengthen our
leading position in the niche cold rolling segment that we operate
in.





Net cash
flows used in investing activities for the nine months ended March 31, 2009 was
$25, 489,763 as compared with $7,512,290 for the nine months ended March 31,
2008. The increase in investing activity was due to payment of a construction
project related to the new 1450mm cold rolling mill and deposit made relating to
the construction of annealing furnaces at Shanghai Blessford production
facilities during the nine months ended March 31, 2009.





As of
March 31, 2009, the Company had $2,495,610 in commitments for capital
expenditures for contractual commitments of the construction projects related to
the new 1450mm cold-rolling mill and annealing furnaces. Management believes
that we currently have sufficient capital resources to meet these contractual
commitments and are in the process of constructing the 1450mm mill.





Financing
Activities.  Net cash flows provided by financing activities
for the nine months ended March 31, 2009, was $182,184 as compared with
$39,637,674 provided by financing activities for the nine months ended March 31,
2008. During the nine months ended March 31, 2009, the Company received $269,985
in net proceeds from the exercise of warrants, which was partially offset by
repayment of short-term loans in the amount of $87,801. The nine months ended
March 31, 2008 reflect net proceeds of approximately $44 million from an
offering of the Company’s common stock, and repayment and renewing of short-term
loans which offset each other.


33


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





Current
Assets. Current assets decreased by $30,770,717, or 28.5%,
period-on-period to $77,363,205 as of March 31, 2009, from $108,133,922 as of
June 30, 2008, principally as a result of decreases in accounts receivable of
$12,753,928, or 37.8%, period-on-period, cash and equivalents by $12,999,036, or
70.0%, period-on-period, and bills receivable of $2,021,012, or 46.9%, period on
period, offset by an increase in inventories of $4,790,952 or 26.9% period on
period. The decrease in cash and cash equivalents is mainly attributable to
payment of construction cost of the third 1450mm rolling mill during the nine
months ended March 31, 2009.





Current
Liabilities. Current liabilities decreased by $5,916,346, or 13.1%,
period-on-period to $39,313,056 as of March 31, 2009, from $45,229,402 as of
June 30, 2008. The decrease was mainly attributable to a decrease in advances
from customers of $3,415,133, or 48.8%, period-on-period, and a decrease in
accounts payable of $2,024,462, or 16.8%, period-on-period.





As of
March 31, 2009, we had $17,430,904 in short term bank debt. This bank debt is
due in July 2009 and we expect to refinance such debt at its maturity, but we
cannot assure you that we will be able to do so on terms favorable to the
Company or at all.





Capital
Expenditures. During
the nine months ended March 31, 2009, we invested $24,703,120 in purchases of
property, plant and equipment, and construction projects related to the new
1450mm cold-rolling mill and annealing furnaces.




Loan
Facilities.  The following table illustrates our credit
facilities as of March 31, 2009, providing the name of the lender, the amount of
the facility, the date of issuance and the maturity date:





All
amounts in U.S. dollars


Lender
                                                
                                                Date
      of Loan
                                                
                                                Maturity
                                                  Date
                                                
                                                Duration
                                                
                                                Interest
      Rate
                                                
                                                Principal
                                                  AmountRaiffeisen
                                                  Zentralbank
      Österreich AG
                                                
                                                July
      23, 2008
                                                
                                                July
      31, 2009
                                                
                                                1
      year
                                                
                                                USD:
      SIBOR + 3%;
                                                  RMB:
      1.13 times of
                                                  the
      PBOC rate
                                                
                                                $
                                                5,300,000;
                                                  $2,902,130
                                                  (RMB20,000,000)Raiffeisen
                                                  Zentralbank
      Österreich AG
                                                
                                                July
      20, 2008
                                                
                                                July
      31, 2009
                                                
                                                1
      year
                                                
                                                1.15
      times of the
                                                  PBOC
      rate
                                                
                                                $
                                                9,228,774
                                                  (RMB63,600,000)Total
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                17,430,904





As of
March 31, 2009, we had $17,430,904 in short term bank debt as illustrated in the
above table. Such debt is secured by land use rights, buildings, plant and
machinery.





We are
not aware of any existing issues that may lead to a withdrawal of the current
bank debt that is due and renewable in July 2009, our inability to renew, and
the unavailability of additional debt financing as a result of economic
pressures on the credit and equity markets could have a material adverse effect
on our business operations.




34


We
believe that our currently available working capital and the credit facilities
referred to above should be adequate to sustain our operations at our current
levels and support our contractual commitments through the next twelve months.
However, our working capital requirements and the cash flow provided by future
operating activities vary from quarter to quarter, depending on the volume of
business during the period and payment terms with our customers. As we expect a
continuation of weak demand and volatility in both domestic and international
markets in the foreseeable future, especially the higher margin low carbon cold
rolled exported products and the high carbon cold rolled products that are sold
to the auto industry, our operating cash flows might be significantly negatively
impacted by such reduced sales and margins. Management has strengthened its
sales and marketing activities, and continues to be in talks with potential
customers whose past orders we had been unable to fill due to full capacity,
which if successful, could result in additional sales and mitigate the impact of
the weakened demand and margins on our operating cash flow. As of March 31,
2009, the Company also had $2,495,610 in contractual commitments for capital
expenditures related to the expansion of our production facilities. As such, we
may need to rely on access to the financial markets to provide us with
significant discretionary funding capacity. However, the current uncertainty
arising out of domestic and global economic conditions, including the recent
disruption in credit markets, poses a risk to the economies in which we operate
and may adversely impact our potential sources of capital financing. The general
unavailability of credit could make capital financing more expensive for us or
impossible altogether. Even if we are able to obtain credit, the incurrence of
indebtedness could result in increased debt service obligations and could result
in operating and financing covenants that could restrict our present and future
operations.





Obligations
under Material Contracts





Below is
a table setting forth our material contractual obligations as of March 31,
2009:





At March
      31, 2009
                        Payments Due By PeriodTotal
                      
                      
                      Fiscal Year
                        2009
                      
                      
                      Fiscal
                        Years
                        2010-2011
                      
                      
                      Fiscal
                        Years
                        2012-2013
                      
                      
                      Fiscal Year
                        2014and
                        BeyondContractual obligations:Debt
      Obligations
                      
                      $
                      18,394,833
                      
                      
                      $
                      18,394,833
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —Construction
      Commitments
                      
                      
                      2,495,610
                      
                      
                      
                      2,495,610
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —$
                      20,890,443
                      
                      
                      $
                      20,890,443
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —





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.
During the nine months ended March 31, 2009, additional payment in the amount of
$717,842 has been made in relation to the abovementioned agreements and land use
right.





As of
March 31, 2009, the Company also had $2,495,610 in commitments for capital
expenditures for contractual commitments of the construction projects related to
expansion of Shanghai Blessford’s production facilities. We believe this capital
investment increases our capacity, expand our product line, and thereby creating
new opportunities to grow sales.





Recent
Accounting Pronouncements





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141(R)”). SFAS No. 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 No. 141(R) will impact the Company in the event of
any future acquisition.


35


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 No. 160”). SFAS No. 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 No. 160 will have a material impact on its consolidated financial
statements.




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





In April
2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of
the Useful Life of Intangible Assets” (“FAS 142-3”), which amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
“Goodwill and Other Intangible Assets” (“SFAS No. 142”).  The intent
of this FSP is to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected cash
flows used to measure the fair value of the asset under SFAS No. 141(R),
“Business Combinations,” and other U.S. generally accepted accounting
principles.  This FSP is effective for fiscal years beginning after
December 15, 2008 (the Company’s fiscal year 2010), and interim periods
within those fiscal years.  The Company does not believe the adoption
of FSP 142-3 will have a material impact on the Company’s consolidated financial
position, results of operations and cash flows.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles" (“SFAS No. 162”).  This statement identifies
the sources of accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements of
non-governmental entities that are presented in conformity with US GAAP. The
provisions of SFAS No. 162 become effective 60 days following the SEC's approval
of the amendment to AU Section 411, "The Meaning of Presents Fairly in
Conformity with Generally Accepted Accounting Principles" by the Public Company
Accounting Oversight Board.  The adoption of this statement is not
expected to have a material effect on the Company’s future reported financial
position or results of operations.





In May
2008, the FASB issued FASB Statement No. 163, “Accounting for Financial
Guarantee Insurance Contracts” (FASB No. 163”). The new standard clarifies how
FASB Statement No. 60, “Accounting and Reporting by Insurance Enterprises”,
applies to financial guarantee insurance contracts issued by insurance
enterprises, including the recognition and measurement of premium revenue and
claim liabilities. It also requires expanded disclosures about financial
guarantee insurance contracts. FASB No. 163 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and all
interim periods within those fiscal years, except for disclosures about the
insurance enterprise’s risk-management activities, which are effective the first
period (including interim periods) beginning after May 23, 2008. Except for the
required disclosures, earlier application is not permitted. The standard is not
applicable to this Company.





In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active” (“FAS 157-3”).
This FSP clarifies the application of FASB Statement No. 157, “Fair Value
Measurements”, in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. FAS 157-3 was effective
upon issuance. The adoption of FAS 157-3 did not impact our consolidated
financial statements in any material respect.


36


In
December 2008, the FASB issued FSP No. FAS 132 (R) -1, Employers’
Disclosures about Postretirement Benefit Plan Assets, an amendment of FASB
Statement No. 132 (revised 2003) ("FSP No. 132 (R) -1"). It provides guidance on
an employer’s disclosures about plan assets, including: how investment
allocation decisions are made and factors that are pertinent to an understanding
of investment policies and strategies; the major categories of plan assets; the
inputs and valuation techniques used to measure the fair value of plan assets;
the effect of fair value measurements using significant unobservable inputs
(level 3) on changes in plan assets for the period, and significant
concentrations of risks within plan assets. FSP 132 (R) -1 is effective for
fiscal years ending after December 15, 2009. We are currently assessing the
potential impact that adoption of this standard may have on our financial
statements.




In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments.  It requires the fair value for all
financial instruments within the scope of SFAS No. 107, Disclosures about Fair
Value of Financial Instruments ("SFAS No. 107"), to be disclosed in the interim
periods as well as in annual financial statements.  This standard is
effective for the quarter ending after June 15, 2009.  We are
currently assessing the potential impact that adoption of this standard may have
on our financial statements.




In April
2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly. It clarifies the objective and
method of fair value measurement even when there has been a significant decrease
in market activity for the asset being measured. This standard is effective for
the quarter ending after June 15, 2009. We are currently assessing the
potential impact that adoption of this standard may have on our financial
statements.





In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation
of Other-Than-Temporary Impairments. The objective of an other-than-temporary
impairment analysis under existing U.S. GAAP is to determine whether the holder
of an investment in a debt or equity security for which changes in fair value
are not regularly recognized in earnings (such as securities classified as
held-to-maturity or available-for-sale) should recognize a loss in earnings when
the investment is impaired. An investment is impaired if the fair value of the
investment is less than its amortized cost basis. This FSP amends the
other-than-temporary impairment guidance in U.S. GAAP for debt securities to
make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements. This FSP does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities. We are currently assessing the potential impact that adoption of
this standard may have on our financial statements.





Critical
Accounting Policies




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:




·
            Accounts Receivable –
      The Company provides credit in the normal course of
      business.  The Company performs ongoing credit evaluations of
      its domestic and international customers and clients and maintains an
      allowance for doubtful accounts equal to the estimated uncollectible
      amounts. The allowances for our domestic and international sales are both
      based on an analysis of past collection experience, recognizing the
      differences between payers and aging of accounts receivable, and making
      allowances for certain customers, such as a longer credit period for a
      recurring customer with good credit history. At March 31, 2009 and June
      30, 2008, the Company had $1,036,609 and $1,033,479 of allowances for
      doubtful accounts, respectively. Our allowance for doubtful accounts is a
      subjective critical estimate that has a direct impact on reported net
      earnings, and it is reasonably possible that the Company’s estimate of the
      allowance will change. These estimates have been relatively accurate in
      the past and there has been no need to revise such estimates. However, we
      will review such estimates more frequently when needed, such as now during
      the global credit crisis, and make revisions if necessary. The
      continuation or intensification of the current global economic crisis and
      turmoil in the global financial markets may have negative consequences for
      the business operations of our customers and adversely impact their
      ability to meet their obligations to us. A significant change in our
      collection experience, deterioration in the aging of receivables and
      collection difficulties could require that we increase our estimate of the
      allowance for doubtful accounts. Any such additional bad debt charges
      could materially and adversely affect our future operating
      results.




37


·
            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 are 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.




·
            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.




·
            Advances to Suppliers -
      In order to secure 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 of $2,530,479 and
      $2,522,837 at March 31, 2009 and June 30, 2008, respectively. The Company
      created these reserves against advances to
      suppliers for goods ordered and not received within one year of the date
      the advance payment was made. Two of the Company’s major long-term
      suppliers, who each represent 33% and 27% of advance to suppliers for the
      nine months ended March 31, 2009, respectively, have advised the
      management that they are committed to delivering the contracted raw
      materials in accordance with the terms of their supply contracts.
      Management expects to receive these raw materials in the next 6
      months.




·
            Intangible Assets
      -Intangible assets represent land use rights in
      China acquired by the Company and are stated at cost less amortization.
      Amortization of land-use rights is calculated on the straight-line method,
      based on the period over which the right is granted by the relevant
      authorities in China. The Company acquired land use rights in August 2004
      and December 2006 for 50 years that expire in August 2054 and December
      2056 respectively. The land use rights are amortized over a fifty-year
      term. An amortization amount of approximately $35,000 is to be recorded
      each year starting from the current financial year ending June 30, 2009
      for the remaining lease period.  Intangible assets of the
      Company are reviewed annually, or more frequently if there are triggering
      events, to determine whether their carrying value has become impaired, in
      conformity with SFAS No. 142 and SFAS No. 144,. The Company also
      re-evaluates the periods of amortization to determine whether subsequent
      events and circumstances warrant revised estimates of useful lives. The
      recent decline in our market capitalization and stock price has triggered
      an interim impairment test under SFAS No. 144 as of March 31,
      2009.  An impairment test was performed as of March 31, 2009 and
      no impairment charges were recognized for the relevant periods. As of
      March 31, 2009, the Company expects these assets to be fully recoverable.
      Goodwill amounting to $99,999 as at March 31, 2009 was considered
      immaterial and not tested for
impairment.




·
            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:




38




Buildings
                10
      yearsOffice
      equipment
                5
      yearsMotor
      vehicles
                5
      yearsPlant
      and machinery
                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, or more
frequently if there are triggering events. 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. The recent
decline in our market capitalization and stock price has triggered an interim
impairment test under SFAS No. 144 as of March 31, 2009.  No
impairment charges were recognized for the relevant periods.





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




Seasonality




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





Off-Balance
Sheet Arrangements





For the
three and nine months ended March 31, 2009, we did not have any off-balance
sheet arrangements.





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 export contracts denominated in US dollars, all of our sales revenues are
collected in and substantially all of our expenses are paid in the Chinese
Renminbi. We face foreign currency rate translation risk when our 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.




39


The
Chinese Renminbi had remained stable against the U.S. Dollar at approximately
8.28 Yuan to 1.00 U.S. Dollar for several years and it was not until July 21,
2005 that the Chinese currency regime was altered, with a 2.1% revaluation
versus the United States Dollar. This move initially valued the Renminbi at 8.11
per United States Dollar. In addition, the Renminbi is no longer linked to the
U.S. currency but rather to a basket of currencies with a 0.3% margin of
fluctuation. However, there remains international pressure on the Chinese
government to adopt an even more flexible currency policy and as of March 31,
2009 the exchange rate was 6.8336 Yuan to 1.00 U.S. Dollar. The exchange rate of
Renminbi is subject to changes in China’s government policies which are, to a
large extent, dependent on the economic and political development both
internationally and locally and the demand and supply of Renminbi in the
domestic market. There can be no assurance that such exchange rate will continue
to remain stable in the future amongst the volatility of currencies,
globalization and the unstable economies in recent years. Since (i) our income
and profit are mainly denominated in Renminbi, and (ii) the payment of dividends
will be in U.S. dollars, if any, any exchange fluctuation of the Renminbi
against other foreign currencies would adversely affect the value of the shares
and dividends payable to shareholders, in foreign currency terms.





At March
31, 2009, the Group’s outstanding financial instruments with foreign currency
exchange rate risk exposure had an aggregate fair value of $17 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 $1.7 million at
March 31, 2009.





Interest
Rates





The Group
is subject to interest rate risk on its non-derivative financial instruments.
The Group does not hedge its interest rate risk. At March 31, 2009, the Group’s
total bank debt outstanding was $17,430,904, all of which was interest-bearing.
Substantially all of the bank debt was floating-rate debt with interest rates
which vary with changes in the standard rate set by the People’s Bank of China.
A change in the interest rate or yield of fixed rate debt will only impact the
fair value of such debt, while a change in the interest rate of floating rate,
or variable rate, debt will impact interest expense as well as the amount of
cash required to service such debt. To the extent interest rates increase, we
will be liable for higher interest payments to our lenders. For the current
financial year, annual interest on loans is anticipated to be approximately $0.9
million. The impact of a 1% increase in interest rates will increase interest
expense by approximately $175,000. As our short-term borrowings mature, we will
be required to either repay or refinance these borrowings. An increase in
short-term interest rates at the time that we seek to refinance short-term
borrowings may increase the cost of borrowings, which may adversely affect our
earnings and cash available for distribution to its shareholders.




At March
31, 2009, the aggregate fair value of the Group’s financial instruments with
exposure to interest rate risk was approximately $17 million. The potential
change in fair value for these financial instruments from an adverse 10% change
in quoted interest rates across all maturities, often referred to as a parallel
shift in the yield curve, would be approximately $0.2 million at March 31,
2009.





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, we also use
large amounts of energy in our operations. Over the last several years, prices
for raw materials and energy, in particular natural gas and oil, have increased
significantly. In many cases these price increases have been at a greater
percentage than price increases for the sale of steel products.





The Group
has no open derivative commodity instruments as of March 31, 2009 and does not
currently hedge its exposure to price fluctuations in the raw materials and
energy required for the manufacture of its products.





Inflation





Inflationary
factors such as increases in the cost of our product and overhead costs may
adversely affect our operating results.  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.


40


Although
we believe that inflation has not had a material effect on our results of
operations to date, a high rate of inflation in the future may have an adverse
effect on our ability to effectively pass along fluctuations to our customers
and our ability to maintain current levels of gross margin and selling, general
and administrative expenses as a percentage of net revenues.





ITEMS 4.   CONTROLS AND
PROCEDURES.





Evaluation of Disclosure Controls and
Procedures.





We
maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Exchange Act). Disclosure controls and procedures refer to controls and
other procedures designed to ensure that information required to be disclosed in
the reports we file or submit under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the SEC and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.





As
required by Rule 13a-15(e), our management has carried out an evaluation, with
the participation and under the supervision of Wo Hing Li, our President and
Chief Executive Officer, and Leada Tak Tai Li, our Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures, as of March 31, 2009. Based upon, and as of the date of this
evaluation, Mr. Li and Ms. Li, determined that our disclosure controls and
procedures were effective.




Changes
in Internal Controls over Financial Reporting




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





There
were no changes in our internal controls over financial reporting during the
third quarter of fiscal 2009 that have materially affected, or are reasonably
likely to materially affect our internal control over financial
reporting.




PART II
- OTHER INFORMATION




ITEM
1A. RISK FACTORS.





There
have been no material changes to the risk factors previously disclosed in the
Company’s Form 10-K for the fiscal year ended June 30, 2008.




ITEM 1.   LEGAL
PROCEEDINGS.




From time
to time, we may become involved in various lawsuits and legal proceedings, which
arise, in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these, or other matters, may
arise from time to time that may harm our business. As of the date of this
report, we are not aware of any such pending litigation against the Company nor
was there any litigation initiated by the Company.




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




We have
not sold any equity securities during the quarter ended March 31, 2009 which
sale was not previously disclosed in a current report on Form 8-K filed during
that period.





ITEM 3.   DEFAULTS UPON SENIOR
SECURITIES




None.


41


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




No
matters were submitted to our security holders during the quarter ended March
31, 2009 that were not reported in a current report on Form 8-K filed during
that period.





ITEM 5.   OTHER INFORMATION




We have
no information to include that was required to be but was not disclosed in a
report on Form 8-K during the period covered by this Form 10-Q. There have been
no material changes to the procedures by which security holders may recommend
nominees to our board of directors.





ITEM 6.   EXHIBITS




(a)  The
following exhibits are filed as part of this report or incorporated by reference
from the reports noted below, pursuant to Rule 12(b)-32, as promulgated
under the Securities Act:





Exhibit
                  Number
                
                Description10.1
                
                Executive
      Employment Agreement, dated as of January 1, 2007, between Wo Hing Li and
      China Precision Steel, Inc.10.2
                
                Executive
      Employment Agreement, dated as of January 1, 2007, between Leada Tak Tai
      Li and China Precision Steel, Inc.10.3
                
                Executive
      Employment Agreement, dated as of January 1, 2007, between Hai Sheng Chen
      and China Precision Steel, Inc.31.1
                
                Certifications
      of Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
                
                Certifications
      of Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
                
                Certifications
      of Chief Executive Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2
                
                Certifications
      of Chief Financial Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of
2002




42


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.Dated:
      May 8, 2009
                      /s/ Wo Hing LiWo
      Hing LiPresident
      and Chief Executive Officer(Principal Executive
      Officer)Dated:
      May 8, 2009
                      /s/ Leada Tak Tai LiLeada
      Tak Tai LiChief
      Financial Officer(Principal
      Financial and Accounting
Officer)







EXHIBIT
INDEX




Exhibit
                      Number
                    
                    Description10.1
                    
                    Executive
      Employment Agreement, dated as of January 1, 2007, between Wo Hing Li and
      China Precision Steel, Inc.10.2
                    
                    Executive
      Employment Agreement, dated as of January 1, 2007, between Leada Tak Tai
      Li and China Precision Steel, Inc.10.3
                    
                    Executive
      Employment Agreement, dated as of January 1, 2007, between Hai Sheng Chen
      and China Precision Steel, Inc.31.1
                    
                    Certifications
      of Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
                    
                    Certifications
      of Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
                    
                    Certifications
      of Chief Executive Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2
                    
                    Certifications
      of Chief Financial Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of
2002