*Table
        of Contents*







**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10−Q**




(Mark
      One)




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




For
      the
      quarterly period ended: September 30, 2008




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




For
      the
      transition period from ____________ to _____________




Commission
      File Number: 000-23039





**CHINA
      PRECISION STEEL, INC.**


(Exact
      name of registrant as specified in its charter)





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





**18th
      Floor, Teda Building**


**87
      Wing Lok Street,**  **Sheungwan,
      Hong Kong,**


**People’s
      Republic of China**


(Address
      of principal executive offices, Zip Code)




**+1-852-2543-2290**


(Registrant’s
      telephone number, including area code)




_____________________________________________________


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





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
      (or
      for such shorter period that the registrant was required to file such reports),
      and (2) has been subject to such filing requirements for the past 90 days.
      Yes x No
o




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





Large
      Accelerated Filer  o Accelerated
      Filer x


Non-Accelerated
      Filer  o(Do not check if a
      smaller reporting company) Smaller reporting company o





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





The
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of November 10, 2008 is as follows:




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












*Table
        of Contents*




**TABLE
      OF CONTENTS**





**PART
                I**- **FINANCIAL
                INFORMATION**
            **2****ITEM
                1.**
            **FINANCIAL
                STATEMENTS.**
            **2****ITEM
                2.**
            **MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                AND RESULTS OF OPERATIONS.**
            **19****ITEM
                4.**
            **CONTROLS
                AND PROCEDURES.**
            **28****PART
                II - **OTHER
                INFORMATION****
            **29****ITEM
                1.**
            **LEGAL
                PROCEEDINGS.**
            **29****ITEM
                1A.**
            **RISK
                FACTORS.**
            **29****ITEM
                2.**
            **UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF
                PROCEEDS.**
            **29****ITEM
                3.**
            **DEFAULTS
                UPON SENIOR SECURITIES.**
            **29****ITEM
                4.**
            **SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS.**
            **29****ITEM
                5.**
            **OTHER
                INFORMATION.**
            **29****ITEM
                6.**
            **EXHIBITS.**
            **29**





1
 *Table
            of Contents*





**PART
      I**


**FINANCIAL
      INFORMATION**




**ITEM
      1.****FINANCIAL
      STATEMENTS.**





**CHINA
      PRECISION STEEL, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED FINANCIAL STATEMENTS**





PageCondensed
                Consolidated Balance Sheets (unaudited)
            3Condensed
                Consolidated Statements of Operations and Comprehensive Income
                (unaudited)
            4Condensed
                Consolidated Statements of Changes in Stockholders'
                Equity (unaudited)
            5Condensed
                Consolidated Statements of Cash Flows (unaudited)
            6Notes
                to Condensed Consolidated Financial Statements
                (unaudited)
            7





2
 *Table
            of Contents*




**Item
      1. Financial Statements.**




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


**Condensed
      Consolidated Balance Sheets**





**(Unaudited)****September 30,**
            
            **June 30,****Notes**
            
            **2008**
            
            **2008****Assets****Current
                assets**Cash
                and equivalents
            
            
            
            
            $
            10,327,075
            
            $
            18,568,842Accounts
                receivableTrade,
                net of allowances of $1,034,354 and $1,033,479 at September 30 and
                June
                30, 2008, respectively
            
            
            
            
            
            36,535,870
            
            
            33,783,074Bills
                receivables
            
            
            
            
            
            7,260,878
            
            
            4,309,703Other
            
            
            
            
            
            575,519
            
            
            571,746Inventories
            
            
            5
            
            
            18,154,946
            
            
            17,815,087Prepaid
                expenses
            
            
            
            
            
            —
            
            
            58,105Advances
                to suppliers, net of allowance of $2,524,973 and $2,522,837 at September
                30 and June 30, 2008, respectively
            
            
            
            
            
            31,082,560
            
            
            33,027,365**Total
                current assets**
            
            
            
            
            
            103,936,848
            
            
            108,133,922**Property
                and equipment**Property
                and equipment, net
            
            
            6
            
            
            39,214,849
            
            
            39,199,305Construction-in-progress
            
            
            7
            
            
            22,930,167
            
            
            16,476,45462,145,016
            
            
            55,675,759**Intangible
                assets, net**
            
            
            
            
            
            1,626,393
            
            
            1,625,690**Goodwill**
            
            
            
            
            
            99,999
            
            
            99,999**Total
                assets**
            
            
            
            
            $
            167,808,256
            
            $
            165,535,370**Liabilities
                and Stockholders' Equity****Current
                liabilities**Accounts
                payable and accrued liabilities
            
            
            
            
            $
            12,873,381
            
            $
            12,047,981Advances
                from customers
            
            
            8
            
            
            3,710,279
            
            
            6,996,996Other
                taxes payables
            
            
            
            
            
            5,561,006
            
            
            3,976,239Current
                income taxes payable
            
            
            
            
            
            4,746,404
            
            
            4,742,387Notes
                payable
            
            
            9
            
            
            17,392,980
            
            
            17,465,799**Total
                current liabilities**
            
            
            
            
            
            44,284,050
            
            
            45,229,402**Stockholders'
                equity:**Preferred
                stock: $0.001 per value, 8,000,000 shares authorized, no shares
                outstanding at September 30, and June 30, 2008
            
            
            11Common
                stock: $0.001 par value, 62,000,000 shares authorized, 46,562,955
                and
                46,472,955 issued and outstanding September 30, and June 30, 2008
            
            
            11
            
            
            46,563
            
            
            46,473Additional
                paid-in capital
            
            
            11
            
            
            75,642,383
            
            
            75,372,488Accumulated
                other comprehensive income
            
            
            
            
            
            9,368,177
            
            
            9,295,658Retained
                earnings
            
            
            
            
            
            38,467,083
            
            
            35,591,349**Total
                stockholders' equity**
            
            
            
            
            
            123,524,206
            
            
            120,305,968**Total
                liabilities and stockholders' equity**
            
            
            
            
            $
            167,808,256
            
            $
            165,535,370




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





3
 *Table
            of Contents*




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


**Condensed
      Consolidated Statements of Operations**


**For
      the Three Months Ended September 30, 2008 and 2007**


**(Unaudited)**





**Notes**
            
            **2008**
            
            **2007****Revenues**Sales
                revenues
            
            
            
            
            $
            25,350,419
            
            $
            27,187,235Cost
                of goods sold
            
            
            
            
            
            21,397,761
            
            
            20,245,135**Gross
                profit**
            
            
            
            
            
            3,952,658
            
            
            6,942,100**Operating
                expenses**Selling
                expenses
            
            
            
            
            
            211,298
            
            
            100,705Administrative
                expenses
            
            
            
            
            
            462,100
            
            
            486,376Provision
                for bad debts
            
            
            
            
            
            —
            
            
            625,998Depreciation
                and amortization expense
            
            
            
            
            
            26,203
            
            
            13,632**Total
                operating expenses**
            
            
            
            
            
            699,601
            
            
            1,226,711**Income
                from continuing operations**
            
            
            
            
            
            3,253,057
            
            
            5,715,389**Other
                income (expense)**Other
                revenues
            
            
            
            
            
            120,703
            
            
            9,155Other
                expenses
            
            
            
            
            
            —
            
            
            —Interest
                and finance costs
            
            
            
            
            
            (327,405
            )
            
            (442,141
            )**Total
                other income (expense)**
            
            
            
            
            
            (206,702
            )
            
            (432,986
            )**Income
                from continuing operations before income tax**
            
            
            
            
            
            3,046,355
            
            
            5,282,403**Provision
                for (benefit from) income tax**
            
            
            10Current
            
            
            
            
            
            170,621
            
            
            505,725Deferred
            
            
            
            
            
            —
            
            
            (1,064,028
            )Total
                income tax expense
            
            
            
            
            
            170,621
            
            
            (558,303
            )**Net
                income**
            
            
            
            
            $
            2,875,734
            
            $
            5,840,706**Basic
                earnings per share**
            
            
            12
            
            $
            0.06
            
            $
            0.16**Basic
                weighted average shares outstanding**
            
            
            
            
            
            46,556,107
            
            
            37,378,143**Diluted
                earnings per share**
            
            
            12
            
            $
            0.06
            
            $
            0.15**Diluted
                weighted average shares outstanding**
            
            
            
            
            
            46,692,711
            
            
            38,397,325**The
                Components of comprehensive income:**Net
                income
            
            
            
            
            $
            2,875,734
            
            $
            5,840,706Foreign
                currency translation adjustment
            
            
            
            
            
            72,519
            
            
            905,537**Comprehensive
                income**
            
            
            
            
            $
            2,948,253
            
            $
            6,746,243




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





4
 *Table
            of Contents*




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


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


**For
      the Year Ended June 30, 2008 and the Three Months Ended September 30,
      2008**





**Accumulated****Additional**
            
            **Other**
            
            
            
            **Total****Ordinary Shares**
            
            **Paid-in**
            
            **Comprehensive**
            
            **Retained**
            
            **Stockholders'****Share**
            
            **Amount**
            
            **Capital**
            
            **Income**
            
            **Earnings**
            
            **Equity**Balance at June
                30, 2007
            
            
            37,378,143
            
            $
            37,378
            
            $
            31,867,063
            
            $
            2,192,160
            
            $
            17,008,238
            
            $
            51,104,839Sale
                of common stock
            
            
            7,100,000
            
            
            7,100
            
            
            44,498,650
            
            
            —
            
            
            —
            
            
            44,505,750Syndication
                fees
            
            
            —
            
            
            —
            
            
            (130,468
            )
            
            —
            
            
            —
            
            
            (130,468
            )Make
                good shares
            
            
            2,000,000
            
            
            2,000
            
            
            (2,000
            )
            
            —
            
            
            —
            
            
            —Exercise
                of warrants
            
            
            765,872
            
            
            766
            
            
            1,729,235
            
            
            —
            
            
            —
            
            
            1,730,001Cancellation
                of stock
            
            
            (771,060
            )
            
            (771
            )
            
            (2,589,992
            )
            
            —
            
            
            —
            
            
            (2,590,763
            )Foreign
                currency translation Adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            7,103,498
            
            
            —
            
            
            7,103,498Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            18,583,111
            
            
            18,583,111Balance
                at June 30, 2008
            
            
            46,472,955
            
            
            46,473
            
            
            75,372,488
            
            
            9,295,658
            
            
            35,591,349
            
            
            120,305,968Exercise
                of warrants
            
            
            90,000
            
            
            90
            
            
            269,895
            
            
            —
            
            
            —
            
            
            269,985Foreign
                currency translation Adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            72,519
            
            
            —
            
            
            72,519Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,875,734
            
            
            2,875,734Balance
                at September 30, 2008(unaudited)
            
            
            46,562,955
            
            $
            46,563
            
            $
            75,642,383
            
            $
            9,368,177
            
            $
            38,467,083
            
            $
            123,524,206





5
 *Table
            of Contents*




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


**Condensed
      Consolidated Statements of Cash Flows**


**For
      the Three Months Ended September 30, 2008 and 2007**


**(Unaudited)**





**2008**
            
            **2007****Cash
                flows from operating activities****Net
                Income**
            
            $
            2,875,734
            
            $
            5,840,706**Adjustments
                to reconcile net income to net cash provided by operating
                activities**Depreciation
                and amortization
            
            
            843,290
            
            
            493,613Allowance
                for bad and doubtful debts
            
            
            —
            
            
            625,998**Net
                changes in assets and liabilities:**Accounts
                receivable, net
            
            
            (5,622,477
            )
            
            (23,095,388
            )Inventories
            
            
            (325,089
            )
            
            8,039,005Deposits
            
            
            —
            
            
            82,758Prepayments
            
            
            —
            
            
            (14,702
            )Advances
                to suppliers
            
            
            1,974,708
            
            
            284,972Accounts
                payable and accrued expenses
            
            
            885,734
            
            
            (1,362,139
            )Advances
                from customers
            
            
            (3,295,867
            )
            
            6,549,629Other
                taxes payable
            
            
            1,582,948
            
            
            1,230,830Current
                income taxes
            
            
            —
            
            
            1,013,596Deferred
                income taxes
            
            
            —
            
            
            (1,064,028
            )**Net
                cash (used in) provided by operating activities**
            
            
            (1,081,019
            )
            
            (1,375,150
            )**Cash
                flows from investing activities**Purchases
                of property, plant and equipment including construction in
                progress
            
            
            (7,263,898
            )
            
            (1,016,793
            )**Net
                cash (used in) investing activities**
            
            
            (7,263,898
            )
            
            (1,016,793
            )**Cash
                flows from financing activities**Exercise
                of common stock warrants
            
            
            269,985
            
            
            —Advances
                from/(to) directors, net
            
            
            —
            
            
            3,047,524Notes
                payable proceeds
            
            
            —
            
            
            16,490,833Repayments
                of notes payable
            
            
            (87,611
            )
            
            (17,084,041
            )**Net
                cash provided by financing activities**
            
            
            182,374
            
            
            2,454,316**Effect
                of exchange rate**
            
            
            (79,224
            )
            
            482,557**Net
                increase (decrease) in cash**
            
            
            (8,241,767
            )
            
            544,930**Cash
                and cash equivalents, beginning of period**
            
            
            18,568,842
            
            
            5,504,862**Cash
                and cash equivalents, end of period**
            
            $
            10,327,075
            
            $
            6,049,792The
                accompanying notes are an integral part of these consolidated financial
                statements.





6
 *Table
            of Contents*





**China
      Precision Steel, Inc.**


Notes
      to the Consolidated Financial Statements





**1.   Description
      of Business**





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




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





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





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





In
      the
      year ended June 30, 2007, we added three indirect subsidiaries to our corporate
      structure. On April 9, 2007, we purchased Shanghai Tuorong Precision Strip
      Company Limited, or Tuorong, through PSHL. The sole activity of Tuorong is
      the
      ownership of a land use right with respect to facilities utilized by Chengtong.
      On April 10, 2007, PSHL purchased for $100,000 Blessford International Limited,
      a British Virgin Islands company. Blessford International Limited does not
      conduct any business, but it owns a single subsidiary, Shanghai Blessford Alloy
      Company Limited, that is a wholly-foreign owned enterprise with limited
      liabilities. Shanghai Blessford was registered on February 24, 2006 in Shanghai
      with a registered capital of $12,000,000 and a defined period of existence
      of 50
      years from February 24, 2006 to February 23, 2056. On May 27, 2008, the
      authorized registered capital was increased to $22,000,000. We intend to hold
      Blessford International Limited as a shell subsidiary. As
      used
      herein, the “Group” refers to the Company, PSHL, Chengtong, Tuorong, Blessford
      International and Shanghai Blessford on a consolidated basis.





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





7
 *Table
            of Contents*





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





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with generally accepted accounting principles for interim
      financial information and with the instructions to Form 10-Q. Accordingly,
      they
      do not include all of the information and footnotes required by generally
      accepted accounting principles for complete financial statements and related
      notes. The accompanying unaudited condensed consolidated financial statements
      and related notes should be read in conjunction with the audited consolidated
      financial statements of the Company and notes thereto for the year ended June
      30, 2008.





In
      the
      opinion of management, the accompanying unaudited condensed consolidated
      financial statements contain all adjustments (which include only normal
      recurring adjustments) necessary to present fairly the balance sheets of China
      Precision Steel, Inc. and subsidiaries as of September 30, 2008 and the results
      of their operations and cash flows for the three months ended September 30,
      2008
      and 2007. The results of operations for the three months ended September 30,
      2008 are not necessarily indicative of the results to be expected for the entire
      year ending June 30, 2009.





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





The
      following is a summary of significant accounting policies:





**Cash
      and Equivalents -** The **** Company
      considers all highly liquid debt instruments purchased with maturity period
      of
      three months or less to be cash equivalents. The carrying amounts reported
      in
      the accompanying consolidated balance sheets 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 September 30, 2008 and June 30, 2008, the Company
      had $1,034,354 and $1,033,479 of allowances for doubtful accounts,
      respectively.





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





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





**Advances
      to Suppliers -** In
      order
      to insure a steady supply of raw materials, the Company is required from time
      to
      time to make cash advances when placing its purchase orders. Cash advances
      are
      shown net of allowances for unrecoverable advances of $2,524,973 and $2,522,837
      at September 30, 2008 and June 30, 2008, respectively.





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





Intangible
      assets of the Company are reviewed annually to determine whether their carrying
      value has become impaired. The Company also re-evaluates the periods of
      amortization to determine whether subsequent events and circumstances warrant
      revised estimates of useful lives. As of September 30, 2008, the Company expects
      these assets to be fully recoverable.





8
 *Table
            of Contents*





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





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


Buildings
            
            
            10
                yearsOffice
                equipment
            
            
            5
                yearsMotor
                vehicles
            
            
            5
                yearsPlant
                and machinery
            
            
            10
                years





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





Property,
      plant and equipment are evaluated annually for any impairment in value. 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 months ended September 30, 2008 and
      2007.





**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 three months ended September 30, 2008 and 2007, the Company
      capitalized no interest to construction-in-progress.





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





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





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





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





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





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





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





9
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            of Contents*





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





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





United
      States





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





BVI





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





PRC





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





*Enterprise
      income tax*





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





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





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.





10
 *Table
            of Contents*





In
      2006,
      the Financial Accounting Standards Board (“FASB”) issued FIN 48, which clarifies
      the application of SFAS No. 109 by defining a criterion that an individual
      income tax position must meet for any part of the benefit of that position
      to be
      recognized in an enterprise’s financial statements and provides guidance on
      measurement, derecognition, classification, accounting for interest and
      penalties, accounting in interim periods, disclosure and transition. In
      accordance with the transition provisions, the Company adopted FIN 48 effective
      January 1, 2007.





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





Based
      on
      all known facts and circumstances and current tax law, the Company believes
      that
      the total amount of unrecognized tax benefits as of September 30, 2008, is
      not
      material to its results of operations, financial condition or cash flows. The
      Company also believes that the total amount of unrecognized tax benefits as
      of
      September 30, 2008, if recognized, would not have a material effect on its
      effective tax rate. The Company further believes that there are no tax positions
      for which it is reasonably possible, based on current Chinese tax law and
      policy, that the unrecognized tax benefits will significantly increase or
      decrease over the next 12 months producing, individually or in the aggregate,
      a
      material effect on the Company’s results of operations, financial condition or
      cash flows.





*Value
      added tax*





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





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





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





For
      the
      three months ended September 30, 2008 and 2007, the Company’s pension cost
      charged to the statements of operations under the plan amounted to $97,399
      and
      $60,599, respectively, all of which have been paid to the National Social
      Security Fund.





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





11
 *Table
            of Contents*





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





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





**Recent
      Accounting Pronouncements** -





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





In
      September 2006, the FASB issued Statement No. 157, “Fair Value
      Measurements” (“SFAS No. 157”). SFAS No. 157 addresses how
      companies should measure fair value when they are required to use a fair value
      measure for recognition or disclosure purposes under generally accepted
      accounting principles. SFAS No. 157 defines fair value, establishes a
      framework for measuring fair value and expands the required disclosures about
      fair value measurements. SFAS No. 157 is effective for fiscal years
      beginning after November 15, 2007, with earlier adoption permitted.
      Management is assessing the impact of the adoption of SFAS No. 157.
      The adoption of SFAS No. 157 did not impact our consolidated financial
      statements in any material respect.





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





In
      February 2007, the FASB issued Statement No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities” (“SFAS No. 159”), an
      amendment of FASB Statement No. 115. SFAS No. 159 addresses how
      companies should measure many financial instruments and certain other items
      at
      fair value. The objective is to mitigate volatility in reported earnings caused
      by measuring related assets and liabilities differently without having to apply
      complex hedge accounting provisions. SFAS No. 159 is effective for
      fiscal years beginning after November 15, 2007, with earlier adoption
      permitted. The adoption of SFAS No. 159 did not impact our consolidated
      financial statements in any material respect.





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




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





12
 *Table
            of Contents*




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





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





The
      Company provides credit in the normal course of business. The Company performs
      ongoing credit evaluations of its customers and clients and maintains allowances
      for doubtful accounts based on factors surrounding the credit risk of specific
      customers and clients, historical trends, and other information. Trade accounts
      receivable, net totaled $36,535,870 and $33,783,074 as of September 30, 2008
      and
      June 30, 2008, respectively.





The
      Company’s list of customers whose purchases exceeded 10% of total sales during
      the three months ended September 30, 2008 and 2007 is as follows:


***Customers***
              
              *2008*
              
              *% to*
                *sales*
              
              *2007*
              
              *% to*
                *sales*Shanghai Ruixuefeng Metals Co., Limited
              
              
              —
              
              
              —
              
              
              8,648,752
              
              
              32Shanghai
                  Changshuo Stainless Steel Co., Ltd.
              
              
              3,414,685
              
              
              13
              
              
              —
              
              
              —Shanghai
                  Bayou Industrial Co. Ltd.
              
              
              2,961,211
              
              
              12
              
              
              —
              
              
              —Shanghai
                  Shengdejia Metal Co. Ltd.
              
              
              —
              
              
              —
              
              
              3,288,926
              
              
              12




The
      Company’s list of suppliers whose sales exceeded 10% of total consumption during
      the three months ended September 30, 2008 and 2007 is as follows:





***Suppliers***
            
            *2008*
            
            *% to*
              *consumption*
            
            *2007*
            
            *% to*
              *consumption*BaoSteel
                Steel Products Trading Co. Ltd.
            
            
            7,571,158
            
            
            40
            
            
            1,257,169
            
            
            7Shanghai
                Pinyun Steel Co., Ltd
            
            
            3,630,582
            
            
            19
            
            
            3,262,936
            
            
            18Hangzhou
                Relian Company Limited
            
            
            —
            *
            
            —
            *
            
            2,291,248
            
            
            12





13
 *Table
            of Contents*





**5.**  **Inventories**





As
      of
      September 30, 2008 and June 30, 2008 inventories consisted of the
      following:





**At
                cost:-**
            
            **September 30,**
              **2008**
            
            **June 30,**
              **2008**Raw materials
            
            $
            8,091,779
            
            $
            8,376,173Work
                in progress
            
            
            1,332,217
            
            
            3,247,093Finished
                goods
            
            
            6,428,527
            
            
            3,918,801Consumable
                items
            
            
            2,302,423
            
            
            2,273,020$
            18,154,946
            
            $
            17,815,087





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





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





**September 30,**
              **2008**
            
            **June 30,**
              **2008**Plant
                and machinery
            
            $
            23,399,238
            
            $
            22,725,528Buildings
            
            
            21,716,056
            
            
            21,685,208Motor
                vehicles
            
            
            525,406
            
            
            379,885Office
                equipment
            
            
            197,309
            
            
            185,16145,838,009
            
            
            44,975,782Less:
                Accumulated depreciation
            
            
            (6,623,160
            )
            
            (5,776,477
            )$
            39,214,849
            
            $
            39,199,305





Depreciation
      expense related to manufacturing is included as a component of cost of goods
      sold. During the three months ended September 30, 2008 and 2007, depreciation
      totaling $824,032 and $477,980, respectively, was included as a component of
      cost of goods sold.





Plant
      and
      machinery amounting to $18,950,135 (June 30, 2008: $18,972,430) and land use
      right amounting to $553,873 (June 30, 2008: $553,404) were pledged for notes
      payable totaling $17,392,980.





**7.  Construction-In-Progress**





As
      of
      September 30, 2008 and June 30, 2008, construction-in-progress consisted of
      the
      following:





**September 30,**
              **2008**
            
            **June 30,**
              **2008**Construction
                costs
            
            $
            22,930,167
            
            $
            16,476,454





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





14
 *Table
            of Contents*




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





Advances
      from customers represent advance cash receipts from new customers and for which
      goods have not been delivered or services rendered as of the balance sheets
      dates. Advances from customers for goods to be delivered or services to be
      rendered in the subsequent period are carried forward as deferred revenue.
      As of
      September 30, 2008 and June 30, 2008, there were advances from customers of
      $3,710,279 and $6,996,996, respectively.





**9.  Short-Term
      Loans**





Short-term
      loans consisted of the following:





**September 30,**
              **2008**
            
            **June 30,**
              **2008**Bank
                loan dated August 1, 2008, due in one year with an interest rate
                of the
                Singapore Interbank Offered Rate (“SIBOR”) plus 3% (6.9% at September 30,
                2008) (Note 6)
            
            
            5,300,000
            
            
            5,300,000Bank
                loan dated August 1, 2008, due in one year with an interest rate
                at 115%
                of the standard market rate set by the People’s Bank of China for Renminbi
                loans, secured by land use rights, buildings, plant and machinery
                (8.59%
                at September 30, 2008) (Note 6)
            
            
            2,893,885
            
            
            2,886,952Bank
                loan dated July 26, 2008, due in one year with an interest rate at
                115% of
                the standard market rate set by the People’s Bank of China for Renminbi
                loans, secured by land use rights, buildings, plant and machinery
                (8.59%
                at September 30, 2008) (Note 6)
            
            
            9,199,095
            
            
            9,278,847$
            17,392,980
            
            $
            17,465,799





The
      weighted average interest rate on short-term loans at September 30, 2008 and
      June 30, 2008 was 8.08% and 7.72%, respectively.





**10.  Income
      Taxes**





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





The
      tax
      holiday resulted in tax savings as follows:


Three months
                ended September 30,2008
              
              2007Tax
                  savings
              
              $
              645,170
              
              $
              676,656Benefit
                  per shareBasic
              
              $
              0.01
              
              $
              0.06Diluted
              
              $
              0.01
              
              $
              0.05


15
 *Table
          of Contents*


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





**Deferred tax
                assets and liabilities:**
            
            **September 30,**
              **2008**
            
            **June 30,**
              **2008**Book
                depreciation in excess of tax depreciation
            
            $
            199,043
            
            $
            169,962Temporary
                differences resulting from provision for bad debts
            
            
            —
            
            
            573,324Net
                deferred income tax asset
            
            $
            199,043
            
            $
            743,286Valuation
                allowance
            
            
            (199,043
            )
            
            (743,286
            )$
            —
            
            $
            —





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





**Three months**
              **ended September 30,****2008**
            
            **2007**Computed tax at
                the federal statutory rate of 34%
            
            $
            1,035,761
            
            $
            1,796,017Less
                adjustment to EIT statutory rate of 25% in 2008 and 27% in
                2007
            
            
            (290,468
            )
            
            (369,768
            )Tax
                effect of US losses not deductible in PRC
            
            
            54,616
            
            
            86,493Income
                not subject to tax
            
            
            —
            
            
            (330,361
            )Expenses
                not deductible for tax
            
            
            6,945
            
            
            —Understated
                taxation for FY2009
            
            
            8,937
            
            
            —Deferred
                taxes
            
            
            —
            
            
            (1,064,028
            )Benefit
                of tax holiday
            
            
            (645,170
            )
            
            (676,656
            )Income
                tax expense per books
            
            $
            170,621
            
            $
            (558,303
            )





Income
      tax expense (benefit) consists of:





**Three months**
              **ended September 30,****2008**
            
            **2007**Income
                tax expense for the year PRC
            
            $
            170,621
            
            $
            505,725Deferred
                income tax expense (benefit) – PRC
            
            
            —
            
            
            (1,064,028
            )Income
                tax expense per books
            
            $
            170,621
            
            $
            (558,303
            )


16
 *Table
          of Contents*


**11.  Equity**





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




Information
      with respect to stock warrants outstanding is as follows:





**Exercise**
              **Price**
            
            **Outstanding**
              **June 30, 2008**
            
            **Granted**
            
            **Expired or**
              **Exercised**
            
            **Outstanding**
              **June 30,**
              **2008**
            
            **Expiration Date**$
            3.00
            
            
            448,392
            
            
            -0-
            
            
            (90,000
            )
            
            358,392
            
            
            February 22, 2011$
            3.60
            
            
            100,000
            
            
            -0-
            
            
            -0-
            
            
            100,000
            
            
            February
                22, 2010$
            8.45
            
            
            1,420,000
            
            
            -0-
            
            
            -0-
            
            
            1,420,000
            
            
            November 6, 2010$
            7.38
            
            
            225,600
            
            
            -0-
            
            
            -0-
            
            
            225,600
            
            
            November
                6, 2010





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





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





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





The
      Company closed the Offering on November 6, 2007 (the “Closing Date”). The net
      proceeds of the offering were approximately $44 million, after deducting
      underwriting commissions and discounts and other fees and expenses relating
      to
      the offering. The warrants were valued at $5.3 million and were recorded to
      additional paid-in capital. The intended usage of the net proceeds was for
      repayment of certain bank debt, capital expenditure, and general corporate
      purposes. During the year ended June 30, 2008, long-term bank loans of
      $13,042,159 were paid off, and a progress payment of $7,016,729 was made in
      relation to the third cold rolling mill. During the three months ended September
      30, 2008, we invested an additional $7,709,434 in construction in progress
      and
      property, production plants and equipment in relation to the third cold rolling
      mill and expansion of the Shanghai Blessford production facilities.


17
 *Table
          of Contents*





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





**12.  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
      three months ended September 30, 2008, dilutive shares include outstanding
      warrants to purchase 358,392 shares of common stock at an exercise price of
      $3.00 and 100,000 shares at an exercise price of $3.60. Warrants to purchase
      1,420,000 shares at an exercise price of $8.45 and 225,600 shares at an exercise
      price of $7.38 were not included as their effect would have been anti-dilutive,
      however, these securities could potentially dilute basic earnings per share
      in
      the future. For the three months ended September 30, 2007, dilutive shares
      include outstanding warrants to purchase 1,300,059 shares of common stock at
      an
      exercise price of $3.00 and 100,000 shares at an exercise price of $3.60.





The
      following reconciles the components of the EPS computation:





**Income**
            
            **Shares**
            
            **Per Share****(Numerator)**
            
            **(Denominator)**
            
            **Amount**For
                the three months ended September 30, 2008:Net
                income
            
            $
            2,875,734Basic
                EPS income available to common shareholders
            
            $
            2,875,734
            
            
            46,556,107
            
            $
            0.06Effect
                of dilutive securities:Warrants
            
            
            
            
            
            136,604Diluted
                EPS income available to common shareholders
            
            $
            2,875,734
            
            
            46,692,711
            
            $
            0.06For
                the three months ended September 30, 2007:Net
                income
            
            $
            5,840,706Basic
                EPS income available to common shareholders
            
            $
            5,840,706
            
            
            37,378,143
            
            $
            0.16Effect
                of dilutive securities:Warrants
            
            
            
            
            
            1,019,182Diluted
                EPS income available to common shareholders
            
            $
            5,840,706
            
            
            38,397,325
            
            $
            0.15





**13.  Commitments**





As
      of
      September 30, 2008, the Company had $5,481,492 in commitments for capital
      expenditures for contractual commitments of the construction projects related
      to
      expansion of Shanghai Blessford’s production facilities.


18
 *Table
          of Contents*


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





**Special
      Note Regarding Forward Looking Statements**





This
      Quarterly Report on Form 10-Q, including the following “Management’s Discussion
      and Analysis of Financial Condition and Results of Operations,” contains
      forward-looking statements within the meaning of Section 27A of the Securities
      Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
      1934,
      as amended. Such statements include, among others, those concerning our expected
      financial performance and strategic and operational plans, as well as all
      assumptions, expectations, predictions, intentions or beliefs about future
      events. You are cautioned that any such forward-looking statements are not
      guarantees of future performance and that a number of risks and uncertainties
      could cause actual results of the Company to differ materially from those
      anticipated, expressed or implied in the forward-looking statements. The words
      “believe,” “expect,” “anticipate,” “project,” “targets,” “optimistic,” “intend,”
“aim,” “will” or similar expressions are intended to identify forward-looking
      statements. All statements other than statements of historical fact are
      statements that could be deemed forward-looking statements. Risks and
      uncertainties that could cause actual results to differ materially from those
      anticipated include risks related to new and existing products; any projections
      of sales, earnings, revenue, margins or other financial items; any statements
      of
      the plans, strategies and objectives of management for future operations; any
      statements regarding future economic conditions or performance; uncertainties
      related to conducting business in China; any of the factors and risks mentioned
      in the “Risk Factors” sections of our Annual Report on Form 10-K for the year
      ended June 30, 2008 and subsequent SEC filings. The Company assumes no
      obligation and does not intend to update any forward-looking statements, except
      as required by law.





**Use
      of Terms**





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





**Overview
      of the Company’s Business**





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





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





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




19
 *Table
          of Contents*




In
      the
      year ended June 30, 2007, we added three indirect subsidiaries to our corporate
      structure. On April 9, 2007, we purchased or Tuorong through PSHL. The sole
      activity of Tuorong is the ownership of a land use right with respect to
      facilities leased to Chengtong. On April 10, 2007, PSHL purchased Blessford
      International for nominal consideration. Blessford International does not
      conduct any business, but it owns a single subsidiary, Shanghai Blessford,
      that
      is a wholly-foreign owned enterprise chartered in China. We intend to hold
      Blessford International as a shell subsidiary.





We
      strive
      to find an appropriate sales mix that provides us with the stability and cash
      flows, along with the higher margin provided by high precision and individually
      customized cold-rolled steel products. To meet market demands in our primary
      market, China, as well as overseas market, there were increased capital
      requirements as we sought to construct additional rolling mills to accommodate
      our planned growth. In addition, our workforce has increased and, in particular,
      we have faced a growing need for experienced executive and technical
      staff.




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





**Results
      of Operations**  ****





***Comparison
      of Three Months Ended September 30, 2008 and September 30, 2007***


**Three Months Ended**
                **September 30,**
              
              **Variance****2008**
              
              **2007**
              
              $
              
              %**SALES
                  REVENUE**
              
              $
              25,350,419
              
              $
              27,187,235
              
              
              (1,836,816
              )
              
              (7
              )Cost
                  of Sales
              
              
              21,397,761
              
              
              20,245,135
              
              
              1,152,626
              
              
              6**GROSS
                  PROFIT**
              
              
              3,952,658
              
              
              6,942,100
              
              
              (2,989,442
              )
              
              (43
              )Administrative
                  expenses
              
              
              462,100
              
              
              486,376
              
              
              (24,276
              )
              
              (5
              )Selling
                  expenses
              
              
              211,298
              
              
              100,705
              
              
              110,593
              
              
              110**INCOME
                  FROM**
              
              
              3,253,057
              
              
              5,715,389
              
              
              (2,462,332
              )
              
              (43
              )Other
                  income (expense)
              
              
              (206,702
              )
              
              (432,986
              )
              
              226,284
              
              
              52Income
                  tax expense
              
              
              170,621
              
              
              (558,303
              )
              
              728,924
              
              
              
              ***NET
                  INCOME**
              
              
              2,875,734
              
              
              5,840,706
              
              
              (2,964,972
              )
              
              (51
              )Basic
                  earnings per share
              
              $
              0.06
              
              $
              0.16
              
              
              (0.10
              )
              
              (61
              )Diluted
                  earnings per share
              
              $
              0.06
              
              $
              0.15
              
              
              (0.09
              )
              
              (59
              )







***
            *Not
                meaningful*





Income
      from continuing operations before tax decreased by $2,236,048, or 42%,
      period-on-period to $3,046,355 for the three months ended September 30,
      2008, from $5,282,403 for the three months ended September 30, 2007 and
      gross profit decreased by $2,989,442, or 43%, period-on-period.





Net
      income decreased by $2,964,972, or 51%, period-on-period
      to $2,875,734 for the three months ended September 30, 2008, from
      $5,840,706 for the three months ended September 30, 2007.





For
      the
      period ended September 30, 2007, there was a one-time write back of impairment
      for consumable items in the amount of $1,644,123, and a one-time write back
      of
      deferred income tax in the amount of $1,064,028, which increased net income
      for
      the three months
      ended September 30, 2007 from $3,132,555 to $5,840,706. Excluding these
      one-time write backs, there was a slight decrease in n et
      income
      by $256,821, or 8%, period-on-period
      to $2,875,734 for the three months ended September 30, 2008 from $3,132,555
      for the three months ended September 30, 2007.


20
 *Table
          of Contents*


***Gross
      Profit*** .
      Gross
      profits in absolute terms decreased by $2,989,442, or 43%, period-on-period
      to
      $3,952,658 for the three months ended September 30, 2008, from $6,942,100
      for the three months ended September 30, 2007, while gross profit margin
      decreased to 15.6% for the three months ended September 30, 2008, from
      25.5% for the three months ended September 30, 2007. The decrease in gross
      profit margin principally resulted from two direct sales transactions of raw
      materials in the amount of $2,685,419, or 11% of sales revenues, as a move
      to
      lower our inventory level in view of decreasing raw material prices during
      the
      three months ended September 30, 2008. Excluding the abovementioned direct
      raw
      material sales, gross profit margin for the three months ended
      September 30, 2008 would have been 17.1%.




***Sales
      Revenues.*** Sales
      volume decreased by 4,467 tons, or 15.6%, period-on-period to 24,216 tons for
      the three months ended September 30, 2008 from 28,683 tons for the three
      months ended September 30, 2007.  As a result, sales revenues
      decreased by $1,836,816, or 6.8%, period-on-period to $25,350,419 for the three
      months ended September 30, 2008 from $27,187,235 for the three months ended
      September 30, 2007. We believe that the decreases in sales and sales
      revenues are a result of reduced orders from existing customers in view of
      a
      slower economy, and the cancellation of an export order of 500 tons of
      hard-rolled steel coils due to decreasing steel prices during the period. The
      decrease in volume produced and shipped during the quarter ended September
      30,
      2008 was mainly in the high carbon cold-rolled category used in auto components
      manufacturing, as well as the low carbon cold-rolled steel category.




Our
      average cost per unit sold increased to $884 for the three months ended
      September 30, 2008 compared to average cost per unit sold of $706 for the
      three months ended September 30, 2007, representing an increase of $178 per
      ton, or 25.2%, period-on-period, due to the combined effect of a significant
      increase in cost of raw materials per unit sold and an increase in factory
      overhead per unit sold.  The
      1400
      mm cold-roll mill which became operational at the beginning of October 2006
      is now operating at approximately 50% of design capacity and will likely take
      another two years to reach its maximum production speed and
      capacity.




Sales
      by Product Line . **** A
      break-down of our sales by product line for the three months ended
      September 30, 2008 and 2007 is as follows:


**Three Months Ended September 30,****2008**
                
                **2007**
                
                **Period-on-period****Product category**
                
                **Quantity**
                  **(tons)**
                
                **$  Amount**
                
                **% of sales**
                
                **Quantity**
                  **(tons)**
                
                **$ Amount**
                
                **% of**
                  **sales**
                
                **Qty.**
                  **Variance**Low
                    carbon cold-rolled
                
                
                10,809
                
                
                10,983,414
                
                
                43.3
                
                
                14,321
                
                
                9,082,234
                
                
                33.4
                
                
                (3,512
                )Low
                    carbon hard rolled
                
                
                3,621
                
                
                4,152,532
                
                
                16.4
                
                
                2,387
                
                
                1,645,333
                
                
                6.0
                
                
                1,234High-carbon
                    cold-rolled
                
                
                2,600
                
                
                3,445,509
                
                
                13.6
                
                
                8,936
                
                
                14,646,426
                
                
                53.9
                
                
                (6,336
                )High-carbon
                    hot-rolled
                
                
                1,412
                
                
                1,918,278
                
                
                7.6
                
                
                1,897
                
                
                1,455,863
                
                
                5.4
                
                
                (485
                )Sales
                    of scrap metal
                
                
                —
                
                
                171,867
                
                
                0.7
                
                
                —
                
                
                277,953
                
                
                1.0
                
                
                —Subcontracting
                    income
                
                
                5,774
                
                
                4,678,819
                
                
                18.4
                
                
                1,142
                
                
                79,426
                
                
                0.3
                
                
                4,632Total
                
                
                24,216
                
                
                25,350,419
                
                
                100.0
                
                
                28,683
                
                
                27,187,235
                
                
                100




There
      were various changes in the break-down of sales among our product lines over
      the
      three months ended September 30, 2008 due to the current economic and business
      environment we operate in and the slowdown across various markets. The
      low-carbon cold-rolled steel products accounted for 43.3% of the current sales
      mix at an average selling price of $1,016 per ton for the three months ended
      September 30, 2008 compared to 33.4% of the sales mix at an average
      selling price per ton of $634 for the three months ended September 30, 2007
      as a result of production of higher precision products in this category. Low
      carbon hard-rolled steel, which is also our exported precision steel product,
      was 6.0% of sales during the three months ended September 30, 2007, and
      accounted for $4,152,532, or 16.4%, of the current sales mix at an average
      selling price of $1,147 per ton for the three months ended September 30,
      2008. High-carbon cold-rolled steel products accounted for 13.6% of the current
      sales mix at an average selling price of $1,326 per ton for the three months
      ended September 30, 2008 compared to 53.9% of the sales mix at an average
      selling price per ton of $1,639 for the three months ended September 30,
      2007. Subcontracting income increased to 18.4% of the current sales mix at
      an
      average selling price of $810 for the three months ended September 30, 2008
      compared to 0.3% of the sales mix for the three months ended September 30,
      2007
      at an average selling price of $70.


21
 *Table
          of Contents*




While
      we
      are experiencing some reduction in orders of certain products from existing
      customers, especially the high-carbon cold-rolled steel coils due to slowdown
      of
      the auto industry, and exports to the South East Asian markets, we continue
      to
      negotiate new contracts with manufacturers who are switching from higher cost
      imports and our overall business remains healthy with a broad and diversified
      customer base. Management continues to take appropriate action to develop new
      products and optimize our product mix without adversely affecting overall sales
      volume and margins amid current market conditions. Management believes that
      there are high barriers to entry in the Chinese domestic precision cold-rolled
      steel industry because of the level of technology expertise required for
      operation and that our unique capabilities and know-how give us a competitive
      advantage to grow sales of higher margin products as we continuously carry
      out
      R&D and strive to launch new products that could potentially lead to new
      segments, customers and markets.




**Three Months Ended**
              **September 30,****Average selling prices**
            
            **2008**
            
            **2007**
            
            **Variance****$**
            
            **$**
            
            **$**
            
            **%**Low-carbon
                cold-rolled
            
            
            1,016
            
            
            634
            
            
            382
            
            
            60Low-carbon
                hard rolled
            
            
            1,147
            
            
            689
            
            
            457
            
            
            66High-carbon
                cold-rolled
            
            
            1,326
            
            
            1,639
            
            
            (313
            )
            
            (19
            )High-carbon
                hot-rolled
            
            
            1,358
            
            
            767
            
            
            591
            
            
            77Subcontracting
                income
            
            
            810
            
            
            70
            
            
            741
            
            
            >100




The
      average unit selling price per ton generated increased to $1047 per ton for
      the
      three months ended September 30, 2008 compared to the corresponding period
      in 2007 of $948, representing an increase of $99, or 10.4%, period-on-period.
      This increase was due to changes in our sales mix during the quarter to focus
      on
      high quality high margin products and subcontracting work. Sales of high-carbon
      cold-rolled steel products have decreased by 6,336 tons, or 70.9%,
      period-on-period to 2,600 tons for the three months ended September 30,
      2008 compared to 8,936 tons for the three months ended September 30, 2007.
      While the volume of high-carbon cold-rolled steel decreased, the average sales
      price declined $313, or 19%, to $1,326 in the three months ended
      September 30, 2008 as compared to an average selling of $1,639 in the three
      months ended September 30, 2007. This product accounted for $3,445,509, or
      13.6%, of the total sales mix for the three months ended September 30, 2008
      compared to $14,646,426, or 53.9%, of the sales mix for the three months ended
      September 30, 2007.




Sales
      Breakdown by Major Customer .


**Three Months Ended September 30****Customers**
              
              **2008 ($)**
              
              **% to sales**
              
              **2007 ($)**
              
              **% to sales**Shanghai
                  Changshuo Stainless Steel Processing Co. Ltd.
              
              
              3,414,685
              
              
              13
              
              
              8,648,752
              
              
              32Shanghai
                  Bayou Industrial Limited
              
              
              2,961,211
              
              
              12
              
              
              
              *
              
              
              *Salzgltter
                  Mannesmann
              
              
              2,392,869
              
              
              9
              
              
              
              *
              
              
              *Jiangsu
                  Sumec International Trading Co., Ltd.
              
              
              1,667,454
              
              
              7
              
              
              
              *
              
              
              *Zhangjiagang
                  Gangxing Innovative Construction Material Co., Ltd.
              
              
              1,527,211
              
              
              6
              
              
              
              *
              
              
              *Shanghai
                  Shengdejia Metal Products Limited
              
              
              
              *
              
              
              *
              
              3,288,926
              
              
              12Beijing
                  Beimo Aircraft Material Technology Co., Ltd.
              
              
              
              *
              
              
              *
              
              1,746,538
              
              
              6Hangzhou
                  Relian Company Limited
              
              
              
              *
              
              
              *
              
              1,393,982
              
              
              5Shangdong
                  Province Boxing County Longhua Material Ltd.
              
              
              
              *
              
              
              *
              
              1,277,358
              
              
              513,429,250
              
              
              47
              
              
              16,355,556
              
              
              60Others
              
              
              11,921,169
              
              
              53
              
              
              10,831,679
              
              
              40**Total**
              
              
              25,350,419
              
              
              100
              
              
              27,187,235
              
              
              100





**
      Not
      major customers for the relevant periods*


22
 *Table
          of Contents*





Sales
      revenues generated from the top five major customers as a percentage of total
      sales decreased to 47% for the three months ended September 30, 2008 as
      compared to 60% for the three months ended September 30, 2007. The top five
      major customers were different period-on-period with the exception of Shanghai
      Changshuo Stainless Steel Processing Co., Ltd.. The change in customer mix
      reflects our shift in product focus during the course of the
      period.




***Cost
      of Sales*** *.* Cost
      of
      sales increased by $1,152,626, or 5.7%, period-on-period to $21,397,761 for
      the
      three months ended September 30, 2008 from $20,245,135 for the three months
      ended September 30, 2007. Cost of sales represented 84.4% of sales revenues
      for the three months ended September 30, 2008 compared to 74.5% for the
      three months ended September 30, 2007. Average cost per ton sold increased
      by $178, or 25.2%, period-on-period to $884 per ton for the three months ended
      September 30, 2008 from $706 per ton for the three months ended
      September 30, 2007. Meanwhile, the average selling price per ton increased
      by $99 per ton, or 10.4%, period-on-period to $1,047 per ton for the three
      months ended September 30, 2008 from $948 per ton for the three months
      ended September 30, 2007.




**Three Months Ended September 30,****2008**
            
            **2007**
            
            **Variance****$**
            
            **$**
            
            **$**
            
            **%****Cost
                of sales**-
                Raw materials
            
            
            18,767,711
            
            
            18,487,907
            
            
            279,804
            
            
            2-
                Direct labor
            
            
            142,214
            
            
            176,906
            
            
            (34,692
            )
            
            (20
            )-
                Factory overhead
            
            
            2,487,836
            
            
            1,580,322
            
            
            907,514
            
            
            5721,397,761
            
            
            20,245,135
            
            
            1,152,626
            
            
            5.7**Cost
                per unit sold**Total
                units sold (tons)
            
            
            24,216
            
            
            28,683
            
            
            (4,467
            )
            
            (16
            )Average
                cost per unit sold ($/ton)
            
            
            884
            
            
            706
            
            
            178
            
            
            25.2




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




·
            a
                significant increase in cost of raw materials per unit sold of $130,
                or
                20%, from $645 per ton for the three months ended September 30,
                2007compared to $775 per ton for the three months ended September
                30,
                2008;·
            an
                increase in factory overhead per unit sold of $47 or 86% from $55
                per ton
                for three months ended September 30, 2007 compared to $102 per ton
                for the three months ended September 30, 2008.





The
      cost
      of raw materials consumed increased by $279,804, or 2%, period-on-period to
      $18,767,711, for the three months ended September 30, 2008 from $18,487,907
      for the three months ended September 30, 2007. This increase was due to
      increases in raw material prices period-on-period.




Manufacturing
      overhead costs increased by $907,514, or 57%, period-on-period to $2,487,836
      for
      the three months ended September 30, 2008 from $1,580,322 for the three
      months ended September 30, 2007. The increase was mainly attributable to
      the combined effect of an increase in utilities of $331,268, or 95%,
      period-on-period to $678,262 for the three months ended September 30, 2008
      from $346,994 for the three months ended September 30, 2007, an increase in
      consumables of $197,402, or 40%, period-on-period to $685,640 for the three
      months ended September 30, 2008 from $488,238 for the three months ended
      September 30, 2007, and an increase in depreciation allocated to cost of
      goods sold of $279,481, or 58%, period-on-period to $757,461 for the three
      months ended September 30, 2008 from $477,980 for the three months ended
      September 30, 2007.


23
 *Table
          of Contents*





***Expenses.***




Selling
      Expenses .
      Selling
      expenses increased by $110,593, or 110%, period-on-period, to $211,298 for
      the
      three months ended September 30, 2008 compared to the corresponding period
      in 2007 of $100,705. The increase was mainly attributable to increases in
      transportation, which rose by 80% period-on-period, due to our increased
      delivery charges of precision steel resulting from a broader customer base,
      especially exports where our standard contract terms are F.O.B. and we incur
      transportation costs to the port of shipment, plus loading costs, as well as
      an
      increase in the frequency of deliveries.




Administrative
      Expenses . **** Administrative
      expenses decreased by $24,276, or 5%, period-on-period, to $462,100 for the
      three months ended September 30, 2008 compared to the comparable period in
      2007. This decrease was chiefly associated with lower SEC compliance costs
      and
      professional fees as there was no financing activity during the quarter and
      we
      become more familiar with the rules and regulations as a listed company. There
      were increases in salaries and wages which were principally due to increases
      in
      the monthly salaries of the management staff as well as increase in average
      number of Chengtong staff.




Finance
      Costs .
      Net
      finance cost decreased 26% period-on-period as a result of the decrease in
      total
      interest expense to $327,405 for 2008 compared to $442,141 for 2007 due to
      lower
      loan balances and a lower weighted average interest rate during 2008 as compared
      to 2007.




**Liquidity
      and Capital Resources**





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





Net
      cash
      flows used in operating activities for the three months ended September 30,
      2008
      was $1,081,019 as compared with $1,375,150 used in operating activities for
      the
      three months ended September 30, 2007, for a net increase of $294,131. This
      increase was due to an increase in accounts receivable, and a decrease in
      advances from customers offset by a decrease in advances to suppliers during
      the
      three months ended September 30, 2008.





Net
      cash
      flows used in investing activities for the three months ended September 30,
      2008
      was $7,263,898 as compared with $1,016,793 for the three months ended September
      30, 2007. The increase in investing activity was due to increased construction
      during the three months ended September 30, 2008 as compared to the same period
      in 2007.





Net
      cash
      flows provided by financing activities for the three months ended September
      30,
      2008, was $182,374 as compared with $2,454,316 provided by financing activities
      for the three months ended September 30, 2007. During the three months ended
      September 30, 2008, the Company received $269,985 in net proceeds from the
      exercise of warrants, which was partially offset by repayment of notes payable
      of the amount $87,611. The three months ended September 30, 2007 **** reflect
      repayment and renewing of notes payable which offset each other, as well as
      advances from directors of the amount $3,047,524.





***Current
      Assets*** .
      Current
      assets decreased by $4,197,074, or 4%, period-on-period to $103,936,848 as
      of
      September 30, 2008 from $108,133,922 as of June 30, 2008, principally as a
      result of decreases in cash and equivalents by $8,241,767, or 44%,
      period-on-period. During the three months ended September 30, 2008, there were
      also increases in accounts receivable of $2,752,796, or 8%, period-on-period,
      bills receivable of $2,951,175, or 68%, period on period, and inventories of
      $339,859, period on period. The decrease in cash and cash equivalents is mainly
      attributable to spending on the construction of the 3 rd mill
      during the three months ended September 30, 2008.


24
 *Table
          of Contents*





***Current
      Liabilities*** .
      Current
      liabilities decreased by $945,352, or 2%, period-on-period to $44,284,050 as
      of
      September 30, 2008 from $45,229,402 as of June30, 2008. The decrease was due
      to
      decreases in advances from customers and was mitigated by increases in accounts
      payable and other taxes payable.





As
      of
      September 30, 2008, we had $17,392,980 in short term bank debt. We expect to
      refinance such debt at its maturity, but we cannot assure you that we will
      be
      able to do so on terms favorable to the Company or at all.





***Capital
      Expenditures*** *.* During
      the three months ended September 30, 2008, we invested $7,709,434 in
      construction in progress and property, production plants and equipment. We
      believe these capital investments increase our capacity, expand our product
      line, and reduce risks related to occupancy costs, thereby creating new
      opportunities to grow sales and control expenses.





As
      of
      September 30, 2008, the Company had $5,481,492 in commitments for capital
      expenditures for contractual commitments of the construction projects related
      to
      the 1450mm mill and expansion of our production facilities. We currently have
      sufficient capital resources to meet these contractual commitments and we plan
      to commerce constructing of the 1450mm mill during the second quarter of fiscal
      2009.





**Off-Balance
      Sheet Arrangements**





For
      the
      three months ended September 30, 2008, we did not have any off-balance sheet
      arrangements.





**Contractual
      Obligations**





**At September 30, 2008**
              **Payments Due By Period****(in thousands)**
            
            **Total**
            
            **Fiscal Year**
              **2009**
            
            **Fiscal**
              **Years**
              **2010-2011**
            
            **Fiscal**
              **Years**
              **2012-2013**
            
            **Fiscal Year**
              **2014and**
              **Beyond**Contractual obligations:Debt
                Obligations
            
            $
            18,798,333
            
            $
            18,798,333
            
            $
            —
            
            $
            —
            
            $
            —Construction
                Commitments
            
            
            5,481,492
            
            
            5,481,492
            
            
            —
            
            
            —
            
            
            —$
            24,279,825
            
            $
            24,279,825
            
            $
            —
            
            $
            —
            
            $
            —





***Short-term
      bank loans***





Short-term
      bank loans decreased by $72,819, period on period to $17,392,980 as of March
      31,
      2008, compared to $17,465,799 as of June 30, 2008.





**Land
      Use Rights**





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





**Inflation**





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


25
 *Table
          of Contents*





**Critical
      Accounting Policies and Estimates**





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





·
            *Functional
                Currency and Translating Financial Statements*—
                The consolidated financial statements have been prepared in accordance
                with accounting principles generally accepted in the United States of
                America. Our functional currency is Chinese Renminbi; however, the
                accompanying consolidated financial statements have been expressed
                in USD.
                The consolidated balance sheets have been translated into USD at
                the
                exchange rates prevailing at each balance sheet date. The consolidated
                statements of operations and cash flows have been translated using
                the
                weighted-average exchange rates prevailing during the periods of
                each
                statement.·
            *Advances
                to Suppliers and from Customers*-
                As is common practice in China, Chengtong will often make advance
                payments
                to its suppliers for materials, or receive advance payments from
                its
                customers. In some cases, the same party may be both a supplier to,
                and
                customer of, Chengtong. In such cases, Chengtong may make an advance
                to a
                third party as supplier and receive an advance from the same party
                as a
                customer. Chengtong’s practice is to offset such amounts against each
                other. We have established an allowance for doubtful accounts as
                a reserve
                against advances made to suppliers to the extent that the related
                goods
                are not received within ninety (90) days of the contract delivery
                date.·
            *Other
                Policies*-
                Other accounting policies used by the Company are set forth in the
                notes
                accompanying our financial
                statements.





**Recent
      Accounting Pronouncements**





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement No.157, “Fair Value Measurements” (“SFAS No.157”). SFAS No.157
      addresses how companies should measure fair value when they are required to
      use
      a fair value measure for recognition or disclosure purposes under generally
      accepted accounting principles. SFAS No.157 defines fair value, establishes
      a
      framework for measuring fair value and expands the required disclosures about
      fair value measurements. SFAS No.157 is effective for fiscal years beginning
      after November15, 2007, with earlier adoption permitted. The adoption of SFAS
      No. 157 did not impact our consolidated financial statements in any material
      respect.





In
      September 2006, the FASB issued Statement No.158, “Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans” (“SFAS No.158”), an
      amendment of FASB Statements No.87, 88, 106 and 132(R). “SFAS No. 158” requires
      (a)recognition of the funded status (measured as the difference between the
      fair
      value of the plan assets and the benefit obligation) of a benefit plan as an
      asset or liability in the employer’s statement of financial position,
      (b)measurement of the funded status as of the employer’s fiscal year-end with
      limited exceptions, and (c)recognition of changes in the funded status in the
      year in which the changes occur through comprehensive income. The requirement
      to
      recognize the funded status of a benefit plan and the disclosure requirements
      are effective as of the end of the fiscal year ending after December15, 2006.
      The requirement to measure the plan assets and benefit obligations as of the
      date of the employer’s fiscal year-end statement of financial position is
      effective for fiscal years ending after December15, 2008. SFAS No. 158 has
      no
      current applicability to the Company’s financial statements.





In
      February 2007, the FASB issued Statement No.159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (“SFAS No.159”), an amendment of
      FASB Statement No.115. SFAS No.159 addresses how companies should measure many
      financial instruments and certain other items at fair value. The objective
      is to
      mitigate volatility in reported earnings caused by measuring related assets
      and
      liabilities differently without having to apply complex hedge accounting
      provisions. SFAS No.159 is effective for fiscal years beginning after
      November15, 2007, with earlier adoption permitted. The adoption of SFAS No.
      159
      did not impact our consolidated financial statements in any material
      respect.


26
 *Table
          of Contents*





In
      December 2007, the FASB issued SFAS No.141 (revised 2007), “Business
      Combinations” (“SFAS 141(R)”). “SFAS 141(R)” will change the accounting for
      business combinations. Under SFAS No.141(R), an acquiring entity will be
      required to recognize all the assets acquired and liabilities assumed in a
      transaction at the acquisition-date fair value with limited exceptions. SFAS
      No.141(R)will change the accounting treatment and disclosure for certain
      specific items in a business combination. SFAS No.141(R)applies prospectively
      to
      business combinations for which the acquisition date is on or after the
      beginning of the first annual reporting period beginning on or after December15,
      2008. SFAS 141(R) will impact the Company in the event of any future
      acquisition.





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





In
      March
      2008, the FASB issued SFAS No.161, Disclosures about Derivative Instruments
      and
      Hedging Activities—an amendment of FASB Statement No.133 (“SFAS 161”). SFAS 161
      changes the disclosure requirements for derivative instruments and hedging
      activities. Entities are required to provide enhanced disclosures about (a)how
      and why an entity uses derivative instruments, (b)how derivative instruments
      and
      related hedged items are accounted for under Statement 133 and its related
      interpretations, and (c)how derivative instruments and related hedged items
      affect an entity’s financial position, financial performance, and cash flows.
      The guidance in “SFAS 161” is effective for financial statements issued for
      fiscal years and interim periods beginning after November15, 2008, with early
      application encouraged. This Statement encourages, but does not require,
      comparative disclosures for earlier periods at initial adoption. The Company
      is
      currently assessing the impact of SFAS 161.





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





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





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





**Foreign
      Currency Exchange Rates**





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


27
 *Table
          of Contents*





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 September
      30, 2008 the exchange rate was 6.8485 Yuan to 1.00 U.S. Dollar. The exchange
      rate of Renminbi is subject to changes in China’s government policies which are,
      to a large extent, dependent on the economic and political development both
      internationally and locally and the demand and supply of Renminbi in the
      domestic market. There can be no assurance that such exchange rate will continue
      to remain stable in the future amongst the volatility of currencies,
      globalization and the unstable economies in recent years. Since (i)our income
      and profit are mainly denominated in Renminbi, and (ii)the payment of dividends
      will be in U.S. dollars, if any, any exchange fluctuation of the Renminbi
      against other foreign currencies would adversely affect the value of the shares
      and dividends payable to shareholders, in foreign currency terms.





At
      September 30, 2008, the Group’s outstanding financial instruments with foreign
      currency exchange rate risk exposure had an aggregate fair value of $16 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 $1.6 million
      at
      September 30, 2008.





**Interest
      Rates**





The
      Group
      is subject to interest rate risk on its non-derivative financial instruments.
      The Group does not hedge its interest rate risk. At September 30, 2008, the
      Group’s total bank debt outstanding was $17,392,980, all of which was
      interest-bearing. Substantially all of the bank debt was floating-rate debt
      with
      interest rates which vary with changes in the standard rate set by the People’s
      Bank of China. A change in the interest rate or yield of fixed rate debt will
      only impact the fair value of such debt, while a change in the interest rate
      of
      floating rate, or variable rate, debt will impact interest expense as well
      as
      the amount of cash required to service such debt. To the extent interest rates
      increase, we will be liable for higher interest payments to our lenders. For
      the
      current financial year, annual interest on loans is anticipated to be
      approximately $1.4 million. The impact of a 1% increase in interest rates will
      increase interest expense by approximately $175,000. As our short-term
      borrowings mature, we will be required to either repay or refinance these
      borrowings. An increase in short-term interest rates at the time that we seek
      to
      refinance short-term borrowings may increase the cost of borrowings, which
      may
      adversely affect our earnings and cash available for distribution to its
      shareholders.




At
      March
      31, 2008, the aggregate fair value of the Group’s financial instruments with
      exposure to interest rate risk was approximately $17 million. The potential
      change in fair value for these financial instruments from an adverse 10% change
      in quoted interest rates across all maturities, often referred to as a parallel
      shift in the yield curve, would be approximately $0.2 million at September
      30,
      2008.





**Commodity
      Prices**





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





The
      Group
      has no open derivative commodity instruments as of September 30, 2008 and does
      not currently hedge its exposure to price fluctuations in the raw materials
      and
      energy required for the manufacture of its products.





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





**Evaluation
      of Disclosure Controls and Procedures.**





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


28
 *Table
          of Contents*





As
      required by Rule 13a-15 under the Exchange Act, our management, including Wo
      Hing Li , our President and Chief Executive Officer and Leada Tak Tai Li, our
      Chief Financial Officer, evaluated the effectiveness of the design and operation
      of our disclosure controls and procedures as of September 30, 2008. Based on
      that evaluation, these executive officers concluded that as of September 30,
      2008, and as of the date that the evaluation of the effectiveness of our
      disclosure controls and procedures was completed, our disclosure controls and
      procedures were effective to satisfy the objectives for which they are intended.





**Changes
      in Internal Control Over Financial Reporting.**





During
      the fiscal quarter ended September 30, 2008, there were no changes in our
      internal control over financial reporting that has materially affected, or
      is
      reasonably likely to materially affect, our internal control over financial
      reporting.





**PART
      II**


**OTHER
      INFORMATION**





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





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





**ITEM
      1A.****RISK
      FACTORS.******





None.





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





None.





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





None.




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





None.





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





None.





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





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





**Exhibit
                No.**
            
            **Description**31.1
            
            Certification
                of Principal Executive Officer filed pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.31.2
            
            Certification
                of Principal Financial Officer filed pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.32.1
            
            Certifications
                of Principal Executive Officer furnished pursuant to 18 U.S.C. Section
                1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
                of
                2002.32.2
            
            Certifications
                of Principal Financial Officer furnished pursuant to 18 U.S.C. Section
                1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
                of
                2002.


29
 *Table
          of Contents*





**SIGNATURES**





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





Dated:
      November 10, 2008





**CHINA
                PRECISION STEEL, INC.**By:
            /s/
                Wo Hing LiWo
                Hing Li
              Chief
                Executive Officer


*Table
          of Contents*


**EXHIBIT
        INDEX**
 
 **Exhibit
                  No.**
              
              **Description**31.1
              
              Certification
                  of Principal Executive Officer filed pursuant to Section 302 of
                  the
                  Sarbanes-Oxley Act of 2002.31.2
              
              Certification
                  of Principal Financial Officer filed pursuant to Section 302 of
                  the
                  Sarbanes-Oxley Act of 2002.32.1
              
              Certifications
                  of Principal Executive Officer furnished pursuant to 18 U.S.C.
                  Section
                  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                  Act of
                  2002.32.2
              
              Certifications
                  of Principal Financial Officer furnished pursuant to 18 U.S.C.
                  Section
                  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                  Act of
                  2002.