UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





**FORM
      10-Q**





(Mark
      One)





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




For
      the
      quarterly period ended March 31, 2007


or





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




For
      the
      transition period from ________  to ________





Commission
      file number 000-23039




**CHINA
                PRECISION STEEL, INC.**(Exact
                name of registrant as specified in
                charter)




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




8th
                Floor, Teda Building, 87 Wing Lok Street, Sheungwan
              Hong
                Kong, The People’s Republic of China(Address
                of principal executive offices)




86-21-5994-8500Registrant’s
                telephone number, including area
                code:




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





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


Yes þ No o





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





Large
      accelerated filer o Accelerated filer o Non-accelerated filer þ





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


Yes o No þ





As
      of May
      14, 2007, there were 35,361,543 shares of the Company’s common stock
      outstanding.









**China
      Precision Steel, Inc.**


**Index
      to Quarterly Report**


**on
      Form 10-Q**





**Quarter
      Ended March 31, 2007**





**Part
                I - Financial Information****Page**Item
                1.
            Financial
                Statements.Condensed
                Consolidated Balance Sheets at March 31, 2007 (unaudited) and June
                30,
                2006 (audited).
            F-1Unaudited
                Condensed Consolidated Statements of Operations for the three and
                nine months ended March 31, 2007 and 2006.
            F-2Unaudited Condensed
                Consolidated Statements of Cash Flows for the nine months ended March
                31,
                2007 and 2006.
            F-3Condensed
                Consolidated Statements of Changes in Stockholders’ Equity for the year
                ended June 30, 2006 (audited) and the nine months ended March 31,
                2007
                (unaudited)
            F-5Notes
                to Condensed Consolidated Financial Statements.
            F-6Item
                2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations.
            2Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk.
            9Item
                4.
            Controls
                and Procedures.
            10**Part
                II - Other Information**Item
                1.
            Legal
                Proceedings.
            11Item
                1A.
            Risk
                Factors.
            11Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds.
            17Item
                3.
            Defaults
                Upon Senior Securities.
            18Item
                4.
            Submission
                of Matters to a Vote of Security Holders.
            18Item
                5.
            Other
                Information.
            18Item
                6.
            Exhibits.
            18Signatures
            
            20










**Item
      1. Financial Statements.**





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




**March
                31,****2007**
            
            **June
                30,****(Unaudited)**
            
            **2006****Assets****Current
                assets**Cash
                and equivalents
            
            $
            11,585,601
            
            $
            186,955Accounts
                receivableTrade,
                net of allowances of $519,614 and $138,837at
                March 31, 2007 and June 30, 2006, respectively
            
            
            4,600,075
            
            
            13,399,003Other
            
            
            148,579
            
            
            69,913Inventory
            
            
            17,831,976
            
            
            6,283,910Deposits
            
            
            301,462
            
            
            75,575Advances
                to suppliers
            
            
            9,336,756
            
            
            3,138,759**Total
                current assets**
            
            
            43,804,449
            
            
            23,154,115**Property
                and equipment**Property
                and equipment, net
            
            
            18,517,748
            
            
            8,664,417Construction-in-progress
            
            
            13,132,806
            
            
            13,752,95431,650,554
            
            
            22,417,371**Total
                assets**
            
            $
            75,455,003
            
            $
            45,571,486**Liabilities
                and Stockholders' Equity****Current
                liabilities**Accounts
                payable
            
            $
            3,240,995
            
            $
            1,801,466Advances
                from customers
            
            
            2,844,296
            
            
            1,859,773Other
                taxes payables
            
            
            971,364
            
            
            862,914Current
                income taxes payable
            
            
            2,513,992
            
            
            —Deferred
                income taxes payable
            
            
            574,942
            
            
            1,535,204Amounts
                due to directors
            
            
            2,188,221
            
            
            5,896,943Current
                portion of long-term debt
            
            
            10,923,671
            
            
            8,918,939Notes
                payable
            
            
            8,959,330
            
            
            9,862,672**Total
                current liabilities**
            
            
            32,216,811
            
            
            30,737,911**Long-term
                debt, net of current portion shown above**
            
            
            4,127,962
            
            
            3,152,415**Stockholders'
                equity:**Preferred
                stock: $0.001 per value, 8,000,000 sharesauthorized,
                no shares outstanding atMarch
                31, 2007 or June 30, 2006Ordinary
                stock: $0.001 par value, 62,000,000 sharesauthorized,
                35,361,543 and 24,283,725 issued andoutstanding
                at March 31, 2007 and June 30, 2006
            
            
            35,362
            
            
            24,284Additional
                paid-in capital
            
            
            21,229,164
            
            
            1,375,716Accumulated
                other comprehensive income
            
            
            1,736,497
            
            
            745,583Retained
                earnings
            
            
            16,109,207
            
            
            9,535,577**Total
                stockholders' equity**
            
            
            39,110,230
            
            
            11,681,160**Total
                liabilities and stockholders' equity**
            
            $
            75,455,003
            
            $
            45,571,486




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




F-1




**China
                Precision Steel, Inc. and Subsidiary****Condensed
                Consolidated Statements of Operations****(Unaudited)**




**Three
                Months Ended:**
            
            **Nine
                Months Ended:****March
                31,**
            
            **March
                31,**
            
            **March
                31,**
            
            **March
                31,****2007**
            
            **2006**
            
            **2007**
            
            **2006****Revenues**Sales
                revenues
            
            $
            11,610,673
            
            $
            8,548,765
            
            $
            37,121,603
            
            $
            26,154,013Cost
                of goods sold
            
            
            8,240,743
            
            
            5,441,194
            
            
            26,635,693
            
            
            17,475,559**Gross
                profit**
            
            
            3,369,930
            
            
            3,107,571
            
            
            10,485,910
            
            
            8,678,454**Operating
                expenses**Selling
                expenses
            
            
            92,315
            
            
            54,795
            
            
            196,705
            
            
            97,173Administrative
                expenses
            
            
            1,411,106
            
            
            250,200
            
            
            2,096,031
            
            
            749,591Depreciation
                and amortization expense
            
            
            11,062
            
            
            115
            
            
            32,324
            
            
            29,769**Total
                operating expenses**
            
            
            1,514,483
            
            
            305,110
            
            
            2,325,060
            
            
            876,533**Income
                from continuing operations**
            
            
            1,855,447
            
            
            2,802,461
            
            
            8,160,850
            
            
            7,801,921**Other
                income (expense)**Other
                revenues
            
            
            53,436
            
            
            —
            
            
            53,436
            
            
            177,714Other
                expenses
            
            
            —
            
            
            (4,564
            )
            
            —
            
            
            (2,024
            )Interest
                and finance costs
            
            
            (196,787
            )
            
            (1,873
            )
            
            (514,869
            )
            
            (25,214
            )**Total
                other income (expense)**
            
            
            (143,351
            )
            
            (6,437
            )
            
            (461,433
            )
            
            150,476**Net
                income from continuing operations****before
                income tax**
            
            
            1,712,096
            
            
            2,796,024
            
            
            7,699,417
            
            
            7,952,397**Provision
                for (benefit from) income tax**Current
            
            
            1,196,573
            
            
            —
            
            
            2,091,886
            
            
            —Deferred
            
            
            (880,694
            )
            
            —
            
            
            (966,099
            )
            
            —Total
                income tax expense
            
            
            315,879
            
            
            —
            
            
            1,125,787
            
            
            —**Net
                income before discontinuing operations**
            
            
            1,396,217
            
            
            2,796,024
            
            
            6,573,630
            
            
            7,952,397**Net
                income from discontinued operations**
            
            
            —
            
            
            333,895
            
            
            831,448
            
            
            446,477**Net
                income**
            
            $
            1,396,217
            
            $
            3,129,919
            
            $
            7,405,078
            
            $
            8,398,874**Basic
                earnings per share**From
                continuing operations
            
            $
            0.05
            
            $
            0.12
            
            $
            0.26
            
            $
            0.30From
                discontinued operations
            
            $
            —
            
            $
            0.01
            
            $
            0.03
            
            $
            0.02Total
            
            $
            0.05
            
            $
            0.13
            
            $
            0.29
            
            $
            0.32**Basic
                weighted average shares outstanding**
            
            
            28,946,086
            
            
            24,283,725
            
            
            25,815,157
            
            
            24,283,725**Diluted
                earnings per share**From
                continuing operations
            
            $
            0.05
            
            $
            0.12
            
            $
            0.26
            
            $
            0.30From
                discontinued operations
            
            $
            —
            
            $
            0.01
            
            $
            0.03
            
            $
            0.02Total
            
            $
            0.05
            
            $
            0.13
            
            $
            0.29
            
            $
            0.32**Diluted
                weighted average shares outstanding**
            
            
            29,387,360
            
            
            24,283,725
            
            
            25,960,101
            
            
            24,283,725**The
                Components of comprehensive income:**Net
                income
            
            $
            1,396,217
            
            $
            3,129,919
            
            $
            7,405,078
            
            $
            8,398,874Foreign
                currency translation adjustment
            
            
            335,929
            
            
            67,235
            
            
            990,914
            
            
            510,341**Comprehensive
                income**
            
            $
            1,732,146
            
            $
            3,197,154
            
            $
            8,395,992
            
            $
            8,909,215




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








F-2


**China
                Precision Steel, Inc. and Subsidiary****Condensed
                Consolidated Statements of Cash Flows****(Unaudited)**




**For
                the Nine Months Ended:****March
                31,**
            
            **March
                31,****2007**
            
            **2006****Cash
                flows from operating activities****Net
                Income**
            
            $
            7,405,078
            
            $
            8,398,874**Adjustments
                to reconcile net income to net cash provided by****(used
                in) operating activities**Depreciation
            
            
            1,095,981
            
            
            939,150Less
                income from discontinued operations - Oralabs, Inc
            
            
            (831,448
            )
            
            (446,477
            )Provision
                for doubtful accounts
            
            
            519,614
            
            
            —Warrants
                issued for consulting
            
            
            447,993
            
            
            —**Net
                changes in assets and liabilities:**Accounts
                receivable, net
            
            
            8,200,648
            
            
            (1,069,471
            )Inventories
            
            
            (11,548,066
            )
            
            (3,169,067
            )Advances
                to suppliers
            
            
            (6,197,997
            )
            
            1,483,036Deposits
            
            
            (225,887
            )
            
            (86,061
            )Accounts
                payable and accrued expenses
            
            
            1,439,529
            
            
            (156,032
            )Advances
                from customers
            
            
            984,523
            
            
            4,098,607Deferred
                income taxes
            
            
            (960,262
            )
            
            —Current
                income taxes
            
            
            2,513,992
            
            
            —Taxes
                payable
            
            
            108,450
            
            
            (94,433
            )**Net
                cash provided by operating activities**
            
            
            2,952,148
            
            
            9,898,126**Cash
                flows from investing activities**Purchases
                of fixed assets including construction in progress
            
            
            (10,329,164
            )
            
            (22,130,609
            )**Net
                cash (used in) investing activities**
            
            
            (10,329,164
            )
            
            (22,130,609
            )**Cash
                flows from financing activities**Advances
                from directors, net
            
            
            (3,708,722
            )
            
            1,908,251Notes
                payable proceeds
            
            
            12,280,943
            
            
            8,607,551Repayments
                of notes payable
            
            
            (10,204,006
            )
            
            —Proceeds
                from sale of common stock
            
            
            19,416,533
            
            
            —**Net
                cash provided by financing activities**
            
            
            17,784,748
            
            
            10,515,802**Effect
                of exchange rate**
            
            
            990,914
            
            
            510,341**Net
                increase (decrease) in cash**
            
            
            11,398,646
            
            
            (1,206,340
            )**Cash
                and cash equivalents, beginning of year**
            
            
            186,955
            
            
            3,133,326**Cash
                and cash equivalents, end of year**
            
            $
            11,585,601
            
            $
            1,926,986




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


F-3




**China
                Precision Steel, Inc. and Subsidiary****Condensed
                Consolidated Statements of Cash Flows****(Unaudited)****For
                the Nine Months
                Ended:****March
                31,**
            
            
            **March
                31,****2007**
            
            
            **2006****Supplemental
                disclosure of cash flow information**Interest
                paid
            
            $
            572,089
            
            $
            659,139Taxes
                paid
            
            $
            —
            
            $
            —Issuance
                of 2,798,191 shares of stock for syndication fees
            
            $
            8,394,573
            
            $
            —Issuance
                of 100,000 warrants for services
            
            $
            562,731
            
            $
            —Issuance
                of 1,300,059 warrants for syndication fees
            
            $
            2,770,349
            
            $
            —




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








F-4




**China
                Precision Steel, Inc. and Subsidiary****Condensed
                Consolidated Statements of Changes in Stockholders'
                Equity****For
                the Year Ended June 30, 2006 (audited) and the Nine
                Months****ended
                March 31, 2007 (audited)**




**Accumulated****Additional**
            
            **Other**
            
            
            
            **Total****Ordinary
                Shares**
            
            **Paid-in**
            
            **Comprehensive**
            
            **Retained**
            
            **Stockholders'****Share**
            
            **Amount**
            
            **Capital**
            
            **Income**
            
            **Earnings**
            
            **Equity**Balance
                at June 30, 2005
            
            
            50,000
            
            
            50,000
            
            
            950,000
            
            
            —
            
            
            2,421,476
            
            
            3,421,476Effects
                of recapitalization
            
            
            24,233,725
            
            
            (25,716
            )
            
            425,716
            
            
            
            
            
            (400,000
            )
            
            —Foreign
                currency translationadjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            745,583
            
            
            —
            
            
            745,583Net
                income for the year
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            8,414,570
            
            
            8,414,570Less
                discontinued operationssold
                to former shareholder
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (900,469
            )
            
            (900,469
            )Balance
                at June 30, 2006
            
            
            24,283,725
            
            
            24,284
            
            
            1,375,716
            
            
            745,583
            
            
            9,535,577
            
            
            11,681,160Sale
                of common stock
            
            
            7,451,665
            
            
            7,452
            
            
            22,347,543
            
            
            —
            
            
            —
            
            
            22,354,995Syndication
                fees
            
            
            —
            
            
            —
            
            
            (2,938,462
            )
            
            —
            
            
            —
            
            
            (2,938,462
            )Stock
                issued for syndication fees
            
            
            2,798,191
            
            
            2,798
            
            
            (2,798
            )
            
            —
            
            
            —
            
            
            —Anti-dilution
                rights stock
            
            
            827,962
            
            
            828
            
            
            (828
            )
            
            —
            
            
            —
            
            
            —Warrants
                issued for consulting
            
            
            —
            
            
            —
            
            
            447,993
            
            
            —
            
            
            —
            
            
            447,993Foreign
                currency translationadjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            990,914
            
            
            —
            
            
            990,914Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            7,405,078
            
            
            7,405,078Less
                discontinued operationssold
                to former shareholder
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (831,448
            )
            
            (831,448
            )Balance
                at March 31, 2007
            
            
            35,361,543
            
            $
            35,362
            
            $
            21,229,164
            
            $
            1,736,497
            
            $
            16,109,207
            
            $
            39,110,230






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




F-5




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





These
      transactions were treated for financial reporting purposes as a
      recapitalization, with prior Oralabs, Inc. operating activities reflected on
      the
      statements of operations as income (loss) from discontinued operations. The
      $558,797 estimated tax liability incurred in connection with the spin-off of
      Oralabs, Inc. was treated as a transaction cost for financial reporting purposes
      and was treated as a reduction in additional paid-in capital to the extent
      of
      the additional cash received, which was also $558,797. See Note 15 of Notes
      to
      Condensed Consolidated Financial Statements.





PSHL,
      registered on April 30, 2002 in the Territory of the British Virgin Islands,
      had
      registered capital of $50,000 as of June 30, 2006 and 2005. It has one
      wholly-owned subsidiary, Shanghai Chengtong Precision Strip Company Limited
      (“Chengtong”) which it acquired in a series of transactions. This acquisition
      was recorded using purchase accounting and resulted in an increase of $1,086,262
      in the carrying amount of property and equipment for financial reporting
      purposes.





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





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





The
      Company’s principal activities are conducted through its principal subsidiary,
      Chengtong. Chengtong, is a niche precision steel processing company principally
      engaged in the manufacture and sales of cold-rolled and hot-rolled precision
      steel products and plates for 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.





**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, 2006.





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


F-6


**China
      Precision Steel, Inc.**





**Notes
      to the Condensed Consolidated Financial Statements**





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





The
      following is a summary of significant accounting policies:





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





**Accounts
      Receivable -** The
      Company provides an allowance for doubtful accounts equal to the estimated
      uncollectible amounts. It is reasonably possible that the Company’s estimate of
      the allowance will change. At March 31, 2007 and June 30, 2006, the Company
      had
      $519,614 and $138,837 of allowances for doubtful accounts, respectively.





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





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





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





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




Buildings
              
              
              25
                  yearsOffice
                  equipment
              
              
              5
                  yearsMotor
                  vehicles
              
              
              5
                  yearsMachineries
              
              
              10
                  years




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





Property,
      plant and equipment are evaluated annually for any impairment in value. Where
      the recoverable amount of any property and equipment is determined to have
      declined below its carrying amount, the carrying amount is reduced to reflect
      the decline in value. There were no property and equipment impairments
      recognized during the three and nine months periods ended March 31, 2007 and
      2006.





**Capitalized
      Interest -** The
      Company capitalizes interest cost on borrowings incurred during the new
      construction or upgrade of qualified assets. Capitalized interest is added
      to
      the cost of the underlying assets and is amortized over the useful lives of
      the
      assets. During the nine months ended March 31, 2007 and 2006, the Company
      capitalized $1,036,812 and $607,073, respectively, of interest to
      construction-in-progress.





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





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


F-7


**China
      Precision Steel, Inc.**





**Notes
      to the Condensed Consolidated Financial Statements**





**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, they will then be 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 the subsequent year are carried forward
      as deferred revenue.





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





**Foreign
      Currencies** - The
      Company’s principal country of operations is in the PRC. The financial position
      and results of operations of the Company are determined using the local currency
      ("Renminbi" or "Yuan") as the functional currency. The results of operations
      denominated in foreign 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. All translation adjustments resulting from the
      translation of the financial statements into the reporting currency (“US
      Dollars”) are dealt with as an exchange fluctuation reserve in shareholders’
equity.





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





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





*Enterprise
      income tax*





Under
      the
      Provisional Regulations of the People’s Republic of China Concerning Income Tax
      on Enterprises promulgated by the State Council which came into effect on
      January 1, 1994, income tax is payable by enterprises at a rate of 33% of their
      taxable income. Preferential tax treatment may, however, be granted pursuant
      to
      any law or regulations from time to time promulgated by the State Council.
      Specialty state companies’ enterprise income tax rate was reduced to 27%. The
      Group is currently enjoying a 50% reduction in the statutory rates due to the
      classification of Chengtong as a “Wholly Foreign Owned Enterprise”. This reduced
      rate applies to the fiscal years ended June 30, 2007, 2008, and 2009. Subsequent
      to June 30, 2009, Chengtong will be subject to enterprise income taxes at the
      prevailing statutory rates. The PRC is currently reviewing its tax rate
      differential between domestic and Wholly Foreign Owned Enterprises and it is
      possible that these rates may change in the future.





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.


F-8


**China
      Precision Steel, Inc.**





**Notes
      to the Condensed Consolidated Financial Statements**





*Value
      added tax*





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





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





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





For
      the
      three and nine month periods ended March 31, 2007 the Company’s pension cost
      charged to the statements of operations under the plan amounted to $36,532
      and
      $110,695, respectively, all of which have been paid to the State Pension Fund.
      For the three and nine month periods ended March 31, 2006, the Company’s pension
      cost charged to the statements of operations under the plan amounted to $5,125
      and $18,154, respectively, all of which has been paid to the State Pension
      Fund.





**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, 2007 and June 30, 2006
      because of the relatively short-term maturity of these instruments.





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





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





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





**Recent
      Accounting Pronouncements** - In
      November 2004, the FASB issued SFAS No. 151, Inventory Costs - an amendment
      of
      ARB No. 43, Chapter 4. SFAS No. 151 requires that certain abnormal costs
      associated with the manufacturing, freight, and handling costs associated with
      inventory be charged to current operations in the period in which they are
      incurred. The adoption of SFAS 151 had no impact on the Group's financial
      position, results of operations, or cash flows.





In
      December 2004, the FASB issued a revision of SFAS No. 123, Share-Based Payment.
      The statement establishes standards for the accounting for transactions in
      which
      an entity exchanges its equity investments for goods and services. It also
      addresses transactions in which an entity incurs liabilities in exchange for
      goods or services that are based on the fair value of the entity's equity
      instruments or that may be settled by the issuance of those equity instruments.
      The statement does not change the accounting guidance for share-based payments
      with parties other than employees.





The
      statement requires a public entity to measure the cost of employee service
      received in exchange for an award of equity instruments based on the grant-date
      fair value of the award (with limited exception). That cost will be recognized
      over the period during which an employee is required to provide service in
      exchange for the award (usually the vesting period). A public entity will
      initially measure the cost of employee services received in exchange for an
      award of liability instrument based on its current fair value; the fair value
      of
      that award will be re-measured subsequently at each reporting date through
      the
      settlement date. Changes in fair value during the requisite service period
      will
      be recognized as compensation over that period.


F-9


**China
      Precision Steel, Inc.**





**Notes
      to the Condensed Consolidated Financial Statements**





The
      grant-date for fair value of employee share options and similar instruments
      will
      be estimated using option-pricing models adjusted for the unique characteristics
      of these instruments. The statement is effective for the quarter beginning
      January 1, 2006.





SFAS
      No.
      152 “Accounting for Real Estate Time-Sharing Transactions - an amendment of FASB
      Statements No. 66 and 67”, SFAS No. 155 “Accounting for Certain Hybrid Financial
      Instruments - an amendment of FASB Statements No. 133 and No. 140”, SFAS No. 156
“Accounting for Servicing of Financial Assets - an amendment of FASB Statement
      No. 140”, SFAS
      No.
      157 “Fair Value Measurement”, and SFAS 158 “Employer’s Accounting for Defined
      Benefit and Other Postretirement Plans” were recently issued .
      SFAS
      No. 152, 155, 156, and 158 have no current applicability to the Group and have
      no significant effect on the consolidated financial statements.





Management
      is currently assessing the effect, if any, that the adoption of SFAS 157 “Fair
      Value Measurement” will have on the reporting of future operations.





In
      June
      of 2006 the Financial Accounting Standards Board issued FASB Interpretation
      No.
      48 “Accounting for Uncertainty in Income Taxes”. This interpretation clarifies
      the accounting and reporting of uncertainty in income taxes recognized in an
      enterprise’s financial statements. This Interpretation will be effective for
      fiscal years beginning after December 15, 2006. The Company is currently
      assessing the effect this Interpretation will have on the reporting of future
      operations.





In
      September 2006, the Securities and Exchange Commission issued Staff
      Accounting Bulletin No. 108 (“SAB No. 108”).
      SAB No. 108 addresses how the effects of prior year uncorrected
      misstatements should be considered when quantifying misstatements in current
      year financial statements. SAB No. 108 requires companies to quantify
      misstatements using a balance sheet and income statement approach and to
      evaluate whether either approach results in quantifying an error that is
      material in light of relevant quantitative and qualitative factors. When the
      effect of initial adoption is material, companies will record the effect as
      a
      cumulative effect adjustment to beginning of year retained earnings and disclose
      the nature and amount of each individual error being corrected in the cumulative
      adjustment. SAB No. 108 is effective beginning January 1,
      2007 and the initial adoption of SAB No. 108 did not have a material
      impact on the Company’s financial position, results of operations, or cash
      flows.





In
      February 2007, the Financial Accounting Standarads Board issued SFAS No. 159
      “The Fair Value Option for Financial Assets and Financial Liabilities.” This
      statement permits companies to choose to measure many financial assets and
      liabilities at fair value. Unrealized gains and losses on items for which the
      fair value option has been elected are reported in earnings. SFAS 159 is
      effective for fiscal years beginning after November 15, 2007. The Company is
      currently assessing the impact of SFAS 159 on its consolidated financial
      statements.





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





The
      Company maintains certain bank accounts in the PRC which are not protected
      by
      FDIC insurance or other insurance. Cash balances within the PRC totaled
      $4,290,854 as of March 31, 2007. As of March 31, 2007, the Company held
      $7,294,748 of cash balances within the United States, of which $7,194,747 was
      in
      excess of FDIC insurance limits.





Chengtong
      provides credit in the normal course of business. Chengtong performs ongoing
      credit evaluations of its customers and clients and maintains allowances for
      doubtful accounts based on factors surrounding the credit risk of specific
      customers and clients, historical trends, and other information. Trade accounts
      receivable totaled $4,600,075 and $13,399,003 as of March 31, 2007 and June
      30,
      2006, respectively.





Chengtong’s
      list of customers whose purchases exceeded 10% of total sales during the nine
      months ended March 31, 2007 and 2006 were as follows:





***Customers***
            
            *2007*
            
            *%
                to sales*
            
            *2006*
            
            *%
                to sales*Sinosteel
                Company Limited
            
            
            4,805,195
            
            
            13
            
            
            -
            
            
            -Shanghai
                Yiyi Industrial Limited
            
            
            -
            
            
            -
            
            
            4,047,902
            
            
            15Shanghai
                Rongrong Steel Plate Limited
            
            
            -
            
            
            -
            
            
            3,424,311
            
            
            13Jiangsu
                Kaiteer Industrial Stove Limited
            
            
            -
            
            
            -
            
            
            5,051,922
            
            
            19





F-10


**China
      Precision Steel, Inc.**





**Notes
      to the Condensed Consolidated Financial Statements**





**5.** **Inventories**





As
      of
      March 31, 2007 and June 30, 2006, inventory consisted of the
      following:





March
                31, 2007
            
            June
                30, 2006Raw
                materials
            
            $
            13,113,586
            
            $
            3,688,773Work
                in progress
            
            
            601,122
            
            
            573,465Finished
                goods
            
            
            4,117,268
            
            
            2,021,672$
            17,831,976
            
            $
            6,283,910





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





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




March
                  31, 2007
              
              June
                  30, 2006Plant
                  and machinery
              
              $
              18,093,312
              
              $
              7,526,395Buildings
              
              
              3,102,112
              
              
              2,755,157Motor
                  vehicles
              
              
              291,073
              
              
              239,219Office
                  equipment
              
              
              71,253
              
              
              51,28121,557,750
              
              
              10,572,052Less:
                  Accumulated depreciation
              
              
              (3,040,002
              )
              
              (1,907,635
              )$
              18,517,748
              
              $
              8,664,417





As
      of
      March 31, 2007, property, plant and equipment at a net book value of
      $18,192,111, along with all construction-in-progress, had been pledged as
      securities on loans with combined outstanding balances of $23,386,980.





Depreciation
      expense related to manufacturing is included as a component of cost of goods
      sold. During the three and nine month periods ended March 31, 2007, depreciation
      totaling $467,514 and $1,063,658, respectively, was included as a component
      of
      cost of goods sold. During the three and nine month periods ended March 31,
      2006, depreciation totaling $276,480 and $3,888,782, respectively, was included
      as a component of cost of goods sold.





**7.** **Construction-In-Progress**





As
      of
      March 31, 2007 and June 30, 2006, construction-in-progress consisted of the
      following:




March
                  31, 2007
              
              June
                  30, 2006Construction
                  costs of plant and machinery
              
              $
              1,310,690
              
              $
              7,059,943Construction
                  on factory building (Phase 2)
              
              
              11,822,116
              
              
              6,693,011$
              13,132,806
              
              $
              13,752,954




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





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





Advances
      from customers represent advance cash receipts from new customers and for which
      goods have not been delivered as of the balance sheets dates. Advances from
      customers for goods to be delivered or services to be rendered in the subsequent
      year are carried forward as deferred revenue. As of March 31, 2007 and June
      30,
      2006, there were advances from customers of $2,844,296 and $1,859,773,
      respectively.


F-11


**China
      Precision Steel, Inc.**





**Notes
      to the Condensed Consolidated Financial Statements**





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





Amounts
      due to directors as of March 31, 2007 and June 30, 2006 are as
      follows:





Name
            
            March
                31, 2007
            
            June
                30, 2006Li
                Wo Hing
            
            $
            1,754,500
            
            $
            5,464,907Chen
                Hai Sheng
            
            
            433,721
            
            
            432,036$
            2,188,221
            
            $
            5,896,943





Amounts
      due are unsecured, non-interest bearing and have no fixed repayment terms.
      As of
      March 31, 2007 and June 30, 2006, Li Wo Hing had advanced an aggregate of
      $8,840,990 and $5,435,842, respectively, for construction costs incurred for
      Chengtong’s production facilities on land to which the land rights are owned by
      another company under his control. Upon the receipt of local governmental
      approval for the transfer of the land rights and the related properties to
      Chengtong, the related costs paid by Li Wo Hing will be reflected on the Group’s
      consolidated financial statements as a payable to him.





Li
      Wo
      Hing, a director and the President of the Company, entered into an agreement
      with the Company and certain other parties, dated as of February 13, 2007,
      as
      amended (the “Debt Conversion Agreement”), such that, upon the occurrence of the
      transfer to Chengtong of the certain assets under his control as referenced
      in
      the preceding paragraph, he will contribute $3,839,607 as additional paid-in
      capital to the Company and additional amounts due to him relating to such assets
      will be converted into common stock of the Company at a price equivalent to
      the
      greater of (i) $3.00 per share and (ii) the closing bid price of the Company’s
      common stock as reported on The NASDAQ Capital Market on the day prior to
      conversion (the “Closing Bid Price”). Mr. Li has also agreed to convert
      current debt outstanding and payable to him into shares of the Company's common
      stock at the Closing Bid Price. See Note 19 of Notes to Condensed
      Consolidated Financial Statements.





**10.** **Short-Term
        Loans**





Short-term
      loans consisted of the following:




March
                31, 2007
            
            June
                30, 2006Bank
                loan, dated September 22, 2005, due December 31, 2007 with a interest
                rate
                of 15% over the standard market rate set by the People’s Bank of China for
                Renminbi loans, secured by land, buildings and machinery
            
            $
            8,335,346
            
            $
            4,119,850Bank
                loan, dated December 14, 2004, rolled over October 21, 2005, due
                in one
                year with a interest rate of 5.58%, guaranteed by a related
                company
            
            
            -
            
            
            1,248,439Bank
                loan, dated December 14, 2004, rolled over November 11, 2005, due
                in one
                year with a interest rate of 5.58%, guaranteed by a related
                company
            
            
            -
            
            
            1,248,439Bank
                loan, dated December 12, 2005, due in one year with a interest rate
                of
                5.58%, guaranteed by a related company
            
            
            -
            
            
            1,747,815Bank
                loan, dated May 19, 2006, due in one year with a interest rate of
                5.85%,
                guaranteed by a related company
            
            
            -
            
            
            1,498,129Other
                unsecured notes payable with no stated interest or fixed
                terms
            
            
            623,984
            
            
            -$
            8,959,330
            
            $
            9,862,672





F-12


**China
      Precision Steel, Inc.**





**Notes
      to the Condensed Consolidated Financial Statements**





**12.** **Long-Term
        Debts - Secured**





March
                31, 2007
            
            June
                30, 2006Long-term
                debts:Bank
                loan, dated October 14, 2004, due July 31, 2007, at an interest rate
                of 3%
                over the 10% of the standard market rate set by the People’s Bank of China
                for Renminbi loans, secured by land, buildings and
                machinery
            
            $
            8,251,350
            
            $
            7,973,215Bank
                loan dated September 22, 2005, payable over 4 years ending August
                31,
                2009, at an interest rate of 15% over the standard market rate set
                by the
                People’s Bank of China for Renminbi loans, secured by land, buildings and
                machinery
            
            
            6,800,283
            
            
            4,098,139Total
                long-term debt
            
            
            15,051,633
            
            
            12,071,354Less:
                Current portion of long-term debts
            
            
            10,923,671
            
            
            8,918,939Long-term
                debts
            
            $
            4,127,962
            
            $
            3,152,415




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




2007
              
              $
              10,923,6712008
              
              
              2,751,9752009
              
              
              1,375,9872010
              
              
              —2011
              
              
              —$
              15,051,633




**13.** **Income
        Tax**





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





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





As
      of
      June 30, 2006, Chengtong had utilized all of its 100% tax holiday, therefore
      any
      timing differences reversing within the next three years would be taxed at
      50%
      of the statutory rate of 27%. Therefore, it was necessary for the Group to
      record a deferred income tax liability and offsetting deferred income tax
      expense of $1,535,203 as of June 30, 2006.




F-13


**China
      Precision Steel, Inc.**





**Notes
      to the Condensed Consolidated Financial Statements**


The
      tax
      holiday resulted in tax savings as follows:





Three
                Months Ended
              March
                31,
            
            Nine
                Months Ended
              March
                31,2007
            
            2006
            
            2007
            
            2006Tax
                savings
            
            $
            215,643
            
            $
            859,003
            
            $
            1,023,932
            
            
            2,147,147Benefit
                per shareBasic
            
            $
            .01
            
            $
            .03
            
            $
            .04
            
            $
            .08Diluted
            
            $
            .01
            
            $
            .03
            
            $
            .04
            
            $
            .08





As
      explained above, there were not significant deferred tax assets or liabilities
      as of June 30, 2005. Significant components of the Group’s deferred tax assets
      and liabilities as of March 31, 2007 and June 30, 2006 are as
      follows:




Deferred
                  tax assets:
              
              March
                  31, 2007
              
              June
                  30, 2006Book
                  depreciation in excess of tax depreciation
              
              $
              43,460
              
              $
              25,753Deferred
                  tax liabilityTiming
                  differences resulting from cash basis reportingfor
                  tax purposes
              
              
              (618,402
              )
              
              (1,560,957
              )Net
                  deferred income tax (liability)
              
              $
              (574,942
              )
              $
              (1,535,204
              )




**14.** **Stock
        Exchange Agreement**





On
      March
      31, 2006, the Company entered into a Stock Exchange Agreement (the “Agreement”)
      under which all of the issued and outstanding shares of PSHL would be acquired
      by it in consideration for the issuance to the owner of PSHL and his designees
      (the “PSHL Shareholder”) of common stock representing a 94% ownership interest
      in the Company (the “Share Exchange”).





On
      December 27, 2006, the Company held its annual meeting of shareholders (the
      “Annual Meeting”). At the Annual Meeting, shareholders owning a majority of the
      issued and outstanding shares of the Company approved:


·
              the
                  Share Exchange;




·
                the
                      Redemption (as defined
                      below);
  ·
                a
                      2006 Directors Option Plan and the and the issuance to non-employee
                      directors of 300,000 shares of the Company’s common
                      stock;
  ·
                the
                      issuance of an undetermined number of shares of the Company’s common
                      stock, shares of preferred stock convertible into the common
                      stock or
                      warrants to purchase the common stock, in an aggregate amount
                      of up to
                      22,600,000 shares of common stock, in connection with potential
                      equity
                      financing from time to
                      time;
 ·
                  the
                          sale to OraLabs, Inc., the Company’s wholly-owned subsidiary, of up to
                          100,000 shares of the Company’s common stock to satisfy a tax indemnity
                          obligation of OraLabs, Inc. in connection with the Redemption;
 ·
                      the
                              amendment to the Company’s Articles of Incorporation to change its name
                              from OraLabs Holding Corp. to China Precision Steel,
                              Inc. and to increase
                              the number of authorized shares of common stock to
                              62,000,000;
 ·
                        the
                                  Amendment to the Company’s Articles of Incorporation to increase the
                                  number of authorized shares of preferred stock
                                  to
                                  8,000,000;
 F-14


**China
      Precision Steel, Inc.**





**Notes
      to the Condensed Consolidated Financial Statements**


·
                the
                            election of Mr. Wo Hing Li and Mr. Hai Sheng Chen as
                            executive directors
                            and Mr. Che Kin Lui, Mr. David Peter Wong, and Mr. Tung
                            Kuen Tsui, the
                            individuals designated by PSHL, as independent non-executive
                            directors of
                            the
                            Company;
 ·
                  the
                              approval of the Company’s 2006 Omnibus Long-Term Incentive Plan that will
                              allow the Company to grant an aggregate of 2,165,220
                              shares of its common
                              stock through stock options and restricted stock awards
                              to qualified key
                              employees;
                              and
 ·
                    the
                                ratification of the appointment of Murrell, Hall,
                                McIntosh & Co., PLLP
                                as the Company’s independent registered public accounting firm for
                                fiscal
                                year
                                2006.


Pursuant
      to the Agreement, the Company entered into a Redemption Agreement, dated
      December 28, 2006 (the “Redemption Agreement”), with its President, Gary H.
      Schlatter, individually (“Schlatter”), whereby the Company redeemed (the
“Redemption”) 3,629,350 shares of its outstanding common stock owned by
      Schlatter in exchange for all of the issued and outstanding shares of OraLabs,
      Inc., the Company’s wholly owned subsidiary. OraLabs, Inc. purchased 100,000
      shares of the Company’s common stock and paid certain amounts in cash to the
      Company to satisfy a tax indemnity obligation of OraLabs, Inc. in connection
      with the Redemption.





On
      December 28, 2006, the Company and PSHL closed on the Share Exchange and the
      Company’s name was changed to China Precision Steel, Inc. At the Closing, the
      Company issued to the sole owner of PSHL and his designees an aggregate of
      25,363,002 shares of common stock (2,698,191 shares of which were issued for
      services rendered in connection with the upcoming private placement and were
      treated as offering costs for financial reporting purposes), which constitutes
      94% of its total issued and outstanding common stock of the Company. Upon the
      consummation of the Share Exchange, each of PSHL and Chengtong became
      wholly-owned subsidiaries of the Company.





Prior
      to
      the closing, the Company issued 300,000 shares to its non-employee directors,
      Mr. Michael I. Friess and Mr. Robert C. Gust, pursuant to the Company’s 2006
      Directors Option Plan. The cost of these 300,000 shares valued at $1,566,000
      was
      treated as a transaction cost and taken against additional paid in capital.





At
      the
      Closing, Mr. Gary H. Schlatter, Mr. Michael I. Friess and Mr. Robert C. Gust
      resigned as directors of the Company and were replaced by Mr. Wo Hing Li and
      Mr.
      Hai Sheng Chen, as executive directors, and Mr. Che Kin Lui, Mr. David Peter
      Wong, and Mr. Tung Kuen Tsui, as independent non-executive directors.. Further,
      Gary H. Schlatter and Michael I. Friess resigned as officers of the Company
      and
      Wo Hing Li was appointed the President of the Company and Leada Tak Tai Li
      the
      Chief Financial Officer, Secretary and Treasurer of the Company.





**15.** **Equity**





On
      or
      about February 22, 2007, the Company issued 7,451,665 shares of its common
      stock for $3.00 per share in a Private Placement in reliance upon exemptions
      from the registration requirements of the Act provided by Section 4(2) of the
      Act and Regulation D and Regulation S thereunder, and in reliance on similar
      exemptions under the applicable state securities laws, to certain institutional
      accredited and other investors.  The net proceeds to the Company from the
      private placement were $18,905,653. The Company also issued 100,000 shares
      to
      the U.S. placement agent in the Private Placement as partial compensation.




On
      or
      about February 22, 2007, the Company issued 827,963 shares to certain existing
      shareholders pursuant to pre-existing anti-dilution rights triggered by the
      Private Placement in reliance upon exemptions from the registration
      requirements of the Act provided by Section 4(2) of the Act and Regulation
      D and
      Regulation S thereunder and in reliance upon exemptions from applicable state
      securities laws. The shareholders receiving these additional shares acquired
      their original shares along with the anti-dilution rights for services rendered
      in connection with the private placement and were treated as offering costs
      for
      financial reporting purposes.





In
      connection with the Private Placement, on February 22, 2007, the Company
      issued warrants to the placement agents to purchase an aggregate
      of 1,300,059 shares of Common Stock as partial compensation for services
      rendered in connection with the Private Placement.





On
      or
      about February 22, 2007, the Company issued warrants to purchase up to 100,000
      shares of Common Stock to the Company's investor relations consultants valued
      at
      $447,993.




F-15


**China
      Precision Steel, Inc.**





**Notes
      to the Condensed Consolidated Financial Statements**





Information
      with respect to stock warrants outstanding are as follows:





ExercisePrice
            
            Outstanding
              June
                30, 2006
            
            Granted
            
            Expired
                orExercised
            
            OutstandingMarch
                31, 2007
            
            ExpirationDate$3.00
            
            
            -0-
            
            
            1,300,059
            
            
            -0-
            
            
            1,300,059
            
            
            02/22/2011$3.60
            
            
            -0-
            
            
            100,000
            
            
            -0-
            
            
            100,000
            
            
            02/22/2010





**16.** **Earnings
        Per Share**





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





For
      the
      year ended December 31, 2006, dilutive shares include outstanding warrants
      to
      purchase 1,300,059 shares of common stock at an exercise price of $3.00 because
      the warrant’s exercise price was greater than the average market price for the
      common stock and their effect would have been antidilutive.





The
      following reconciles the components of the EPS computation:




Income
                (Numerator)
              
              Shares
                (Denominator)
              
              Per
                  Share AmountFor
                  the three months ended March 31, 2007:Net
                  income
              
              $
              1,396,217Less
                  Net income from discontinuedOperations
              
              $
              —Basic
                  EPS income available tocommon
                  shareholders
              
              $
              1,396,217
              
              
              28,946,086
              
              $
              0.05Effect
                  of dilutive securities:Warrants
              
              
              —
              
              
              441,274Diluted
                  EPS income available tocommon
                  shareholders
              
              $
              1,396,217
              
              
              29,387,360
              
              $
              0.05For
                  the nine months ended March 31, 2007:Net
                  income
              
              $
              7,405,078Less
                  net income from discontiunedoperations
              
              $
              (831,448
              )Basic
                  EPS income available tocommon
                  shareholders
              
              $
              6,573,630
              
              
              25,815,157
              
              $
              0.26Effect
                  of dilutive securities:Warrants
              
              
              —
              
              
              144,944Diluted
                  EPS income available tocommon
                  shareholders
              
              $
              6,573,630
              
              
              25,960,101
              
              $
              0.26




**17.** **Discontinued
        Operations**





The
      operations of Oralabs, Inc. prior to December 28, 2006 are shown in the
      financial statements as income from discontinued operations as these operations
      were transferred to a former shareholder in exchange for the redemption of
      his
      common stock as described further in Note 15 of Notes to Condensed Consolidated
      Financial Statements, above. The condensed consolidated financial statements
      have been reclassified to conform to discontinued operations presentation for
      all historical periods presented.


F-16


**China
      Precision Steel, Inc.**





**Notes
      to the Condensed Consolidated Financial Statements**





Summarized
      selected financial information for discontinued operations for the three and
      nine month periods ended March 31, 2007 and 2006 is as follows:




**Three
                Months Ended:**
            
            **Nine
                Months Ended:****March
                31,**
            
            **March
                31,**
            
            **March
                31,**
            
            **March
                31,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Revenues
            
            $
            -
            
            $
            4,519,000
            
            $
            9,404,000
            
            $
            11,980,000Income
                before tax
            
            
            -
            
            
            551,000
            
            
            1,023,000
            
            
            735,000Income
                taxes
            
            
            -
            
            
            217,000
            
            
            192,000
            
            
            288,000Income
                from discontinued operations
            
            $
            -
            
            $
            334,000
            
            $
            831,000
            
            $
            447,000




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




**18.** **Commitments**





As
      of
      March 31, 2007, the Company had $1,629,453, in commitments for capital
      expenditures for contractual commitments of the construction projects related
      to
      expansion of Chengtong’s production facilities.




**19.** **Subsequent
        Events**





On
      April
      9, 2007, approval was received from the Shanghai Business and Commercial
      Administration Authority, Jiading District Board, to transfer all of the share
      capital of Shanghai Tuorong Precision Strip Co., Ltd. to Chengtong pursuant
      to
      an agreement entered into in 2002. As a result of this transfer, an aggregate
      net amount of approximately $6.8 million is due and payable to Wo Hing Li,
      the Company’s Chairman and Chief Executive Officer. In accordance with the Debt
      Conversion Agreement, Dr. Li has agreed to convert such net amount into shares
      of the Company’s common stock on May 18, 2007
      at
      the closing bid price of the common stock as reported on The NASDAQ Capital
      Market on May 17, 2007.  See Note 9 of Notes to Condensed Consolidated
      Financial Statements.




F-17




**Item
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**





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





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





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





**Introduction**





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





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




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




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




**Overview
      of the Group’s Business**





*General*




The
      Company, through its wholly-owned operating subsidiary, Shanghai Chengtong
      Precision Strip Co., Limited, a wholly foreign owned enterprise organized under
      the laws of the People’s Republic of China (“Chengtong”), is a niche precision
      steel processing company principally engaged in the manufacture and sale of
      high
      precision cold-rolled steel products and in the provision of heat treatment
      and
      cutting of medium and high carbon hot-rolled steel strips and chrome series
      stainless steel. 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.







The
      Group’s operations are conducted principally in China. However, the Group
      intends to expand overseas into Japan, Taiwan, Korea, Thailand, the Philippines,
      the European Union and the United States in the future.**Chengtong currently has approximately 280 employees, including 30 senior
      management and technical staff members and leases 20,000 square meters
      production facilities (including 10,000 square meters of a new Phase 2
      production facilities) in Jiading District, Shanghai, on four acres of property.****





*Products*





Cold-rolled
      specialty precision steel is a relatively new industry in China and
      manufacturers of products that use specialty precision steel products have
      traditionally imported precision steel products from Japan, Korea, the European
      Union and the United States. Cold-rolled steel products represent hot-rolled
      de-scaled (pickled) steel coils which are used as raw materials in the precision
      steel industry which have been processed by cold reduction through a
      cold-rolling mill to the desired thinness. The process does not involve heating
      and the primary feature of cold reduction is to reduce the thickness of the
      steel coils. However, because the cold reduction operation induces very
      high strains (work hardening) into the steel sheet, the precision steel sheet
      not only becomes thinner, but also becomes much harder, less ductile and very
      difficult to form. Thus cold-reduced steel products are annealed (heated to
      high
      temperatures) to become soft and formable. Cold-rolled sheet products are used
      in a wide variety of end applications such as appliances (refrigerators,
      washers, dryers, and other small appliances), automobiles (exposed as well
      as
      unexposed parts), food packaging materials, electric motors and bathtubs.
      Cold-rolled sheet products are used in these and many other areas of
      manufacturing.




2




Hard-rolled
      steel represents steel products manufactured from cold reduction to the desired
      thinness without annealing. The product is very stiff; it is intended for flat
      work where deformation is very minimal. This type of hard-rolled steel is most
      often applied to further processing for applications such as continuous
      galvanizing. Hard-rolled or cold-rolled steel with low carbon represents
      hard-rolled or cold-rolled steel with carbon content of less than 0.1%.  It
      is a very versatile and useful material, easily machined and worked into complex
      shapes, and has low cost and good mechanical properties. Hard-rolled or
      cold-rolled steel with medium carbon represents hard-rolled or cold-rolled
      steel
      with carbon content of 0.30%. It is a typical engineered steel product.
      Hard-rolled or cold-rolled steel with high carbon represents hard-rolled or
      cold-rolled steel with a carbon content of 0.8% or more. This precision steel
      product is very hard and also quite brittle and much less ductile than low
      carbon steel. High carbon steel has good wear resistance, and is used for
      railways as well as for cutting tools. Acid wash steel is also known as the
      acid
      pickling and refers to the process of using liquid acids, for example
      hydrochloric acid, to remove rust or oxides from the surface of steel. Removing
      rust prepares the surface for a protective coating.





Products
      with greater width have more applications and intended uses. Width is an
      important differentiation factor because certain end products such as washers
      and automobiles require materials with a certain minimum width. Although
      materials with smaller width could also be used for these applications through
      jointing, this increases production cost and thus makes wider products more
      flexible and cost efficient.





The
      Company believes that generally, to date, the average quality and standards
      of
      China’s high precision steel industry lags behind the international norm.
      Nonetheless, during the last three years, Chengtong believes that it has begun
      to develop and establish itself as a nationally recognized brand in China.
       Despite exports to Thailand and the Philippines during the nine months
      ended March 31, 2007, Chengtong is not yet established as an internationally
      recognized brand for specialty precision steel products. As of March 31, 2007,
      Chengtong produced approximately 40 high precision steel products covering
      a
      range of over one hundred specifications. Currently, Chengtong produces
      precision steel products which can be categorized into six major categories
      of
      products.





**Categories
                of Precision Steel Products:**
            
            **Functions**1.
                Low carbon cold-rolled steel
            
            Food
                packaging, dry batteries, electronic devices, kitchen
                tools2.
                Low carbon acid wash steel
            
            Food
                packaging, dry batteries, electronic devices, kitchen
                tools3.
                Low carbon hard-rolled steel
            
            Food
                packaging, dry batteries, electronic devices, kitchen
                tools4.
                High carbon cold-rolled steel
            
            Automobile
                components, saw blades, weaving needles, springs5.
                High carbon hard-rolled steel
            
            Automobile
                components, saw blades, weaving needles, springs6.
                High end cold-rolled steel
            
            Microchips
                in the mobile phone industry





The
      Company currently produces extremely thin cold-rolled precision steel strips
      ranging from 3.0 mm to 0.03 mm. The Company also currently provides heat
      treatment and cutting of medium and high carbon hot-rolled steel strips and
      chrome stainless steel series not exceeding 3.0 millimeters fineness. Currently,
      the Company’s specialty precision products are mainly used in the manufacture of
      automobile parts and components, food packaging materials, saw blades, textile
      needles, microelectronics, packing and containers.





As
      of
      March 31, 2007, Chengtong had an annual production capacity of approximately
      145,000 tons. **** The
      new
      Phase 2 production facilities, which added approximately 10,000 square meters
      of
      production area, and an office building were completed in August 2006 and
      product trial runs commenced in September 2006. Actual production commenced
      in October 2006. In addition, with the completion of the new production
      facilities, Chengtong installed one 1,400mm width cold roll mill, adding a
      further 150,000 tons to the Company’s annual production capacity. The
      installation of a 1,700mm cold roll mill, with a further 150,000 tons of
      capacity, is expected to be completed prior to the end of the year 2007. The
      directors of the Company believe that the increased production capacity of
      approximately 300,000 tons from the two new mills will be fully utilized within
      two to three years after commencement of operation.





The
      new
      production facilities will focus on the production of high carbon, high strength
      cold-rolled steel products and the production of more complex precision steel
      products that can not be manufactured in the Company’s current rolling mill,
      while the facilities are also able to process the low carbon materials. The
      Company’s existing facilities will primarily manufacture low carbon cold-rolled
      steel products to maximize efficiency. Actual product mix from each period,
      however, may vary depending on customer demand and strategic
      allocation.





*Raw
      Materials*





The
      Company is not dependent on any one single supplier for supply of hot-rolled
      de-scaled (pickled) coils and steel sheet. Over 40 steelmakers supply hot-rolled
      de-scaled (pickled) coils and steel sheets to the Company.






3





Based
      upon information obtained by the Company from the China Metallurgical Industry
      Planning and Research Institute (“CMI”), in 2006 the price of steel has
      generally decreased. However, the cost of imported iron-ores has increased
      substantially. This apparent anomaly was due to excess supplies arising from
      excess capacities of the steel producers and, as a result of the downwards
      pressure on the price of steel, the cost of steel rolls have generally decreased
      in 2005 and 2006. The CMI website may be viewed in English and the website
      URL
      is www.metal.net.cn.





The
      prices of steel rolls are very competitive, very volatile and dependent on
      supplies and demands. To provide some protection from the pressure and
      volatility of the market (i.e., to minimize the amount of purchases that
      Chengtong must make at high prices during the high demand seasons), Chengtong
      makes bulk purchases after taking into account customers’ orders on hand
      whenever steel prices are considered to be lower in the market. As steel rolls
      have an extremely long shelf-life, obsolescence is not a major concern and
      Chengtong may build up its inventory during such periods when prices are
      low.





When
      sales orders are executed between the customers and Chengtong, the
      agreed selling price is based on the cost of raw material at that date,
      effectively allowing Chengtong to pass incremental cost in raw materials to
      its
      customers.    The
      Group’s high precision steel products are sold directly to the end-users in
      various parts of China and the Company’s production is based on confirmed sales
      orders. Generally, an initial deposit (approximately 30% of the aggregate
      contracted sales amount) is pre-paid when a contract is signed.




*Taxes*





As
      a
      wholly foreign owned enterprise, Chengtong is entitled to preferential tax
      advantages, including full tax exemption on the enterprise income tax that
      was
      generated in the first two years after the recoveries of previous losses and
      a
      one-half reduction in the enterprise income tax to a rate of 13.5% for the
      next
      3 years. The full tax exemption for the enterprise income tax expired on
      December 31, 2005 and the right to a one-half reduction on the enterprise income
      tax will expire on December 31, 2008. After such tax holidays, the profits
      generated by Chengtong shall be subject to the full tax rate of
      27%.





*Property*





The
      Company leases for $1 per month the existing 20,000 square meters of production
      and office facilities in Jiading District, Shanghai on four acres of property
      held by Shanghai Tuorong Precision Strip Company Limited, which became a
      subsidiary of the Company in April 2007.  See “Recent Business
      Developments—Shanghai Tuorong Precision Strip Co. Ltd.” and “Liquidity and
      Capital Resources—Contractual Obligations” below and Note 9 and Note 18 of
      Notes to Condensed Consolidated Financial Statements in Part I, Item 1,
“Financial Statements,” for further information.





*Recent
      Business Developments*





New
      Production Facilities .
      Total
      cost of the new production facilities discussed above, including the plant
      and
      machinery, is estimated to be approximately $25 million. As of March 31, 2007,
      capital expenditures totalling $23,646,187 had been recorded. The capital
      expenditures already incurred on the new production facility and plant and
      equipment for the 1,400mm and 1,700mm mills were funded internally and through
      external bank borrowings.





The
      Company intends to raise funds to finance part of the costs of the new
      production facilites and working capital requirements. If for any reason the
      proposed financing is not consummated, the Company intends to use internally
      generated resources and external borrowings to fund the remainder of the
      construction expenditure.




Stock
      Purchase Agreement.On
      February 16, 2007, the Company entered into a Stock Purchase Agreement with
      the
      investors named therein (the “Stock Purchase Agreement”) pursuant to which the
      Company agreed to issue and sell in a private placement (the “Private
      Placement”) up to 7,451,665 new shares of its common stock, par value
      $.001 per share (the “Common Stock”), at a price of $3.00 per share. The Private
      Placement was made to accredited institutional and other investors in the United
      States and elsewhere in reliance upon available exemptions from the registration
      requirements of the Securities Act of 1933, as amended (the “Act”), including
      Section 4(2) thereof and Regulation D and Regulation S promulgated thereunder.
      On February 21, 2007, the Company received gross proceeds of $20,805,000 upon
      the initial closing of the Private Placement. A further closing occurred on
      or about February 23, 2007 with respect to the receipt of additional
      proceeds of $1,549,995. The Company intends to use the proceeds from the Private
      Placement for expansion of its production capacity, to repay certain of its
      outstanding debt and for general working capital purposes. Under
      the
      Stock Purchase Agreement, the Company’s officers and directors, as well as the
      U.S. and International placement agents, entered into lock-up agreements with
      respect to their shareholdings in the Company.  The
      foregoing summary is qualified in its entirety by reference to the Stock
      Purchase Agreement and the form of lock-up agreement, both as incorporated
      herein by reference to Exhibits 10.4 and 10.5 attached hereto. The
      securities sold in The Private Placement have been registered for resale under
      the Act on a registration statement on Form S-3, File No. 333-141588, which
      was
      declared effective by the U.S. Securities and Exchange Commission on April
      4,
      2007.






4




Shanghai
      Tuorong Precision Strip Co. Ltd. On April
      9, 2007, the Shanghai Business and Commercial Administration Authority, Jiading
      District Board, approved the change in shareholdings of Shanghai Tuorong
      Precision Strip Co. Ltd. (“Tuorong”). As a result of such approval, all of the
      share capital of Tuorong has been transferred to Chengtong. See Notes 9 and
      19
      of Notes to Condensed Consolidated Financial Statements.




**Results
      of Operations**





**Summary
                of Condensed Consolidated Statements of
                Operations****(Unaudited)**




**Three
                  Months Ended:**
              
              **Nine
                  Months Ended:****March
                  31,**
              
              **March
                  31,**
              
              **March
                  31,**
              
              **March
                  31,****2007**
              
              **2006**
              
              **2007**
              
              **2006****Revenues**Sales
                  revenues
              
              $
              11,610,673
              
              $
              8,548,765
              
              $
              37,121,603
              
              $
              26,154,013Cost
                  of goods sold
              
              
              8,240,743
              
              
              5,441,194
              
              
              26,635,693
              
              
              17,475,559**Gross
                  profit**
              
              
              3,369,930
              
              
              3,107,571
              
              
              10,485,910
              
              
              8,678,454**Total
                  operating expenses**
              
              
              1,514,483
              
              
              305,110
              
              
              2,325,060
              
              
              876,533**Income
                  from continuing operations**
              
              
              1,855,447
              
              
              2,802,461
              
              
              8,160,850
              
              
              7,801,921**Total
                  other income (expense)**
              
              
              (143,351
              )
              
              (6,437
              )
              
              (461,433
              )
              
              150,476**Provision
                  for (benefit from) income tax**
              
              
              315,879
              
              
              —
              
              
              1,125,787
              
              
              —**Net
                  income from discontinued operations**
              
              
              —
              
              
              333,895
              
              
              831,448
              
              
              446,477**Net
                  income**
              
              $
              1,396,217
              
              $
              3,129,919
              
              $
              7,405,078
              
              $
              8,398,874**Basic
                  earnings per share**From
                  continuing operations
              
              $
              0.05
              
              $
              0.12
              
              $
              0.26
              
              $
              0.30From
                  discontinued operations
              
              $
              0.00
              
              $
              0.01
              
              $
              0.03
              
              $
              0.02Total
              
              $
              0.05
              
              $
              0.13
              
              $
              0.29
              
              $
              0.32**Basic
                  weighted average shares outstanding**
              
              
              28,946,086
              
              
              24,283,725
              
              
              25,815,157
              
              
              24,283,725**Diluted
                  earnings per share**From
                  continuing operations
              
              $
              0.05
              
              $
              0.12
              
              $
              0.26
              
              $
              0.30From
                  discontinuing operations
              
              $
              0.00
              
              $
              0.01
              
              $
              0.03
              
              $
              0.02Total
              
              $
              0.05
              
              $
              0.13
              
              $
              0.29
              
              $
              0.32**Diluted
                  weighted average shares outstanding**
              
              
              29,387,360
              
              
              24,283,725
              
              
              25,960,101
              
              
              24,283,725**The
                  components of comprehensive income:**Net
                  income
              
              $
              1,396,217
              
              $
              3,129,919
              
              $
              7,405,078
              
              $
              8,398,874Foreign
                  currency translation adjustment
              
              
              335,929
              
              
              67,235
              
              
              990,914
              
              
              510,341**Comprehensive
                  income**
              
              $
              1,732,146
              
              $
              3,197,154
              
              $
              8,395,992
              
              $
              8,909,215










5




***Three
      months ended March 31, 2007 compared to the three months ended March 31,
      2006***





Net
      income for the three months ended March 31, 2007, was $1,396,217, as compared
      to
      the three months ended March 31, 2006, which was $3,129,919, resulting in a
      decrease of 55%. Components of sales and expenses resulting in this increase
      in
      net income are discussed below.





Sales
      Revenues. Sales
      revenues in 2007 increased $3,061,908, or 36%, to $11,610,673 from $8,548,765
      in
      2006. The reasons for the increase in sales revenues for the three months ended
      March 31, 2007, were as follows:





·  Sales
      volume increased by 5,576 tons, or 53%, to 16,110 tons for the three months
      ended March 31, 2007, compared to 2006 of 10,534 tons when Chengtong shifted
      to
      balance its sales mix during the three months ended March 31, 2007, compared
      to
      the same corresponding period in 2007, when high precision steel products were
      produced.





·  Average
      selling price per ton decreased by an average of $91 per ton, or 11%, to $721
      per ton for the three months ended March 31, 2007, compared to the same
      corresponding period in 2005 of $812 per ton. This decrease arose from changes
      to the sales/production mix with high carbon sales accounting for 53% of sales
      compared to 58% in 2006 and an increase of low carbon production to 47% compared
      to 42% in 2006.





·  Sales
      revenue generated from low carbon precision steel sales mix increased by
      $1,921,866 or 54% to $5,495,553 from March 31, 2006 sales of $3,573,687. This
      was due to increased sales volume of 1,587 tons of low carbon cold-rolled steel
      compared to March 31, 2006.





·  International
      sales were $1,674,143 for the three months ended March 31, 2007 compared to
      none
      in 2006.





Cost
      of Goods Sold. Cost
      of
      goods increased by $2,799,549, or 51%, to $8,240,743 for the three months ended
      March 31, 2007, from $5,441,194 in 2006. The increase is due in part to a 36%
      increase in sales.





·  Raw
      materials (principally hot-rolled de-scaled (pickled) steel coils) consumed
      increased by $2,664,834, or 63%, quarter-on-quarter to $6,781,677 for the
      quarter ended March 31, 2007 compared to the same corresponding quarter in
      2006
      of $4,206,843. The increase was mainly attributable to increases in sales
      volume by 5,576 tons, or 53%, to 16,110 tons (average cost of raw materials
      consumed was $427 per ton) for the three months ended March 31, 2007 compared
      to
      10,534 tons (average cost of $399 per ton) in 2006.





Gross
      Profit Margin .
      Gross
      profit margin decreased to 29% for the three months ended March 31, 2007,
      compared to the three months ended March 31, 2006 of 36%. This decrease is
      due
      largely to the unfavorable variance in cost of sales by 51% in relation to
      the
      increase in sales revenue by 36%.





Selling
      Expenses .
      Selling
      expenses increased by $37,520, or 68%, to $92,315 for the quarter ended March
      31, 2007, compared to $54,795 for the quarter ended March 31, 2006. The increase
      was primarily due to increases in transportation expenses of $41,543 offset
      by
      decreases in traveling expenses.





Administrative
      expenses increased by $1,160,906, or 464%, to $1,411,106 for the three months ended
      March
      31, 2007, compared to $250,200 for the three months ended March 31, 2006. The
      increase was due to increases in legal and professional expenses of $61,666,
      investor relations expenses of $447,993 and allowance for doubtful accounts
      of
      $519,614.





Depreciation
      expense ,
      a
      portion of which is included as a component of cost of goods sold, increased
      by
      $201,981, or 73%, to $478,576 in 2007, from $276,595 in 2006, due primarily
      to
      an increase in depreciable assets in 2007 when compared to 2006 attributable
      to
      the upgrading of the production facilities in Shanghai.





Interest
      and Finance Costs. For the
      quarters ended March 31, 2007 and 2006, the Company incurred $735,913 and
      $306,477, respectively, in interest and financing costs associated with debts.
      Interest costs of $539,126 incurred during the quarter ended March 31, 2007
      were
      capitalized as part of the construction-in-progress, with the balance of
      $196,787 attributable to interest expense. This increase was due primarily
      to
      increased borrowings to finance the construction-in-progress and plant and
      machinery, specifically for the purpose of increasing production capacity by
      300,000 tons.





Income
      Taxes. The
      provision for income taxes increased to $315,879 for the three months ended
      March 31, 2007 as compared to $ 0 for the three months ended March 31, 2006.
      This increase was due to the expiration of the 100% tax holiday from enterprise
      income taxes imposed in the PRC. For the fiscal year ending June 30, 2007,
      the
      Company is currently allowed a 50% reduction in enterprise income
      taxes.





Discontinued
      Operations .
      Included in income from discontinued operations is the income from Oralabs,
      Inc.’s operations prior to its divestiture on December 28, 2006. The income from
      discontinued operations decreased by $333,895 or 100% from $333,895 during
      the
      three months ended March 31, 2006 to none during the three months ended March
      31, 2007.






6




***Nine
      months ended March 31, 2007 compared to the nine months ended March 31,
      2006***





Net
      income for the nine months ended March 31, 2007 was $7,405,078, compared to
      the
      nine months ended March 31, 2006, which was $8,398,874, resulting in an decrease
      of 12%. Components of sales and expenses resulting in this decrease in net
      income are discussed below.





Sales
      Revenues .
      Sales
      revenues in 2007 increased $10,967,590, or 42%, to $37,121,603 from $26,154,013
      in 2006. The reasons for the increase in sales revenues for the nine months
      ended March 31, 2007 were as follows:





·  Sales
      volume increased by 13,102 tons, or 40%, to 45,603 tons for the nine months
      ended March 31, 2007, compared to 2006 of 32,501 tons. During the nine months
      ended March 31, 2007, Chengtong shifted to balance its sales mix compared to
      the
      corresponding period in 2006, when high precision steel products were
      produced.





·  Average
      selling price per ton increased by an average of $10 per ton, or 1%, to $814
      per
      ton for the nine months ended March 31, 2007, compared to the same corresponding
      period in 2006 of $804 per ton. The average was assisted by increases in three
      major categories of precision steel products: low carbon cold-rolled steel,
      $604
      compared to $504; high carbon hot-rolled steel, $601 compared to $681; and
      high
      carbon cold-rolled steel, $1,983 compared to $2,578. Chengtong also started
      production of high end cold-rolled steel products with a average selling price
      of $9,620 for the nine months ended March 31, 2007.





·  International
      sales increased to $3,333,163 for the nine months ended March 31, 2007, compared
      to none in 2006.





Cost
      of Goods Sold .
      Cost of
      goods sold increased by $9,178,134, or 52%, to $26,653,693 for the nine months
      ended March 31, 2007, from $17,475,559 in 2006. The increase is due in large
      part to a 42% increase in sales.





·  Raw
      materials (principally hot-rolled de-scaled (pickled) steel coils) consumed
      increased by $8,080,471, or 53%, to $16,335,269 for the nine months ended March
      31, 2007, compared to the corresponding nine months in 2006 of $15,126,475.
      The
      increase was mainly attributable to increases in sales volume by 13,102 tons,
      or
      40%, to 45,603 tons (average cost of raw materials consumed was $509 per ton)
      for the nine months ended March 31, 2007, compared to 32,501 tons (average
      cost
      of $465 per ton) in 2006.





Gross
      Profit Margin .
      Gross
      profit margin decreased to 28% for the nine months ended March 31, 2007,
      compared to the nine months ended March 31, 2006 of 33%. This decrease is due
      largely to the unfavorable variance in cost of sales by 52% in relation to
      the
      increase in sales revenue by 42%.





Selling
      Expenses. Selling
      expenses increased by $99,532 or 102%, to $196,705 for the nine months ended
      March 31, 2007, compared to $97,173 for the nine months ended March 31, 2006.
      The increase was due to increases in transportation expenses of $75,483,
      advertising of $7,391, insurance of $4,079, entertainment expense of $5,682
      and
      traveling expense of $7,743.





Administrative
      expenses. increased by $1,346,440, or 180%, to $2,096,031 for the nine months ended March
      31, 2007, compared to $749,591 for the nine months ended March 31, 2006. The
      increase was due to increases in investor relations expenses of $447,993,
      allowance for doubtful accounts of $519,614, legal and professional expenses
      of
      $24,737 and salaries of $47,222.





Depreciation
      expense ,
      a
      portion of which is included as a component of cost of goods sold, increased
      by
      $156,831, or 17%, to $1,095,981 in 2007, from $939,150 in 2006. The
      increase was due primarily to an increase in depreciable assets in 2007
      when compared to 2006 due to the upgrading of the production
      facilities.





Interest
      and Finance Costs. For the
      nine months ended March 31, 2007 and 2006, the Company incurred $1,551,681
      and
      $632,287, respectively, in interest and financing costs associated with debts.
      Interest costs of $1,036,812 incurred during the nine months ended March 31,
      2007 were capitalized as part of the construction-in-progress, with the balance
      of $514,869 attributable to interest expense. This increase was due primarily
      to
      increased borrowings to finance the construction-in-progress and plant and
      machinery, specifically for the purpose of increasing production capacity by
      300,000 tons.





Income
      taxes. The
      provision for income taxes increased to $1,125,787 for the nine months ended
      March 31, 2007, compared to none for the nine months ended March 31, 2006.
      This
      increase was due to the expiration of the 100% tax holiday from enterprise
      income taxes imposed in the PRC. For the fiscal year ending June 30, 2007,
      the
      Company is currently allowed a 50% reduction in enterprise income
      taxes.





Discontinued
      Operations .
      Included in income from discontinued operations is the income from Oralabs,
      Inc.’s operations prior to its divestiture on December 28, 2006. The income from
      discontinued operations increased by $384,971, or 86%, from $446,477 during
      the
      nine months ended March 31, 2006 to $831,448 during the nine months ended March
      31, 2007.




**Liquidity
      and Capital Resources**





Net
      cash
      flow provided by operating activities for the nine months ended March 31, 2007,
      was $2,952,148 compared with $9,898,126 provided by operating activities for
      the
      nine months ended March 31, 2006, for a net decrease of $6,945,978. This
      decrease was due primarily to a $11,548,066 increase in inventory combined
      with
      a $6,197,997 increase in advances to suppliers and a $1,553,730 increase in
      taxes payable offset in part by decreases in accounts receivable of $8,200,648
      and an increase in accounts payable and accrued expenses of $1,439,529 during
      2007.






7




Net
      cash
      flow used in investing activities for the nine months ended March 31, 2007,
      was
      $10,329,164 compared to $22,130,609 for the nine months ended March 31, 2006.
      The decrease in investing activity was due to substantial decreases in the
      amount spent on construction-in-progress during 2007 relating to the new
      production facilities in Shanghai.





Net
      cash
      flow provided by financing activities for the nine months ended March 31, 2007
      was $17,832,665 compared to $10,515,802 provided by financing activities for
      the
      nine months ended March 31, 2006. Both years reflect substantial borrowing
      which
      was incurred for expansion of the operations and to finance the
      construction-in-progress on new facilities. Repayments on advances from
      directors in 2007 offset the bank borrowings. During the nine months ended
      March
      31, 2007, the Company also received $19,464,450 in stock proceeds and
      restructuring contributions.





**Contractual
      Obligations**





The
      following table is a summary of the Company’s contractual obligations as of
      March 31, 2007:




**Payments
                  Due by Period**Contractual
                  Obligations
              
              Total
              
              Less
                  than 1 Year
              
              2-3
                  Years
              
              4-5
                  YearsNotes
                  payable
                (Principal
                  and interest)
              
              $
              8,959,330
              
              $
              8,959,330
              
              $
              —
              
              $
              —Long-term
                  debt
              
              
              15,051,633
              
              
              10,923,671
              
              
              4,127,962
              
              
              —(Principal
                  and interest)Purchase
                  obligation for construction projects
              
              
              1,629,453
              
              
              1,629,453
              
              
              —
              
              
              —$
              25,640,416
              
              $
              21,512,454
              
              $
              4,127,962
              
              $
              —





Notes
      payable consisted of:





Bank
      note, dated September 22, 2005, of $8,335,346, with an interest rate of 15%
      over
      the standard market rate set by the People’s Bank of China for Renminbi loans,
      secured by land, buildings and machinery that matures on December 31,
      2007.





Other
      unsecured notes payable with no stated interest or fixed terms of $623,984.





Long-term
      debt consisted of:





Bank
      loan, dated October 14, 2004, of $8,251,350, due July 31, 2007, at an interest
      rate of 3% over the 10% of the standard market rate set by the People’s Bank of
      China for Renminbi loans, secured by land, buildings and machinery.





Bank
      loan, dated September 22, 2005, payable over 4 years ending August 31, 2009,
      at
      an interest rate of 15% over the standard market rate set by the People’s Bank
      of China for Renminbi loans, secured by land, buildings and
      machinery.





Purchase
      obligation for construction projects consists of the amounts obligated on
      Chengtong’s new production facilities.





As
      of
      December 31, 2006, Wo Hing Li, the Company’s Chief Executive Officer and
      Chairman, had advanced an aggregate of $8,840,990 (based upon exchange rates
      at
      December 31, 2006 between the U.S. Dollar and Chinese Yuan of 7.804 Yuan to
      the
      Dollar) for construction costs incurred for Chengtong’s production facilities on
      land to which the land rights are owned by Tuorong. Following receipt of local
      governmental approval in China on April 9, 2007 for the transfer of the land
      rights and the related properties to Chengtong, the related costs paid by Wo
      Hing Li will become due and owing to Mr. Li by the Company. On February 13,
      2007, Wo Hing Li entered into a Debt Reduction Agreement, as amended on February
      20, 2007, with the Company and PSHL such that, upon the occurrence of such
      asset
      transfer to Chengtong, he will contribute $3,839,607 as additional paid-in
      capital to the Company and the balance due to him in respect of such asset
      transfer is to be converted into common stock of the Company. Mr. Li has also
      agreed to convert current debt outstanding and payable to him into shares of
      the
      Company's common stock. In the absence of shareholder approval, the
      conversion into common stock of the amounts due Dr. Li may not be effected
      at a
      price below the closing bid of the common stock on The NASDAQ Capital Market
      on
      the business day prior to such conversion. Mr. Li has agreed to convert the
      net
      amount owed to him of approximately $6.8 million into shares of the
      Company’s common stock on May 18, 2007, at the closing bid price as reported on
      The NASDAQ Capital Market on May 17, 2007. See
      Notes
      9 and 19 of Notes to Condensed Consolidated Financial Statements contained
      in Part I, Item I, of this Quarterly Report. See also Item 5. Other Information
      below. The
      foregoing summary is qualified in its entirety by reference to the Debt
      Reduction Agreement and the Amendment thereto, which are attached hereto as
      Exhibits 10.1 and 10.3 to this Quarterly Report and incorporated herein by
      reference.




8


**Item
      3. Quantitative and Qualitative Disclosures about Market
      Risk**





The
      Company has exposure to several types of market risk: changes in foreign
      currency exchange rates, interest rates and commodity prices. The Company
      neither holds nor issues financial instruments for trading purposes nor does
      the
      Company make use of derivative instruments to hedge the risks discussed
      below.





The
      following sections provide quantitative information on the Company’s exposure to
      market risks. Its 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
      conducts operations principally in the Chinese Renminbi. Save for the recent
      exports to Thailand and the Philippines, all of the Company’s local sales
      revenues are collected in and substantially all of its expenses are paid in
      the
      Chinese Renminbi. The Company faces foreign currency rate translation risk
      when
      Chengtong’s results are translated to U.S. Dollars, as well as foreign currency
      rate transaction risk with respect to sales outside of China and with respect
      to
      financial instruments denominated in foreign currencies. The results of
      operations denominated in foreign currency are translated at the average rate
      of
      exchange during the reporting period. Assets and liabilities denominated in
      foreign currencies at the balance sheet date are translated at the market rate
      of exchange ruling at that date. The registered equity capital denominated
      in
      the functional currency is translated at the historical rate of exchange at
      the
      time of capital contribution.





The
      Chinese Renminbi 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,
      2007 the exchange rate was 7.74 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) the income
      and profit of the Company 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, 2007, the Group’s outstanding financial instruments with foreign currency
      exchange rate risk exposure had an aggregate fair value of $12 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 $1.2 million
      at
      March 31, 2007.





**Interest
      Rates**





The
      Group
      is subject to interest rate risk on its non-derivative financial instruments.
      The Group does not hedge its interest rate risk. At March 31, 2007, the Group’s
      total bank debt outstanding was $24,010,963, all of which was interest-bearing.
      Approximately 80% 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,
      the
      Company will be liable for higher interest payments to its lenders. For the
      current financial year, annual interest on loans is anticipated to be
      approximately $1.8 million. The impact of a 1% increase in interest rates will
      increase interest expense by approximately $240,000. As the Company’s short-term
      borrowings mature, it will be required to either repay or refinance these
      borrowings. An increase in short-term interest rates at the time that the
      Company seeks to refinance short-term borrowings may increase the cost of
      borrowings, which may adversely affect the Company’s earnings and cash available
      for distribution to its shareholders.





At
      March
      31, 2007, the aggregate fair value of the Group’s financial instruments with
      exposure to interest rate risk was $24 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 $2.4 million at March 31,
      2007.





**Commodity
      Prices**





Steel
      producers, such as 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. 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, 2007 and does
      not
      currently hedge its exposure to price fluctuations in the raw materials and
      energy required for the manufacture of its products.






9





**Item
      4.****Controls
      and Procedures.**





(a) **Disclosure
      Controls and Procedures** . The
      Company's President and its Chief Financial Officer, after evaluating the
      effectiveness of the Company's disclosure controls and procedures (as defined
      in
      Rules 13a-14(c) and 15d-14(c) under the Exchange Act as of the last day of
      the
      period covered by this Quarterly Report (the "Evaluation Date")), have concluded
      that as of the Evaluation Date, the Company's disclosure controls and procedures
      were adequate and effective to ensure that material information relating to
      the
      Company and its consolidated subsidiaries would be made known to them by others
      within those entities, particularly during the period in which this Quarterly
      Report on Form 10-Q was being prepared **.**





(b) **Changes
      in Internal Control Over Financial Reporting** . There
      were no changes in the Company’s internal control over financial reporting (as
      such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange
      Act)
      during the Company’s third quarter of fiscal 2007 that materially affected, or
      are reasonably likely to materially affect, the Company’s internal control over
      financial reporting.





10


**Part
      II - Other Information**




**Item
      1.**  **Legal
      Proceedings.**





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





**Item
      1A.**  **Risk
      Factors.**





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




The
      realization of any of the risks described below could have a material adverse
      effect on the Company’s business, results of operations and future
      prospects.




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




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




*Rapidly
      growing demand and supply in China and other developing economies may result
      in
      additional excess worldwide capacity and falling steel prices.*




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




*Increases
      in prices and limited availability of raw materials and energy may constrain
      operating levels and reduce profit margins.*




Steel
      producers 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. 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. Steel producers have periodically
      been
      faced with problems in receiving sufficient raw materials and energy in a timely
      manner, resulting in production curtailments. These production curtailments
      and
      escalated costs have reduced profit margins and may continue to do so in the
      future, which could have a material adverse effect upon the Company and its
      results of operations.




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




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




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




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






11




*The
      Company faces significant competition from competitors who have greater
      resources than the Company, and the Company may not have the resources necessary
      to successfully compete with them.*




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




*The
      Company produces a limited number of products.*




Cold-rolled
      specialty precision steel is a relatively new industry in China; manufacturers
      previously relied on imports from Japan, Korea, the European Union and the
      United States. Accordingly, the average quality and standards of China’s high
      precision steel industry lags behind the international norm. During the last
      three years, the Company believes that it has developed a nationally
      recognizable brand, however, it has not yet established an internationally
      recognizable brand for its specialty steel products. As of March 31, 2007,
      the
      Company offered more than 40 high
      precision steel products of over one hundred specifications. Currently the
      Company produces six major categories and over ten types of high precision
      steel
      products. However, there are many other specialty precision steel products
      of
      similar nature in the market and the narrow band of the Company’s precision
      steel products may negatively impact the Company’s financial performance should
      there be drastic changes in market demands and/or competition.




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




Through
      March 2007 ,
      China’s
      total production of cold-rolled steel sheets was approximately 3.36 million
      tons, an increase of 47.3% over the comparable period in 2006. However, domestic
      production continues to be insufficient to meet demand. As a result, China
      continues to import a significant portion of its steel products. Foreign
      competitors may have lower labor costs, and are often owned, controlled or
      subsidized by their governments, which allows their production and pricing
      decisions to be influenced by political and economic policy considerations
      as
      well as prevailing market conditions. Import levels may also be impacted by
      decisions of government agencies, under trade laws. Increases in future levels
      of imported steel could negatively impact future market prices and demand levels
      for steel produced by the Company.




*The
      Company has substantial indebtedness with floating 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, 2007, the Group’s
      total bank debt outstanding was $24,010,963, all of which was interest-bearing.
      Approximately 80% 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,
      the
      Company will be liable for higher interest payments to its lenders. For the
      current financial year, annual interest on loans is anticipated to be
      approximately $1.8 million. The impact of a 1% increase in interest rates will
      increase interest expense by approximately $240,000. As the Company’s short-term
      borrowings mature, it will be required to either repay or refinance these
      borrowings. An increase in short-term interest rates at the time that the
      Company seeks to refinance short-term borrowings may increase the cost of
      borrowings, which may adversely affect the Company’s earnings and cash available
      for distribution to its shareholders.





At
      March
      31, 2007, the aggregate fair value of the Group’s financial instruments with
      exposure to interest rate risk was $24 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 shirt
      in
      the yield curve, would be approximately $2.4 million at March 31,
      2007.




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




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





*Termination
      of preferential taxation policy may negatively impact our
      profitability.*




As
      a
      wholly foreign owned enterprise, Chengtong is entitled to preferential tax
      advantages, including full tax exemption on the enterprise income tax that
      was
      generated in the first two years, after the recoveries of previous losses,
      and a
      one-half reduction in the enterprise income tax, to a rate of 13.5%, for the
      next 3 years. The full tax exemption for the enterprise income tax expired
      on
      December 31, 2005 and the one-half reduction on the enterprise profit tax will
      expire on December 31, 2008. After such tax holidays, profits generated by
      the
      Company shall be subject to the full tax rate of 27%. In the event that the
      Company no longer receives preferential tax treatment, such a condition would
      have a material adverse effect on the results of its operations.




12




*Protection
      and infringement of intellectual property.*




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




*The
      Company depends upon its largest customers for a significant portion of its
      sales revenue, and the Company cannot be certain that sales to these customers
      will continue. If sales to these customers do not continue, then the Company’s
      sales may decline and our business may be negatively impacted.*




The
      Company currently supplies its high precision steel products to 12 major
      customers in the Chinese domestic market. For the years ended June 30, 2006
      and
      2005, sales revenues generated from the top five major customers amounted to
      50%
      and 88% of total sales revenues, respectively; sales to the largest single
      customer for the same periods amounted to 15% and 28% of total sales revenues,
      respectively. For the nine months ended March 31, 2007 and 2006, sales to
      Chengtong’s largest customer in each such period amounted to 13 %
      and
      19 %,
      respectively. The Company does not enter into long-term contracts with its
      customers, and therefore cannot be certain that sales to these customers will
      continue. The loss of any of our largest customers would likely have a material
      negative impact on the Company’s sales revenues and business.




*Defects
      in the Company’s products could impair the Company’s ability to sell its
      products or could result in litigation and other significant
      costs.*




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





*If
      the Company’s production facilities were destroyed or significantly damaged as a
      result of fire or some other natural disaster, the Company would be adversely
      affected.*




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




*Judgments
      against the Company and management may be difficult to obtain or
      enforce.*




The
      Company’s principal executive offices are located in Hong Kong, PRC. Outside the
      United States, it may be difficult for investors to enforce judgments obtained
      against the Company in actions brought in the United States, including actions
      predicated upon the civil liability provisions of federal securities laws.
      In
      addition, most of the Company’s officers and directors reside outside of the
      United States and the assets of these persons are located outside of the United
      States. As a result, it may not be possible for investors to effect service
      of
      process within the United States upon these persons, or to enforce against
      the
      Company or these persons judgments predicated upon the liability provisions
      of
      United States federal securities laws.




13




*The
      Company may not pay dividends in the future.*




The
      Company may not be able to declare dividends or the Board of Directors may
      decide not to declare dividends in the future.




**Risks
      Relating to China**




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




Chengtong’s
      manufacturing facility is located in China. As of March 31, 2007, all of the
      Company’s assets are located in China and, except for a small volume of exports
      to Thailand and the Philippines, all of its sales revenues are generated in
      China. Accordingly, the Company’s results of operations, financial state of
      affairs and future growth are, to a significant degree, subject to China’s
      economic, political and legal development and related uncertainties. Changes
      in
      policies by the Chinese government resulting in changes in laws or regulations
      or the interpretation of laws or regulations, confiscatory taxation, changes
      in
      employment restrictions, restrictions on imports and sources of supply, import
      duties, corruption, currency revaluation or the expropriation of private
      enterprise could materially and adversely affect the Company. Over the past
      several years, the Chinese government has pursued economic reform policies
      including the encouragement of private economic activities and greater economic
      decentralization. If the Chinese government does not continue to pursue its
      present policies that encourage foreign investment and operations in China,
      or
      if these policies are either not successful or are significantly altered, then
      the Company’s business could be adversely affected. Chengtong could even be
      subject to the risk of nationalization, which could result in the total loss
      of
      investment. Following the Chinese government’s policy of privatizing many
      state-owned enterprises, the Chinese government has attempted to augment its
      revenues through increased tax collection. Continued efforts to increase tax
      revenues could result in increased taxation expenses being incurred by the
      Company. Economic development may be limited as well by the imposition of
      austerity measures intended to reduce inflation, the inadequate development
      of
      infrastructure and the potential unavailability of adequate power and water
      supplies, transportation and communications.




*Fluctuations
      in exchange rates of the Renminbi could adversely affect the value of and
      dividends, if any, payable of shares of the Company’s common
      stock.*




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





The
      Chinese Renminbi 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,
      2007 the exchange rate was 7.74 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) the income
      and profit of the Company 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, 2007, the Group’s outstanding financial instruments with foreign currency
      exchange rate risk exposure had an aggregate fair value of $12 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 $1.2 million
      at
      March 31, 2007.





*Uncertainty
      relating to the laws and regulations in China.*




The
      Chinese legal system is a civil law system based on written statutes. Unlike
      common law systems, it is a system in which decided legal cases have little
      precedential value. In 1979, the Chinese government began to promulgate a
      comprehensive system of laws and regulations governing economic matters in
      general. Legislation over the past 25 years has significantly enhanced the
      protections afforded to various forms of foreign investment in China.
      Enforcement of existing laws or agreements may be sporadic and implementation
      and interpretation of laws inconsistent. The Chinese judiciary is relatively
      inexperienced in enforcing the laws that exist, leading to a higher than usual
      degree of uncertainty as to the outcome of any litigation. Even where adequate
      law exists in China, it may not be possible to obtain swift and equitable
      enforcement of that law. The legal system in China cannot provide shareholders
      with the same level of protection as in the United States. Chengtong is governed
      by the laws and regulations generally applicable to local enterprises, and
      those
      laws and regulations have been recently introduced, remain experimental in
      nature and are subject to changes and further amendments.




14




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




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




*Future
      changes in the labor laws in China may result in the continued increase in
      labor
      costs.*




The
      Company has recently experienced an increase in the cost of labor. Any future
      changes in the labor laws in China could result in the Company having to pay
      increased labor costs. There can be no assurance that the labor laws will not
      change, which may have a material adverse effect upon the Company’s business and
      results of operations.




**Risks
      Relating to Our Common Stock**




*The
      market price for shares of our common stock could be volatile; the sale of
      material amounts of our common stock could reduce the price of our common stock
      and encourage short sales.*




Our
      common stock is listed on The NASDAQ Capital Market under the symbol “CPSL.” The
      market price for the shares of our common stock may fluctuate in response to
      a
      number of factors, many of which are beyond our control. Such factors may
      include, without limitation, the general economic and monetary environment,
      quarter-to-quarter variations in our anticipated and actual operating results,
      future financing activities and the open-market trading of our shares, in
      particular.




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




As
      of May
      11, 2007, 39.5%, or 13,964,883 shares, of our issued and outstanding common
      stock was not owned by affiliates, of which 10,338,729 were unrestricted and
      free to trade. Thus, the market price for our common stock is subject to
      volatility and holders of common stock may be unable to resell their shares
      at
      or near their original purchase price or at any price. In the absence of an
      active trading market:




·
            investors
                may have difficulty buying and
                selling;




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




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




*Our
      common stock price is volatile and could decline in the
      future.*





The
      stock
      market, in general, has experienced extreme stock price fluctuations. In some
      cases, these fluctuations have been unrelated to the operating performance
      of
      the affected companies. Many companies with Chinese operations have experienced
      dramatic volatility in the market prices of their common stock. We believe
      that
      a number of factors, both within and outside of our control, could cause the
      price of our common stock to fluctuate, perhaps substantially. Factors such
      as
      the following could have a significant adverse impact on the market price of
      our
      common stock:




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




·
            our
                financial position and results of
                operations;




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




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




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




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




·
            changes
                in interest rates; and




·
            general
                economic and other national
                conditions.






15




*Shares
      eligible for future sale may adversely affect the market price of our common
      stock.*





From
      time
      to time, certain of our stockholders may be eligible to sell all or some of
      their shares of common stock by means of ordinary brokerage transactions in
      the
      open market, pursuant to Rule 144 promulgated under the Securities Act, subject
      to certain limitations. In general, pursuant to Rule 144, a stockholder (or
      stockholders whose shares are aggregated) who has satisfied a one-year holding
      period may, under certain circumstances, sell within any three-month period
      a
      number of securities which does not exceed the greater of 1% of the then
      outstanding shares of common stock or the average weekly trading volume of
      the
      class during the four calendar weeks prior to such sale. Rule 144 also permits,
      under certain circumstances, the sale of securities, without any limitations,
      by
      a non-affiliate of our company that has satisfied a two-year holding period.
      Any
      substantial sale of common stock pursuant to Rule 144 or pursuant to a resale
      prospectus may have an adverse effect on the market price of our common
      stock.




*One
      stockholder exercises significant control over matters requiring shareholder
      approval.*




Wo
      Hing
      Li, the Company’s President, had voting power as of May 11, 2007, equal to
      approximately 57% of our voting securities. As a result, Wo Hing Li, through
      such stock ownership, exercises significant control over all matters requiring
      shareholder approval, including the election of directors and approval of
      significant corporate transactions. This concentration of ownership in Wo Hing
      Li may also have the effect of delaying or preventing a change in control that
      may otherwise be viewed as beneficial by shareholders other than Wo Hing
      Li.




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




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





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




We
      may
      require additional financing to fund future operations, including expansion
      in
      current and new markets. We may not be able to obtain financing on favorable
      terms, if at all. If we raise additional funds by issuing equity securities,
      the
      percentage ownership of our current shareholders will be reduced, and the
      holders of the new equity securities may have rights superior to those of the
      holders of shares of common stock, which could adversely affect the market
      price
      and the voting power of shares of our common stock. If we raise additional
      funds
      by issuing debt securities, the holders of these debt securities would similarly
      have some rights senior to those of the holders of shares of common stock,
      and
      the terms of these debt securities could impose restrictions on operations
      and
      create a significant interest expense for us. At the Company’s Annual Meeting on
      December 27, 2006, we received approval from shareholders to issue an
      undetermined number of our equity securities in an aggregate amount of up to
      22,600,000 shares of our common stock, in connection with potential financings
      on such terms as the Company may determine at the time of such financings and
      in
      reliance upon available exemptions from the registration requirements of the
      Securities Act. Pursuant to such authority and as reported in our Current Report
      on Form 8-K, dated February 16, 2007, we issued a total of 8,379,627 shares
      of
      common stock to accredited institutional and other investors in connection
      with
      a private placement in the United States and elsewhere in reliance on exemptions
      from the registration requirements of the Securities Act.




*We
      may have difficulty raising necessary capital to fund operations as a result
      of
      market price volatility for our shares of common stock.*




In
      recent
      years, the securities markets in the United States have experienced a high
      level
      of price and volume volatility, and the market price of securities of many
      companies have experienced wide fluctuations that have not necessarily been
      related to the operations, performances, underlying asset values or prospects
      of
      such companies. For these reasons, our shares of common stock can also be
      expected to be subject to volatility resulting purely from market
      forces over which we will have no control. If our business development plans
      are
      successful, we may require additional financing to continue to develop and
      exploit existing and new products and to expand into new markets. The
      exploitation of our products may, therefore, be dependent upon our ability
      to
      obtain financing through debt and equity or other means.




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




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






16




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




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




**Item
      2.**  **Unregistered
      Sales of Equity Securities and Use of Proceeds**





As
      more
      fully disclosed in Item 3.02 of the Company’s Current Report on Form 8-K, filed
      with the Commission and dated as of February 16, 2007 and incorporated herein
      by
      reference, the following unregistered issuances of the Company’s Common Stock
      were made:




(i)
      On
      February 21, 2007, the Company issued 6,934,999 shares of Common Stock in
      the Private Placement for $3.00 per share, pursuant to the Stock Purchase
      Agreement and in reliance upon exemptions from the registration requirements
      of
      the Act provided by Section 4(2) of the Act and Regulation D and Regulation
      S
      thereunder, and in reliance on similar exemptions under the applicable state
      securities laws, to certain institutional accredited and other investors. On
      February 22, 2007, the Company issued an additional 516,665 shares of its common
      stock to additional investors for $3.00 per share in the Private
      Placement. These 7,451,664 shares of the Company’s Common Stock are
      currently registered for resale under the Act on a registration statement on
      Form S-3. The registration statement was declared effective by the Commission
      on
      April 4, 2007 and its Commission file number is 333-141588. The Company will
      not
      receive any proceeds from the sale or other disposition of such registered
      shares of its Common Stock.





(ii)
      On
      or about February 22, 2007, the Company also issued 100,000 shares to the U.S.
      placement agent in the Private Placement as partial compensation for services
      rendered in connection with the Private Placement.





(iii)
      In
      connection with the Private Placement, on or about February 22, 2007, the
      Company issued warrants to the placement agents to purchase an aggregate
      of 1,300,059 shares of Common Stock as partial compensation for services
      rendered in connection with the Private Placement (the “Warrants”). The Warrants
      are immediately exercisable and the holders may purchase Warrant Shares (as
      defined in the Form of Warrant) at any time until the third anniversary of
      the
      date of issue. If the Warrants are exercised in full at the $3.00 per share
      exercise price (the “Exercise Price”), the Company would receive aggregate
      proceeds of approximately $3,900,177. The Exercise Price and the number of
      shares of Common Stock issuable pursuant thereto are subject to customary
      adjustments. The Warrants do not contain any registration rights. The foregoing
      summary is qualified in its entirety by reference to the Form of Warrant, which
      is attached hereto as Exhibit 4.2 and incorporated herein by reference. The
      warrants and the shares issued to the placement agents were issued in reliance
      upon exemptions from the registration requirements of the Act provided by
      Section 4(2) of the Act and Regulation D and Regulation S thereunder and in
      reliance upon exemptions from applicable state securities laws.






(iv)
      On
      February 22, 2007, the Company issued warrants to purchase up to 100,000 shares
      of Common Stock to the Company's investor relations consultants as partial
      compensation for services rendered in execution of the Company’s investor
      relations strategy. These warrants are immediately exercisable and the holders
      may purchase Warrant Shares (as defined in such form of warrant) at any time
      until the third anniversary of the date of issue. If these warrants are
      exercised at the $3.60 per share exercise price, the Company would receive
      aggregate proceeds of approximately $360,000. The Exercise Price and the number
      of shares of Common Stock issuable pursuant thereto are subject to customary
      adjustments. The Warrants do not contain any registration rights. The foregoing
      summary is qualified in its entirety by reference to the form of warrant, which
      is attached hereto as Exhibit 4.4 and incorporated herein by reference. These
      warrants issued to the Company’s investor relations consultants were issued in
      reliance upon exemptions from the registration requirements of the Act provided
      by Section 4(2) of the Act and Regulation D and Regulation S thereunder and
      in
      reliance upon exemptions from applicable state securities laws.






17




(v)
      On or
      about February 22, 2007, the Company issued 827,963 shares to certain existing
      shareholders pursuant to pre-existing anti-dilution rights triggered by the
      Private Placement in reliance upon exemptions from the registration
      requirements of the Act provided by Section 4(2) of the Act and Regulation
      D and
      Regulation S thereunder and in reliance upon exemptions from applicable state
      securities laws.




**Item
      3.**  **Defaults
      Upon Senior Securities**





None.




**Item
      4.**  **Submission
      of Matters to a Vote of Security Holders**





None.





**Item
      5.**  **Other
      Information**





(a)
        On April 9, 2007, the Shanghai Business and Commercial Administration
      Authority, Jiading District Board, approved the change in shareholdings of
      Shanghai Tuorong Precision Strip Co. Ltd. (“Tuorong”), in accordance with an
      agreement entered into in 2002. As a result of such approval, all of the share
      capital of Tuorong has been transferred to Chengtong. See Notes 9 and 19 of
      Notes to Condensed Consolidated Financial Statements included in Part I,
      Item 1, Financial Statements. As a result of the transfer, certain amounts
      are
      due and payable to the Company's Chief Executive Officer, which he has agreed
      to
      convert into shares of the Company's common stock, as described
      under “Liquidity and Capital Resources—Contractual Obligations” in
      Part I, Item 2, which is incorporated herein by reference.





(b)
        None.




**Item
      6.**  **Exhibits**





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





Exhibit
                  No.
              
              Exhibit:3.1
              
              Amended
                  and Restated Articles of Incorporation (incorporated herein by
                  reference
                  to the Company’s Form 8-K, filed January 4, 2007, Exhibit
                  3.1)3.2
              
              Second
                  Amended and Restated Bylaws (incorporated herein by reference to
                  the
                  Company’s Form 10-KSB, filed March 31, 1999, Exhibit
                  3.1.II)4.1
              
              Specimen
                  Certificate for Common Stock (incorporated herein by reference
                  to the
                  Company’s Form 10-Q for the quarterly period ended December 31,
                  2006)4.2
              
              Form
                  of Warrant (incorporated herein by reference to the Company’s Form 8-K,
                  dated February 16, 2007, Exhibit 4.1)4.3
              
              Warrant,
                  dated February 22, 2007, to Belmont Capital Group Limited (incorporated
                  herein by reference to the Company’s Form 8-K, dated February 16, 2007,
                  Exhibit 4.2)4.4
              
              Warrant,
                  dated February 22, 2007, to CCG Elite Investor Relations
                  (incorporated herein by reference to the Company’s Form 8-K, dated
                  February 16, 2007, Exhibit 4.3)10.1
              
              Debt
                  Reduction Agreement, dated February 13, 2007, by and among the
                  Company, Wo
                  Hing Li and Partner Success Holdings Limited (incorporated herein
                  by
                  reference to the Company’s Form 8-K, dated February 13, 2007, Exhibit
                  10.1)10.2
              
              Deed
                  of Release, dated February 13, 2007, from Wo Hing Li, in favor
                  of the
                  Company, Partner Success Holdings Limited and Shanghai Chengtong
                  Precision
                  Strip Co., Ltd. (incorporated herein by reference to the Company’s Form
                  8-K, dated February 13, 2007, Exhibit 10.1)10.3
              
              Amendment
                  to the Debt Reduction Agreement, dated February 20, 2007, by and
                  among the
                  Company, Wo Hing Li and Partner Success Holdings Limited (incorporated
                  herein by reference to the Company’s Form 8-K, dated February 16, 2007,
                  Exhibit 10.4)10.4
              
              Form
                  of Stock Purchase Agreement, by and among the Company and the Investors,
                  dated February 16, 2007
                (incorporated
                  herein by reference to the Company’s Form 8-K, dated February 16, 2007,
                  Exhibit 10.1)10.5
              
              Form
                  of Limited Standstill Agreement (incorporated herein by reference
                  to the
                  Company’s Form 8-K, dated February 16, 2007, Exhibit
                  10.2)




18




21
              
              List
                  of Subsidiaries of the Company (incorporated herein by reference
                  to the
                  Company’s Form 10-Q for the quarterly period ended December 31,
                  2006)
  31(i).1
              
              Certification
                  of President pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
                  Exchange Act.31(i).2
              
              Certification
                  of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
                  of the
                  Securities Exchange Act.32
              
              Certification
                  of President and Chief Financial Officer Pursuant to 18 U.S.C.
                  Section
                  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002




19




SIGNATURES





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




**CHINA
              PRECISION STEEL, INC.**Date: May
              14,
              2007
            By:
            /s/
              Wo Hing LiWo
              Hing LiPresident




20


EXHIBIT
      INDEX




Exhibit
                  No.
              
              Exhibits3.1
              
              Amended
                  and Restated Articles of Incorporation (incorporated herein by
                  reference
                  to the Company’s Form 8-K, filed January 4, 2007, Exhibit
                  3.1)3.2
              
              Second
                  Amended and Restated Bylaws (incorporated herein by reference to
                  the
                  Company’s Form 10-KSB, filed March 31, 1999, Exhibit
                  3.1.II)4.1
              
              Specimen
                  Certificate for Common Stock (incorporated herein by reference
                  to the
                  Company’s Form 10-Q for the quarterly period ended December 31,
                  2006)4.2
              
              Form
                  of Warrant (incorporated herein by reference to the Company’s Form 8-K,
                  dated February 16, 2007, Exhibit 4.1)4.3
              
              Warrant,
                  dated February 22, 2007, to Belmont Capital Group Limited (incorporated
                  herein by reference to the Company’s Form 8-K, dated February 16, 2007,
                  Exhibit 4.2)4.4
              
              Warrant,
                  datedFebruary
                  22, 2007, to CCG Elite Investor Relations (incorporated herein
                  by
                  reference to the Company’s Form 8-K, dated February 16, 2007, Exhibit
                  4.3)10.1
              
              Debt
                  Reduction Agreement, dated February 13, 2007, by and among the
                  Company, Wo
                  Hing Li and Partner Success Holdings Limited (incorporated herein
                  by
                  reference to the Company’s Form 8-K, dated February 13, 2007, Exhibit
                  10.1)10.2
              
              Deed
                  of Release, dated February 13, 2007, from Wo Hing Li, in favor
                  of the
                  Company, Partner Success Holdings Limited and Shanghai Chengtong
                  Precision
                  Strip Co., Ltd. (incorporated herein by reference to the Company’s Form
                  8-K, dated February 13, 2007, Exhibit 10.1)10.3
              
              Amendment
                  to the Debt Reduction Agreement, dated February 20, 2007, by and
                  among the
                  Company, Wo Hing Li and Partner Success Holdings Limited (incorporated
                  herein by reference to the Company’s Form 8-K, dated February 16, 2007,
                  Exhibit 10.4)10.4
              
              Form
                  of Stock Purchase Agreement, by and among the Company and the Investors,
                  dated February 16, 2007
                (incorporated
                  herein by reference to the Company’s Form 8-K, dated February 16, 2007,
                  Exhibit 10.1)10.5
              
              Form
                  of Limited Standstill Agreement (incorporated herein by reference
                  to the
                  Company’s Form 8-K, dated February 16, 2007, Exhibit
                  10.2)
 
 21
              
              List
                  of Subsidiaries of the Company (incorporated herein by reference
                  to the
                  Company’s Form 10-Q for the quarterly period ended December 31,
                  2006)
  31(i).1
              
              Certification
                  of President pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
                  Exchange Act.31(i).2
              
              Certification
                  of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
                  of the
                  Securities Exchange Act.32
              
              Certification
                  of President and Chief Financial Officer Pursuant to 18 U.S.C.
                  Section
                  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                  Act of
                  2002
 21