UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





(Mark
One)





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


For the
fiscal year ended: June 30,
2009





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


For the
transition period from ____________ to _____________





Commission
File No. 000-23039





CHINA
PRECISION STEEL, INC.





(Exact
name of registrant as specified in 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)





852-2543-2290


(Registrant’s
telephone number, including area code)





Securities
registered pursuant to Section 12(b) of the Act:




Title of each class
                  
                  Name of each exchange on which
      registeredCommon
      Stock, par value $0.001 per share
                  
                  The
      NASDAQ Capital
Market





Securities
registered pursuant to Section 12(g) of the Exchange Act: None




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes  ̈ No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes  ̈ No x




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No  ̈




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




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.x




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




Indicate
by check mark whether registrant is a shell company (as defined in Rule 12b-2 of
the Act).  Yes o No x




The
aggregate market value of the 31,013,715 shares of voting stock and non-voting
common stock held by non-affiliates of the registrant as of December 31, 2008
was $36,906,321, based upon the last sale price of the registrant’s common stock
on December 31, 2008 (the last business day of the registrant’s most recently
completed second fiscal quarter) of $1.19 per share, as reported by the NASDAQ
Stock Market, Inc.




There
were a total of 46,562,955 shares of the registrant’s common stock outstanding
as of September 21, 2009.




DOCUMENTS INCORPORATED BY
REFERENCE





None.

















CHINA
PRECISION STEEL, INC.





FORM
10-K


FOR
THE FISCAL YEAR ENDED JUNE 30, 2009





TABLE
OF CONTENTS




PART IItem
      1.
                            Business.
                            
                            3Item
      1A.
                            Risk
      Factors.
                            
                            14Item
      1B.
                            Unresolved
      Staff Comments.
                            
                            32Item
      2.
                            Properties.
                            
                            32Item
      3.
                            Legal
      Proceedings.
                            
                            32Item
      4.
                            Submission
      of Matters To a Vote of Security Holders.
                            
                            32PART IIItem
      5.
                            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
                            
                            33Item
      6.
                            Selected
      Financial Data.
                            
                            35Item
      7.
                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                            
                            36Item
      7A.
                            Quantitative
      and Qualitative Disclosures About Market Risk.
                            
                            57Item
      8.
                            Financial
      Statements and Supplementary Data.
                            
                            58Item
      9.
                            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.
                            
                            58Item
      9A.
                            Controls
      and Procedures.
                            
                            58Item
      9B.
                            Other
      Information.
                            
                            59PART IIIItem
      10.
                            Directors,
      Executive Officers and Corporate Governance.
                            
                            60Item
      11.
                            Executive
      Compensation.
                            
                            64Item
      12.
                            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
                            
                            70Item
      13.
                            Certain
      Relationships and Related Transactions, and Director
      Independence.
                            
                            72Item
      14.
                            Principal
      Accounting Fees and Services.
                            
                            73PART IVItem
      15.
                            Exhibits,
      Financial Statement Schedules.
                            
                            74





Special
Note Regarding Forward Looking Statements





This
Annual Report on Form 10-K and the documents incorporated by reference herein
include “forward-looking statements” within the meaning of Section 27A of the
United States Securities Act of 1933, as amended, or the Securities Act, and
Section 21E of the United States Securities Exchange Act of 1934, as amended, or
the Exchange Act. Any statements about our expectations, beliefs, plans,
objectives, assumptions or future events or performance are not historical facts
and may be forward-looking. These statements are often, but not always, made
through the use of words or phrases like “anticipate,” “estimate,” “plans,”
“projects,” “continuing,” “ongoing,” “target,” “expects,” “management believes,”
“we believe,” “we intend,” “we may,” “we will,” “we should,” “we seek,” “we
plan,” the negative of those terms, and similar words or phrases.  We base these
forward-looking statements on our expectations, assumptions, estimates and
projections about our business and the industry in which we operate as of the
date of this Form 10-K.  These forward-looking statements are subject
to a number of risks and uncertainties that cannot be predicted, quantified or
controlled and that could cause actual results to differ materially from those
set forth in, contemplated by, or underlying the forward-looking
statements.  Statements in this Form 10-K and in documents
incorporated herein describe factors, among others, that could contribute to or
cause these differences. Actual results may vary materially from those
anticipated, estimated, projected or expected should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
including, but not limited to, our critical accounting policies and statements
relating to, among others: plans to expand our exports outside of China; plans
to increase our production capacity and the anticipated dates that such
facilities may commence operations; our ability to obtain additional funding for
our continuing operations and to fund our expansion; our ability to meet our
financial projections for any financial year; our ability to retain our key
executives and to hire additional senior management; continued growth of the
Chinese economy and industries demanding our products; our ability to produce
and sell cold-rolled precision steel products at high margins; our ability to
secure at acceptable prices the raw materials we need to produce our products;
political changes in China that may impact our ability to produce and sell our
products in our target markets; general business conditions and competitive
factors, including pricing pressures and product development; and changes in our
relationships with customers and suppliers.





Because
the factors discussed in this Form 10-K or documents incorporated by reference
could cause actual results or outcomes to differ materially from those expressed
in any forward-looking statement made by us or on our behalf, you should not
place undue reliance on any such forward-looking statement. Further, any
forward-looking statement speaks only as of the date on which it is made, and we
undertake no obligation to update any forward-looking statement or statements to
reflect events or circumstances after the date on which such statement is made
or to reflect the occurrence of unanticipated events. New factors emerge from
time to time, and it is not possible for us to predict which will arise. In
addition, we cannot assess the impact of each factor on our business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statement.
Except as required by law, we undertake no obligation to publicly revise our
forward-looking statements to reflect events or circumstances that arise after
the date of this Form 10-K or the date of documents incorporated by reference
herein that include forward-looking statements.





Use
of Terms





Except as
otherwise indicated by the context, all references in this annual report to (i)
the “Company,” the “Group,” “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) “Chengtong” are to PSHL’s subsidiary Shanghai Chengtong Precision Strip
Company Limited, a PRC company; (iv) “Tuorong” are to PSHL’s subsidiary Shanghai
Tuorong Precision Strip Company Limited, a PRC company; (v) “Blessford
International” are to PSHL’s subsidiary Blessford International Limited, a BVI
company; (vi) “Shanghai Blessford” are to Blessford International’s subsidiary
Shanghai Blessford Alloy Company Limited, a PRC company; (vii) “Securities Act”
are to the Securities Act of 1933, as amended; (viii) “Exchange Act” are to 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) “China,” “Chinese” and “PRC” are to the
People’s Republic of China; and (xii) “BVI” are to the British Virgin
Islands.


2


PART
I




ITEM
      1.
            BUSINESS.





Overview





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




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




We
produce and sell precision ultra-thin and high strength cold-rolled steel
products with thicknesses ranging from 7.5 mm to 0.03 mm. We also provide heat
treatment and cutting and slitting of cold-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.




As of
June 30, 2009, we had an annual production capacity of approximately 120,000
tons.  Our first rolling mill, which has an operating capacity of 60,000 to
70,000 tons depending on the thickness of the steel processed, primarily
manufactures low carbon precision cold-rolled steel products.  Our
second cold-rolling mill, which has been operating since October 2006 with a
production design capacity of 100,000 tons, has achieved 60% of its design
capacity as of June 30, 2009. We have completed construction of our third cold
rolling mill and are currently in the stage of testing and commissioning. Each
mill takes approximately three to four years to reach its full operating
capacity. The second and third mills have similar capacities and will focus on
the production of high carbon, high strength cold-rolled steel products and the
production of more complex precision steel products that cannot be manufactured
in our first rolling mill. Due to reduced orders on hand, our two rolling mills
were running at approximately 70% utilization rate as of June 30,
2009.




During
the fiscal years ended June 30, 2009, 2008 and 2007, we earned net loss of
$408,338, and net income of $18,583,111 and $7,472,661,
respectively.  At June 30, 2009, we had total assets of $163,409,114.
Chengtong and Shanghai Blessford currently have approximately 331 employees,
including 45 senior management and technical staff members, and operate in
20,000 square meters of production facilities in Jiading District, Shanghai, the
PRC, on four acres of leased land.





Corporate
History and Structure





We are a
Delaware company. We became a public company in May 1997 through a reverse
merger with SSI Capital Corporation. At that time, we changed our name to
OraLabs Holding Corp. and our principal business was the production and sale of
consumer products relating to oral care and lip care and the distribution of
nutritional supplements through our wholly-owned subsidiary, OraLabs, Inc. In
December 2006, we merged with PSHL, a BVI company, which owns Chengtong. In
connection with that transaction, we subsequently redeemed all of the shares of
our outstanding common stock owned by our former President, Gary Schlatter, in
exchange for all of the issued shares of OraLabs, Inc. Thereafter, we renamed
ourselves China Precision Steel, Inc. to reflect our continuing
operations.


3




In the
year ended June 30, 2007, we added three indirect subsidiaries to our corporate
structure.  On April 9, 2007, we purchased Tuorong, a PRC company,
through PSHL’s indirectly owned PRC subsidiary, Chengtong.  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, a BVI company, 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.





The
following chart reflects our organizational structure as of the date of this
report:











Our
business is conducted principally through Chengtong and through Shanghai
Blessford in Shanghai, PRC. Both Chengtong and Shanghai Blessford are Wholly
Foreign Owned Enterprises, or WFOEs, under Chinese law.





Our corporate headquarters are located
at 18th Floor, Teda Building, 87 Wing Lok Street, Sheung Wan, Hong Kong, and our
telephone number is (011) 852-2543-2290. Although we maintain a website atwww.chinaprecisionsteelinc.com,we do not intend that information
available on our website be incorporated into this filing.





Growth
Strategy




We aim to
maintain our position as the leading supplier of high strength and ultra-thin
cold-rolled premium specialty steel products in China, while building brand
awareness and demand for our products internationally. We have identified six
factors critical to the achievement of this goal:


4





·
            Focus on
      Rapidly Growing Niche Segment. We will continue to focus on niche
      markets. According to publicly available information, the demand for
      precision cold-rolled steel products has been growing at a rate of 20%
      annually over the past five years in China. Export demand, coupled with
      domestic Chinese demand for automobile parts and components, steel
      roofing, plane friction discs, appliances, food packaging materials, saw
      blades, textile needles and microelectronics, is expected to continue,
      thereby increasing demand for high precision steel products. Moreover, new
      applications of steel products are continually being developed. Our
      research and development efforts are focused on advancing processing
      techniques and production of high strength and ultra-thin, cold-rolled
      precision steel products to enhance our product offerings and expand our
      market share.





·
            Leverage
      Our Strengths to Compete Effectively with Imports. Specialty
      precision steel is a relatively new industry in China with the majority of
      precision steel imported from Japan, Korea, the European Union and the
      United States. As a result, the average quality and standards of China’s
      high precision steel industry lags behind the international norm. We
      believe that our lower cost base allows us to sell our products at an
      average of 5 to 10% below our international competitors and our
      manufacturing in China gives us an advantage of shorter delivery time to
      users in China. We will leverage our lower operating cost base, our
      state-of-the-art patented manufacturing system and process, and our
      strategic relationships with our major suppliers to produce cold-rolled
      steel products with quality similar to international standards at lower
      cost than international
competitors.





·
            Focus on
      High Margin Products. We will continue to manufacture products with
      high sustainable margins. We increased our gross margin from 5.8% in 2004
      to 10.1% in 2009. The average gross margin of our high carbon steel
      products ranges between 20 and 40% while the same for our low carbon steel
      products ranges between 10 and 30%. We will provide additional services
      such as heat treatment and cutting and slitting to further enhance our
      margins. We believe these high gross margins are sustainable despite
      fluctuations in steel prices because of the specialty of the end product
      which allows price increases of raw material to be substantially passed
      directly to our customers.





·
            Expand
      Manufacturing Capacity. We will increase our production capacity by
      commencing construction of a third cold-rolling mill with a design
      capacity of 100,000 tons, based on the current range of specifications we
      produce, in calendar year 2010. This will increase our total production
      capacity to a total of approximately 260,000 tons in four years from now
      when all three mills are operating at full
  capacity.





·
            Compete
      Internationally. We intend to expand our exports to compete in the
      international marketplace. We believe that at present we are the only
      non-Japanese company able to compete in the global marketplace with low
      carbon precision cold-rolled steel products in the thickness range between
      0.1 to 0.2 mm used for steel roofing. In addition, we are not aware of any
      other company that currently manufactures high strength high carbon
      cold-rolled steel with a width of or exceeding 1400mm. These products
      provide us with a unique opportunity to compete in the global
      marketplace.





·
            Retain Key
      Personnel. The Chinese market is highly competitive for experienced
      and talented executives and we will strive to retain our key executives,
      including our Chairman, Wo Hing Li, and the General Manager, Hai Sheng
      Chen. Their experience in strategic expansions and in steel manufacturing,
      respectively, is critical to our continued growth and
    success.




Overview
of the Chinese Steel Industry




The
following industry information has been obtained from various publicly available
sources. We believe it is the most current information available on this
subject, and that it is widely available and reliable.




According
to The World Steel Association, China is the largest steel producing country,
producing over one-third of the world’s steel. In 2008, China produced 500
million tons of steel, up 2.2% from 2007. The China Iron and Steel Institute
estimates that China’s steel demand for 2009 will be between 490 million tons to
520 million tons and demand will exceed 600 million tons by 2011, while global
steel demand is projected to be 1.2 billion tons and reach over 1.45 billion
tons, respectively. China has increased its
steel exports from 7 million tons in 2003 to 60.5 million tons in 2008, making
it the number one ranked steel exporter globally. However, while China is a net
exporter of crude steel, it is a net importer of higher value precision cold
rolled steel products such as those produced by the Company.


5




Steel
products can be categorized as low-end (long products such as pipes, tubes,
wires and rods) and high end (flat products such as hot-rolled steel or
cold-rolled steel strips). Based upon information we obtained from the China
Metallurgical Industry Planning and Research Institute, or CMI, we believe that
approximately 65% of China’s steel production are low-end long products and
approximately 35% are high-end high value cold-rolled steel strips. The Company
operates in the high-end category of this market with its niche precision steel
processing and produces and sells high precision cold-rolled steel
products.





The
Chinese government has historically provided a subsidy by means of a value added
tax, or VAT, rebate to exporters of steel products. This rebate was reduced in
April 2007 in response to international pressure on China to curb its exports.
The subsidy has been eliminated for 83 products, including hot-rolled, thin
plate, steel wire, section, bar and H-beam, despite which, a 5% tax rebate
currently applies to the high value-add cold-rolled steel products the Company
produces.




We expect
that the Chinese government will continue to impose additional controls on
domestic steel producers in order to reduce pollution and further restrict
exports. For more information on Chinese regulations, see “Regulation”
below.





Products




Cold-rolled
specialty precision steel is a relatively new industry in China. Manufacturers
of products that use specialty precision steel products have traditionally
imported precision steel products from Japan, Korea, the European Union and the
United States. We believe that generally, to date, the average quality and
standards of China’s high precision steel industry lag behind the international
norm. Nonetheless, during the last five years, we believe that we have begun to
develop and establish a nationally recognized brand in China.  Despite
having exported 21,009 tons of precision cold-rolled steel products to Thailand,
Nigeria and Ethiopia during the year ended June 30, 2009, we are not yet an
internationally widely known brand for cold-rolled precision steel
products.




For the
year ended June 30, 2009, we sold 84,001 tons of high precision
steel products with over one hundred specifications. We currently produce high
strength and ultra-thin cold-rolled precision steel coils and sheets with
reduced thickness ranging from 7.5 mm to 0.03 mm. We also provide heat treatment
and cutting and slitting of steel strips not exceeding 7.5 mm thickness. Our
precision steel products and services can be categorized into four major
categories:





Categories
              
              Uses
              
              Thickness1.
      Low carbon steel
                (cold-rolled,
      hard-rolled)
              
              Steel
      roofing, food packaging, dry batteries, electronic devices, kitchen
      tools
              
              0.03-6.0mm2.
      High carbon steel
                (cold-rolled,
      hot-rolled)
              
              Automobile
      parts and components, grinding pieces, saw blades, weaving
      needles
              
              0.5-7.5mm3.
      Steel processing
              
              Tailor
      made cold rolled steel products according to customer
      specifications
              
              0.03-7.5mm4.
      Steel services
              
              Heat
      treatment of hot-rolled steel coils; cutting and slitting





In 2006,
we made a strategic decision to switch our product mix from a concentration in
low carbon cold-rolled steel products with comparatively lower margins to a
combination of low carbon and higher end, higher margin, high-carbon cold-rolled
steel products as a result of continuous research and development and
accumulated experience. We produce our high strength and ultra-thin cold-rolled
precision steel strips using a process that utilizes our proprietary know-how
and certain patented technology. The finished products have a reduced thickness
ranging from 7.5 mm to 0.03 mm, and a width between 1000 mm to 1400 mm. We also
provide heat treatment and cutting and slitting services for high carbon
hot-rolled steel coils with thicknesses not exceeding 7.5 mm. To the best of our
knowledge, we are not aware of any other company in China that currently
manufactures high carbon high strength cold-rolled steel with a width of or
exceeding 1400 mm.


6




Cold-rolled
steel products are manufactured from hot-rolled de-scaled (pickled) steel coils
which are processed by cold reduction through a cold-rolling mill to customer
specified thicknesses. The process does not involve heating and the primary
feature of cold reduction is to reduce the thickness of the steel coils.
However, because the cold reduction operation induces very high strains
(work hardening) into the steel sheet, the precision steel sheet not only
becomes thinner, but also becomes much harder, less ductile and very
difficult to form. In order to make the cold-reduced steel products soft and
formable, they are annealed, or heated to high temperatures. Cold-rolled sheet
products are used in a wide variety of end applications, such as appliances
(refrigerators, washers, dryers, and other small appliances), automobiles
(exposed as well as unexposed parts), steel roofing, food packaging materials,
electric motors, microelectronics and food packaging.




Hard-rolled
steel represents steel products manufactured from cold reduction to the desired
thinness without annealing. The product is very stiff and is intended for flat
work where deformation is very minimal. This type of hard-rolled steel is most
often applied to further processing for applications such as continuous
galvanizing.




Hard-rolled
or cold-rolled steel with low carbon has a carbon content of less than 0.1%.
 It is a very versatile and useful material, easily machined and worked
into complex shapes, is low in cost and has good mechanical properties.
Hard-rolled or cold-rolled steel with medium carbon has a carbon content of
0.3%. It is a typical engineered steel product. Hard-rolled or cold-rolled steel
with high carbon has a carbon content of 0.8% or more. This precision steel
product is very hard and quite brittle and is much less ductile than low carbon
steel. High carbon steel has good wear resistance and is used for railways as
well as for cutting tools. Acid wash steel is also known as acid pickling and
refers to the process of using liquid acids, for example hydrochloric acid, to
remove rust or oxides from the surface of steel. Removing rust prepares the
surface for a protective coating.




Products
with greater width have more applications and intended uses. Width is an
important differentiating factor because certain end products, such as washers
and automobiles, require materials with a certain minimum width. Although
materials with smaller width could also be used for these applications through
jointing, this increases production costs. As a result, wider products are more
flexible and cost efficient which further reduces the end user’s overall
cost.





Production
Facilities




Cold
Rolling Mills





As of
June 30, 2009, we had an annual production design capacity of approximately
120,000 tons, comprised of:





·
            one
      1100 mm 12-high cold rolling mill, with an operating capacity of 60,000
      tons, and





·
            one
      1400 mm 12-high cold rolling mill, with an operation capacity of 100,000
      tons and a 70% utilization rate at June 30,
  2009.





Construction
of a third mill, a 1450mm 4-high cold rolling mill, is currently in the testing
stage and expected to commence production in calendar year 2010. This mill will
have a design capacity of 100,000 tons, based on our current product
specifications, increasing our total production design capacity to approximately
260,000 tons in four years. The production facilities for the second and third
mills were completed in August 2006 and added approximately 10,000 square meters
of production area. These production facilities will primarily focus on high
carbon, high strength cold-rolled steel products and more complex precision
steel products that cannot be manufactured in our first rolling mill, which will
primarily dedicate to low carbon cold-rolled steel products.


7




Each mill
takes approximately three to four years to reach full operating capacity due to
the break-in and tuning period required for the equipment. Operating capacity,
or actual tonnage, may differ from design capacity due to modifications required
to accommodate different production processes, as well as product mix which
influences processing time. For example, the design capacity of the 1100 mm
rolling mill is 100,000 tons. However, it is now operating at its full
production capacity of 60,000 tons since it is manufacturing products with a
much reduced thickness than those contemplated by the original design. The 1400
mm rolling mill, which began production in October 2006, was operating at 60% of
its 100,000 ton design capacity at June 30, 2009 and is expected to reach its
full operating capacity in calendar year 2011.




Hydrogen
Annealing Furnace





Our
state-of-the-art annealing furnaces automatically control the complete annealing
process. The furnace uses pure hydrogen as protective gas to make the steel
surface clean and smooth with no carbon-off post-annealing. The furnace also
includes an oxygen station. In addition to the cold-rolling mills and annealing
furnaces, we also have a 1250 mm cleaning line, a 1000 mm cutting and slitting
line and a 1200 mm tension leveller.





Raw
Materials and Suppliers




We are
not dependent on any one single supplier for supply of hot-rolled coils. Several
Chinese steelmakers supply hot-rolled coils to us. Our largest supplier for the
year ended June 30, 2009 was BaoSteel Steel Products Trading Co.
Ltd..





Below is
a list of our principal suppliers during the fiscal years ended June 30, 2009,
2008 and 2007:





2009
                      
                      
                      2008
                      
                      
                      2007Principal Suppliers
                      
                      $
                      
                      
                      % to
                        consumption
                      
                      
                      $
                      
                      
                      % to
                        consumption
                      
                      
                      $
                      
                      
                      % to
                        consumptionBaoSteel
      Steel Products Trading Co. Ltd
                      
                      
                      15,805,702
                      
                      
                      
                      21
                      
                      
                      
                      16,439,918
                      
                      
                      
                      30
                      
                      
                      
                      4,633,054
                      
                      
                      
                      14Hangzhou
      Relian Company Limited
                      
                      
                      -
                      *
                      
                      
                      -
                      *
                      
                      
                      11,050,813
                      
                      
                      
                      20
                      
                      
                      
                      8,598,117
                      
                      
                      
                      25Shanghai
      Pinyun Steel Co., Limited
                      
                      
                      9,349,480
                      
                      
                      
                      13
                      
                      
                      
                      10,025,183
                      
                      
                      
                      18
                      
                      
                      
                      6,355,445
                      
                      
                      
                      19Shanghai
      Changshuo Steel Company Ltd
                      
                      
                      -
                      *
                      
                      
                      -
                      *
                      
                      
                      -
                      *
                      
                      
                      -
                      *
                      
                      
                      3,408,301
                      
                      
                      
                      10




*
Not major suppliers for the relevant years





Based
upon information obtained by us from the CMI, during our financial year ended
June 30, 2009 the price of steel generally decreased. However, the cost of
imported iron-ore increased substantially. This apparent anomaly was due to
excess supplies arising from excess capacities of the steel producers and, as a
result of the downwards pressure on the price of steel, the cost of steel rolls
have generally decreased within the relevant year. The CMI website may be viewed
in English and the website URL is www.metal.net.cn.
Although selling prices generally decreased, as of June 30, 2009, there is a
Chinese export tax of 5% on exports of certain steel products, including the
precision cold-rolled steel products that we produce. This has increased the
competitiveness of our products in the international marketplace.




The
prices of steel coils are very competitive, very volatile and dependent on
supply and demand. We have made bulk purchases in the past after taking into
account customers’ orders on hand at the time when steel supply was tight and
prices were high, in order to secure sufficient supply of raw material for
necessary production. As steel rolls have an extremely long shelf-life,
obsolescence is not a major concern. However, due to the decreases in steel
prices during the year ended June 30, 2009 and therefore selling prices of our
products, the raw materials we had built up some time ago in the high demand
season consequentially has an adverse impact on our margins.


8





Customers





All of
our production is based on confirmed sales orders. Generally, for new customers,
an initial deposit (approximately 30% of the aggregate contracted sales amount)
is pre-paid when the contract is signed. We have approximately 350 customers
with domestic customers primarily located in East China and overseas sales
reaching Thailand, Nigeria and Ethiopia. Our location in Shanghai with a well
developed transport network is particularly advantageous for meeting with
customers from inside and outside of China for product design discussions and
customer service. In addition, the delivery time is shorter and our products
have lower associated cost than international competitors. We intend to increase
our customer base by further expanding into North China, where the automotive
industries are concentrated, and globally.




Below is
a list of our principal customers during the fiscal years ended June 30, 2009,
2008 and 2007:





2009
                          
                          
                          2008
                          
                          
                          2007Customers
                          
                          $
                          
                          
                          % to
                            sales
                          
                          
                          $
                          
                          
                          % to
                            sales
                          
                          
                          $
                          
                          
                          % to
                            salesSalzgitter
      Mannesmann International GMBH
                          
                          
                          14,275,799
                          
                          
                          
                          19
                          %Shanghai
      Changshuo Steel Company, Ltd
                          
                          
                          10,999,692
                          
                          
                          
                          14
                          %
                          
                          
                          18,513,819
                          
                          
                          
                          21
                          
                          
                          
                          5,428,110
                          
                          
                          
                          10Shanghai
      Bayou Industrial Co. Ltd
                          
                          
                          —
                          *
                          
                          
                          —
                          *
                          
                          
                          10,494,752
                          
                          
                          
                          12
                          
                          
                          
                          —
                          *
                          
                          
                          —
                          *Shanghai
      Shengdejia Metal Co. Ltd
                          
                          
                          —
                          *
                          
                          
                          —
                          *
                          
                          
                          10,414,545
                          
                          
                          
                          12
                          
                          
                          
                          —
                          *
                          
                          
                          —
                          *Shanghai
      Ruixuefeng Metals Co., Limited
                          
                          
                          —
                          *
                          
                          
                          —
                          *
                          
                          
                          —
                          *
                          
                          
                          —
                          *
                          
                          
                          12,192,219
                          
                          
                          
                          23




*
Not major customers for the relevant years





Sales
and Marketing




Our high
precision steel products are sold both to components manufactures and directly
to the end-users in various parts of China and international marketplace such as
Thailand, Nigeria and Ethiopia. Due to the nature of the industry and our
ability to process quality high end cold-rolled steel, we do very little formal
marketing. The majority of new orders come from current customers reducing
imports and new customers who contact us directly or through trading agents or
current customers.




Competition





Our
business is concentrated in the niche low carbon ultra-thin cold-rolled
precision steel and high-carbon, high strength cold-rolled steel processing and
is not in direct competition with large Chinese steelmakers such as Baosteel
Group Corporation and Magang Group. China’s large steelmakers concentrate on the
production of crude steel and hot-rolled steel from iron ore imported from
Brazil and Australia. Hot-rolled steel coils produced by these steelmakers are
then supplied as raw materials to high precision steel manufacturers, such as
us, for cold reduction processing to the desired thickness and applications.
Cold-rolled steel products are then sold to manufacturers and other customers in
industries such as automobile and food packaging.


9




Our
business is becoming increasingly competitive and capital intensive, and
competition comes primarily from importers. Some of our competitors have
financial resources, staff and facilities substantially greater than ours and we
may be at a competitive disadvantage compared with larger steel companies. Our
domestic competition in China’s ultra-thin cold-rolled precision steel segment
mainly comes from Qinghuangdao Longteng Precision Strip Co., Limited, or
Longteng. However, we understand that Longteng’s production capabilities are for
cold-rolled steel with widths of approximately 400 mm, whereas our cold-rolled
steel mills have a width of 1000 mm to 1400 mm (or up to 1450 mm with the
planned addition of the third cold-rolling mill). Consequently, Longteng’s
products are sold in a different market segment than ours and are not considered
to be direct competition. In the high carbon cold-rolled steel products segment,
we mainly compete with imports from Shinwha Steel Co., Ltd. in Korea. Further,
there are potential competitors who are currently constructing mills that are
expected to produce precision and specialty steel products both in China and
internationally.




Although
there is intense competition in China’s steel industry, this affects mostly
low-end or long steel products. We are currently the only supplier of high
carbon, high strength cold-rolled steel products with a thickness up to 6.0 mm
in China. We are not aware of any other Chinese manufacturer processing high
carbon cold-rolled steel products with this specification. In addition, the low
carbon precision cold-rolled steel products in the thickness range between 0.1
to 0.2 mm are traditionally dominated by Japanese manufacturers with higher
production costs. We started exporting low carbon products in this range during
fiscal 2007. We are not aware of any other manufacturer currently competing in
this specific low carbon segment in the global market that is from a
non-Japanese background.





Research
and Development





As of
June 30, 2009, we had three experienced engineers and technicians in the
Research and Development Department. The Research and Development Department
focuses on new product development, and the advancement and improvement in
quality and manufacturing technique of ultra-thin and high-strength cold-rolled
steel strip. In addition to the traditional research and development activities,
our engineers frequently interact with customers to detect changes in “patterns”
and customers’ specifications arising from constantly changing industry
needs.




Further,
we are working on research and development projects involving coiled springs for
automotive seat belts and steel for igniters in automotive air bag inflation
devices. The amount spent on research and development activities each year is
approximately 1% of our revenue for such year. We have budgeted 1% of revenues
to be spent for research and development activities for fiscal
2010.





Quality
Control




Following
the accreditation of the International Organization for Standardization, or ISO,
on October 8, 2004, we implemented the Quality Handbook in October 2004. This
Quality Handbook was prepared on the basis and standards of the ISO/TS16949
specifications, which ISO Technical Specifications are compatible with existing
American (QS-9000), German (VDA6.1), French (EAQF) and Italian (AVSQ) automotive
quality systems standards within the global automotive industry. Together with
ISO 9001:2000, ISO/TS 16949 specifies the quality system requirements for the
design, development, production, installation and servicing of automotive
related products.





Intellectual
Property




On
December 8, 2004, the State Intellectual Property Office in China granted a
ten-year patent right to the “Environment-Conscious Mill Bearing with Inner
Circulation Lubricant” to Chengtong and Shanghai Te’an-Yikai Bearing Co.,
Limited. The patented bearing is installed in our existing cold-roll mill and,
together with our internal know-how complementary to the patented bearing, we
believe we address a number of issues associated with the bearing lubrication in
cold-rolling and ensure smooth and effective operation of the cold-roll mill.
There is no direct or indirect affiliation between us and Shanghai Te’an-Yikai
Bearing Co, Limited. We and Shanghai Te’an-Yikai Bearing Co., Limited jointly
developed the environment-conscious mill bearing with inner circular
lubrication. Shanghai Te’an-Yikai Bearing Co., Limited retains the proprietary
right to the technology while we have the exclusive right to the application of
the technology.


10




We have
elected not to register any other patents and internally developed know-how
because of the uncertainty over the ability to enforce intellectual property
rights in China. We also protect our internally developed know-how and
production process (such as system pressure, cleanliness of the lubrication,
temperature control, appropriate allocation of oil supply and retrieving which
are vital in providing a radical solution to the difficulties associated with
lubricating rolling mills’ backing bearing) by requiring all key personnel
(production engineers and management staff members) to sign non-disclosure and
confidentiality contracts.





There can
be no assurance that third parties will not assert infringement or other claims
against us with respect to any of our existing or future products or processes.
There can be no assurance that licenses would be available if any of our
technology was successfully challenged by a third party, or if it became
desirable to use any third-party technology to enhance our products. Litigation
to protect our proprietary information or to determine the validity of any
third-party claims could result in a significant expense and divert the efforts
of our technical and management personnel, whether or not such litigation is
determined in our favor.





While we
have no knowledge that we are infringing upon the proprietary rights of any
third party, there can be no assurance that such claims will not be asserted in
the future with respect to existing or future products or processes. Any such
assertion by a third party could require us to pay royalties, to participate in
costly litigation and defend licensees in any such suit pursuant to
indemnification agreements, or to refrain from selling an alleged infringing
product.





Employees




As of
June 30, 2009, we employed a total of 331 full-time employees. The following
table sets forth the number of our employees by function.




Function
                                
                                Number of EmployeesSenior
      Management
                                
                                10Equipment
      & Maintenance
                                
                                46Production
                                
                                184Sales
      and Marketing
                                
                                9Logistics
                                
                                38Quality
      Control
                                
                                9Research
      & Development
                                
                                3Human
      Resource & Administration
                                
                                26Accounting
                                
                                7Total
                                
                                331





Each
employee must enter into multiple employment contracts, including a
non-competition agreement, which are then filed with the municipal government.
All employees receive a base monthly salary. Management are entitled to a
year-end bonus up to 100% of their annual salary based upon our overall
performance results, seniority and individual performance and contribution to
the Company. Production employees are entitled to a monthly bonus calculated on
the basis of the quality of the products produced, and their respective
contribution to volume, safe production, correct use of equipment and energy
saving.  Our production employees are not subject to collective
bargaining agreements.





Our
employees in China participate in a state pension plan mandated by Chinese
municipal and provincial governments. Benefits include social security, pension
benefits, and medical insurance. These benefits are paid in full by us and
equate to approximately 40% of our annual salary expenditures.  We
believe that we are in material compliance with the relevant PRC
laws.





We
maintain a satisfactory working relationship with our employees, and we have not
experienced any significant labor disputes or any difficulty in recruiting staff
for our operations.


11




Regulation




The
Chinese legal system is based upon a civil law system of written statutes.
Unlike the common law system in the United States, prior court decisions may be
cited for reference but are not binding on subsequent cases and have limited
value as precedent. Since 1979, the PRC legislative bodies have promulgated laws
and regulations dealing with economic matters such as foreign investment,
corporate organization and governance, commerce, taxation and trade. We are
subject to numerous Chinese provincial and local laws and regulations, which may
be changed from time to time in response to economic or political conditions and
have a significant impact upon overall operations. Changes in these regulations
could require us to expend significant resources to comply with new laws or
regulations or changes to current requirements and could have a material adverse
effect on our operations and financial results.




The China
Central Government has promulgated a series of ongoing macro-control policies
which focus on the improvement of the country’s investment structure, with the
goal to secure a fast and sound development of the national economy. Excessive
investment in certain sectors is placed under stringent control while incentives
are given to other sectors.




Environmental
Laws





We are
currently subject to numerous Chinese provincial and local laws and regulations
relating to the protection of the environment. These laws continue to evolve and
are becoming increasingly stringent. The ultimate impact of complying with such
laws and regulations is not always clearly known or determinable because
regulations under some of these laws have not yet been promulgated or are
undergoing revision.




The State
Environmental Protection Administration Bureau is responsible for the
supervision of environmental protection, the implementation of national
standards for environmental quality and discharge of pollutants, and supervision
of the environmental management system in China. Environmental protection
bureaus at the county level or above are responsible for environmental
protection within their jurisdictions. The laws and regulations on environmental
protection require each company to prepare environmental impact statements for a
construction project to the environmental protection bureaus at the county
level. These must be prepared prior to when the construction, expansion or
modification commences.




The
Environmental Protection Law requires production facilities that may cause
pollution or produce other toxic materials to take steps to protect the
environment and establish an environmental protection and management system. The
system includes the adoption of effective measures to prevent and control
exhaust gas, sewage, waste residues, dust and other waste materials. Entities
discharging pollutants must register with the relevant environmental protection
authorities.




Penalties
for breaching the Environmental Protection Law include a warning, payment of a
penalty calculated on the damage incurred, or payment of a fine. When an entity
has failed to adopt preventive measures or control facilities that meet the
requirements of environmental protection standards, it may be required to
suspend its production or operations and pay a fine. Material violations of
environmental laws and regulations causing property damage or casualties may
also be subject to criminal liabilities.




We
believe that our current production and operating activities are in compliance
with the environmental protection requirements. We are not subject to any
admonition, penalty, investigations or inquiries imposed by the environmental
regulators, nor are we subject to any claims or legal proceedings to which we
are named as defendant for violation of any environmental laws and regulations.
To the best of our knowledge, our cold-rolled mills produce no impermissible
emissions. Our pickling process is outsourced to a local company which is
wholly-responsible for any failure to comply with applicable law. In addition,
our production facilities in Shanghai are on land formerly used for rice
farming. We have no reason to believe that such land has been subjected to any
prior contamination.


12





Patent
Protection





The PRC’s
intellectual property protection regime is consistent with those of other modern
industrialized countries, although enforcement of rights may prove difficult and
complex. China has domestic laws for the protection of rights in copyrights,
patents, trademarks and trade secrets. The PRC is also a signatory to most of
the world’s major intellectual property conventions, including:





·
            Convention
      establishing the World Intellectual Property Organization (WIPO
      Convention) (June 4, 1980);





·
            Paris
      Convention for the Protection of Industrial Property (March 19,
      1985);





·
            Patent
      Cooperation Treaty (January 1, 1994);
and





·
            The
      Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs)
      (November 11, 2001).





Patents
are governed by the China Patent Law and its Implementing Regulations, each of
which went into effect in 1985 and have been amended subsequently. China is a
signatory to the Paris Convention for the Protection of Industrial Property, in
accordance with which any person who has duly filed an application for a patent
in one signatory country shall enjoy, for the purposes of filing in the other
countries, a right of priority during the period fixed in the convention (12
months for inventions and utility models, and 6 months for industrial
designs).





The
Patent Law covers three kinds of patents, i.e. patents for inventions, utility
models and designs. The Chinese patent system adopts the principle of first to
file. This means that, where more than one person files a patent application for
the same invention, a patent can only be granted to the person who first filed
the application. Consistent with international practice, the PRC only allows the
patenting of inventions or utility models that possess the characteristics of
novelty, inventiveness and practical applicability. For a design to be
patentable, it should not be identical with or similar to any design which,
before the date of filing, has been publicly disclosed in publications in the
country or abroad or has been publicly used in the country and should not be in
conflict with any prior right of another.





PRC law
provides that anyone wishing to exploit the patent of another must conclude a
written licensing contract with the patent holder and pay the patent holder a
fee. One rather broad exception to this, however, is that where a party
possesses the means to exploit a patent but cannot obtain a license from the
patent holder on reasonable terms and in a reasonable period of time, the PRC
State Intellectual Property Office, or SIPO, is authorized to grant a compulsory
license. A compulsory license can also be granted where a national emergency or
any extraordinary state of affairs occurs or where the public interest so
requires. SIPO, however, has not granted any compulsory license up to now. The
patent holder may appeal such decision within three months from receiving
notification by filing a suit in the People’s Court.




PRC law
defines patent infringement as the exploitation of a patent without the
authorization of the patent holder. A patent holder who believes his patent is
being infringed may file a civil suit or file a complaint with a PRC local
Intellectual Property Administrative Authority, which may order the infringer to
stop the infringing acts. A preliminary injunction may be issued by the People’s
Court upon the patentee’s or the interested parties’ request before instituting
any legal proceedings or during the proceedings. Evidence preservation and
property preservation measures are also available both before and during the
litigation. Damages in the case of patent infringement is calculated as either
the loss suffered by the patent holder arising from the infringement or the
benefit gained by the infringer from the infringement. If it is difficult to
ascertain damages in this manner, damages may be reasonably determined in an
amount in excess of the license fee under a contractual license. The infringing
party may be also fined by Administration of Patent Management in an amount of
up to three times the unlawful income earned by such infringing party. If there
is no unlawful income so earned, the infringing party may be fined in an amount
of up to RMB500,000, or approximately $62,500.


13





Currency





The value
of the Renminbi, the main currency used in China, fluctuates and is affected by,
among other things, changes in China’s political and economic conditions. The
conversion of Renminbi into foreign currencies such as the U.S. dollar has been
generally based on rates set by the People’s Bank of China, which are set daily
based on the previous day’s interbank foreign exchange market rates and current
exchange rates on the world financial markets. The official exchange rate had
remained stable over the past several years. However, China has adopted a
floating rate with respect to the Renminbi, with a 0.3% fluctuation and is
expected to appreciate against other currencies, including the U.S.
dollar.




In
addition, the Renminbi is not a freely convertible currency at this time. Except
for export sales revenues in United States dollars, we receive all of our local
sales revenues in Renminbi. Payments of dividends and other expenditures in
foreign currencies outside China by us will require the conversion of Renminbi
into other currencies. We are able to make payments (including dividends) in
foreign currencies upon presentation of business documents through banks in
China authorized to conduct foreign currency transactions without the prior
approval from the PRC State Administration of Foreign Exchange, or SAFE. The
Chinese government has indicated that it will consider allowing the free
conversion of Renminbi into other currencies. However, there is no assurance
that it will not impose foreign exchange controls on normal transactions in the
future.





Labor
Laws





The new
Labor Contract Law took effect January 1, 2008 and governs standard terms and
conditions for employment, including termination and lay-off rights, contract
requirements, compensation levels and consultation with labor unions, among
other topics. In addition, the law limits non-competition agreements with senior
management and other employees with knowledge of trade secrets to two years and
imposes restrictions or geographical limits





ITEM
      1A.
            RISK
      FACTORS.





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





RISKS
RELATED TO OUR BUSINESS





The
global economic crisis could further impair the demand for our products and
affecting the overall availability and cost of external financing for our
operations.





The
continuation or intensification of the global economic crisis and turmoil in the
global financial markets may adversely impact our business, the businesses of
our customers from whom we generate revenues and our potential sources of
capital financing.  The global economic crisis harmed most industries and
has been particularly detrimental to the real estate, construction, automobile
and consumer product industry.  Since our steel products serve as key
components in construction and building materials, automobiles and household
products, our sales and business operations are dependent on the financial
health of the these industries and could suffer if our customers
experience, or continue to experience, a downturn in their business.  In
addition, the lack of availability of credit could lead to a further weakening
of the Chinese and global economies and make capital financing of our operations
more expensive for us or impossible altogether.  Presently, it is unclear
whether and to what extent the economic stimulus measures and other actions
taken or contemplated by the Chinese government and other governments throughout
the world will mitigate the effects of the crisis on the industries that affect
our business.  These conditions have not presently impaired our ability to
access credit markets and finance our operations.  However, the impact of
the current crisis on our ability to obtain capital financing in the future, and
the cost and terms of same, is unclear.  Furthermore, deteriorating
economic conditions including business layoffs, downsizing, industry slowdowns
and other similar factors that affect our customers could have further negative
consequences for the real estate, construction, automobile and consumer product
industry and result in lower sales, price reductions in our products and
declining profit margins. The economic situation also could harm our current or
future lenders or customers, causing them to fail to meet their obligations to
us. No assurances can be given that the effects of the current crisis will not
damage on our business, financial condition and results of
operations.


14





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




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





The
risk that we could suffer unrecoverable losses on our accounts receivable may be
increased by our practice of offering extended customer credit and payment terms
to our customers, together with the current negative global economic
conditions.  Any such unrecoverable losses could adversely affect our
financial results.




We
operate our business in China. Credit periods vary substantially in China across
industries, segments, types and size of companies.  We operate in a
niche of the China steel industry, specifically in the manufacture and sale of
high precision cold-rolled steel products and in the provision of heat treatment
and cutting of medium and high carbon hot-rolled steel strips.  Our
customers are also niche operators, including manufacturers of automobile parts
and components, steel roofing, plane friction discs, appliances, food packaging
materials, saw blades, textile needles and microelectronics.  Because
of the nature of our business, our business cycle and that of our customers is
relatively long.  As a result, the credit and payment terms that we
extend to our customers in the normal course of business are also relatively
long. We offer credit to our customers for periods of 60 days, 90 days, 120 days
and 180 days, with the longer credit terms generally offered to longstanding
recurring customers with good payment histories and sizable operations. Our
management determines the collectability of outstanding accounts by maintaining
quarterly communication with such customers and obtaining confirmation of their
intent and ability to fulfill their obligations to the Company. In making this
determination, our management also considers past collection experience, our
relationship with customers and the impact of current economic conditions on our
industry and market and the financial condition of the customer, to the extend
discoverable.  Until June 30, 2009, we did not have a policy of
writing off or reserving a specific dollar amount or percentage of accounts
receivable based on aging of such accounts.




The
following table reflects the aging of our accounts receivable as of June 30,
2009 and 2008, after taking into consideration credit periods offered to our
customers.  As of June 30, 2009, apart from one major customer who
accounted for 38% of accounts receivable which were past due over 180 days, the
remaining 62% of our accounts receivable over 180 days is spread among
approximately 27 different customers.





June 30,
2009




US$
                
                Total
                
                
                Current
                
                
                1 to 30
                  days
                
                
                31 to
                  90 days
                
                
                91 to 180
                  days
                
                
                181 to 360
                  days
                
                
                over
                  1 yearTOTAL
                
                
                25,970,961
                
                
                
                14,497,258
                
                
                
                405,769
                
                
                
                1,639,027
                
                
                
                7,061,774
                
                
                
                2,168,481
                
                
                
                198,652%
                
                
                100
                
                
                
                56
                
                
                
                2
                
                
                
                6
                
                
                
                27
                
                
                
                8
                
                
                
                1


15





June 30,
2008




US$
                
                Total
                
                
                Current
                
                
                1 to 30
                  days
                
                
                31 to
                  90 days
                
                
                91 to 180
                  days
                
                
                181 to 360
                  days
                
                
                over
                  1 yearTOTAL
                
                
                34,816,553
                
                
                
                32,711,335
                
                
                
                313,936
                
                
                
                1,414,991
                
                
                
                157,578
                
                
                
                111,863
                
                
                
                106,850%
                
                
                100
                
                
                
                94
                
                
                
                1
                
                
                
                4
                
                
                <1
                
                
                <1
                
                
                <1





We have
not previously determined it appropriate or necessary to write-off or
specifically reserve for any aged accounts receivable based on a determination
of uncollectability, other than a write-off of accounts receivable of $3,835,124
during the fiscal year ended June 30, 2009.  This charge reflects a
write-off of accounts receivable due to a dispute between the Company and one of
our customers regarding a special stainless steel product processed by the
Company and delivered to the customer during the third and fourth quarters of
the year ended June 30, 2008. Revenues for these products were initially
recognized as services had been rendered and the goods had been delivered, and
collectability was reasonably assured as the goods were delivered in accordance
to the terms of the contract and management had no reason to believe that the
customer would object to the goods and services provided.  However, in
the months following such delivery, a dispute arose during the use of such
products by the customer, which was followed by discussions between us and the
customer regarding the technical aspects of the products and the possibility of
reprocessing the products. After a few rounds of negotiation with the customer
regarding the products and payment, our management determined as of June 30,
2009, that this account receivable is uncollectible. The Company does not have
any other accounts receivable related to this product.





As of
June 30, 2009, all our customers confirmed that they were committed to
fulfilling their obligations to the Company and we were aware of no other basis
for reclassifying any such accounts as uncollectable.  As a result, we
determined that an allowance for doubtful accounts of $830,127 as of June
30, 2009, was appropriate, as compared to $1,033,479 at June 30, 2008. To date,
we have collected approximately $0.9 million, or 40% of our accounts that were
over 180 days old at June 30, 2009. We believe there was no material
deterioration of the accounts receivable at June 30, 2009.





We note,
however, that we experienced delays in customer payment of accounts receivable
during the fiscal year ended June 30, 2009.  Approximately 9% of our
accounts receivable as of June 30, 2009 was over 180 days past due, compared to
1% of our accounts receivable being over 180 days past due as of June 30,
2008.  Our customers, for example the high-carbon cold-rolled steel
customers in the auto industry, had high inventory balances on hand at the time
due to build up during the sales boom immediately before the global crisis, and
had indicated delay in payments due to slower turnaround. These delays have
caused a much smaller decrease in the accounts receivable balance as compared to
the decrease of sales revenue in the fiscal year ended June 30, 2009. However,
the Chinese government has been implementing measures and macro-economic
policies aimed to stimulate the Chinese economy since the start of 2009, and as
one of the pillar industries under support, our customers in the auto industry
have indicated to us that they were seeing increased orders during the second
and third quarters of 2009 as a result of the stimulus packages and have
indicated to us that they were committed to settling their respective
outstanding accounts receivable. There are similar cases with our other
customers who have also expressed confirmation for settlement as they have been
seeing increased orders and collection themselves as the stimulus package is
implemented. We also note the continuation or intensification of the current
worldwide economic crisis may have negative consequences on the business
operations of our customers despite the efforts of the Chinese government and
may adversely impact their ability to meet these financial obligations to us,
resulting in unrecoverable losses on such accounts
receivable.  Although we believe that our current reserves for
doubtful accounts are adequate in light of current market conditions, and we are
not aware of any specific increases in doubtful accounts, we have nevertheless
elected to prepare for the potential worsening of the global economic downturn,
and the slowdown in the steel industry in China in particular, by increasing
such reserves for 2009. To reserve for potentially uncollectible accounts
receivable, management has made a 50% provision for all accounts receivable that
are over 180 days past due and full provision for all accounts receivable over 1
year past due for the year ended June 30, 2009. The Company had $830,127 and
$1,033,479 of allowances for doubtful accounts, respectively; and provision for
bad debts of $3,831,478 and $686,955, respectively, for the year ended June 30,
2009 and 2008.


16





From time
to time we will review credit periods offered, along with our collection
experience and the other factors discussed above, to evaluate the adequacy of
our allowance for doubtful accounts, and to make changes to the allowance, if
necessary, including reducing such allowances if uncollectable accounts do not
actually increase and the other factors we consider in determining the
collectability of accounts do not deteriorate.  However, if our actual
collection experience with our customers or other conditions change, or the
other factors that we consider indicate that it is appropriate, a further
provision for doubtful accounts may be required, which could adversely affect
our financial results.





We
provide advances to suppliers when placing purchase orders in the ordinary
course of our business.  If we must write-off a material amount of
these advances for any reason, or if we are unable to obtain delivery of raw
material from suppliers to whom we have paid advances for any reason, our
financial results will be negatively impacted.





In order
to insure a steady supply of raw materials, the Company is required from time to
time to make cash advances to its suppliers when placing purchase orders, for a
guaranteed minimum delivery quantity at future times when raw materials are
required. The advance is seen as a deposit to suppliers and guarantees our
access to raw materials during periods of shortages and market volatility, and
is therefore considered an important component of our
operations.  Contracted raw materials are priced at prevailing market
rates agreed by us with the suppliers prior to each delivery date and the
balance of our advances decrease when we take down contracted material at a
future date.  Balances decrease at a slower rate during periods when
raw material prices are decreasing or when we take fewer deliveries from our
suppliers. During the fiscal year ended June 30, 2009, lower steel prices
coupled with reduced orders and therefore take down of contracted raw materials
from the advances paid led to a slower decrease of such balance. We had
therefore obtained a cash refund from one of our major suppliers in the amount
of $5.0 million in view of the above.





Advances
to suppliers are shown net of an allowance which represents potentially
unrecoverable cash advances at each balance sheet date. Our allowances for
advances to suppliers are subjective critical estimates that have a direct
impact on reported net earnings, and are reviewed quarterly at a minimum to
ensure the appropriateness of the allowance in light of the circumstances
present at the time of the review.  Such allowances are based on an
analysis of past raw materials receipt experience and the credibility of each
supplier according to its size and background. For example, we do not generally
provide allowances against advances paid to state owned companies as we believe
that there is minimal risk of default.  It is reasonably possible that
the Company’s estimate of the allowance will change, such as in the case when
the Company becomes aware of a supplier’s inability to deliver the contracted
raw materials or meet its financial obligations.  At June 30, 2009 and
2008, the Company had allowances of advances to suppliers of $1,631,557 and
$2,522,837, respectively. Approximately 48% of our advance to suppliers was
greater than 180 days as of June 30, 2009, the majority, or 74% of which, is
attributable to our advances to a single supplier, a subsidiary of a state-owned
company in China. We believe that advances paid to state-owned companies are
ultimately collectible because they are backed by the full faith and credit of
the PRC government. As such, we do not provide allowances against such advances.
During the fiscal year June 30, 2009, we have also received a $5.0 million cash
refund of supplier advances of over 180 days from one of our major suppliers,
representing 23% of advances to suppliers as of June 30, 2009.





Allowances
for advances to suppliers are written off when all efforts to collect the
materials or recover the cash advances have been unsuccessful, or when it has
become known to the management that there is no intention for the suppliers to
deliver the contracted raw materials or refund the cash advances.  To
date we have not written off any advances to suppliers.  If any
material advances to suppliers must be written-off, or if we can not secure
delivery of raw materials that have pre-paid with such advances, then our
financial results will be negatively impacted.





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




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


17




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




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




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




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




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




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




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




Cold-rolled
specialty precision steel is a relatively new industry in China; Chinese
manufacturers of durable goods previously relied solely on imports from Japan,
Korea, the European Union and the United States. We believe the average quality
and standards of products of China’s high precision steel industry lags behind
the international norm. During the last four years, we have developed a
nationally recognizable brand, however, we are not yet an internationally
recognizable brand for our specialty steel products. Although we offer high
precision cold rolled steel products in over 100 specifications, there are many
other specialty precision steel products of similar nature in the market, even
though none currently compete directly with our products. If there are
significant changes in market demands and/or competitive forces, we may not be
able to change our product mix or adapt our production equipment quickly enough
to meet customers’ needs. Under such circumstances, our narrow band of precision
steel products and/or new market entrants may negatively impact our financial
performance.


18




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




Based on
our understanding, China’s total production capacity of precision cold-rolled
steel coils was over two million tons as of June 30, 2009.  However,
domestic production continues to be insufficient to meet demand. As a result,
China continues to import a significant portion of its steel products. Foreign
competitors may have lower labor costs, and are often owned, controlled or
subsidized by their governments, which allows their production and pricing
decisions to be influenced by political and economic policy considerations as
well as prevailing market conditions. Import levels may also be impacted by
decisions of government agencies, under trade laws. Increases in future levels
of imported steel could negatively impact future market prices and demand levels
for our precision steel products.




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





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





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





·
            lack
      of developed infrastructure;





·
            variances
      in payment cycles;





·
            currency
      fluctuations;





·
            overlapping
      taxes and multiple taxation issues;





·
            employment
      and severance taxes;





·
            compliance
      with local laws and regulatory
requirements;





·
            greater
      difficulty in collecting accounts receivable;
  and





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





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





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





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




19





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





·
            environmental
      and waste management;





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





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





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





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




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




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





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





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




Although
a substantial portion of our raw material requirements is met by BaoSteel Steel
Products Trading Co., Ltd. for the year ended June 30, 2009, we are not
dependent on any one single supplier for supply of hot-rolled coils as these
coils are generally available in the market. However, we do not currently have
long-term supply contracts with any particular supplier, including BaoSteel
Steel Products Trading Co., Ltd., to assure a continued supply of the raw
materials we need in our operations. While we maintain good relationships with
these suppliers, the supply of raw materials may nevertheless be interrupted on
account of events outside our control, which will negatively impact our
operations.




20





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




We are
subject to interest rate risk on our non-derivative financial instruments. We do
not hedge our interest rate risk. At June 30, 2009, our total bank debt
outstanding was $22,489,031, 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 for RMB loans and
SIBOR for USD loan. A change in the interest rate or yield of fixed rate debt
will only impact the fair value of such debt, while a change in the interest
rate of floating rate, or variable rate, debt will impact interest expense as
well as the amount of cash required to service such debt. To the extent interest
rates increase, we will be liable for higher interest payments to its lenders.
We anticipate that annual interest on loans for the fiscal year ending June 30,
2010, will be approximately $1.2 million. The impact of a 1% increase in
interest rates will increase interest expense by approximately $225,000. As our
short-term loans mature in July 2010, we will be required to either repay or
refinance these loans. An increase in short-term interest rates at the time that
we seek to refinance short-term borrowings may increase the cost of borrowings,
which may adversely affect our earnings and cash available for distribution to
our stockholders.




At June
30, 2009, the aggregate fair value of our financial instruments with exposure to
interest rate risk was approximately $22.5 million. The potential change in fair
value for these financial instruments from an adverse 10% change in quoted
interest rates across all maturities, often referred to as a parallel shift in
the yield curve, would be approximately $2.5 million at June 30,
2009.




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




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




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





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




21





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




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




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





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





·
            quality;





·
            price
      competitiveness;





·
            technical
      expertise and development
capability;





·
            innovation;





·
            reliability
      and timeliness of delivery;





·
            product
      design capability;





·
            operational
      flexibility;





·
            customer
      service; and





·
            overall
      management.





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




22





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




We
currently supply high precision steel products to five major customers in the
Chinese domestic market. For the years ended June 30, 2009 and 2008, sales
revenues generated from the top five major customers amounted to 50% and 62% of
total sales revenues, respectively; sales to the largest single customer
for the same years amounted to 19% and 21% of total sales revenues,
respectively. We do not enter into long-term contracts with our customers and
therefore cannot be certain that sales to these customers will continue. The
loss of any of our largest customers would likely have a material negative
impact on our sales revenues and business.




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




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




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





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





·
            accurately
      forecasting demand;





·
            predicting
      volatility;





·
            timing
      volume sales to our customers;





·
            balancing
      our productive resources with product mix;
and





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





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





·
            utilization
      rates of manufacturing lines;





·
            downtime
      due to product changeover;





·
            impurities
      in raw materials causing shutdowns;
and





·
            maintenance
      of contaminant-free operations.





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




23




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





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




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




Unexpected
equipment failures may lead to production curtailments or
shutdowns.




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




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




All of
our products are currently manufactured at our existing facilities located in
the Jiading District in Shanghai, China. Fire fighting and disaster relief or
assistance in China may not be as developed as in Western countries. While we
maintain property damage insurance aggregating approximately $53.7 million
covering our inventories, equipment, plant and buildings and another $35.1
million insurance against equipment damage, we do not maintain business
interruption insurance. Material damage to, or the loss of, our production
facilities due to fire, severe weather, flood or other act of God or cause, even
if insured, could have a material adverse effect on our financial condition,
results of operations, business and prospects.





Our
holding company structure may limit the payment of dividends.




We have
no direct business operations, other than our ownership of our subsidiaries.
 While we have no current intention of paying dividends, should we decide
in the future to do so, as a holding company, our ability to pay dividends and
meet other obligations depends upon the receipt of dividends or other payments
from our operating subsidiaries and other holdings and investments.  In
addition, our operating subsidiaries, from time to time, may be subject to
restrictions on their ability to make distributions to us, including as a result
of restrictive covenants in loan agreements, restrictions on the conversion of
local currency into U.S. dollars or other hard currency and other regulatory
restrictions as discussed below.  If future dividends are paid in RMB,
fluctuations in the exchange rate for the conversion of RMB into U.S. dollars
may reduce the amount received by U.S. stockholders upon conversion of the
dividend payment into U.S. dollars.




24




Chinese
regulations currently permit the payment of dividends only out of accumulated
profits as determined in accordance with Chinese accounting standards and
regulations.  Our subsidiaries in China are also required to set aside a
portion of their after tax profits according to Chinese accounting standards and
regulations to fund certain reserve funds.  Currently, our subsidiaries in
China are the only sources of revenues or investment holdings for the payment of
dividends.  If they do not accumulate sufficient profits under Chinese
accounting standards and regulations to first fund certain reserve funds as
required by Chinese accounting standards, we will be unable to pay any
dividends.





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





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





We
may be exposed to potential risks relating to our internal controls over
financial reporting and our ability to have those controls attested to by our
independent auditors.





As
directed by Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404, the SEC
adopted rules requiring public companies to include a report of management on
the company’s internal controls over financial reporting in their annual
reports, including Form 10-K.  In addition, an independent registered
public accounting firm must also attest to and report on the operating
effectiveness of the company’s internal controls.  We can provide no
assurance that we will comply with all of the requirements imposed thereby.
 There can be no positive assurance that we will receive a positive
attestation from our independent auditors.  In the event we identify
significant deficiencies or material weaknesses in our internal controls that we
cannot remediate in a timely manner or we are unable to receive a positive
attestation from our independent auditors with respect to our internal controls,
investors and others may lose confidence in the reliability of our financial
statements.





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




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




25




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





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





RISKS
RELATED TO DOING BUSINESS IN CHINA





Adverse
changes in political and economic policies of the PRC government could impede
the overall economic growth of China, which could reduce the demand for our
products and damage our business.




We
conduct substantially all of our operations and generate most of our revenue in
China.   Accordingly, our business, financial condition, results of
operations and prospects are affected significantly by economic, political and
legal developments in China.  The PRC economy differs from the economies of
most developed countries in many respects, including:




·
            a
      higher level of government
involvement;





·
            a
      early stage of development of the market-oriented sector of the
      economy;





·
            a
      rapid growth rate;





·
            a
      higher level of control over foreign exchange;
  and





·
            the
      allocation of resources.




As the
PRC economy has been transitioning from a planned economy to a more
market-oriented economy, the PRC government has implemented various measures to
encourage economic growth and guide the allocation of resources. While these
measures may benefit the overall PRC economy, they may also have a negative
effect on us.




Although
the PRC government has in recent years implemented measures emphasizing the
utilization of market forces for economic reform, the PRC government continues
to exercise significant control over economic growth in China through the
allocation of resources, controlling the payment of foreign currency-denominated
obligations, setting monetary policy and imposing policies that impact
particular industries or companies in different ways.




Any
adverse change in economic conditions or government policies in China could have
a material adverse effect on the overall economic growth in China, which in turn
could lead to a reduction in demand for our services and consequently have a
material adverse effect on our business and prospects.




Uncertainties
with respect to the PRC legal system could limit the legal protections available
to you and us.




We
conduct substantially all of our business through our operating subsidiaries in
the PRC. Our operating subsidiaries are generally subject to laws and
regulations applicable to foreign investments in China and, in particular, laws
applicable to foreign-invested enterprises. The PRC legal system is based on
written statutes, and prior court decisions may be cited for reference but have
limited precedential value. Since 1979, a series of new PRC laws and regulations
have significantly enhanced the protections afforded to various forms of foreign
investments in China. However, since the PRC legal system continues to rapidly
evolve, the interpretations of many laws, regulations and rules are not always
uniform and enforcement of these laws, regulations and rules involve
uncertainties, which may limit legal protections available to you and us. In
addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention.  In addition,
all of our executive officers and all of our directors are residents of China
and not of the United States, and substantially all the assets of these persons
are located outside the United States.  As a result, it could be difficult
for investors to affect service of process in the United States or to enforce a
judgment obtained in the United States against our Chinese operations and
subsidiaries.




26




If
we are found to have failed to comply with applicable laws, we may incur
additional expenditures or be subject to significant fines and
penalties.




Our
operations are subject to PRC laws and regulations applicable to us. However,
many PRC laws and regulations are uncertain in their scope, and the
implementation of such laws and regulations in different localities could have
significant differences. In certain instances, local implementation rules and/or
the actual implementation are not necessarily consistent with the regulations at
the national level. Although we strive to comply with all the applicable PRC
laws and regulations, we cannot assure you that the relevant PRC government
authorities will not later determine that we have not been in compliance with
certain laws or regulations.  Our failure to comply with the
applicable laws and regulations in China could subject us to administrative
penalties and injunctive relief, as well as civil remedies, including fines,
injunctions and recalls of our products. It is possible that changes to such
laws or more rigorous enforcement of such laws or with respect to our current or
past practices could have a material adverse effect on our business, operating
results and financial condition. Further, additional environmental or safety
issues relating to matters that are not currently known to management may result
in unanticipated liabilities and expenditures.




The
PRC government exerts substantial influence over the manner in which we must
conduct our business activities.





The PRC
government has exercised and continues to exercise substantial control over
virtually every sector of the Chinese economy through regulation and state
ownership.  Our ability to operate in China may be harmed by changes in its
laws and regulations, including those relating to taxation, import and export
tariffs, environmental regulations, land use rights, property and other matters.
 We believe that our operations in China are in material compliance with
all applicable legal and regulatory requirements.  However, the central or
local governments of the jurisdictions in which we operate may impose new,
stricter regulations or interpretations of existing regulations that would
require additional expenditures and efforts on our part to ensure our compliance
with such regulations or interpretations.





Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.





Restrictions
on currency exchange may limit our ability to receive and use our sales revenue
effectively.





Most of
our sales revenue and expenses are denominated in RMB. Under PRC law, the RMB is
currently convertible under the “current account,” which includes dividends and
trade and service-related foreign exchange transactions, but not under the
“capital account,” which includes foreign direct investment and loans.
Currently, our PRC operating subsidiaries may purchase foreign currencies for
settlement of current account transactions, including payments of dividends to
us, without the approval of the State Administration of Foreign Exchange, or
SAFE, by complying with certain procedural requirements. However, the relevant
PRC government authorities may limit or eliminate our ability to purchase
foreign currencies in the future. Since a significant amount of our future
revenue will be denominated in RMB, any existing and future restrictions on
currency exchange may limit our ability to utilize revenue generated in RMB to
fund our business activities outside China that are denominated in foreign
currencies.




27




Foreign
exchange transactions by PRC operating subsidiaries under the capital account
continue to be subject to significant foreign exchange controls and require the
approval of or need to register with PRC government authorities, including SAFE.
In particular, if our PRC operating subsidiaries borrow foreign currency through
loans from us or other foreign lenders, these loans must be registered with
SAFE, and if we finance the subsidiaries by means of additional capital
contributions, these capital contributions must be approved by certain
government authorities, including the Ministry of Commerce or their respective
local counterparts. These limitations could affect their ability to obtain
foreign exchange through debt or equity financing.




Fluctuations
in exchange rates could adversely affect our business and the value of our
securities.





The value
of our common stock will be indirectly affected by the foreign exchange rate
between U.S. dollars and RMB and between those currencies and other currencies
in which our sales may be denominated. Because substantially all of our earnings
and cash assets are denominated in RMB, fluctuations in the exchange rate
between the U.S. dollar and the RMB will affect the relative purchasing power of
these proceeds, our balance sheet and our earnings per share in U.S. dollars. In
addition, appreciation or depreciation in the value of the RMB relative to the
U.S. dollar would affect our financial results reported in U.S. dollar terms
without giving effect to any underlying change in our business or results of
operations. Fluctuations in the exchange rate will also affect the relative
value of any dividend we issue that will be exchanged into U.S. dollars as well
as earnings from, and the value of, any U.S. dollar-denominated investments we
make in the future.




Since
July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the
People’s Bank of China regularly intervenes in the foreign exchange market to
prevent significant short-term fluctuations in the exchange rate, the RMB may
appreciate or depreciate significantly in value against the U.S. dollar in the
medium to long term. Moreover, it is possible that in the future PRC authorities
may lift restrictions on fluctuations in the RMB exchange rate and lessen
intervention in the foreign exchange market.




Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert RMB into foreign currencies.




Currently,
some of our raw materials and major equipment are imported.  In the event
that the U.S. dollars appreciate against RMB, our costs will increase.  If
we cannot pass the resulting cost increases on to our customers, our
profitability and operating results will suffer.  In addition, since our
sales to international customers are growing rapidly, we are increasingly
subject to the risk of foreign currency depreciation.





Restrictions
under PRC law on our PRC subsidiaries’ ability to make dividends and other
distributions could materially and adversely affect our ability to grow, make
investments or acquisitions that could benefit our business, pay dividends to
you, and otherwise fund and conduct our businesses.




Substantially
all of our revenues are earned by our PRC subsidiaries. However, PRC regulations
restrict the ability of our PRC subsidiaries to make dividends and other
payments to their offshore parent company. PRC legal restrictions permit
payments of dividend by our PRC subsidiaries only out of their accumulated
after-tax profits, if any, determined in accordance with PRC accounting
standards and regulations. Each of our PRC subsidiaries is also required under
PRC laws and regulations to allocate at least 10% of our annual after-tax
profits determined in accordance with PRC GAAP to a statutory general reserve
fund until the amounts in said fund reaches 50% of our registered capital.
Allocations to these statutory reserve funds can only be used for specific
purposes and are not transferable to us in the form of loans, advances or cash
dividends. Any limitations on the ability of our PRC subsidiaries to transfer
funds to us could materially and adversely limit our ability to grow, make
investments or acquisitions that could be beneficial to our business, pay
dividends and otherwise fund and conduct our business.




28





Under
the New EIT Law, we may be classified as a “resident enterprise” of China. Such
classification will likely result in unfavorable tax consequences to us and our
non-PRC shareholders.





On March
16, 2007, the National People’s Congress of China passed a new Enterprise Income
Tax Law, or the New EIT Law, and on December 6, 2007, the State Council of China
passed the Implementing Rules for the New EIT Law, or the Implementing Rules,
which took effect on January 1, 2008. Under the New EIT Law, an enterprise
established outside of China with “de facto management bodies” within China is
considered a “resident enterprise,” meaning that it can be treated in a manner
similar to a Chinese enterprise for enterprise income tax
purposes.  The Implementing Rules define de facto management as
“substantial and overall management and control over the production and
operations, personnel, accounting, and properties” of the
enterprise.





On April
22, 2009, the State Administration of Taxation issued the Notice Concerning
Relevant Issues Regarding Cognizance of Chinese Investment Controlled
Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria
of de facto Management Bodies, or the Notice, further interpreting the
application of the New EIT Law and its implementation with respect to
non-Chinese enterprise or group controlled offshore
entities.  Pursuant to the Notice, an enterprise incorporated in an
offshore jurisdiction and controlled by a Chinese enterprise or group will be
classified as a “non-domestically incorporated resident enterprise” if (i) its
senior management in charge of daily operation reside or perform their duties
mainly in China; (ii) its financial or personnel decisions are made or approved
by bodies or persons in China; (iii) its substantial properties, accounting
books, corporate chops, board and shareholder minutes are kept in China; and
(iv) 1⁄2 directors with voting rights or senior management often resident in
China.  Such resident enterprise would be subject to an enterprise
income tax rate of 25% on its worldwide income and must pay a withholding tax at
a rate of 10% when paying dividends to its non-PRC
shareholders.  However, it remains unclear as to whether the Notice is
applicable to an offshore enterprise incorporated by a Chinese natural
person.  Nor are detailed measures on imposition of tax from
non-domestically incorporated resident enterprises are
available. Therefore, it is unclear how tax authorities will determine tax
residency based on the facts of each case.





However,
as our case substantially meets the foregoing criteria, there is a likelihood
that we are deemed to be a  resident enterprise by Chinese tax
authorities. If the PRC tax authorities determine that we are a “resident
enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC
tax consequences could follow. First, we may be subject to the enterprise income
tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise
income tax reporting obligations. In our case, this would mean that income such
as interest on financing proceeds and non-China source income would be subject
to PRC enterprise income tax at a rate of 25%. Second, although under the New
EIT Law and its Implementing Rules dividends paid to us from our PRC
subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such
dividends will not be subject to a 10% withholding tax, as the PRC foreign
exchange control authorities, which enforce the withholding tax, have not yet
issued guidance with respect to the processing of outbound remittances to
entities that are treated as resident enterprises for PRC enterprise income tax
purposes.  Finally, it is possible that future guidance issued with
respect to the new “resident enterprise” classification could result in a
situation in which a 10% withholding tax is imposed on dividends we pay to our
non-PRC shareholders and with respect to gains derived by our non-PRC
shareholders from transferring our shares.  We are actively monitoring
the possibility of “resident enterprise” treatment and are evaluating
appropriate organizational changes to avoid this treatment, to the extent
possible.





If we
were treated as a “resident enterprise” by PRC tax authorities, we would be
subject to taxation in both the U.S. and China, and our PRC tax may not be
creditable against our U.S. tax.




29




The
M&A Rule establishes more complex procedures for some acquisitions of
Chinese companies by foreign investors, which could make it more difficult for
us to pursue growth through acquisitions in China.





On August
8, 2006, six PRC regulatory agencies, including the China Securities Regulatory
Commission, promulgated the Provisions Regarding Mergers and Acquisitions of
Domestic Enterprises by Foreign Investors, or the M&A Rule, which became
effective on September 8, 2006. The M&A Rule establishes procedures and
requirements that could make some acquisitions of Chinese companies by foreign
investors more time-consuming and complex, including requirements in some
instances that the PRC Ministry of Commerce be notified in advance of any
change-of-control transaction and in some situations, require approval of the
PRC Ministry of Commerce when a foreign investor takes control of a Chinese
domestic enterprise. In the future, we may grow our business in part by
acquiring complementary businesses, although we do not have any plans to do so
at this time. The M&A Rule also requires PRC Ministry of Commerce anti-trust
review of any change-of-control transactions involving certain types of foreign
acquirers. Complying with the requirements of the M&A Rule to complete such
transactions could be time-consuming, and any required approval processes,
including obtaining approval from the PRC Ministry of Commerce, may delay or
inhibit our ability to complete such transactions, which could affect our
ability to expand our business or maintain our market share.




You
may have difficulty enforcing judgments against us.




We are a
Delaware holding company and most of our assets are located outside of the
United States. Most of our current operations are conducted in the PRC. In
addition, most of our directors and officers are nationals and residents of
countries other than the United States. A substantial portion of the assets of
these persons is located outside the United States. As a result, it may be
difficult for you to effect service of process within the United States upon
these persons. It may also be difficult for you to enforce in U.S. courts
judgments on the civil liability provisions of the U.S. federal securities laws
against us and our officers and directors, most of whom are not residents in the
United States and the substantial majority of whose assets are located outside
of the United States. In addition, there is uncertainty as to whether the courts
of the PRC would recognize or enforce judgments of U.S. courts. Courts in China
may recognize and enforce foreign judgments in accordance with the requirements
of the PRC Civil Procedures Law based on treaties between China and the country
where the judgment is made or on reciprocity between jurisdictions. China does
not have any treaties or other arrangements that provide for the reciprocal
recognition and enforcement of foreign judgments with the United States. In
addition, according to the PRC Civil Procedures Law, courts in the PRC will not
enforce a foreign judgment against us or our directors and officers if they
decide that the judgment violates basic principles of PRC law or national
sovereignty, security or the public interest. So, it is uncertain whether a PRC
court would enforce a judgment rendered by a court in the United
States.





RISKS
RELATED TO THE MARKET FOR OUR STOCK GENERALLY





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




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





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





·
            our
      financial position and results of
operations;





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





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





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





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





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


30




·
            changes
      in interest rates; and





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





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




As of
June 30, 2009, 67%, or 31,013,715 shares, of our issued and outstanding common
stock were owned by non-affiliates, and 31,098,819 of our issued and
outstanding common stockwere
unrestricted and free to trade. The market price for our common stock is subject
to volatility and holders of common stock may be unable to resell their shares
at or near their original purchase price or at any price. In the absence of an
active trading market:





·
            investors
      may have difficulty buying and
selling;





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





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




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




Wo Hing
Li, our Chief Executive Officer, had voting power as of June 30, 2009 equal to
approximately 33% of our voting securities. As a result, Wo Hing Li, through
such stock ownership, exercises significant control over all matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions. This concentration of ownership in Wo Hing
Li may also have the effect of delaying or preventing a change in control or
other transactions that may otherwise be viewed as beneficial by
shareholders other than Wo Hing Li.





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




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




We
do not intend to pay dividends for the foreseeable future.





For the
foreseeable future, we intend to retain any earnings to finance the development
and expansion of our business, and we do not anticipate paying any cash
dividends on our common stock. Accordingly, investors must be prepared to rely
on sales of their common stock after price appreciation to earn an investment
return, which may never occur. Investors seeking cash dividends should not
purchase our common stock. Any determination to pay dividends in the future will
be made at the discretion of our board of directors and will depend on our
results of operations, financial condition, contractual restrictions,
restrictions imposed by applicable law and other factors our board deems
relevant.




31





ITEM
      1B.
            UNRESOLVED
      STAFF COMMENTS.





Not
Applicable.





ITEM
      2.
            PROPERTIES.





All land
in China is owned by the State. Individuals and companies are permitted to
acquire rights to use land or land use rights for specific purposes. In the case
of land used for industrial purposes, the land use rights are granted for a
period of 50 years.  This period may be renewed at the expiration of the
initial and any subsequent terms. Granted land use rights are transferable and
may be used as security for borrowings and other obligations.





We
currently have land use rights to approximately 48.38 acres consisting
of manufacturing facilities, warehouse and office buildings in Shanghai, China.
The chart below lists all facilities owned by us.





Location
                
                Type of Facility
                
                Size of Land(acre)Jiading
      District, Shanghai
                
                Manufacturing
      facilities, warehouse and office buildings
                
                21.34Jiading
      District, Shanghai
                
                Manufacturing
      facilities
                
                27.04





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.





ITEM
      3.
            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
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS.





On June
16, 2009, we held an annual meeting at which a majority of our stockholders
elected six directors and approved the ratification of Moore Stephens, Certified
Public Accounts as our independent accountants for fiscal year
2009.




The
following table sets forth the matters voted upon at the annual meeting and the
results of the voting on each matter voted upon:




32





Matter Voted Upon
                
                Votes For
                
                Withheld
                
                Votes
                  Against
                
                Abstentions
                
                Broker
                  Non-VotesElection
      of Wo Hing Li to Board of Directors
                
                23,727,537
                
                -
                
                49,939
                
                -
                
                -Election
      of Tung Kuen Tsui to Board of Directors
                
                24,067,151
                
                -
                
                110,325
                
                -
                
                -Election
      of David Peter Wong to Board of Directors
                
                24,065,085
                
                -
                
                112,391
                
                -
                
                -Election
      of Che Kin Lui to Board of Directors
                
                24,063,082
                
                -
                
                114,394
                
                -
                
                -Election
      of Hai Sheng Chen to Board of Directors
                
                23,723,122
                
                -
                
                454,354
                
                -
                
                -Election
      of Daniel Carlson to Board of Directors
                
                23,731,295
                
                -
                
                446,181
                
                -
                
                -Approval
      of Moore Stephens, Certified Public Accounts as the Company’s independent
      accountants for fiscal year 2009
                
                24,112,726
                
                -
                
                44,538
                
                -
                
                -





Each of
the above matters was approved by the stockholders at the annual
meeting.





PART
II




ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES.





Market
Information





Our
Common Stock has been trading on the NASDAQ Capital Market under the symbol
“CPSL” since December 29, 2006 and was previously trading on that market under
the symbol “OLAB.”  The CUSIP number for our common stock is
16941J106.





The
following table sets forth, for the periods indicated, the available high and
low closing prices for our common stock. Prices reflect inter-dealer prices,
without retail mark-up, mark-down or commissions and may not represent actual
transactions.





Closing Prices(1)High
              
              
              LowFiscal
      Year Ended June 30, 20091st
      Quarter
              
              $
              5.49
              
              
              $
              0.862nd
      Quarter
              
              $
              3.14
              
              
              $
              0.953rd
      Quarter
              
              $
              1.80
              
              
              $
              0.864th
      Quarter
              
              $
              3.24
              
              
              $
              1.20Fiscal
      Year Ended June 30, 20081st
      Quarter
              
              $
              12.65
              
              
              $
              2.812nd
      Quarter
              
              $
              11.45
              
              
              $
              4.203rd
      Quarter
              
              $
              6.22
              
              
              $
              3.304th
      Quarter
              
              $
              8.48
              
              
              $
              3.50





(1)The
above tables set forth the range of high and low closing prices per share of our
common stock as reported by www.quotemedia.com
for the periods indicated.





Approximate
Number of Holders of Our Common Stock





As of
June 30, 2009, there were approximately 863 stockholders of record of our common
stock. The number of record holders does not include persons who held our common
stock in nominee or “street name” accounts through brokers.


33


Dividends





We have
never declared or paid a cash dividend. Any future decisions
regarding dividends will be made by our board of directors.  We currently
intend to retain and use any future earnings for the development and expansion
of our business and do not anticipate paying any cash dividends in the
foreseeable future.  Our board of directors has complete discretion on
whether to pay dividends, subject to the approval of our stockholders.
 Even if our board of directors decides to pay dividends, the form,
frequency and amount will depend upon our future operations and earnings,
capital requirements and surplus, general financial condition, contractual
restrictions and other factors that the board of directors may deem
relevant.





Securities
Authorized for Issuance Under Equity Compensation Plans





The
information required by the item relating to “Securities Authorized for Issuance
Under Equity Compensation Plans” is set forth under that heading in Item 12,
“Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters” and is incorporated herein by reference.





Stock
Performance Graph





The
following graph provides a comparison of the cumulative total return on our
common stock for the period beginning at the market close on June 30, 2004,
through and including June 30, 2009, with the cumulative total return for (i)
the Nasdaq Stock Market (U.S. Companies) Index (the “Nasdaq Index”) and (ii) a
peer group selected by us that consists of companies with a similar
line-of-business and in the same industry. These companies are Steel Dynamics,
Tarpon Industries, Arcelor Mittel, Nucor Corp., and Olympic Steel (the “Peer
Index”). Total return values were calculated based on cumulative total return
assuming the investment, on June 30, 2004, of $100 in each of our Common Stock,
the NASDAQ Index and the Peer Index and are based on share prices plus any
dividends paid in cash, with the dividends reinvested on the date they were
paid. The calculations exclude trading commissions and taxes. Cumulative total
returns for the period beginning at the market close on June 30, 2004, through
and including December 28, 2006, relate to our prior operations under our former
name of OraLabs Holding Corp. We do not believe that such historical information
prior to December 28, 2006 is relevant to our continuing operations and is not
necessarily indicative of the results to be expected for any future period. On
December 29, 2006, our Common Stock began trading under the symbol
“CPSL”.









34





The
information contained in this Item 5 of this Annual Report on Form 10-K under
“Stock Performance Graph” is not deemed to be “soliciting material” or to be
“filed” with the SEC or subject to Regulation 14A or 14C under the Exchange Act
or to the liabilities of Section 18 of the Exchange Act, and will not be deemed
to be incorporated by reference into any filing under the Securities Act or the
Exchange Act, except to the extent we specifically incorporate it by reference
into such a filing.





Recent
Sales of Unregistered Securities





We have
not sold any equity securities during the fiscal year ended June 30, 2009 that
were not previously disclosed in a quarterly report on Form 10-Q or a current
report on Form 8-K that was filed during the 2009 fiscal year.





Purchases
of Equity Securities





No
repurchases of our common stock were made during the fourth quarter of our
fiscal year ended June 30, 2009.





ITEM
      6.
            SELECTED
      FINANCIAL DATA.





Selected
consolidated financial data are set forth below as of June 30, 2009 and for the
years ended June 30, 2009, 2008, 2007, 2006 and 2005 and should be read in
conjunction with our audited consolidated financial statements and related notes
thereto, and with Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”  In conjunction with the
consummation of the Stock Exchange Agreement on December 28, 2006, we changed
our fiscal year from December 31 to June 30. The historical data presented below
and in our historical consolidated financial statement is not necessarily
indicative of the results to be expected for any future period.





The scope
of our continuing business is substantially different from that conducted by us
prior to January 1, 2007. You should not view our historical consolidated
financial statements or the financial data derived therefrom as predictive of
our future financial position or results of operations.





Fiscal Year Ended June 30,2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005Statement
      of Operations DataSales
      revenues
                
                
                76,281
                
                
                
                87,739
                
                
                
                53,960
                
                
                
                34,881
                
                
                
                53,145Cost
      of goods sold
                
                
                68,549
                
                
                
                65,242
                
                
                
                38,926
                
                
                
                24,892
                
                
                
                45,562Gross
      profit
                
                
                7,732
                
                
                
                22,497
                
                
                
                15,034
                
                
                
                9,989
                
                
                
                7,583Net
      (loss)/income before discontinued operations
                
                
                (408
                )
                
                
                18,583
                
                
                
                7,473
                
                
                
                7,514
                
                
                
                6,366Net
      income/(loss) from discontinued operations
                
                
                -
                
                
                
                -
                
                
                
                831
                
                
                
                900
                
                
                
                (341
                )Net
      (loss)/income
                
                
                (408
                )
                
                
                18,583
                
                
                
                8,304
                
                
                
                8,415
                
                
                
                6,026(Loss)/earnings
      per share from continuing operationsBasic
                
                
                (0.01
                )
                
                
                0.43
                
                
                
                0.26
                
                
                
                0.31
                
                
                
                0.26Diluted
                
                
                (0.01
                )
                
                
                0.43
                
                
                
                0.26
                
                
                
                0.31
                
                
                
                0.26Income/(loss)
      per share from discontinued operationsBasic
                
                
                -
                
                
                
                -
                
                
                
                0.03
                
                
                
                0.04
                
                
                
                (0.01
                )Diluted
                
                
                -
                
                
                
                -
                
                
                
                0.03
                
                
                
                0.04
                
                
                
                (0.01
                )Net
      (loss)/income per shareBasic
                
                
                (0.01
                )
                
                
                0.43
                
                
                
                0.29
                
                
                
                0.35
                
                
                
                0.25Diluted
                
                
                (0.01
                )
                
                
                0.43
                
                
                
                0.29
                
                
                
                0.35
                
                
                
                0.25Shares
      used in per share calculationBasic
                
                
                46,561,229
                
                
                
                43,044,420
                
                
                
                28,438,313
                
                
                
                24,283,725
                
                
                
                24,283,725Diluted
                
                
                46,561,229
                
                
                
                43,256,434
                
                
                
                28,759,553
                
                
                
                24,283,725
                
                
                
                24,283,725Balance
      Sheet Data (at year end)Current
      assets
                
                
                84,032
                
                
                
                108,134
                
                
                
                41,339
                
                
                
                23,154
                
                
                
                13,028Total
      assets
                
                
                163,409
                
                
                
                165,535
                
                
                
                82,158
                
                
                
                45,571
                
                
                
                25,489Working
      Capital
                
                
                41,226
                
                
                
                62,905
                
                
                
                14,574
                
                
                
                (7,584
                )
                
                
                (1,326
                )Long-term
      debt
                
                
                -
                
                
                
                -
                
                
                
                6,878
                
                
                
                3,152
                
                
                
                7,713Total
      Stockholder’s equity
                
                
                120,603
                
                
                
                120,306
                
                
                
                51,105
                
                
                
                11,681
                
                
                
                3,421


35


ITEM
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.





The
following management’s discussion and analysis should be read in conjunction
with our financial statements and the notes thereto and the other financial
information appearing elsewhere in this report. In addition to historical
information, the following discussion contains certain forward-looking
information. See “Special Note Regarding Forward Looking Statements” above for
certain information concerning those forward looking statements. Our financial
statements are prepared in U.S. dollars and in accordance with U.S.
GAAP.





Introduction




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





·
            Overview of
      the Company’s Business - This section provides a general
      description of the Group’s business, as well as recent developments that
      have either occurred during the fiscal year ended June 30, 2009 and are
      important in understanding the results of operations and financial
      condition or disclose known trends.





·
            Results of
      Operations - This section provides an analysis of our results of
      operations for the fiscal year ended June 30, 2009. This discussion
      includes a brief description of significant transactions and events that
      have an impact on the comparability of the results being
      analyzed.





·
            Liquidity
      and Capital Resources - This section provides an analysis of the
      Group’s cash flows for the fiscal year ended June 30, 2009. Included in
      this section is a discussion of the Group’s outstanding debt and the
      financial capacity available to fund the Group’s future commitments and
      obligations.





Overview
of Our Business





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





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


36


We
conduct our operations principally in the PRC through our wholly-owned operating
subsidiaries, Chengtong and Shanghai Blessford, which are wholly owned
subsidiaries of our direct subsidiary, PSHL. Our products are sold domestically
in China as well as in overseas markets such as Thailand, Nigeria and Ethiopia.
We intend to further expand into additional overseas markets in the future,
subject to suitable market conditions and favorable regulatory
controls.





Fiscal
2009 Financial Performance Highlights





During
the 2009 fiscal year, we saw slower demand and lower steel prices compared to
last year as a result of the impact of the persisting global crisis. There were
decreases in order and sales volume over the year as we are faced with multiple
challenges due to the global economic downturn. We have seen weaker demands and
reduced orders from existing customers, especially in the high-carbon
cold-rolled steel segment, which are mainly used in auto components
manufacturing, due to excess capacity and high inventory levels in the industry.
Excess capacity, low industrial concentration and a lack of access to natural
resources have long plagued China’s steel sector, and these problems have been
exacerbated by the impact of the global financial and economic
crisis.  Our two cold-rolling mills are now operating at approximately
70% utilization rate due to reduced orders on hand.





During
the fiscal year ended June 30, 2009, we sold a total of 84,001 tons of products,
a decrease of 5,121 tons from 89,122 tons a year ago, due to slower demand and
reduced orders on hand. We believe that such decrease was mainly caused by
decreases in product orders from auto components manufacturers and from the
Chinese auto industry that experienced weak demand and excess capacity during
the year ended June 30, 2009. Lower sales and high raw material costs have led
to a gross profit of $7,732,195 and a net loss of $408,338 for the fiscal year
ended June 30, 2009.





The
RMB400 billion economic stimulus package formulated jointly by the Chinese
government’s National Development and Reform Commission and the Ministry of
Industry and Information Technology in November 2008 is now planned to focus
mainly on nine pillar industries, which include steel, automobiles,
shipbuilding, petrochemicals, light industry, textiles, non-ferrous metals,
machinery, and information technology, all with serious production surpluses in
the whole industrial system. Automobiles and steel sectors have been given
priority and are the two main industries out of the nine pillars for which the
government is expected to announce specific support packages and further
details. On January 14, 2009, China’s State Council approved a “rejuvenation
plan” to support the steel industry, with the immediate aim to deal with the
effects of the global financial and economic crisis and to also ease the
industry’s long-term structural problems. The steel industry plan includes
eliminating obsolete capacity, speeding up innovation, promoting alliances and
mergers and cutting export tariffs. The government will also subsidize loans of
about RMB15 billion to encourage technological upgrading and product
rationalization to better meet demand.





Although
the series of measures adopted by the Chinese government to promote economic
growth have achieved some results, it is currently unclear whether and to what
extent the economic stimulus measures and other actions taken or contemplated by
the Chinese government and other governments throughout the world will mitigate
the effects of the crisis on the industries that affect our business. We expect
to continue to experience volatilities in demands in both domestic and
international markets in the foreseeable future. Furthermore, deteriorating
economic conditions, including business layoffs, downsizing, industry slowdowns
and other similar factors that affect our customers could have further negative
consequences on our business operations.  For the foreseeable future,
we expect a continuation of weak demand and volatility in both domestic and
international markets across all product segments, and significantly adverse
impacts on our gross margin due to a decrease in sales of our high margin high
carbon cold rolled steel used mainly in auto components
manufacturing.  However, due to the nature of our niche segment and
high-end products, we have been able to keep quality customers and negotiate new
contracts with a total of 123 new customers during the year. Management
continues to be in talks with potential customers whose past orders we had been
unable to fill due to full capacity.  If these talks are successful,
we could see additional sales from a broadened customer base which would further
mitigate the impact of the current global slowdown on our business and results
of operations. Total company backlog as of June 30, 2009 was $9,278,675.


37


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





The
following are some financial highlights for the 2009 fiscal year:





·
            Revenues:
      Our revenues were approximately $76.3 million for the 2009 fiscal year, a
      decrease of 13.1% from last year.





·
            Gross
      Margin: Gross margin was 10.1% for the 2009 fiscal year, as
      compared to 25.6% in 2008.





·
            Income/(loss)
      from operations before tax: Loss from operations before tax was
      approximately $0.4 million for the 2009 fiscal year, as compared to income
      from operations before tax of $19.2 million last
  year.





·
            Net
      Income/(loss): Net loss was approximately $0.4 million for the 2009
      fiscal year, a decrease of 102.2% from a net income of approximately $18.6
      million last year.





·
            Fully
      diluted Income/(loss) per share: Fully diluted loss per share was
      $0.01 for the 2009 fiscal year compared to a fully diluted earnings per
      share of $0.43 last year.




Taxation





United
States




China
Precision Steel, Inc. is incorporated in the State of Delaware and is subject
the tax laws of United States at a tax rate of 34%. No provision for income
taxes in the United States has been made as China Precision Steel, Inc. incurred
no taxable income for federal tax purposes. In addition, no deferred tax on
undistributed earnings of its non-U.S. subsidiaries was provided, as it is our
current policy to reinvest these earnings in non-U.S. operations.




British
Virgin Islands




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




PRC




On March
16, 2007, the National People’s Congress of China passed The Enterprise Income
Tax Law, or the New EIT Law,, and on December 6, 2007, the State Council of
China passed the Implementing Rules for the EIT Law, or the Implementing Rules,
which took effect on January 1, 2008. The New EIT Law and Implementing Rules
impose a unified enterprise income tax, or EIT, of 25% on all domestic-invested
enterprises and foreign invested entities, or 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.





The New
EIT Law gives the FIEs established before March 16, 2007, or Old FIEs, a
five-year grandfather period during which they can continue to enjoy their
existing preferential tax treatment. During this five-year grandfather period,
the Old FIEs which enjoyed tax rates lower than 25% under the original tax law
shall gradually increase their enterprise income tax rate by 2% per year until
the tax rate reaches 25%.  In addition, the Old FIEs that are eligible for
the “two-year exemption and three-year half reduction” or “five-year exemption
and five-year half-reduction” under the original tax law, are allowed to remain
to enjoy their preference until these holidays expire.




38


Chengtong
has been entitled to preferential tax advantages in China, including full tax
exemption on the enterprise income tax that was generated in the first two years
after the recoveries of previous losses and a one-half reduction in the
prevailing enterprise income tax rate for the next 3 years. The full tax
exemption for the enterprise income tax expired on December 31, 2005 and the
right to a one-half reduction on the enterprise income tax expired on December
31, 2008.  Chengtong is therefore subject to the 25% income tax rate
from January 1, 2009.





Shanghai
Blessford has also been entitled to preferential tax advantages in China,
including full tax exemption on the enterprise income tax that was generated in
the first two years after the recoveries of previous losses and a one-half
reduction in the prevailing enterprise income tax rate for the next 3 years. The
full tax exemption for the enterprise income tax will expire on December 31,
2009 and the right to a one-half reduction on the enterprise income tax will
expire on December 31, 2012.  Shanghai Blessford will therefore be
subject to 12.5% or one-half of the prevailing tax rate from December 31, 2009
until December 31, 2012.





Substantially
all of our income may be derived from dividends we receive from our PRC
operating subsidiaries described above.  The New EIT Law and its
Implementing Rules generally provide that a 10% withholding tax applies to
China-sourced income derived by non-resident enterprises for PRC enterprise
income tax purposes.  We expect that such 10% withholding tax will
apply to dividends paid to us by our PRC subsidiaries, but this treatment will
depend on our status as a non-resident enterprise.  For detailed
discussion of PRC tax issues related to resident enterprise status, see “Risk
Factors — Risks Related to Doing Business in China — Under the New EIT Law, we
may be classified as a “resident enterprise” of China.  Such
classification will likely result in unfavorable tax consequences to us and our
non-PRC shareholders.”





Results
of Operations





The
following table sets forth key components of our results of operations for the
years ended June 30, 2009, 2008 and 2007 and as a percentage of
revenues.




(All
amounts in U.S. dollars)





2009
                
                
                2008
                
                
                2007Amount
                
                
                % of
                  Revenues
                
                
                Amount
                
                
                % of
                  Revenues
                
                
                Amount
                
                
                % of
                  RevenuesRevenues
                
                
                76,281,621
                
                
                
                100.0
                %
                
                
                87,739,326
                
                
                
                100.0
                %
                
                
                53,960,243
                
                
                
                100.0
                %Cost
      of sales (including depreciation and amortization)
                
                $
                68,549,426
                
                
                
                89.9
                %
                
                $
                65,241,825
                
                
                
                74.4
                %
                
                $
                38,925,987
                
                
                
                72.1
                %Gross
      profit
                
                
                7,732,195
                
                
                
                10.1
                %
                
                
                22,497,501
                
                
                
                25.6
                %
                
                
                15,034,256
                
                
                
                27.9
                %Selling
      and marketing
                
                
                1,679,283
                
                
                
                2.2
                %
                
                
                608,060
                
                
                
                0.7
                %
                
                
                245,695
                
                
                
                0.5
                %Administrative
      expenses
                
                
                2,238,088
                
                
                
                2.9
                %
                
                
                2,758,536
                
                
                
                3.1
                %
                
                
                1,863,994
                
                
                
                3.5
                %Allowance
      for bad and doubtful debts
                
                
                3,831,478
                
                
                
                5.0
                %
                
                
                686,955
                
                
                
                0.8
                %
                
                
                3,775,645
                
                
                
                7.0
                %Depreciation
      and amortization
                
                
                196,793
                
                
                
                0.3
                %
                
                
                64,253
                
                
                
                0.1
                %
                
                
                44,375
                
                
                
                0.1
                %(Loss)/Income
      from continuing operations
                
                
                (213,447
                )
                
                
                (0.3
                )%
                
                
                18,379,697
                
                
                
                20.9
                %
                
                
                9,104,547
                
                
                
                16.9
                %Other
      income
                
                
                1,397,258
                
                
                
                1.8
                %
                
                
                2,006,777
                
                
                
                2.3
                %
                
                
                103,388
                
                
                
                0.2
                %Interest
      and finance costs
                
                
                (1,228,665
                )
                
                
                (1.6
                )
      %
                
                
                (1,231,040
                )
                
                
                (1.4
                )%
                
                
                (312,222
                )
                
                
                (0.6
                )%Income/(loss)
      from continuing operations before income taxes
                
                
                (44,854
                )
                
                
                (0.1
                )%
                
                
                19,155,434
                
                
                
                21.8
                %
                
                
                8,894,351
                
                
                
                16.5
                %Income
      taxes
                
                
                (363,484
                )
                
                
                0.5
                %
                
                
                572,323
                
                
                
                0.7
                %
                
                
                1,421,690
                
                
                
                2.6
                %Net
      income/(loss) before discontinued operations
                
                
                (408,338
                )
                
                
                (0.5
                )%
                
                
                18,583,111
                
                
                
                21.2
                %
                
                
                7,472,661
                
                
                
                13.9
                %Net
      income from discontinued operations
                
                
                —
                
                
                
                
                
                
                
                —
                
                
                
                
                
                
                
                831,448
                
                
                
                1.5
                %Net
      (loss)/income
                
                $
                (408,338
                )
                
                $
                (0.5
                )%
                
                $
                18,583,111
                
                
                $
                21.2
                %
                
                $
                (8,304,109
                )
                
                $
                15.4
                %Basic
      earnings/(loss) per shareFrom
      continuing operations
                
                $
                (0.01
                )
                
                
                
                
                
                $
                0.43
                
                
                
                
                
                
                $
                0.26From
      discontinued operations
                
                $
                0.00
                
                
                
                
                
                
                $
                0.00
                
                
                
                
                
                
                $
                0.03Total
                
                $
                (0.01
                )
                
                
                
                
                
                $
                0.43
                
                
                
                
                
                
                $
                0.29Diluted
      earnings/(loss) per shareFrom
      continuing operations
                
                $
                (0.01
                )
                
                
                
                
                
                $
                0.43
                
                
                
                
                
                
                $
                0.26From
      discontinued operations
                
                $
                0.00
                
                
                
                
                
                
                $
                0.00
                
                
                
                
                
                
                $
                0.03Total
                
                $
                (0.01
                )
                
                
                
                
                
                $
                0.43
                
                
                
                
                
                
                $
                0.29


39


Fiscal Year Ended June 30,
2009 Compared to Fiscal Year Ended June 30, 2008




Sales Revenues.Sales volume decreased by 5,121 tons, or 5.7%, year-on-year to 84,001
tons for the year ended June 30, 2009 from 89,122 tons for the year ended June
30, 2008 and, as a result, sales revenues decreased by $11,457,705, or 13.1%,
year-on-year to $76,281,621 for the year ended June 30, 2009 from $87,739,326
for the year ended June 30, 2008. The decrease in sales revenues is mainly
attributable to a decrease in demand for high-carbon cold-rolled products used
in automobile components production due to the slowdown of the automobile
industry, as well as lower average sale prices during the year ended June 30,
2009.




Sales by Product
Line





A
break-down of our sales by product line for the years ended June 30, 2009 and
2008 is as follows:





2009
                  
                  
                  2008
                  
                  
                  Year-on-YearProduct
      Category
                  
                  Quantity
                    (tons)
                  
                  
                  $
      Amount
                  
                  
                  %
      of
                    Sales
                  
                  
                  Quantity
                    (tons)
                  
                  
                  $
      Amount
                  
                  
                  %
      of
                    Sales
                  
                  
                  Qty.
                    VarianceLow
      carbon hard rolled
                  
                  
                  21,009
                  
                  
                  
                  21,051,186
                  
                  
                  
                  28
                  
                  
                  
                  18,612
                  
                  
                  
                  15,959,415
                  
                  
                  
                  18
                  
                  
                  
                  2,397Low
      carbon cold-rolled
                  
                  
                  38,526
                  
                  
                  
                  29,774,589
                  
                  
                  
                  39
                  
                  
                  
                  35,163
                  
                  
                  
                  27,497,894
                  
                  
                  
                  32
                  
                  
                  
                  3,363High-carbon
      hot-rolled
                  
                  
                  5,499
                  
                  
                  
                  5,487,958
                  
                  
                  
                  7
                  
                  
                  
                  6,790
                  
                  
                  
                  6,291,036
                  
                  
                  
                  7
                  
                  
                  
                  (1,291High-carbon
      cold-rolled
                  
                  
                  7,755
                  
                  
                  
                  11,305,674
                  
                  
                  
                  15
                  
                  
                  
                  17,754
                  
                  
                  
                  29,029,418
                  
                  
                  
                  33
                  
                  
                  
                  (9,999Subcontracting
      income
                  
                  
                  11,212
                  
                  
                  
                  6,392,815
                  
                  
                  
                  8
                  
                  
                  
                  10,803
                  
                  
                  
                  6,425,008
                  
                  
                  
                  7
                  
                  
                  
                  409Sales
      of scrap metal
                  
                  
                  -
                  
                  
                  
                  2,269,399
                  
                  
                  
                  3
                  
                  
                  
                  -
                  
                  
                  
                  2,536,555
                  
                  
                  
                  3
                  
                  
                  
                  -Total
                  
                  
                  84,001
                  
                  
                  
                  76,281,621
                  
                  
                  
                  100
                  
                  
                  
                  89,122
                  
                  
                  
                  87,739,326
                  
                  
                  
                  100
                  
                  
                  
                  (5,121





There
were different trends of demand across various product categories during the
year ended June 30, 2009. High-carbon cold-rolled steel products only accounted
for 15% of the current sales mix at an average selling price of $1,458 per ton
for the year ended June 30, 2009, compared to 33 % of the sales mix at an
average selling price per ton of $1,635 for the year ended June 30, 2008. This
was a result of the slow down of the automobile industry as a large quantity of
the products in this category is sold to automobile components manufacturers.
Low-carbon cold-rolled steel products accounted for 39% of the current sales mix
at an average selling price of $773 per ton for the year ended June 30, 2009,
compared to 32% of the sales mix at an average selling price per ton of $782 for
the year ended June 30, 2008. Low-carbon hard-rolled steel products accounted
for 28% of the current sales mix at an average selling price of $1,002 per ton
for the year ended June 30, 2009, compared to 18% of the sales mix at an average
selling price per ton of $857 for the year ended June 30,
2008.  Subcontracting income revenues decreased slightly to
$6,392,815, or 8%, of the sales mix for the year ended June 30, 2009 as compared
to $6,425,008, or 7%, of the sales mix during the year ended June 20,
2008.


40





2009
                
                
                2008
                
                
                VarianceAverage
      Selling Prices
                
                ($)
                
                
                ($)
                
                
                ($)
                
                
                (%)Low-carbon
      hard rolled
                
                
                1,002
                
                
                
                857
                
                
                
                145
                
                
                
                17Low-carbon
      cold-rolled
                
                
                773
                
                
                
                782
                
                
                
                (9
                )
                
                
                (1
                )High-carbon
      hot-rolled
                
                
                998
                
                
                
                927
                
                
                
                71
                
                
                
                8High-carbon
      cold-rolled
                
                
                1,458
                
                
                
                1,635
                
                
                
                (177
                )
                
                
                (11
                )Subcontracting
      income
                
                
                570
                
                
                
                595
                
                
                
                (25
                
                
                
                (4





The
average selling price per ton decreased to $908 for the year ended June 30,
2009, compared to the corresponding year in 2008 of $984, representing
a decrease of $76, or 7.8%, year-on-year. This decrease was mainly due to
decreases in steel prices and therefore selling prices due to volatilities in
the industry, as well as a decrease in percentage of high-carbon cold rolled
steel products during the year.  High-carbon cold-rolled steel
products have the highest selling prices among all product categories, and only
accounted for 15% of the current sales mix, compared to 33% of the sales mix
year-on-year.  There was also been a decrease in the average selling
price of high-carbon cold-rolled steel products to $1,458 per ton for the year
ended June 30, 2009, from $1,635 for the year ended June 30, 2008.





Sales Breakdown by Major
Customer





2009
                  
                  
                  2008Customers
                  
                  $
                  
                  
                  %
      of Sales
                  
                  
                  $
                  
                  
                  %
      of SalesSalzgitter
      Mannesmann International GMBH
                  
                  
                  14,275,799
                  
                  
                  
                  19
                  
                  
                  
                  *
                  
                  
                  
                  *Shanghai
      Changshuo Stainless Steel Co., Ltd.
                  
                  
                  10,999,692
                  
                  
                  
                  14
                  
                  
                  
                  18,513,819
                  
                  
                  
                  21Shanghai
      Shengdejia Metal Co., Ltd
                  
                  
                  4,827,675
                  
                  
                  
                  6
                  
                  
                  
                  10,414,545
                  
                  
                  
                  12Zhangjiagang
      Gangxing Innovative Construction Material Co., Ltd.
                  
                  
                  4,413,512
                  
                  
                  
                  6
                  
                  
                  
                  *
                  
                  
                  
                  *Unimax
      and Far Corporation
                  
                  
                  3,777,196
                  
                  
                  
                  5
                  
                  
                  
                  7,695,294
                  
                  
                  
                  9Shanghai
      Bayou Industrial Co., Ltd.
                  
                  
                  *
                  
                  
                  
                  *
                  
                  
                  
                  10,494,752
                  
                  
                  
                  12Baosteel
      Steel Products Trading Co., Ltd.
                  
                  
                  *
                  
                  
                  
                  *
                  
                  
                  
                  6,758,976
                  
                  
                  
                  838,293,874
                  
                  
                  
                  50
                  
                  
                  
                  53,877,386
                  
                  
                  
                  62Others
                  
                  
                  37,987,747
                  
                  
                  
                  50
                  
                  
                  
                  33,861,940
                  
                  
                  
                  38Total
                  
                  
                  76,281,621
                  
                  
                  
                  100
                  
                  
                  
                  87,739,326
                  
                  
                  
                  100




*
Not major customers for the relevant years





Sales
revenues generated from our top five major customers as a percentage of total
sales decreased to 50% for the year ended June 30, 2009, compared to 62% for the
year ended June 30, 2008. Sales to two new major customers, Salzgitter
Mannesmann International GMBH and Shanghai Changshuo Stainless Steel Co., Ltd.,
for the year accounted for 33% of our sales revenues. The change in customer mix
reflects management’s continuous efforts in expanding our customer base and
geographical coverage during the course of the year.




Cost of Goods
Sold.Cost
of sales increased by $3,307,601, or 5.1%, year-on-year to $68,549,426 for the
year ended June 30, 2009, from $65,241,825 for the year ended June 30, 2008.
Cost of sales represented 89.9% of sales revenues for the year ended June 30,
2009 compared to 74.4% for the year ended June 30, 2008. Average cost of
production per ton increased to $816 for the year ended June 30, 2009, compared
to an average cost of production per ton of $732 for the year ended June 30,
2008,  representing an increase of $84 per ton, or 11.5%,
year-on-year.


41





2009
                  
                  
                  2008
                  
                  
                  Variance($)
                  
                  
                  ($)
                  
                  
                  ($)
                  
                  
                  (%)Cost
      of goods sold-
      Raw materials
                  
                  
                  57,401,094
                  
                  
                  
                  57,019,804
                  
                  
                  
                  381,290
                  
                  
                  
                  1-
      Direct labor
                  
                  
                  1,205,070
                  
                  
                  
                  946,770
                  
                  
                  
                  258,300
                  
                  
                  
                  27-
      Manufacturing overhead
                  
                  
                  9,943,262
                  
                  
                  
                  7,275,251
                  
                  
                  
                  2,668,011
                  
                  
                  
                  3768,549,426
                  
                  
                  
                  65,241,825
                  
                  
                  
                  3,307,601
                  
                  
                  
                  5Cost
      per unit soldTotal
      units sold (tons)
                  
                  
                  84,001
                  
                  
                  
                  89,122
                  
                  
                  
                  (5,121
                  )
                  
                  
                  (6
                  )Average
      cost per unit sold ($/ton)
                  
                  
                  816
                  
                  
                  
                  732
                  
                  
                  
                  84
                  
                  
                  
                  11





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





·
            an
      increase in cost of raw materials per unit sold of $43, or 6.7%, from $640
      for the year ended June 30, 2008 compared  to $683 for the year
      ended June 30, 2009;





·
            an
      increase in direct labor per unit sold of $3, or 27.3%, from $11 for the
      year ended June 30, 2008 compared to $14 for the year ended June 30, 2009;





·
            an
      increase in factory overhead per unit sold of $36, or 43.9%, from $82 for
      the year ended June 30, 2008 compared to $118 for the year ended June 30,
      2009.





The cost
of raw materials consumed increased by $381,290, or 0.7%, year-on-year, to
$57,401,094 for the year ended June 30, 2009 from $57,019,804 for the year ended
June 30, 2008. This increase was mainly due to increases in raw material prices
year-on-year, offset by decrease in total units sold.





Direct
labor costs increased by $258,300, or 27.3%, year-on-year, to $1,205,070 for the
year ended June 30, 2009, from $946,770 for the year ended June 30, 2008. The
increase was due to increases in wages during the year following the lifting of
the minimum monthly wage in Shanghai, as well as increases in related pension
costs resulting from the additional base wages.




Manufacturing
overhead costs increased by $2,668,011, or 36.7%, year-on-year, to $9,943,262
for the year ended June 30, 2009, from $7,275,251 for the year ended June 30,
2008. The increase was mainly attributable to the combined effect of an increase
in depreciation of $1,529,348, or 75.8%, year-on-year to $3,547,453 for the year
ended June 30, 2009, from $2,018,105 for the year ended June 30, 2008, an
increase in utilities of $538,415, or 21.8%, year-on-year to $3,005,366 for the
year ended June 30, 2009, from $2,466,951 for the year ended June 30, 2008 due
to increased consumption of natural gas associated with the production of 2,397
additional tons of low carbon hard rolled steel year-on-year, and an increase in
low consumables by $967,693, or 52.3%, year-on-year to $2,816,436 for the year
ended June 30, 2009, from $1,848,743 for the year ended June 30,
2008.





Gross
Profit. Gross profit in
absolute terms decreased by $14,765,306, or 65.6%, year-on-year, to $7,732,195
for the year ended June 30, 2009, from $22,497,501 for the year ended June 30,
2008, while gross profit margin decreased to 10.1% for the year ended June 30,
2009, from 25.6% for the year ended June 30, 2008. The decrease in gross profit
is mainly attributable to a 13.1% year-on-year decrease in sales revenues, as
well as a 5.1% year-on-year increase in cost of goods sold. The decrease in
gross profit margin principally resulted from the higher cost per ton sold of
raw materials as we are taking down raw materials from inventories we purchased
some time ago at higher prices during restricted supplies, as well as a decrease
in average selling prices due to the decrease in steel prices during the 2009
fiscal year.





Selling
Expenses. Selling expenses increased by $1,071,223, or 176.2%,
year-on-year, to $1,679,283 for the year ended June 30, 2009 compared to the
corresponding year in 2008 of $608,060. The increase was mainly attributable to
increases in sales commission paid to export agents based on increased tonnage
exported during the year, and transportation and custom clearing charges in
relation to such export sales year-on-year. Our export precision products, the
low carbon hard-rolled steel, accounted for $21,051,186, or 28%, of the sales
mix for the year ended June 30, 2009, compared to $15,959,415, or 18% of sales
during the year ended June 30, 2008.


42


Administrative
Expenses.Administrative expenses
decreased by $520,448, or 18.9%, year-on-year, to $2,238,088 for the year ended
June 30, 2009 compared to $2,758,536 for the year ended June 30, 2008. This
decrease was chiefly associated with lower SEC compliance costs and professional
fees as there was no financing activity during the year ended June 30, 2009 and
lower legal and advisory fees as we become more familiar with the rules and
regulations as a listed company.





Provision for bad
debt. Provision for bad debt increased by $3,144,523, or 457.7%,
year-on-year, because of bad debt expense in the amount of $3,831,478 recognized
during the year. This charge reflects a provision for doubtful accounts due to a
dispute between the Company and one of our customers regarding a special
stainless steel product processed by the Company and delivered to the customer
during the third and fourth quarters of the year ended June 30, 2008. Revenues
for these products were initially recognized as services had been rendered and
goods had been delivered in accordance to the terms of the contract,
collectability was reasonably assured and management had no reason to believe
that the customer would object to the goods and services
provided.  However, in the months following such delivery, a dispute
arose during the use of such products by the customer, which was followed by
discussions between the Company and the customer regarding the technical aspects
of the products and the possibility of reprocessing. After a few rounds of
negotiation with the customer regarding the products and payment, our management
determined that this accounts receivable was uncollectible. The Company does not
have any other accounts receivable related to this product.





Income from
Operations. Income from operations before income tax decreased by
$18,593,144, or 101.2%, year-on-year to a loss of $213,447 for the year ended
June 30, 2009 from income of $18,379,697 for the year ended June 30, 2008, as a
result of the factors discussed above.





Other
revenues.  Our other income decreased $609,519, or 30.4%, to
$1,397,258 for the year ended June 30, 2009 from $2,006,777 for the year ended
June 30, 2008.  As a percentage of revenues, other income decreased to
1.8% for the year ended June 30, 2009 from 2.3% for the year ended June 30,
2008. Such percentage decrease in other income was primarily due to lower cash
balances and decrease in interest rate year-on-year.





Interest
Expense.  Total interest expense decreased $2,375, or 0.2%, to
$1,228,665 for the year ended June 30, 2009, from $1,231,040 for the year ended
June 30, 2008 due to an increase in loan balances offset by a lower weighted
average interest rate year-on-year.





Income
Tax. For the year ended June 30, 2009, we recognized income tax expense
of $363,484, compared to an income tax expense of $572,323 for the year ended
June 30, 2008. Other than a lower income from operations year-on-year, the
income tax expense for the year ended June 30, 2008 reflects a reversal of
deferred tax liabilities in the amount of $1,064,028 which had substantially
decreased the total income tax expense for the year.





Net
Income(loss). Net income decreased by $18,991,449, or 102.2%,
year-on-year, to a net loss of $408,338 for the year ended June 30, 2009 from
net income of $18,583,111 for the year ended June 30, 2008. The decrease in net
income is attributable to a combination of factors discussed above, including a
decrease in tons of goods sold due to weakened demand amid the current global
economic downturn, which in turn led to a decrease in sales revenue, and lower
average selling prices year-on-year.  The decrease in net income is
also attributable to a decrease in gross margin, largely due to higher raw
material costs and the recognition of a $3,831,478 bad debt expense for the year
ended June 30, 2009.





Fiscal Year Ended June 30,
2008 Compared to Fiscal Year Ended June 30, 2007





Sales
Revenues.Sales
volume increased by 22,101 tons, or 33%, year-on-year to 89,122 tons for the
year ended June 30, 2008 from 67,021 tons for the year ended June 30, 2007 and,
as a result, sales revenues increased by $33,779,083, or 62.6%, year-on-year to
$87,739,326 for the year ended June 30, 2008 from $53,960,243 for the year ended
June 30, 2007. We believe that the increases in sales and sales revenues are a
direct result of increases in our capacity and the building of our brand both in
China and overseas among users of cold-rolled precision steel
products.


43


Average
cost per unit sold increased to $732 for the year ended June 30, 2008,
compared to an average cost per unit sold of $581 for the year ended
June 30, 2007, representing an increase of $151 per ton, or 26%,
year-on-year. The increase in average cost per unit sold is mainly attributable
to the increase in raw material prices.





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





2008
                    
                    
                    2007
                    
                    
                    Year-on-YearProduct
      Category
                    
                    Quantity
                      (tons)
                    
                    
                    $
      Amount
                    
                    
                    %
      of
                      Sales
                    
                    
                    Quantity
                      (tons)
                    
                    
                    $
      Amount
                    
                    
                    %
      of
                      Sales
                    
                    
                    Qty.
                      VarianceLow
      carbon cold-rolled
                    
                    
                    35,163
                    
                    
                    
                    27,497,894
                    
                    
                    
                    32
                    
                    
                    
                    37,066
                    
                    
                    
                    22,072,438
                    
                    
                    
                    41
                    
                    
                    
                    (1,903
                    )Low
      carbon acid wash
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    14
                    
                    
                    
                    5,732
                    
                    
                    
                    -
                    
                    
                    
                    (14
                    )Low
      carbon hard rolled
                    
                    
                    18,612
                    
                    
                    
                    15,959,415
                    
                    
                    
                    18
                    
                    
                    
                    1,149
                    
                    
                    
                    782,835
                    
                    
                    
                    1
                    
                    
                    
                    17,463High-carbon
      cold-rolled
                    
                    
                    17,754
                    
                    
                    
                    29,029,418
                    
                    
                    
                    33
                    
                    
                    
                    5,287
                    
                    
                    
                    5,529,717
                    
                    
                    
                    10
                    
                    
                    
                    12,467High-carbon
      hot-rolled
                    
                    
                    6,790
                    
                    
                    
                    6,291,036
                    
                    
                    
                    7
                    
                    
                    
                    11,918
                    
                    
                    
                    9,176,414
                    
                    
                    
                    17
                    
                    
                    
                    (5,128High
      end cold-rolled
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    865
                    
                    
                    
                    14,618,831
                    
                    
                    
                    27
                    
                    
                    
                    (865
                    )Sales
      of Scrap Metal
                    
                    
                    -
                    
                    
                    
                    2,536,555
                    
                    
                    
                    3
                    
                    
                    
                    -
                    
                    
                    
                    851,742
                    
                    
                    
                    2
                    
                    
                    
                    -Subcontracting
      income
                    
                    
                    10,803
                    
                    
                    
                    6,425,008
                    
                    
                    
                    7
                    
                    
                    
                    10,722
                    
                    
                    
                    922,534
                    
                    
                    
                    2
                    
                    
                    
                    81Total
                    
                    
                    89,122
                    
                    
                    
                    87,739,326
                    
                    
                    
                    100
                    
                    
                    
                    67,021
                    
                    
                    
                    53,960,243
                    
                    
                    
                    100
                    
                    
                    
                    22,101




There
were various changes in the break-down of sales among our product categories
over the year ended June 30, 2008 as we have been ramping up the capacity of the
second mill since October 2006 and are in the process of developing new products
and new markets. High-carbon cold-rolled steel products accounted for 33% of the
sales mix at an average selling price of $1,635 per ton for the year ended June
30, 2008 compared to 10% of the sales mix at an average selling price per ton of
$1,046 for the year ended June 30, 2007, as we continued to see our customers of
the high-carbon hot-rolled products switch to the high-carbon cold-rolled
products. The low-carbon cold-rolled steel products accounted for 32% of the
sales mix at an average selling price of $782 per ton for the year ended
June 30, 2008 compared to 41% of the sales mix at an average selling
price per ton of $595 for the year ended June 30, 2007. This is a result of
increased production of the low carbon hard rolled steel category, which is our
exported precision steel product, from 1% of sales during the year ended
June 30, 2007 accounting for $782,835, to 18% of the sales mix, accounting
for $15,959,415, at an average selling price of $857 per ton for the year ended
June 30, 2008.




2008
                
                
                2007
                
                
                VarianceAverage
      Selling Prices
                
                ($)
                
                
                ($)
                
                
                ($)
                
                
                (%)Low-carbon
      cold-rolled
                
                
                782
                
                
                
                595
                
                
                
                187
                
                
                
                31Low-carbon
      acid wash
                
                
                -
                
                
                
                409
                
                
                
                (409
                )
                
                
                (100
                )Low-carbon
      hard rolled
                
                
                857
                
                
                
                681
                
                
                
                176
                
                
                
                26High-carbon
      cold-rolled
                
                
                1,635
                
                
                
                1,046
                
                
                
                589
                
                
                
                56High-carbon
      hot-rolled
                
                
                927
                
                
                
                770
                
                
                
                157
                
                
                
                20High-end
      cold-rolled
                
                
                -
                
                
                
                16,900
                
                
                
                (16,900
                )
                
                
                (100
                )Subcontracting
      income
                
                
                595
                
                
                
                86
                
                
                
                509
                
                
                >
      100





The
average selling price per ton generated increased to $984 for the year ended
June 30, 2008 compared to the corresponding year in 2007 of $805, representing
an increase of $179, or 22.3%, year-on-year. This increase was due to both
changes in our sales mix during the year to focus on high quality high margin
products and rising raw material prices.


44


Sales
Breakdown by Major Customer





2008
                                    
                                    
                                    2007Customers
                                    
                                    $
                                    
                                    
                                    %
      of Sales
                                    
                                    
                                    $
                                    
                                    
                                    %
      of SalesShanghai
      Changshuo Stainless Steel Co., Ltd.
                                    
                                    
                                    18,513,819
                                    
                                    
                                    
                                    21
                                    
                                    
                                    
                                    5,428,110
                                    
                                    
                                    
                                    10Shanghai
      Bayou Industrial Co., Ltd.
                                    
                                    
                                    10,494,752
                                    
                                    
                                    
                                    12
                                    
                                    
                                    
                                    -
                                    *
                                    
                                    
                                    -
                                    *Shanghai
      Shengdejia Metal Co. Ltd
                                    
                                    
                                    10,414,545
                                    
                                    
                                    
                                    12
                                    
                                    
                                    
                                    -
                                    *
                                    
                                    
                                    -
                                    *Unimax
      and Far Corporation
                                    
                                    
                                    7,695,294
                                    
                                    
                                    
                                    9
                                    
                                    
                                    
                                    -
                                    *
                                    
                                    
                                    -
                                    *Baosteel
      Steel Products Trading Co., Ltd.
                                    
                                    
                                    6,758,976
                                    
                                    
                                    
                                    8
                                    
                                    
                                    
                                    -
                                    *
                                    
                                    
                                    -
                                    *Shanghai
      Ruixuefeng Metals Co. Ltd
                                    
                                    
                                    -
                                    *
                                    
                                    
                                    -
                                    *
                                    
                                    
                                    12,192,219
                                    
                                    
                                    
                                    23China
      Railway Materials Shanghai Company
                                    
                                    
                                    -
                                    *
                                    
                                    
                                    -
                                    *
                                    
                                    
                                    3,498,770
                                    
                                    
                                    
                                    6Hangzhou
      Relian Company Limited
                                    
                                    
                                    -
                                    *
                                    
                                    
                                    -
                                    *
                                    
                                    
                                    3,323,981
                                    
                                    
                                    
                                    6Sinosteel
      Company Limited
                                    
                                    
                                    -
                                    *
                                    
                                    
                                    -
                                    *
                                    
                                    
                                    3,251,450
                                    
                                    
                                    
                                    653,877,386
                                    
                                    
                                    
                                    62
                                    
                                    
                                    
                                    27,694,530
                                    
                                    
                                    
                                    51Others
                                    
                                    
                                    33,861,940
                                    
                                    
                                    
                                    38
                                    
                                    
                                    
                                    26,265,713
                                    
                                    
                                    
                                    49Total
                                    
                                    
                                    87,739,326
                                    
                                    
                                    
                                    100
                                    
                                    
                                    
                                    53,960,243
                                    
                                    
                                    
                                    100




*
Not major customers for the relevant years





Sales
revenues generated from our top five major customers as a percentage of total
sales increased to 62% for the year ended June 30, 2008. With the exception of
Shanghai Changshuo Stainless Steel Co., Ltd., the top five major customers were
different year-on-year. The change in customer mix reflects our shift in product
focus during the course of the year.




Cost of Goods
Sold.Cost
of goods sold increased by $26,315,838, or 68%, year-on-year to $65,241,825 for
the year ended June 30, 2008, from $38,925,987 for the year ended June 30, 2007.
Cost of goods sold represented 74% of sales revenues for the year ended June 30,
2008, compared to 72% for the year ended June 30, 2007. Average cost per unit
sold increased by $151, or 26%, year-on-year to $732 per ton for the year ended
June 30, 2008, from $581 per ton for the year ended June 30, 2007. Meanwhile,
the average selling price per ton increased by $179 per ton, or 22%,
year-on-year to $984 per ton for the year ended June 30, 2008, from $805 per ton
for the year ended June 30, 2007.





2008
                                              
                                              2007
                                              
                                              Variance$
                                              
                                              $
                                              
                                              $
                                              
                                              %Cost
      of goods sold-
      Raw materials
                                              
                                              
                                              57,019,804
                                              
                                              33,809,809
                                              
                                              
                                              23,209,995
                                              
                                              69-
      Direct labor
                                              
                                              
                                              946,770
                                              
                                              635,885
                                              
                                              
                                              310,885
                                              
                                              49-
      Manufacturing overhead
                                              
                                              
                                              7,275,251
                                              
                                              4,480,293
                                              
                                              
                                              2,794,958
                                              
                                              6265,241,825
                                              
                                              38,925,987
                                              
                                              
                                              26,315,838
                                              
                                              68Cost
      per unit soldTotal
      units sold (tons)
                                              
                                              
                                              89,122
                                              
                                              67,021
                                              
                                              
                                              22,101
                                              
                                              33Average
      cost per unit sold ($/ton)
                                              
                                              
                                              732
                                              
                                              581
                                              
                                              
                                              151
                                              
                                              26





The raw
materials cost component relative to sales revenues increased to 65% for the
year ended June 30, 2008 compared to 63% for the year ended June 30, 2007. Due
to rising raw material prices over the year, the average cost of raw materials
per unit sold increased by $136, or 27%, year-on-year, to $640 for the year
ended June 30, 2008 compared to $504 for the year ended June 30,
2007.


45


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





·
            significant
      increases in sales of high-carbon cold-rolled steel to 17,754 tons
      (compared to 5,287 tons for the year ended June 30, 2007) at an average
      selling price of $1,635 per ton (compared to $1,046 per ton for the year
      ended June 30, 2007) for the year ended June 30, 2008;
  and





·
            increase
      in sales of low-carbon hard-rolled steel to 18,612 tons (compared to 1,149
      tons for the year ended June 30, 2007) at an average selling price of $857
      per ton (compared to $681 per ton for the year ended June 30, 2007) for
      the year ended June 30, 2008.





The cost
of raw materials consumed increased by $23,209,995, or 68.6%, year-on-year, to
$57,019,804 for the year ended June 30, 2008, from $33,809,809 for the year
ended June 30, 2007. This increase was mainly attributable to increases in
production capacity and sales volume by 22,101 tons, or 33.0%, year-on-year, to
89,122 tons for the year ended June 30, 2008 from 67,021 tons for the year ended
June 30, 2007, resulting in higher input and cost of raw materials. Average cost
per unit sold produced increased by $151, or 26%, year-on-year, to $732 for the
year ended June 30, 2008 from $581 for the year ended June 30,
2007.




Manufacturing
overhead costs increased by $2,794,958, or 62%, year-on-year, to $7,275,251 for
the year ended June 30, 2008 from $4,480,293 for the year ended June 30, 2007.
This increase was mainly attributable to the combined effect of an increase in
low consumables by $1,108,432, or 150%, year-on-year, to $1,848,743 for the year
ended June 30, 2008 from $740,312 for the year ended June 30, 2007, an increase
in depreciation by $425,050, or 27%, year-on-year, to $2,018,105 for the year
ended June 30, 2008 from $1,593,055 for the year ended June 30, 2007, and an
increase in utilities by $564,660, or 64%, year-on-year, to $1,441,341 for the
year ended June 30, 2008 from $876,681 for the year ended June 30,
2007.





Gross
Profit. Gross profit in
absolute terms increased by $7,463,245, or 49.6%, year-on-year to $22,497,501
for the year ended June 30, 2008 from $15,034,256 for the year ended June 30,
2007, while gross profit margin decreased to 25.6% for the year ended June 30,
2008 from 27.9% for the year ended June 30, 2007. The increase in gross profit
is mainly attributable to a 62.6% year-on-year increase in sales revenues in
relation to a 67.6% year-on-year increase in cost of goods sold. The decrease in
gross profit margin principally resulted from increases of raw material prices
during the year. We passed on the majority of the increased cost to our
customers through increases in selling prices.





Selling
Expenses. Selling expenses increased by $362,365, or 147%, year-on-year,
to $608,060 for the year ended June 30, 2008, compared to the corresponding year
in 2007 of $245,695. The increase was mainly attributable to increases in
transportation, which rose by $276,957, or 251%, year-on-year, to $387,212, due
to our increased sales volume of export products and related delivery
charges.




Administrative
Expenses.Administrative expenses increased by $894,542, or 48%, year-on-year, to
$2,758,536 for the year ended June 30, 2008, compared to the comparable year in
2007. This was chiefly due to increases in listing and compliance fees after our
admission to the NASDAQ Capital Market in December 2006, directors’
remuneration, traveling expenses and salaries and wages. Increases in salaries
and wages were principally due to increases in the average number of staff at
our operating subsidiaries.




Finance
Costs. Net finance cost increased 294% year-on-year as a result of
increases in total interest expense by $918,818. The increases in net interest
expenses were due a decrease in capitalized interest of $826,101 year-on-year
and increases in interest rates during the year.





Net
Income. Net income increased by $10,279,002, or 124%, year-on-year, to
$18,583,111 for the year ended June 30, 2008 from $8,304,109 for the year ended
June 30, 2007. The increase in net income is mainly attributable to the increase
in sales during the year, due to increased production capacity.


46


Liquidity
and Capital Resources




General





Our
business is capital intensive and requires substantial expenditures for, among
other things, the purchase and maintenance of plant and equipment used in our
operations. Our short-term and long-term liquidity needs arise primarily from
capital expenditures, working capital requirements and principal and interest
payments related to our outstanding indebtedness. We have met these liquidity
requirements with cash provided by operations, equity financing, and bank
debt. As of June 30, 2009, we had cash and cash equivalents of
approximately $13.6 million.





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





CASH
FLOW





Year
      Ended June 30,2009
                
                
                2008
                
                
                2007Net
      cash provided by/(used in) operating activities
                
                $
                15,105,012
                
                
                $
                (12,606,520
                )
                
                $
                2,902,389Net
      cash used in investing activities
                
                
                (25,330,600
                )
                
                
                (14,705,302
                )
                
                
                (9,996,144
                )Net
      cash provided by financing activities
                
                
                5,232,873
                
                
                
                38,197,178
                
                
                
                11,599,357Net
      cash flow
                
                
                (4,919,255
                )
                
                
                13,063,980
                
                
                
                5,317,907





Operating
Activities





Net cash flows provided
by operating activities for the year ended June 30, 2009 was $15,105,012 as
compared with $12,606,520 used in operating activities for the year ended June
30, 2008, for a net increase of $27,711,532. This increase was mainly due to
reduction in cash flows to advances to suppliers of $32,061,519. As compared
with a cash outflow in the amount of $19,898,096 to advances to suppliers during
the year ended June 30, 2008, we made less advances during the current year and
received approximately $5.0 million of cash refund of an advance made to one of
our major suppliers. The increase in operating cash flows was also attributed to
a substantial increase in cash flows from accounts receivable of $33,203,564,
due to strengthened collection activities during the year, offset by decreases
from accounts payable and advances from customers during the year ended June 30,
2009.





For the
year ended June 30, 2009, sales revenues generated from the top five major
customers as a percentage of total sales decreased to 50% as compared to 62% for
the year ended June 30, 2008. The loss of all or portion of the sales volume
from a significant customer would have an adverse effect on our operating cash
flows. While our operating cash flows from accounts receivable substantially
increased year-on-year, Days Sales Outstanding also increased from 87.4 for the
year ended June 30, 2008 to 141.0 for the year ended June 30, 2009 as we have
experienced delays in customer payment. We note that the continuation or
intensification of the current worldwide economic crisis may have negative
consequences on the business operations of our customers and adversely impact
their ability to meet their financial obligations to us, resulting in
unrecoverable losses on such accounts receivable. We have been strengthening our
collection activities and will continue to closely monitor any changes in
collection experience and the credit ratings of our customers.  From
time to time we will review credit periods offered, along with our collection
experience and the other relevant factors, to evaluate the adequacy of our
allowance for doubtful accounts, and to make changes to the allowance, if
necessary. Delays or non-payment of accounts receivable would have an adverse
effect on our operating cash flows.




Investing
Activities





Our main
uses of cash for investing activities during the year ended June 30, 2009 were
for the purchase of property, plant and equipment related to the addition of a
new cold rolling mill and annealing furnaces at our Shanghai Blessford
facilities.  We believe these capital investments increase our
capacity, expand product line and improve product qualities, thereby creating
opportunities to grow sales, enter new markets and further strengthen our
leading position in the niche cold rolling segment that we operate
in.


47


Net cash
flows used in investing activities for the year ended June 30, 2009 was
$25,330,600 as compared with $14,705,302 for the year ended June 30, 2008. The
increase in investing activity was due to payment of the construction project
related to the new 1450mm cold rolling mill and a deposit made relating to the
construction of annealing furnaces during the year ended June 30,
2009.





As of
June 30, 2009, the Company had $2,496,669 in commitments for capital
expenditures for construction projects mentioned above. Management believes that
we currently have sufficient capital resources to meet these contractual
commitments and expect to complete the trial production of the new mill by end
of calendar 2009. We also forecast lower capital expenditures in the coming
years as by now the Company has completed most of its expansion plans and the
majority of the construction costs relating to our third cold rolling mill has
already been paid for as at June 30, 2009.





Financing
Activities




Net cash
flows provided by financing activities for the year ended June 30, 2009 was
$5,232,873 as compared with $38,197,178 provided by financing activities for the
year ended June 30, 2008. During the year ended June 30, 2009, the Company
received short-term loans of $5,505,727 and net proceeds from the exercise of
warrants of $269,985, which was partially offset by repayment of short-term
loans in the amount of $87,839. The year ended June 30, 2008 reflects net
proceeds of approximately $44 million from an offering of the Company’s common
stock, and repayment and renewing of short-term loans which offset each
other.





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




While we
currently generate sufficient operating cash flows to support our working
capital requirements, our working capital requirements and the cash flow
provided by future operating activities will vary from quarter to quarter, and
are dependent on factors such as volume of business and payment terms with our
customers. As such, we may need to rely on access to the financial markets to
provide us with significant discretionary funding capacity. However, the current
uncertainty arising out of domestic and global economic conditions, including
the recent disruption in credit markets, poses a risk to the economies in which
we operate and may adversely impact our potential sources of capital financing.
The general unavailability of credit could make capital financing more expensive
for us or impossible altogether.  Even if we are able to obtain
credit, the incurrence of indebtedness could result in increased debt service
obligations. Our inability to renew our current bank debt that is due in July
2010, and the unavailability of additional debt financing as a result of
economic pressures on the credit and equity markets could have a material
adverse effect on our business operations.





Current
Assets





Current
assets decreased by $24,102,171, or 22.3%, year-on-year to $84,031,751 as of
June 30, 2009, from $108,133,922 as of June 30, 2008, principally as a result of
a decrease in accounts receivable of $8,642,240, or 25.6%, year-on-year, as a
result of strengthened efforts in credit collection during the year, cash and
cash equivalents by $4,919,255, or 26.5%, year-on-year, advances to suppliers of
$11,149,318, or 33.8%, year-on-year, and inventories of $1,540,017, or 8.6%,
year-on-year, offset by an increase in bills receivable of $1,821,440, or 42.3%,
year-on-year. The decrease in cash and cash equivalents is mainly attributable
to payment in relation to the construction cost of the additional rolling mill
and annealing furnaces during the year ended June 30, 2009.


48


Accounts
receivable, representing 29.9% of total current assets as of June 30, 2009, is a
significant asset of the Company. We offer credit to our customers in the normal
course of our business and accounts receivable is stated net of allowance for
doubtful accounts. Credit periods vary substantially across industries,
segments, types and size of companies in China where we operate our business.
Because of the niche products that we process, our customers are usually also
niche players in their own respective segment, who then sell their products to
the end product manufacturers. The business cycle is relatively long, as well as
the credit periods. The Company offers credit to its customers for periods of 60
days, 90 days, 120 days and 180 days. We generally offer the longer credit terms
to longstanding recurring customers with good payment histories and sizable
operations. From time to time we review these credit periods, along with our
collection experience and the other factors discussed above, to evaluate the
adequacy of our allowance for doubtful accounts, and to make changes to the
allowance, if necessary.  If our actual collection experience or other
conditions change, revisions to our allowances may be required, including a
further provision which could adversely affect our operating income, or write
back of provision when estimated uncollectible accounts are actually
collected.





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





The
following table reflects the aging of our accounts receivable as of June 30,
2009 and 2008:





June 30,
2009




US$
                
                Total
                
                
                Current
                
                
                1 to 30
                  days
                
                
                31 to
                  90 days
                
                
                91 to 180
                  days
                
                
                181 to 360
                  days
                
                
                over
                  1 yearTOTAL
                
                
                25,970,961
                
                
                
                14,497,258
                
                
                
                405,769
                
                
                
                1,639,027
                
                
                
                7,061,774
                
                
                
                2,168,481
                
                
                
                198,652%
                
                
                100
                
                
                
                56
                
                
                
                2
                
                
                
                6
                
                
                
                27
                
                
                
                8
                
                
                
                1





June 30,
2008




US$
                
                Total
                
                
                Current
                
                
                1 to 30
                  days
                
                
                31 to
                  90 days
                
                
                91 to 180
                  days
                
                
                181 to 360
                  days
                
                
                over
                  1 yearTOTAL
                
                
                34,816,553
                
                
                
                32,711,335
                
                
                
                313,936
                
                
                
                1,414,991
                
                
                
                157,578
                
                
                
                111,863
                
                
                
                106,850%
                
                
                100
                
                
                
                94
                
                
                
                1
                
                
                
                4
                
                
                <1
                
                
                <1
                
                
                <1




Management
continues to take appropriate actions to perform business and credit reviews of
any prospective customers (whether new or returning) to protect the Company from
any who might pose a high credit risk to our business based on their commercial
credit reports, our past collection history with them, and our perception of the
risk posed by their geographic location. For example, we have halted all our
sales transactions directly with customers in the Philippines as we consider the
associated credit risk to be relatively high. Based on publicly available
reports, such as that issued by A.M. Best, there is a high risk that financial
volatility may erupt in that country due to inadequate reporting standards, a
weak banking system or asset markets and/or poor regulatory structure. We expect
to resume such exports when conditions improve. Management is also of the
opinion that we do not currently have any high risk receivables on our
accounts.


49


Current
Liabilities





Current
liabilities decreased by $2,423,750, or 5.4%, year-on-year, to $42,805,652 as of
June 30, 2009, from $45,229,402 as of June 30, 2008. The decrease was mainly
attributable to a decrease in advances from customers of $5,254,052, or 75.1%,
year-on-year, and a decrease in accounts payable of $4,903,739, or 40.7%,
year-on-year, offset by an increase in short-term loans of $5,023,232, or 28.8%,
year-on-year.





As of
June 30, 2009, we had $22,489,031 in short term-loans. These short term loans
have been renewed in July 2009 for one year and will be due on July 31, 2010. 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 year ended June 30, 2009, we invested $24,990,534 in purchases of property,
plant and equipment, and construction projects in relation to the new
cold-rolling mill and annealing furnaces.




Loan
Facilities





The
following table illustrates our credit facilities as of June 30, 2009, providing
the name of the lender, the amount of the facility, the date of issuance and the
maturity date:





All
amounts in U.S. dollars





Lender
                                      
                                      Date of
                                        Loan
                                      
                                      Maturity
                                        Date
                                      
                                      Duration
                                      
                                      Interest Rate
                                      
                                      Principal
                                        AmountRaiffeisen
                                        Zentralbank
      Österreich AG (“RZB”)
                                      
                                      July
      23, 2008
                                      
                                      July
      31, 2009
                                      
                                      1
      year
                                      
                                      USD:
      SIBOR + 3%;
                                        RMB:
      1.13 times of
                                        the
      PBOC rate
                                      
                                      $5,300,000;
                                        $2,915,238
                                        (RMB20,000,000)Raiffeisen
                                        Zentralbank
      Österreich AG
                                      
                                      July
      20, 2008
                                      
                                      July
      31, 2009
                                      
                                      1
      year
                                      
                                      1.15
      times of the
                                        PBOC
      rate
                                      
                                      $14,273,793
                                        (RMB97,500,000Total
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      22,489,031





As of
June 30, 2009, we had $22,489,031 in short-term loans as illustrated in the
above table. The above loans have been renewed at an interest rate of 1.15 times
of the standard market rate set by the People’s Bank of China, or PBOC, for
Renminbi loans and at SIBOR plus 3% for USD loans, for one year due on July 31,
2010 and are secured by land use rights, buildings, plant and machineries, and
guaranteed by PSHL and Mr. Li Wo Hing.





We are
not aware of any existing issues that may lead to a withdrawal of these loans
that are due and renewable in July 2010. Our inability to renew, and the
unavailability of debt financing due to credit market conditions could have a
material adverse effect on our business operations.





We
believe that our currently available working capital and the credit facilities
referred to above should be adequate to sustain our operations at our current
levels and support our contractual commitments through the next twelve months.
However, our working capital requirements and the cash flow provided by future
operating activities vary from quarter to quarter, depending on the volume of
business during the period and payment terms with our customers. As we expect a
continuation of weak demand and volatility in both domestic and international
markets in the foreseeable future, especially the higher margin low carbon cold
rolled exported products and the high carbon cold rolled products that are sold
to the auto industry, our operating cash flows might be significantly negatively
impacted by such reduced sales and margins. Management has strengthened its
sales and marketing activities, and continues to be in talks with potential
customers whose past orders we had been unable to fill due to full capacity,
which if successful, could result in additional sales and mitigate the impact of
the weakened demand and margins on our operating cash flow. As of June 30, 2009,
the Company also had $2,496,669 in contractual commitments for capital
expenditures related to the expansion of our production facilities. As such, we
may need to rely on access to the financial markets to provide us with
significant discretionary funding capacity. However, the current uncertainty
arising out of domestic and global economic conditions, including the recent
disruption in credit markets, poses a risk to the economies in which we operate
and may adversely impact our potential sources of capital financing. The general
unavailability of credit could make capital financing more expensive for us or
impossible altogether. Even if we are able to obtain credit, the incurrence of
indebtedness could result in increased debt service obligations and could result
in operating and financing covenants that could restrict our present and future
operations.


50


Obligations
under Material Contracts





Below is
a table setting forth our material contractual obligations as of June 30,
2009:





Payments Due by PeriodContractual obligations
                
                Total
                
                
                Fiscal
                  Year 2010
                
                
                FiscalYears
                  2011-2012
                
                
                FiscalYears
                  2012-2013
                
                
                Fiscal Year
                  2014 and
                  BeyondShort-Term
      Debt Obligations
                
                $
                23,730,426
                
                
                $
                23,730,426
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Construction
      Commitments
                
                $
                2,496,669
                
                
                $
                2,496,669
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -TOTAL
                
                $
                26,227,095
                
                
                $
                26,227,095
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -





Recent
Accounting Pronouncements





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





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




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




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


51


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





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





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





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




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




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


52


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





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events”, which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. We have adopted the provisions of
SFAS No. 165, which became effective for interim and annual reporting
periods ending after June 15, 2009. No material subsequent events have
occurred since June 30, 2009 that required recognition or disclosure in our
current year financial statements.





In
June 2009, the FASB issued SFAS No. 167, “Amendments to FASB
Interpretation No. 46(R)”, which amends FASB Interpretation No. 46
(revised December 2003) to address the elimination of the concept of a
qualifying special purpose entity. SFAS No. 167 also replaces the
quantitative-based risks and rewards calculation for determining which
enterprise has a controlling financial interest in a variable interest entity
with an approach focused on identifying which enterprise has the power to direct
the activities of a variable interest entity and the obligation to absorb losses
of the entity or the right to receive benefits from the entity. Additionally,
SFAS No. 167 provides more timely and useful information about an enterprise’s
involvement with a variable interest entity. SFAS No. 167 will become effective
in July 2010. The Company is currently evaluating whether this standard will
have an impact on the Company consolidated financial statements.





In
June 2009, the FASB issued SFAS No. 168, “The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles”. SFAS No. 168 will become the single source of authoritative
nongovernmental GAAP, superseding existing FASB, American Institute of Certified
Public Accountants (AICPA), EITF, and related accounting literature. SFAS No.
168 reorganizes the thousands of GAAP pronouncements into roughly 90 accounting
topics and displays them using a consistent structure. Also included is relevant
SEC guidance organized using the same topical structure in separate sections.
SFAS No. 168 will be effective for financial statements issued for reporting
periods that end after September 15, 2009. This will have an impact on the
Company’s financial statement disclosures since all future references to
authoritative accounting literature will be referenced in accordance with SFAS
No. 168.





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.


53


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.





Accounts
Receivable





Credit
periods vary substantially across industries, segments, types and size of
companies in China where we operate our business. Because of the niche products
that we process, our customers are usually also niche players in their own
respective segment, who then sell their products to end product manufacturers.
The business cycle is relatively long, as well as credit periods. The Company
offers credit to its customers for periods of 60 days, 90 days, 120 days and 180
days. We generally offer the longer credit terms to longstanding recurring
customers with good payment histories and sizable operations.





Accounts
receivable is recorded at the time revenue is recognized and is stated net of
allowance for doubtful accounts. The Company maintains an allowance for doubtful
accounts based on its assessment of the collectability of the accounts
receivable. Management determines the collectability of outstanding accounts by
maintaining regular communication with such customers and obtaining confirmation
of their intent to fulfill their obligations to the Company. Management also
considers past collection experience, our relationship with customers and the
impact of current economic conditions on our industry and market. However, we
note that the continuation or intensification of the current global economic
crisis may have negative consequences on the business operations of our
customers and adversely impact their ability to meet their financial
obligations. At June 30, 2009, approximately 9% of our accounts receivable were
past due over 180 days.  To reserve for potentially uncollectible
accounts receivable, for the year ended June 30, 2009, our management has made a
50% provision for all accounts receivable that are over 180 days past due and
full provision for all accounts receivable over one year past
due.  From time to time, we will review these credit periods, along
with our collection experience and the other factors discussed above, to
evaluate the adequacy of our allowance for doubtful accounts, and to make
changes to the allowance, if necessary.  If our actual collection
experience or other conditions change, revisions to our allowances may be
required, including a further provision which could adversely affect our
operating income, or write back of provision when estimated uncollectible
accounts are actually collected. At June 30, 2009 and 2008, the Company had
$830,127 and $1,033,479 of allowances for doubtful accounts,
respectively.





Bad debts
are written off for past due balances over two years or when it becomes known to
management that such amount is uncollectible. Provision for bad
debts recognized for the year ended June 30, 2009 and 2008 were $3,831,478
and $686,955, respectively. The current year charge reflects a provision for
doubtful accounts due to a dispute between the Company and one of our customers
regarding a special stainless steel product processed by the Company and
delivered to the customer during the third and fourth quarters of the year ended
June 30, 2008. Revenues for these products were initially recognized as services
had been rendered and goods had been delivered in accordance to the terms of the
contract, collectability was reasonably assured and management had no reason to
believe that the customer would object to the goods and services
provided.  However, in the months following such delivery, a dispute
arose during the use of such products by the customer, which was followed by
discussions between the Company and the customer regarding the technical aspects
of the products and the possibility of reprocessing. After a few rounds of
negotiation with the customer regarding the products and payment, our management
determined that this accounts receivable was uncollectible. The Company does not
have any other accounts receivable related to this product.





Our
management is continually working to ensure that any known uncollectible amounts
are immediately written off as bad debt against outstanding
balances.


54


Advances to
Suppliers





In order
to insure a steady supply of raw materials, the Company is required from time to
time to make cash advances to its suppliers when placing purchase orders, for a
guaranteed minimum delivery quantity at future times when raw materials are
required. The advance is seen as a deposit to suppliers and guarantees our
access to raw materials during periods of shortages and market volatility, and
is therefore considered an important component of our
operations.  Contracted raw materials are priced at prevailing market
rates agreed by us with the suppliers prior to each delivery date. Advances to
suppliers are shown net of an allowance which represents potentially
unrecoverable cash advances at each balance sheet date. Such allowances are
based on an analysis of past raw materials receipt experience and the
credibility of each supplier according to its size and background. In general,
we don’t provide allowances against advances paid to state owned companies as
there is minimal risk of default. Our allowances for advances to suppliers are
subjective critical estimates that have a direct impact on reported net
earnings, and are reviewed quarterly at a minimum to reflect changes from our
historic raw material receipt experience and to ensure the appropriateness of
the allowance in light of the circumstances present at the time of the
review.  It is reasonably possible that the Company’s estimate of the
allowance will change, such as in the case when the Company becomes aware of a
supplier’s inability to deliver the contracted raw materials or meet its
financial obligations. At June 30, 2009 and 2008, the Company had allowances for
advances to suppliers of $1,631,557and $2,522,837, respectively.





During
the year ended June 30, 2009, we have received a $5.4 million cash refund of our
advances of over 180 days to suppliers, from one of our major suppliers. The
majority of the remaining advances to suppliers of over 180 days is attributable
to our advances to a subsidiary of a state-owned company in China, whose risk of
default is minimal. At June 30, 2009, this supplier has confirmed to our
management that it is committed to delivering the contracted raw materials as
and when those are needed by the Company.





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





Inventory





Inventory
is stated at the lower of cost or market. Cost is determined using the
weighted-average method.





Intangible Assets





Intangible
assets represent land use rights in China acquired by the Company and are stated
at cost less amortization. Amortization of land-use rights is calculated on the
straight-line method, based on the period over which the right is granted by the
relevant authorities in China. The Company acquired land use rights in August
2004 and December 2006 for 50 years that both expire in December 2056. The land
use rights are amortized over a fifty-year term. An amortization amount of
approximately $98,000 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 for impairment
if there are triggering events, to determine whether their carrying value has
become impaired, in conformity with SFAS No. 144. The Company also re-evaluates
the periods of amortization to determine whether subsequent events and
circumstances warrant revised estimates of useful lives. An impairment test was
performed as of June 30, 2009 and no impairment charges were recognized for the
relevant periods. As of June 30, 2009, the Company expects these assets to be
fully recoverable.


55


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
      yearsPlant
      and machinery
                  10
      yearsMotor
      vehicles
                  5
      yearsOffice
      equipment
                  5
      to 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.





The
Company accounts for impairment of propery, plant and equipment and amortizable
intangible assets in accordance with SFAS No. 144, which requires the Company to
evaluate a long-lived asset for recoverability when there is an event or
circumstance that indicate the carrying value of the asset may not be
recoverable. We determine such impairment by measuring the estimated
undiscounted future cash flow generated by the assets, comparing the result to
the asset carrying value and adjusting the asset to the lower of its carrying
value or fair value and charging current operations for the measured impairment.
Where the recoverable amount of any property, plant and equipment is
determined to have declined below its carrying amount, the carrying amount is
reduced to reflect the decline in value. We performed an impairment test as of
June 30, 2009, using a normal and a worse-case scenario, and assessed fair value
based on average tons sold, selling price per ton, gross margin, and other cash
inflows and outflows for the next ten years where our mills are expected to
remain in operation. No impairment charges were recognized for the relevant
year. Assumptions and estimates used in our impairment test provide the general
direction of major factors expected to affect our business and cash flows, and
are subject to risks and uncertainties such as changes in interest rates,
industry cyclicality, and factors surrounding the general Chinese and global
economies. Those estimates will be reassessed for their reasonableness at each
impairment test.




Other
Policies





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





Seasonality




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





Off-Balance
Sheet Arrangements





For the
year ended June 30, 2009, we did not have any off-balance sheet
arrangements.


56


ITEM 7A.
            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





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





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 June 30,
2009 the exchange rate was 6.8307 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 June 30, 2009, the Group’s
outstanding financial instruments with foreign currency exchange rate risk
exposure had an aggregate fair value of $22.5 million (including the Group’s
non-U.S. dollar denominated debt). The potential increase in the fair values of
these instruments resulting from a 10% adverse change in quoted foreign currency
exchange rates would be approximately $2.3 million at June 30,
2009.





Interest
Rates





We are
subject to interest rate risk on its non-derivative financial instruments. We do
not hedge our interest rate risk. At June 30, 2009, our total bank debt
outstanding was $22,489,031, 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 fiscal year ending June 30,
2010, annual interest on loans is anticipated to be approximately $1.2 million.
The impact of a 1% increase in interest rates will increase interest expense by
approximately $225,000. As our short-term loans mature, we will be required to
either repay or refinance these loans. An increase in short-term interest rates
at the time that we seek to refinance these short-term loans may increase the
cost of borrowing, which may adversely affect our earnings and cash available
for distribution to shareholders.


57


At
June 30, 2009, the aggregate fair value of the Group’s financial
instruments with exposure to interest rate risk was approximately $22.5 million.
The potential change in fair value for these financial instruments from an
adverse 10% change in quoted interest rates across all maturities, often
referred to as a parallel shift in the yield curve, would be approximately $2.3
million at June 30, 2009.





Commodity
Prices





The steel
coils and other raw materials used by the Company 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.





We have
no open derivative commodity instruments as of June 30, 2009 and do not
currently hedge our exposure to price fluctuations in the raw materials and
energy required for the manufacture of our products.





Inflation





Inflationary
factors such as increases in the cost of our product and overhead costs may
adversely affect our operating results.  We generally manufacture our
products to match orders from our customers. Due to the specialized nature of
our products, we are able to purchase raw materials based upon customer orders.
This operating model allows us to effectively pass along fluctuations in the
price of raw materials to our customers. For commonly used raw materials, we
purchase larger quantities when we believe prices are likely to increase in the
short term in order to minimize the impact of any such price
increase.





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




ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA.





The
financial statements required by this item begin on page F-1
hereof.





ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.





None.





ITEM
      9A.
            CONTROLS
      AND PROCEDURES.





Disclosure
Controls and Procedures





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


58





As
required by Rule 13a-15 under the Exchange Act, our management, including our
Chief Executive Officer, Mr. Wo Hing Li, and Chief Financial Officer, Ms. Leada
Tak Tai Li, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of June 30, 2009.  Based on our
assessment, Mr. Li and Ms. Li determined that, as of June 30, 2009, 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.





Internal
Controls Over Financial Reporting





Management’s
Annual Report on Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company. Internal control over
financial reporting refers to the process designed by, or under the supervision
of, our Chief Executive Officer and Chief Financial Officer, and effected by our
Board of Directors, management and other personnel, to provide reasonable
assurance regarding the reliability of our financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. GAAP, and includes those policies and procedures that:





(1)
            pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of our
      assets;





(2)
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with U.S. GAAP, and that
      our receipts and expenditures are being made only in accordance with the
      authorization of our management and directors;
  and





(3)
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of our assets that could have
      a material effect on the financial
statements.





Our
management assessed the effectiveness of our internal control over financial
reporting as of June 30, 2009. In making this assessment, management used the
framework set forth in the report entitled Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on that evaluation, our management concluded that our internal
control over financial reporting is effective, as of June 30, 2009.




Our
internal control over financial reporting as of June 30, 2009 has been audited
by Moore Stephens, an independent registered public accounting firm, as stated
in their report, which appears herein.





Changes
in Internal Controls over Financial Reporting





During
the fiscal year ended June 30, 2009, there were no changes in our internal
control over financial reporting identified in connection with the evaluation
performed during the fiscal year covered by this report that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.





ITEM
      9B.
            OTHER
      INFORMATION.





None.


59





PART
III




ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.





Directors
and Executive Officers





The
following sets forth the name and position of each of our current executive
officers and directors.





NAME
                    
                    AGE
                    
                    POSITIONWo
      Hing Li
                    
                    63
                    
                    Director,
      Chief Executive Officer, PresidentTung
      Kuen Tsui
                    
                    65
                    
                    DirectorDavid
      Peter Wong
                    
                    53
                    
                    DirectorChe
      Kin Lui
                    
                    46
                    
                    DirectorHai
      Sheng Chen
                    
                    46
                    
                    Director,
      Vice-PresidentLeada
      Tak Tai Li
                    
                    29
                    
                    Chief
      Financial OfficerDaniel
      Carlson
                    
                    42
                    
                    Non-Executive
      and Non-Voting Director





Wo Hing Li.  Mr. Wo
Hing Li has been the Executive Director and President of the Company since
December 28, 2006. In addition, he has been the Chairman and Executive Director
of PSHL since May 2002 and the Executive Director of Chengtong since June 2004.
From April 2004 until March 2006, Mr. Li served as a Non-Executive Director of
China Petrotech Holdings Limited, an oil software and exploration company listed
on the Singapore Stock Exchange. From October 2001 to June 2008, Mr. Li served
as a director of Medical China Limited, a company listed on the GEM Board of the
Hong Kong Stock Exchange. From 1997 to 2001, Mr. Li served as a director of Teda
(HK) Holdings Limited. Mr. Li served in various positions within the Grand
Finance Group between 1984 and 1997, serving the last seven years as the General
Manager of its subsidiary, Grand International (China) Investment Holding Co.,
Limited. Mr. Li has a Master’s Degree in Business Administration from the
Murdoch University of Australia, and a PhD in Management through a program
co-organized by the University of International Business & Economics of
China and the European University of Ireland.





Tung Kuen
Tsui.  Tung Kuen Tsui has been a member of our board of
directors since December 28, 2006.  Mr. Tsui has been retired since
1998. From 1995 to 1998, Mr. Tsui served as a Senior Credit Controller for
PricewaterhouseCoopers. Prior to working as the Senior Credit Controller, Mr.
Tsui held a variety of positions with PricewaterhouseCoopers since 1971,
including Senior Manager, Information Systems. Mr. Tsui has a Master of Business
Administration from the University of Macau. Mr. Tsui graduated as an Associate
Member of Chartered Institute of Secretaries and Administrators in the United
Kingdom.





David Peter
Wong.  David Peter Wong has been a member of our board of
directors since December 28, 2006. Mr. Wong is the Chief Financial Officer of
Private Wealth Partners, LLC, an SEC-registered investment adviser based in
California, and has been since November 2005. Mr. Wong served as the Corporate
Controller for H&Q Asia Pacific, an Asian private equity firm from November
2002 to October 2005. Mr. Wong was the Corporate Controller of Hellman &
Friedman, a private equity firm from January 2002 to September 2002. Mr. Wong is
a U.K. Chartered Accountant with six years of public accounting experience with
Ernst & Young in London and PriceWaterhouseCoopers in Hong Kong. Mr. Wong
has a Bachelor of Arts degree in Economics and Geography from the University of
Leeds in the United Kingdom.





Che Kin Lui.  Che
Kin Lui has been a member of our board of directors since December 28, 2006. Mr.
Lui has been the Chief Financial Officer of Mirach Energy Limited, an oil
exploration and production company listed on the Singapore Stock Exchange, since
April 2007. Mr. Lui served as a consultant for Synthesis Consultancy Limited
from July 2002 until March 2007. From June 1999 to July 2002, Mr. Lui served as
a manager for MVP (HK) Industries Limited, a company engaged in manufacturing
household tools. Mr. Lui has a Master’s Degree in Business Administration from
the University of Ballarat, Australia, and a diploma in Business Administration
from Hong Kong Shue Yan College.


60





Hai Sheng Chen.Mr. Hai Sheng
Chen is an Executive Director and General Manager of the Company. Mr. Chen has
been the General Manager and an Executive Director of Chengtong since its
formation in July 2002 as well as an Executive Director of Shanghai Tuorong
Precision Strip Company, Limited since June 2001. From July 2001 to July 2002,
Mr. Chen was the Managing Director of Shanghai Krupp Stainless Steel Co.
Limited, a steel processing company. From August 1999 to May 2001, Mr. Chen was
the Deputy General Manager of PuDong Steel Co. Limited, a subsidiary of the
BaoSteel Group, a steel processing company. Mr. Chen has an Executive Master’s
Degree in Business Administration from China Europe International Business
School and a Bachelors Degree in Metallic Pressure Processing from the Beijing
University of Science and Technologies.





Leada Tak Tai
Li.  Ms. Leada Tak Tai Li has been the Chief Financial Officer
of the Company since December 28, 2006. From October 2005 until December 28,
2006, Ms. Li was the Chief Financial Officer of PSHL. Ms. Li has been a
Non-Executive Director of STAR Pharmaceutical Limited since August 2009, and was
an assistant to the Chairman for the same company between June 2004 and October
2005, where she was assisting with group activities and financial reporting.
From November 2003 until May 2004, Ms. Li was an accountant with KPMG Hong Kong,
a company engaged in audit, assurances and consulting services, conducting
commercial due diligence on businesses in China. From January 2002 until
September 2002, Ms. Li was an investment advisor conducting research and
analysis with the private equity firm Suez Asia Holdings (Hong Kong) Ltd. In
2003, Ms. Li received her Master’s Degree in Accounting and Finance from Napier
University in the U.K., and a Bachelors Degree in Commerce from the University
of Melbourne in 2001.





Daniel Carlson.Mr. Carlson
has served as a non-executive and non-voting member of our Board of Directors
since February 2008. He is currently a member of the Business Development
Advisory Team of Clean Coal Resources USA Corporation, a company specializing in
underground coal gasification on a commercial scale. Mr. Carlson is also a
Series 7 licensed registered representative of European American Equities, a
niche investment bank focused on natural resources and alternative energy. Prior
to joining Clean Coal Resources USA, Mr. Carlson has 18 years’ experience
working in various capacities in the money management industry. Between 2002 and
2008, Mr. Carlson worked in the hedge fund industry focusing on PIPE
investments, including sourcing and structuring of transactions. From 2001 to
2002 he served as the Head of Trading at Husic Capital Management, where he
assisted in managing several billion dollars of pension fund assets and assisted
in the management and risk management of hedge fund products. Prior to joining
Husic Capital, Mr. Carlson served from served from July 2000 through December
2001 as an Analyst and Head of Trading at Azure Capital Partners, a Venture
Capital/Crossover fund investing in the technology industry. Mr. Carlson started
in the asset management industry with RCM Capital Management, where he was a
Senior Trader from 1995 to 2000. Mr. Carlson graduated in 1989 from Tufts
University with a degree in Economics.





Except as
noted above, there are no agreements or understandings for any of our executive
officers or directors to resign at the request of another person and no officer
or director is acting on behalf of, nor will any of them act at the direction
of, any other person.  Directors are elected until their successors
are duly elected and qualified.





Family
Relationships




Wo Hing
Li is the father of Leada Tak Tai Li, the Company’s Chief Financial Officer.
There are no other family relationships among any of our officers and
directors.





Involvement
in Certain Legal Proceedings





To the
best of our knowledge, none of our directors or executive officers has been
convicted in a criminal proceeding, excluding traffic violations or similar
misdemeanors, or has been a party to any judicial or administrative proceeding
during the past five years that resulted in a judgment, decree or final order
enjoining the person from future violations of, or prohibiting activities
subject to, federal or state securities laws, or a finding of any violation of
federal or state securities laws, except for matters that were dismissed without
sanction or settlement.  Except as set forth in our discussion below
in “Certain Relationships and Related Transactions, and Director Independence,”
none of our directors, director nominees or executive officers has been involved
in any transactions with us or any of our directors, executive officers,
affiliates or associates which are required to be disclosed pursuant to the
rules and regulations of the SEC.


61


Promoters
and Certain Control Persons





We did
not have any promoters at any time during the past five fiscal
years.





Section
16(A) Beneficial Ownership Reporting Compliance





Under
U.S. securities laws, directors, certain executive officers and persons holding
more than 10% of our common stock must report their initial ownership of the
common stock, and any changes in that ownership, to the SEC.  The SEC has
designated specific due dates for these reports. Based solely on our review of
copies of such reports filed with the SEC, we believe that the required reports
were filed on time in fiscal year 2009.





Company Code of Conduct and
Ethics





Our board
of directors has adopted a Code of Conduct and Ethics that applies to our
directors, officers and employees. A copy of this policy is available via
our website at http://www.chinaprecisionsteelinc.com.





Committees
of the Board of Directors





Our board
of directors currently consists of six members: Wo Hing Li, Hai Sheng Chen, Tung
Kuen Tsui, Che Kin Lui, David Peter Wong and Daniel Carlson; Mr. Carlson serves
as a non-executive, non-voting member of the board of directors. Our board of
directors has established three committees: an audit committee, a compensation
committee, and a nominating and governance committee. Each committee is
comprised entirely of independent directors. From time to time, our board of
directors may establish other committees. Our board of directors has adopted a
written charter for each of the committees which is available on our website
www.chinaprecisionsteelinc.com.
Printed copies of these charters may be obtained, without charge, by contacting
the Corporate Secretary, China Precision Steel, Inc., 18th Floor, Teda Building,
87 Wing Lok Street, Sheung Wan, Hong Kong, People’s Republic of
China.





Audit
Committee





We have a
standing audit committee comprised of Tung Kuen Tsui, Che Kin Lui and David
Peter Wong, all of whom are independent within the meaning of Rule 4200(a)(15)
of the Marketplace Rules of The NASDAQ Stock Market, Inc., or the NASDAQ
Marketplace Rules, and Exchange Act Rule 10A-3. Each audit committee member
meets the financial literacy requirements of the NASDAQ Marketplace Rules. The
Board has named Mr. David Peter Wong, who meets the professional experience
requirements of the NASDAQ Marketplace Rules, as its audit committee financial
expert as such term is defined in Item 401(h) of Regulation S-K promulgated by
the SEC. Mr. Wong’s professional experience is detailed above.





The
purpose of the audit committee is to oversee our accounting and financial
reporting processes and the audits of our financial statements. The primary
function of the audit committee is to oversee the Board by reviewing the
financial information that will be provided to the stockholders and others, the
preparation of our internal financial statements, and our audit and financial
reporting process, including internal control over financial reporting. In
addition, our audit committee is responsible for maintaining free and open lines
of communication among the committee, the independent auditors and management.
Our audit committee consults with our management and independent auditors before
the presentation of financial statements to stockholders and, as appropriate,
initiates inquiries into various aspects of our financial affairs. The committee
is also responsible for considering, appointing, and establishing fee
arrangements with our independent auditors and, if necessary, dismissing them.
It is not responsible for preparing our financial statements or for planning or
conducting the audits.


62





The
Report of the Audit Committee regarding our audited financials statements for
the fiscal year ended June 30, 2009 is located under Item 14, “Principal
Accounting Fees and Services.”





Compensation
Committee





We have a
standing compensation committee comprised of Tung Kuen Tsui, Che Kin Lui and
David Peter Wong. Each member of the compensation committee is independent
within the meaning of Rule 4200(a)(15) of the NASDAQ Marketplace Rules and
Exchange Act Rule 10A-3.





The
compensation committee is responsible for: (a) reviewing our compensation
programs to determine that they effectively and appropriately motivate
performance that is consistent with our business goals and tie executives’
financial interests to those of the stockholders; (b) assure that the Chief
Executive Officer’s annual objectives are consistent with our business goals,
are explicit, and that performance against these objectives is reviewed
annually; (c) define, oversee and ensure that we develop and maintain a program
of management succession planning, particularly with respect to the position of
Chief Executive Officer; and (d) such other matters as are specifically
delegated to the compensation committee by our board of directors from time to
time or which are otherwise included in the committee’s charter. According to
the charter of the compensation committee, the Chief Executive Officer shall be
an advisor to the committee and may be delegated such responsibilities as the
committee deems appropriate. In addition, the committee may, in its discretion,
delegate all or a portion of its duties and responsibilities to a subcommittee
of the compensation committee. The committee also has the authority to select,
retain, terminate, and approve the fees and other retention terms of special
counsel or other experts or consultants, as it deems appropriate, without
seeking approval of our board of directors or management. With respect to
consultants or search firms used to identify director candidates, this authority
is vested solely in the committee.





Nominations
and Governance Committee





We have a
standing nominations and governance committee comprised of Tung Kuen Tsui, Che
Kin Lui and David Peter Wong. Each member of the nominations and governance
committee is independent within the meaning of Rule 4200(a)(15) of the NASDAQ
Marketplace Rules and Exchange Act Rule 10A-3. The committee is required to
maintain two or three members.





The
nominations and governance committee has the responsibility to identify,
evaluate, recruit, and recommend qualified candidates to our board of directors
for nomination or election. In addition, it is the responsibility of the
committee to make recommendations to our board of directors regarding the size
and composition of the board or any committee thereof, identify individuals
believed to be qualified to become board members or fill vacancies on committees
of the board, consistent with criteria approved by the board, and to select, or
recommend to the board of directors, the nominees to stand for election as
directors at the annual meeting of stockholders, monitor our performance in
meeting our obligations of fairness in internal and external matters and our
principles of corporate governance, and such other matters that are specifically
delegated to the committee by our board of directors from time to time or which
are otherwise included in the committee’s charter.





Our board
of directors has an objective that its membership be composed of experienced and
dedicated individuals with diversity of backgrounds, perspectives, and skills
relevant to our business. The nominations and governance committee selects
candidates for director based on their character, judgment, diversity of
experience relevant to our business, business acumen, and ability to act on
behalf of all stockholders. Each director nominee is selected by the nominations
and governance committee based on his/her experience in management or accounting
and finance, or industry and technology knowledge, personal and professional
ethics, and the willingness and ability to devote sufficient time to effectively
carry out his/her duties as a director.


63


Any
stockholder who desires to recommend a nominee for director must submit a
letter, addressed to the Corporate Secretary, China Precision Steel, Inc., 18th
Floor, Teda Building, 87 Wing Lok Street, Sheung Wan, Hong Kong, People’s
Republic of China, which is clearly identified as a “Director Nominee
Recommendation.” All recommendation letters must identify the author as a
stockholder and provide a brief summary of the candidate’s qualifications, as
well as contact information for both the candidate and the stockholder, to
enable the committee to contact the nominee for additional information to
evaluate the person’s qualifications. Any such nominee will be required to meet
the criteria established by the committee and may be interviewed by at least one
member of the committee. If the nominee is found to be eligible during the
initial interview, the nominee will then be invited to meet with the full
committee or the board of directors for further evaluation. The committee will
consider all proposed nominees whose names are submitted in accordance with the
above-stated requirements. We have never received a stockholder nominee for
director, but if we do, we would evaluate him or her based on the same standards
used for other candidates.





ITEM
      11.
            EXECUTIVE
      COMPENSATION.





Compensation
Discussion and Analysis





Overview





The
compensation of our executive officers is determined by the compensation
committee of the board of directors (referred to in this Item 11, “Executive
Compensation” as the “Committee”). The Committee has three members, each of whom
is independent of management. None of the members of the Committee has any
insider or interlocking relationship with the Company, and each of them is a
non-employee director, as these terms are defined in applicable rules and
regulations of the SEC.





Our board
of directors seeks to ensure that the total compensation paid to our named
executive officers is fair, reasonable and competitive. The Committee is
responsible for establishing, implementing and monitoring our executive
compensation program philosophy and practices. Generally, the types of
compensation and benefits provided to named executive officers are similar to
those provided to our other officers. The Committee annually reviews the
performance of each named executive officer. The conclusions reached and
recommendations based on these reviews, including with respect to salary
adjustments and annual award amounts, are presented to the Committee. The
Committee can exercise its discretion in modifying any recommended adjustments
or awards to executives.





Throughout
this Annual Report, the individuals who served as our Chief Executive Officer
and Chief Financial Officer during fiscal 2009, and who are included in the
Summary Compensation Table, are referred to as the “Named Executive
Officers.”





Compensation
Philosophy





Our
executive compensation philosophy is to provide compensation necessary to
attract and retain the talent needed to ensure our success and the achievement
of long-range strategic goals and growth in total stockholder value. Because the
Named Executive Officers already own a considerable number of shares of our
common stock, the Committee has determined that equity compensation is not
necessary at this time. The core element of executive compensation is
competitive base salary.





The
Committee believes that an effective executive compensation program should
provide base annual compensation that is reasonable in relation to individual
executive’s job responsibilities and reward the achievement of our annual and
long-term strategic goals. The Committee evaluates both performance and
compensation to maintain our ability to attract and retain excellent employees
in key positions and to assure that compensation provided to key employees
remains competitive relative to the compensation paid to similarly situated
executives of comparable companies.




The components of executive compensation
in fiscal year 2009 consisted solely of a base salary.  The
Committee has not yet implemented or offered any awards under our 2006
Omnibus Long Term Incentive Plan, which provides for issuances of options, stock
appreciation rights, restricted stock, restricted stock units, unrestricted
stock and cash awards to our employees, including our executive
officers, however, the Committee may elect to offer
such awards as a component of our executive compensation in the
future.
  64





The
Committee also takes our financial and working capital condition into account in
its compensation decisions. Accordingly, from time to time we may defer payment
of cash compensation, although this did not occur in fiscal 2009. The Committee
may reassess the proper weighting of equity and cash compensation in light of
our improved working capital situation.





Setting
Executive Compensation





Based on
the foregoing objectives, the Committee has structured our annual cash and
non-cash executive compensation to motivate executives to achieve our business
goals, to reward the executives for achieving such goals, and to retain the
executives. In doing so, the Committee historically has not employed outside
compensation consultants. The Committee set compensation for our executive
officers at levels targeted at or around the average of the compensation amounts
provided to executives at comparable companies considering, for each individual,
their individual experience level related to their position with us. There is no
pre-established policy or target for the allocation between cash and non-cash
incentive compensation.





Base
Salary





Base
salary levels for executive officers are determined not only on the basis of the
Committee’s assessment of individual performance, but also on the total
compensation, including salaries, paid by companies engaged in similar
businesses, to persons holding equivalent positions. The Committee believes that
any increases in base salary should be based upon a favorable evaluation of
individual performance relative to individual goals, the functioning of the
executive’s team within the corporate structure, success in furthering the
corporate strategy and goals, and individual management skills, responsibilities
and anticipated workload.





The
Committee also considers demonstrated loyalty and commitment and the competitive
salaries offered by similar companies to attract and retain executives. Merit
increases for executives are to be subject to the same budgetary guidelines as
apply to any other employees.





Annual
Incentive Compensation





Bonuses





We may
pay bonuses to provide incentives to executives and to reward executives based
on our overall performance, as well as on the performance of each executive
officer’s area of responsibility or operating group. Measures of performance are
both financial and strategic. Financial elements are based on whether the
Company has achieved its net income growth target for the relevant periods, and
strategic elements include, but are not limited to technological or quality
improvements, improvements in operations and contributions to business success.
The goals are also structured to provide the kinds of objectivity and checks and
balances required to ensure compliance with SEC regulations and the
Sarbanes-Oxley Act. For the year ended June 30, 2009, there was no bonus payment
to the Named Executive Officers.


65


Equity
Awards





Executives
are eligible for equity awards in the form of stock options, restricted stock
units, unrestricted stock units and stock appreciation rights under our 2006
Omnibus Long Term Incentive Plan. Awards are made at the discretion of the
Committee. The number of shares awarded to any individual depends on individual
performance, salary level and competitive data, and the impact that such
employee’s productivity may make to stockholder value over time. In addition, in
determining the number of stock options, restricted stock units, unrestricted
stock units or stock appreciation rights to grant to each executive, the
Committee reviews the unvested options and units of each executive to determine
the future benefits potentially available to the executive. The number of
options or units granted will depend in part on the total number of unvested
options and units deemed necessary to provide an incentive to that individual to
make a long term commitment to remain with the Company. By giving executives an
equity interest in the Company, the value of which depends upon stock
performance, the policies seek to further align management and stockholder
interests. The Committee did not grant any awards to our executives under the
plan during the year ended June 30, 2009.





Tax
and Accounting Implications





As part
of its role, the Committee reviews and considers the deductibility of executive
compensation under Section 162(m) of the Internal Revenue Code, which provides
that corporations may not deduct compensation of more than $1,000,000 that is
paid to certain individuals. We believe that compensation paid to our executive
officers generally is fully deductible for federal income tax purposes. The
Committee takes into consideration the tax consequences of compensation to the
Named Executive Officers, but tax considerations are not a significant part of
our compensation policy.





Employment
and Severance Agreements





We have
entered into executive employment agreements with each of Wo Hing Li, our
President and Chief Executive Officer, Leada Tak Tai Li, our Chief Financial
Officer, and Hai Sheng Chen, our General Manager of operations. Each of the
executive employment agreements were entered into as of January 1, 2007, and
will continue indefinitely until terminated in accordance with the terms of
agreement. The base salary shown in the Summary Compensation Table below is
described in each of the executive officer’s respective employment agreement,
and each of them has the right to participate in our employee benefit plans. The
executives are also entitled to reimbursement, to the fullest extent authorized
by Delaware law, of all expenses incurred or suffered by them in connection with
any claim brought against them because of or in connection with their positions
with us or any of our affiliates, except to the extent that, such expenses arise
as a result of the bad faith, willful misconduct or gross negligence of the
executive, or as a result of his or her conviction for a felony.





Each of
the executive employment agreements permits us to terminate the executive’s
employment at any time by giving a written notice to the executive officer,
provided that, if we terminate the executive’s employment without cause, the
executive will be entitled to a termination payment equal to six months of his
or her then current base salary, payable in six equal installments over the
six-month period immediate following the date of termination. We may also
terminate for cause, at any time, without notice or remuneration, for certain
acts of the executive, including but not limited to a conviction or plea of
guilty to a felony, negligence or dishonesty to our detriment and failure to
perform agreed duties after a reasonable opportunity to cure the failure. An
executive may terminate his or her employment upon thirty days’ written notice
if there is a material reduction in his authority, duties and responsibilities
or if there is a material breach by the us of the terms or conditions of the
agreement after a reasonable opportunity to cure the breach. The agreements also
provide that, if within 12 months following a change of control, any of the
executives are terminated without cause or any of them terminate for good
reason, then the vesting and exercisability of 50% of his or her stock options
that are unvested at the time of the termination (if any) will accelerate and
immediately become vested and exercisable as of the termination date, and will
remain exercisable for 12 months following the termination date.





Each of
the executive employment agreements contains customary non-competition,
confidentiality, and non-disclosure covenants. Specifically, each executive
officer has agreed, both during and after he or she is no longer employed by us,
to hold in strict confidence and not to use, except as required in the
performance of his duties in connection with the employment, any confidential
information, technical data, trade secrets and know-how of our company or the
confidential information of any third party, including our affiliated entities
and our subsidiaries, received by us. The executive officers have also agreed to
disclose in confidence to us all inventions, designs and trade secrets which
they conceive, develop or reduce to practice and to assign all right, title and
interest in them to us. In addition, each of the executive officers has agreed
not to, while employed by us and for a period of 3 years following the
termination or expiration of the agreement:


66


·
            approach
      our clients, customers or contacts or other persons or entities, and not
      to interfere with the business relationship between us and such persons
      and/or entities;




·
            assume
      employment with or provide services as a director for any of our
      competitors, or engage in any business which is in direct or indirect
      competition with our business; or




·
            solicit
      the services of any of our
employees.




Summary
Compensation Table – Fiscal Years Ended June 30, 2009, 2008 and
2007





The
following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to the named persons for services
rendered in all capacities during the noted periods.  No other
executive officers received total annual salary and bonus compensation in excess
of $100,000.





Name
      and Principal Position
                                  
                                  Year
                                  
                                  Salary
                                    ($)
                                  
                                  
                                  Bonus
                                    ($)
                                  
                                  
                                  Total
                                    ($)Wo
      Hing Li,
                                  
                                  2009
                                  
                                  
                                  140,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  140,000President
      &
                                  
                                  2008
                                  
                                  
                                  140,000
                                  
                                  
                                  
                                  35,000
                                  
                                  
                                  
                                  175,000Chief
      Executive Officer
                                  
                                  2007
                                  
                                  
                                  140,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  140,000Leada
      Tak Tai Li,
                                  
                                  2009
                                  
                                  
                                  60,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  60,000Chief
      Financial Officer
                                  
                                  2008
                                  
                                  
                                  60,000
                                  
                                  
                                  
                                  15,000
                                  
                                  
                                  
                                  75,0002007
                                  
                                  
                                  60,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  60,000




Narrative
Disclosure to Summary Compensation Table





Each of
our Named Executive Officers has entered into an executive employment agreement,
as described above, with the Company pursuant to which they receive annual
compensation as well as discretionary bonuses as may be determined by the
Committee.





Plan-Based
Awards





No
plan-based awards were granted to any of the Named Executive Officers during the
year ended June 30, 2009.





Outstanding
Equity Awards at June 30, 2009





No
unexercised options or warrants were held by any of the Named Executive Officers
at year end. No equity awards were made during the year ended June 30,
2009.





Option
Exercises and Stock Vested





No
options to purchase capital stock of the Company were exercised by any of the
Named Executive Officers, nor was any restricted stock held by such executive
officers vested during the year ended June 30, 2009.





Pension
Benefits





No Named
Executive Officers received or held pension benefits during the year ended June
30, 2009.


67


Nonqualified
Deferred Compensation





No
nonqualified deferred compensation was offered or issued to any Named Executive
Officer during the year ended June 30, 2009.





Potential
Payments Upon Termination or Change in Control





We do not
have change-in-control or severance agreements with our named executive
officers. However, each of Mr. Li, Ms. Li and Mr. Chen’s executive employment
agreement provides a payment equaling six months of his or her then current base
salary, payable in six equal installments over the six-month period immediately
following the date of termination, if we terminate any of them without cause or
any of them terminate for good reason. In addition, if any of them are
terminated without cause or any of them terminate for good reason within 12
months following a change of control, then the vesting and exercisability of
fifty percent of his or her stock options that are unvested at the time of the
termination will accelerate and immediately become vested and exercisable as of
the termination date, and will remain exercisable for 12 months following the
termination date.





The
following table reflects amounts payable to each of Mr. Li, Ms. Li and Mr. Chen
(1) assuming their employment was terminated without cause or for good reason on
June 30, 2009 and (2) assuming a termination without cause or for good reason
occurred on June 30, 2009 and within 12 months following a change in
control.





Name
                
                Termination
                  Without Cause(1)
                
                
                Change in
                  Control(2)Wo
      Hing Li
                
                $
                70,000
                
                
                $
                -Leada
      Tak Tai Li
                
                $
                30,000
                
                
                $
                -Hai
      Sheng Chen
                
                $
                4,827
                
                
                $
                -





(1)
            Amounts
      in this column reflect the value of unvested options that would be
      accelerated upon termination without cause or for good reason within 12
      months following a change in control. Amounts are calculated based on (1)
      the difference between (a) the closing market price of a share of Common
      Stock on June 30, 2009 and (b) the exercise price per share for an option
      grant (2) multiplied by the number of shares subject to the option
      grant.





(2)
            In
      accordance with their employment agreements, Mr. Li, Ms. Li and Mr. Chen,
      if terminated without cause on the last day of the 2009 fiscal year, would
      have been entitled to a payment of their 2008 base salary in six equal
      installment over a six-month
period.





Director
Compensation





The
following table provides information about the compensation earned by directors
who served during fiscal year 2009:





Name
                    
                    Fees Earned or
                      Paid in Cash
                      ($)
                    
                    
                    All Other
                      Compensation
                      ($)
                    
                    
                    Total
                      ($)Wo
      Hing Li
                    
                    
                    -
                    
                    
                    
                    140,000
                    (1)
                    
                    
                    140,000Hai
      Sheng Chen
                    
                    
                    -
                    
                    
                    
                    9,653
                    (1)
                    
                    
                    9,653Che
      Kin Lui
                    
                    
                    30,000
                    
                    
                    
                    -
                    
                    
                    
                    30,000David
      Peter Wong
                    
                    
                    36,000
                    
                    
                    
                    -
                    
                    
                    
                    36,000Tung
      Kuen Tsui
                    
                    
                    30,000
                    
                    
                    
                    -
                    
                    
                    
                    30,000Daniel
      Carlson (1)
                    
                    
                    30,000
                    
                    
                    
                    -
                    
                    
                    
                    30,000


68





(1)
            The
      compensation reported for Mr. Li and Mr. Chen reflects compensation that
      they received as executives of the Company.  Neither Mr. Li nor
      Mr. Chen received compensation for serving as our
    Directors.





(2)
            Mr.
      Carlson serves on our Board of Directors as a non-executive
      director.





Narrative
to Director Compensation Table





For the
year ended June 30, 2009, we paid fees in the total amount of $126,000 for our
three independent directors and one non-executive director for service on our
board of directors and service to the Company. The fees paid to our independent
directors and non-executive director were standard monthly director fees
pursuant to the independent director and non-executive director agreements
entered into with these directors. David P. Wong receives $3,000/month as
compensation for his services as our independent director and audit committee
chair, and Che Kin Lui and Tung Kuen Tsui each receives $2,500/month as
compensation for their services as our independent directors, and Daniel Carlson
receives $2,500/month as compensation for his services as our non-executive
director.





The
bonuses granted to our directors are discretionary cash bonuses based on the
overall performance of the Company for the year, and specifically on the
Company’s ability to meet of its Net Income target.  There was no
bonus payment to our directors during the year. Other than monthly director fees
and discretionary bonuses, we have no other compensation arrangements with our
directors for committee service, service as chairman of the board or a
committee, meeting attendance or the like.





Compensation
Committee Report





Our
Compensation Committee, at the direction of our board of directors has prepared
the following report for inclusion in this Annual Report. The Compensation
Committee is comprised of Messrs. Tsui, Lui and Wong, three non-employee
directors who are “disinterested persons” within the meaning of Rule 16b-3 of
the Exchange Act  and who are “independent” as required by applicable
laws and regulations, and the NASDAQ Marketplace Rules. The Compensation
Committee has the responsibility for all compensation matters concerning our
executive officers. The Compensation Committee is also responsible for oversight
of our compensation plans and benefit programs and equity based awards to our
non-executive employees and consultants. The Compensation Committee acts
pursuant to a written charter, which is available at our website at http://www.chinaprecisionsteelinc.com.  The
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis with management. Based on such review and discussions, the
Compensation Committee recommended to the board of directors, and the board of
directors has approved, the inclusion of the Compensation Discussion and
Analysis in our Annual Report on Form 10-K.





Respectfully
      submitted,/s/ The Compensation
    CommitteeChe
      Kin Lui, ChairmanDavid
      Peter WongTung
      Kuen Tsui





The Compensation Committee Report
above does not constitute “soliciting material” and will not be deemed “filed”
or incorporated by reference into any of our filings under the Securities Act or
the Exchange Act that might incorporate our SEC filings by reference, in whole
or in part, notwithstanding anything to the contrary set forth in those
filings, except to
the extent that the Company specifically incorporates it by reference into such
filing.





Compensation
Committee Interlocks and Insider Participation





During
the year ended June 30, 2009, Messrs. Tsui, Lui and Wong fulfilled all functions
of the Compensation Committee with regard to determining compensation of
executive officers of the Company.


69


ITEM 12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.





Security
Ownership of Certain Beneficial Owners and Management





The
following table sets forth, as of September 21, 2009, certain information with
respect to the beneficial ownership of our common stock by (i) each director and
executive officer, (ii) each person known by us to be the beneficial owner of
five percent or more of the outstanding shares of common stock, and (iii) all
directors and executive officers as a group.  Unless otherwise
indicated, the person or entity listed in the table is the beneficial owner of,
and has sole voting and investment power with respect to, the shares
indicated.  Unless otherwise specified, the address of each of the
persons set forth below is in care of China Precision Steel, Inc., 18th Floor,
Teda Building, 87 Wing Lok Street, Sheungwan, Hong Kong, People’s Republic of
China.





Name & Address of Beneficial
                                Owner
                              
                              Office, If Any
                              
                              Title of Class
                              
                              Amount and
                                Nature of
                                Beneficial
                                Ownership(1)
                              
                              Percent of
                                Class(2)Officers
      and DirectorsWo Hing Li
                              
                              CEO,
                                President, and
                                Chairman
                              
                              Common Stock,
                                $0.01 par value
                              
                              15,349,240
                              
                              33.0
                              %Leada Tak Tai Li
                              
                              Chief Financial
                                Officer
                              
                              Common Stock,
                                $0.01 par value
                              
                              200,000
                              
                              
                              *Hai Sheng Chen
                              
                              Director
                              
                              Common Stock,
                                $0.01 par value
                              
                              0
                              
                              
                              *Che Kin Lui
                              
                              Director
                              
                              Common Stock,
                                $0.01 par value
                              
                              0
                              
                              
                              *Tung Kuen Tsui
                              
                              Director
                              
                              
                              
                              0
                              
                              
                              *David Peter Wong
                              
                              Director
                              
                              
                              
                              0
                              
                              
                              *Daniel Carlson
                              
                              Director
                              
                              Common Stock,
                                $0.01 par value
                              
                              10,000
                              
                              
                              *All officers and directors as a group (7 persons named above)
                              
                              
                              
                              Common Stock,
                                $0.01 par value
                              
                              15,559,240
                              
                              33.0
                              %5%
      Security HoldersWo
      Hing Li
                              
                              
                              
                              Common Stock,
                                $0.01 par value
                              
                              15,349,240
                              
                              33.0
                              %Hudson Bay Overseas
                                Fund, Ltd.
                                120 Broadway, 40th Floor
                                New York, New York 10271
                              
                              
                              
                              Common Stock,
                                $0.01 par value
                              
                              2,711,110
                              
                              5.8
                              %Sander Gerber
                                c/o Hudson Bay Fund, LP
                                120 Broadway, 40th Floor
                                New York, New York 10271
                              
                              
                              
                              Common Stock,
                                $0.01 par value
                              
                              3,851,110
                              (3)
                              8.3
                              %Yoav Roth
                                c/o Hudson Bay Fund, LP
                                120 Broadway, 40th Floor
                                New York, New York 10271
                              
                              
                              
                              Common Stock,
                                $0.01 par value
                              
                              3,851,110
                              (3)
                              8.3
                              %Charles Winkler
                                c/o Hudson Bay Fund, LP
                                120 Broadway, 40th Floor
                                New York, New York 10271
                              
                              
                              
                              Common Stock,
                                $0.01 par value
                              
                              3,851,110
                              (3)
                              8.3
                              %


70





*Less
than 1%





(1)
              Beneficial
      Ownership is determined in accordance with the rules of the SEC and
      generally includes voting or investment power with respect to
      securities.  Each of the beneficial owners listed above has
      direct ownership of and sole voting power and investment power with
      respect to the shares of our common
stock.




(2)
              As
      of September 21, 2009, a total of 46,562,955 shares of our common stock
      are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1).
       For each Beneficial Owner above, any options exercisable within 60
      days have been included in the
denominator.




(3)
              Includes
      2,711,110 shares of our common stock held by Hudson Bay Overseas Fund, Ltd
      and 1,140,000 shares of our common stock held by the Hudson Bay Fund, LP.
      Sander Gerber, Yoav Roth and Charles Winkler share voting and investment
      power over, but disclaim beneficial ownership over, such
      shares.




Changes
in Control





There are
currently no arrangements which may result in a change in control of the
Company.





Securities
Authorized for Issuances under Equity Compensation Plans





The
following table includes the information as of the end of fiscal year 2009 for
each category of our equity compensation plan:





Plan category
                        
                        Number of securities to be
                          issued upon exercise of
                          outstanding options,
                          warrants and rights
                          (a)
                        
                        
                        Weighted-average
                          exercise price of
                          outstanding options,
                          warrants and rights
                          (b)
                        
                        
                        Number of securities
                          remaining available for future
                          issuance under equity
                          compensation plans (excluding
                          securities reflected in column
                          (a))
                          (c)Equity
      compensation plans approved by security holders(1)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,165,220Equity
      compensation plans not approved by security holders
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Total
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,165,220


(1)
              The
      China Precision Steel, Inc. 2006 Omnibus Long-Term Incentive Plan was
      approved by our stockholders on December 27, 2006. The plan is
      administered by our Compensation Committee and allows us to grant awards
      of stock options (including incentive stock options), stock appreciation
      rights, restricted stock, restricted stock units, unrestricted stock and
      cash awards to: (i) any employee, officer or director of the Company or
      our affiliates, or a consultant or adviser currently providing services to
      the Company or an affiliate; (ii) any outside director; and (iii) any
      other individual whose participation in the plan is determined to be in
      the best interests of the Company by the Compensation
      Committee.  We have reserved a maximum of 2,165,220 shares of
      our common stock to be issued under the plan.  No shares have
      been awarded under the 2006 Omnibus Long-Term Incentive
    Plan.


71





ITEM
      13.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.





Related
Party Transactions





The
following includes a summary of transactions since the beginning of the 2009
fiscal year, or any currently proposed transaction, in which we were or are to
be a participant and the amount involved exceeded or exceeds the lesser of
$120,000 or one percent of the average of our total assets at year end for the
last two completed fiscal years, and in which any related person had or will
have a direct or indirect material interest (other than compensation described
under Item 11. “Executive Compensation”).  We believe the terms obtained or
consideration that we paid or received, as applicable, in connection with the
transactions described below were comparable to terms available or the amounts
that would be paid or received, as applicable, in arm’s-length
transactions.




None of
our directors, director nominees or executive officers has been involved in any
transactions with us or any of our directors, executive officers, affiliates or
associates which are required to be disclosed pursuant to the rules and
regulations of the SEC.





Review
and Approval of Related Person Transactions





We review
all relationships and transactions in which the Company and our directors and
executive officers or their immediate family members are participants to
determine whether such persons have a direct or indirect material interest. Our
Chief Financial Officer is primarily responsible for the development and
implementation of processes and controls to obtain information from the
directors and executive officers with respect to related person transactions and
for then determining, based on the facts and circumstances, whether the company
or a related person has a direct or indirect material interest in the
transaction. As required under SEC rules, transactions that are determined to be
directly or indirectly material to the Company or a related person are disclosed
in our proxy statement. In addition, the disinterested members of the board of
directors or audit committee review and approve or ratify any related person
transaction that is required to be disclosed. Though the audit committee and
board of directors do not follow a written policy or procedure in reviewing
related party transactions, in the course of their review and approval or
ratification of a disclosable related party transaction, as disclosed in the
respective minutes of the meetings of such entities, consider:




·
            the
      nature of the related person’s interest in the
      transaction;





·
            the
      material terms of the transaction, including, without limitation, the
      amount and type of transaction;





·
            the
      importance of the transaction to the related
  person;





·
            the
      importance of the transaction to the
company;





·
            whether
      the transaction would impair the judgment of a director or executive
      officer to act in the best interest of the company;
  and





·
            any
      other matters deemed appropriate.





Any
member of the audit committee who is a related person with respect to a
transaction under review may not participate in the deliberations or vote
respecting approval or ratification of the transaction, provided, however, that
such director may be counted in determining the presence of a quorum at a
meeting of the committee that considers the transaction.


72





Director
Independence





Our board
of directors has determined that the majority of the board is comprised of
“independent directors” within the meaning of applicable NASDAQ listing
standards relating to board composition and Section 301 of the Sarbanes-Oxley
Act of 2002. Our independent directors are: Mr. Tsui, Mr. Wong and Mr.
Lui.





ITEM
      14.
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES.





Independent
Auditors’ Fees





The
following are the fees billed to us by our former auditors, Murrell, Hall,
McIntosh & Co., Certified Public Accountants, or MHM, for services rendered
to us during 2008, and by Moore Stephens, Certified Public Accountants, for
services rendered to us during 2009 and 2008:





Year Ended June 30,2009
                    
                    
                    2008Audit
      Fees
                    
                    $
                    114,000
                    
                    
                    $
                    115,159Audit-Related
      Fees
                    
                    $
                    55,000
                    
                    
                    $
                    55,000Tax
      Fees
                    
                    $
                    -
                    
                    
                    $
                    7,500All
      Other Fees
                    
                    $
                    3,000
                    
                    
                    $
                    15,855TOTAL
                    
                    $
                    172,00
                    
                    
                    $
                    193,514





“Audit
Fees” consisted of the aggregate fees billed for professional services rendered
for the audit of our annual financial statements and the reviews of the
financial statements included in our Forms 10-Q and for any other services that
were normally provided by MHM and Moore Stephens, respectively, in connection
with our statutory and regulatory filings or engagements.





“Audit
Related Fees” consisted of the aggregate fees billed for professional services
rendered for assurance and related services that were reasonably related to the
performance of the audit or review of our financial statements and were not
otherwise included in Audit Fees.





“Tax
Fees” consisted of the aggregate fees billed for professional services rendered
for tax compliance, tax advice and tax planning. Included in such Tax Fees were
fees for preparation of our tax returns and consultancy and advice on other tax
planning matters.





“All
Other Fees” consisted of the aggregate fees billed for products and services
provided by MHM and Moore Stephens, respectively, and not otherwise included in
Audit Fees, Audit Related Fees or Tax Fees. Included in such Other Fees were
fees for services rendered by MHM and Moore Stephens, respectively, in
connection with our S3 registration statements and private and public offerings
conducted during such years.





Our audit
committee has considered whether the provision of the non-audit services
described above is compatible with maintaining auditor independence and
determined that such services are appropriate. Before auditors are engaged to
provide us audit or non-audit services, such engagement is (without exception,
required to be) approved by the audit committee of our board of
directors.





Pre-Approval
Policies and Procedures





Under the
Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our
auditors must be approved in advance by our board of directors to assure that
such services do not impair the auditors’ independence from us. In accordance
with its policies and procedures, our board of directors pre-approved the audit
service performed by Moore Stephens, Certified Public Accounts for our financial
statements as of and for the year ended June 30, 2009.


73





Report
of the Audit Committee





Our audit
committee, at the direction of our board of directors, has prepared the
following report for inclusion in this Annual Report. The audit committee is
comprised of Messrs. Wong, Lui and Tsui, three non-employee directors who meet
the independence criteria prescribed by applicable law and the rules of the SEC
for audit committee membership and is an “independent director” within the
meaning of the NASDAQ Marketplace Rules. Each audit committee member meets the
NASDAQ’s financial literacy requirements. The board of directors has named Mr.
David Peter Wong, who meets the NASDAQ’s professional experience requirements,
as its audit committee financial expert as such term is defined in Item 401(h)
of Regulation S-K promulgated by the SEC. The audit committee acts pursuant to a
written charter, which complies with the applicable provisions of the
Sarbanes-Oxley Act of 2002 and related rules of the SEC and NASDAQ, which is
available via our website at http://www.chinaprecisionsteelinc.com.





The audit
committee reviewed and discussed our audited consolidated financial statements
for the fiscal year ended June 30, 2009 with management and with Moore Stephens,
the independent registered public accounting firm retained by the Company to
audit its financial statements. The audit committee received and reviewed
management’s representation and the opinion of the independent registered public
accounting firm that the Company’s audited financial statements were prepared in
accordance with United States generally accepted accounting principles. The
audit committee also discussed with the independent registered public accounting
firm during the 2009 fiscal year the matters required to be discussed by
Statement on Auditing Standards No. 61 (Communication with Audit
Committees), as amended, and other standards of the Public Company Accounting
Oversight Board, rules of the SEC and other applicable regulations.





The audit
committee received from Moore Stephens the written disclosures and the letter
required by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees) and discussed with Moore Stephens the
independence of their firm.





Based
upon the review and discussions referenced above, the audit committee
recommended to our board of directors, and the board of directors approved, that
the audited consolidated financial statements be included in the Company’s
Annual Report on Form 10-K for the fiscal year ended June 30, 2009, for filing
with the SEC.





Respectfully
      submitted,/s/ The Audit CommitteeDavid
      Peter Wong, ChairmanChe
      Kin LuiTung
      Kuen Tsui





The Audit Committee Report above
does not constitute “soliciting material” and will not be deemed “filed” or
incorporated by reference into any of our filings under the Securities Act or
the Exchange Act that might incorporate our SEC filings by reference, in whole
or in part, notwithstanding anything to the contrary set forth in those
filings, except to
the extent that the Company specifically incorporates it by reference into such
filing.





PART
IV




ITEM
      15.
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES.





Financial
Statements and Schedules





The
financial statements are set forth under Item 8 of this Annual Report on Form
10-K. Financial statement schedules have been omitted since they are either not
required, not applicable, or the information is otherwise
included.


74


Exhibit
List





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





Exhibit No.
                
                Description3.1
                
                Certificate
      of Incorporation of the Company (incorporated herein by reference to Annex
      2 to the Company’s Definitive Proxy Statement filed on October 16,
      2007)3.2
                
                Bylaws
      of the Company (incorporated herein by reference to Annex 3 to the
      Company’s Definitive Proxy Statement filed on October 16,
      2007)4.1
                
                Form
      of Warrant, dated November 6, 2007 (incorporated herein by reference to
      Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November
      1, 2007)4.2
                
                Warrant,
      dated November 6, 2007, issued to Roth Capital Partners LLC (incorporated
      herein by reference Exhibit 4.2 to the Company’s Current Report on Form
      8-K filed on November 1, 2007)4.3
                
                Form
      of Warrant, dated February 2007 (incorporated herein by reference to
      Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on February
      22, 2007)4.4
                
                Warrant,
      dated February 22, 2007, issued to Belmont Capital Group Limited
      (incorporated herein by reference Exhibit 4.2 to the Company’s Current
      Report on Form 8-K filed on February 22, 2007)4.5
                
                Warrant,
      dated February 22, 2007, issued to CCG Elite Investor Relations
      (incorporated herein by reference to Exhibit 4.3 to the Company’s Current
      Report on Form 8-K filed on February 22, 2007)10.1
                
                Form
      of Subscription Agreement, dated November 1, 2007 (incorporated herein by
      reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
      filed on November 1, 2007)10.2
                
                Form
      of Placement Agency Agreement, dated October 31, 2007 (incorporated herein
      by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
      filed on November 1, 2007)10.3
                
                Form
      of Stock Purchase Agreement, dated February 16, 2007 (incorporated herein
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
      filed on February 22, 2007)10.4
                
                Form
      of Limited Standstill Agreement (incorporated herein by reference to
      Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February
      22, 2007)10.5
                
                Redemption
      Agreement, dated December 28, 2006 (incorporated herein by reference to
      Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January
      4, 2007)10.6
                
                Tax
      Indemnity Agreement, dated December 28, 2006 (incorporated herein by
      reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
      filed on January 4, 2007)10.7
                
                Equipment
      Mortgage Agreement between Chengtong and Raiffeisen Zentralbank Österreich
      AG, dated January 12, 2005 (incorporated herein by reference to Exhibit
      10.4 to the Company’s Current Report on Form 8-K filed on January 4,
      2007)10.8
                
                Mortgage
      Agreement on Immovables between Shanghai Tuorong Precision Strip Company
      Limited and Raisffesien Zentralbank Öesterreich AG, dated January 12, 2005
      (incorporated herein by reference to Exhibit 10.5 to the Company’s Current
      Report on Form 8-K filed on January 4, 2007)10.9
                
                Letter
      of Offer between Shanghai Chengtong Precision Strip CompanyLimited and
      Raiffeisen Zentralbank Österreich AG, dated October 14, 2004 (incorporated
      herein by reference to Exhibit 10.6 to the Company’s Current Report on
      Form 8-K filed on January 4, 2007)10.10
                
                Amendment
      No. 1 to Letter of Offer between Shanghai Chengtong Precision Strip
      CompanyLimited and Raiffeisen Zentralbank Österreich AG, dated December
      28, 2004 (incorporated herein by reference to Exhibit 10.7 to the
      Company’s Current Report on Form 8-K filed on January 4,
    2007)


75





Exhibit No.
                
                Description10.11
                
                Amendment
      No. 2 to Letter of Offer between Shanghai Chengtong Precision Strip
      CompanyLimited and Raiffeisen Zentralbank Österreich AG, dated May 10,
      2005 (incorporated herein by reference to Exhibit 10.8 to the Company’s
      Current Report on Form 8-K filed on January 4, 2007)10.12
                
                Amendment
      No. 3 to Letter of Offer between Shanghai Chengtong Precision Strip
      CompanyLimited and Raiffeisen Zentralbank Österreich AG,  dated July
      26, 2005 (incorporated herein by reference to Exhibit 10.9 to the
      Company’s Current Report on Form 8-K filed on January 4,
    2007)10.13
                
                Deed
      of Release, dated February 13, 2007, from Wo Hing Li, in favor of the
      Company, Partner Success Holdings Limited and Shanghai Chengtong Precision
      Strip Company Limited (incorporated herein by reference to Exhibit 10.2 to
      the Company’s Current Report on Form 8-K filed on February 13,
      2007)10.14
                
                Debt
      Reduction Agreement, dated February 13, 2007, by and among the Company, Wo
      Hing Li and Partner Success Holdings Limited (incorporated herein by
      reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
      filed on February 13, 2007)10.15
                
                Amendment
      to the Debt Reduction Agreement, dated February 20, 2007, by and among the
      Company, Wo Hing Li and Partner Success Holdings Limited (incorporated
      herein by reference to Exhibit 10.4 to the Company’s Current Report on
      Form 8-K filed on February 22, 2007)10.16
                
                China
      Precision Steel, Inc. 2006 Omnibus Long Term Incentive Plan (incorporated
      herein by reference to Exhibit 10.3 to the Company’s Current Report on
      Form 8-K filed on January 4, 2007)10.17
                
                2006
      Director Stock Plan, dated March 1, 2006 (incorporated herein by reference
      to Annex 3 to the Company’s Definitive Proxy Statement filed on November
      22, 2006)10.18
                
                Executive
      Employment Agreement, dated as of January 1, 2007, between the Company and
      Wo Hing Li (incorporated herein by reference to Exhibit 10.1 to the
      Company’s Quarterly Report on Form 10-Q filed on May 11,
    2009)10.19
                
                Executive
      Employment Agreement, dated as of January 1, 2007, between the Company and
      Leada Tak Tai Li (incorporated herein by reference to Exhibit 10.2 to the
      Company’s Quarterly Report on Form 10-Q filed on May 11,
    2009)10.20
                
                Executive
      Employment Agreement, dated as of January 1, 2007, between the Company and
      Hai Sheng Chen (incorporated herein by reference to Exhibit 10.3 to the
      Company’s Quarterly Report on Form 10-Q filed on May 11,
    2009)21
                
                Subsidiaries
      of the Registrant (incorporated herein by reference to Exhibit 21 to the
      Company’s Annual Report on Form 10-K filed on September 15,
      2008)23.1*
                
                Consent
      of Murrell, Hall, McIntosh & Co., PLLP23.2*
                
                Consent
      of Moore Stephens31.1*
                
                Certifications
      of Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2*
                
                Certifications
      of Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1*
                
                Certification
      of Chief Executive Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2*
                
                Certification
      of Chief Financial Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of
2002




*Filed
herewith.


76


SIGNATURES




In
accordance with section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant caused this Report on Form 10-K to be signed on its behalf by the
undersigned, thereto duly authorized individual.




Date:
September 28, 2009




CHINA
      PRECISION STEEL, INC.By:
              /s/ Wo
      Hing LiWo
      Hing LiChief
      Executive Officer




In
accordance with the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.





Signature
                                  
                                  Title
                                  
                                  Date/s/ Wo Hing Li
                                  
                                  Director, Chief Executive Officer and President
                                  
                                  September 28, 2009Wo Hing Li
                                  
                                  (Principal Executive Officer)/s/ Leada Tak Tai Li
                                  
                                  Chief Financial Officer
                                  
                                  September 28, 2009Leada Tak Tai Li
                                  
                                  (Principal Financial and Accounting Officer)/s/ Tung Kuen Tsui
                                  
                                  Director
                                  
                                  September 28, 2009Tung Kuen Tsui/s/ David Peter Wong
                                  
                                  Director
                                  
                                  September 28, 2009David Peter Wong/s/ Che Kin Lui
                                  
                                  Director
                                  
                                  September 28, 2009Che Kin Lui/s/ Hai Sheng Chen
                                  
                                  Director and Vice-President
                                  
                                  September 28, 2009Hai Sheng Chen/s/ Daniel Carlson
                                  
                                  Non-Executive, Non-Voting Director
                                  
                                  September 28, 2009Daniel Carlson


77


CHINA
PRECISION STEEL, INC.


INDEX
TO FINANCIAL STATEMENTS FOR THE YEARS


ENDED
JUNE 30, 2009, 2008 AND 2007




Contents
                
                Page(s)Reports
      of Independent Registered Public Accounting Firms
                
                F-1Consolidated
      Balance Sheets as of June 30, 2009 and 2008
                
                F-4Consolidated
      Statements of Operations for the Years Ended June 30, 2009, 2008 and
      2007
                
                F-5Consolidated
      Statements of Stockholders’ Equity for the Years Ended June 30, 2009, 2008
      and 2007
                
                F-6Consolidated
      Statements of Cash Flows for the Years June 30, 2009, 2008 and
      2007
                
                F-7Notes
      to Consolidated Financial Statements
                
                F-8




78




Report
of Independent Registered Public Accounting Firm





To the
Board of Directors and Shareholders of


China
Precision Steel, Inc.





We have
audited the accompanying consolidated balance sheets of China Precision Steel,
Inc. and subsidiaries (collectively, the “Company”) (see Note 1) as of June 30,
2009 and 2008, and the related consolidated statements of operations, changes in
stockholders’ equity, and cash flows for each of the two years in the period
ended June 30, 2009. We have also audited the Company’s internal control over
financial reporting as of June 30, 2009, based on criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).  The Company’s
management is responsible for these financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial Reporting
appearing under Item 9A.  Our responsibility is to express an opinion
on these consolidated financial statements and an opinion on the Company’s
internal control over financial reporting based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in
all material respects.  Our audits of the financial statements
included examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall financial statement presentation.  Our audit of internal
control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk.  Our audits also included
performing such other procedures as we considered necessary in the
circumstances.  We believe that our audits provide a reasonable basis
for our opinions.





A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements for external purposes
in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of consolidated financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the consolidated financial statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.


F-1





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company as
of June 30, 2009 and 2008, and the results of their operations and their cash
flows for each of the two years in the period ended June 30, 2009, in conformity
with accounting principles generally accepted in the United States of
America.  Also, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
June 30, 2009, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).






Certified
Public Accountants


Hong
Kong


September
26, 2009


F-2





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





We have
audited the accompanying consolidated statements of operations, stockholders’
equity and cash flows for the year ended June 30, 2007 of China Precision Steel,
Inc. and Subsidiaries (the “Company”). These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.





We
conducted our audit in accordance with standards of the Public Companies
Accounting Oversight Board (United States). The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purposes of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated results of the Company’s operations
and cash flows for the year ended June 30, 2007, in conformity with accounting
principles generally accepted in the United States of America.





/s/Murrell,
Hall, McIntosh & Co. PLLP





Oklahoma
City, Oklahoma


October
11, 2007


(October
15, 2007 as to subsequent events disclosed in Note 20)


F-3





China
      Precision Steel, Inc. and SubsidiariesConsolidated
      Balance SheetsJune
      30,
                
                
                June
      30,Notes
                
                
                2009
                
                
                2008AssetsCurrent
      assetsCash
      and equivalents
                
                
                
                
                $
                13,649,587
                
                
                $
                18,568,842Accounts
      receivableTrade,
      net of allowances of $830,127 and $1,033,479 at June 30, 2009 and 2008,
      respectively
                
                
                
                
                
                25,140,834
                
                
                
                33,783,074Bills
      receivable
                
                
                
                
                
                6,131,143
                
                
                
                4,309,703Other
                
                
                
                
                
                881,153
                
                
                
                571,746Inventories
                
                
                8
                
                
                
                16,275,070
                
                
                
                17,815,087Prepaid
      expenses
                
                
                
                
                
                
                75,917
                
                
                
                58,105Advances
      to suppliers, net of allowance of $1,631,557 and $2,522,837 at June 30,
      2009 and 2008, respectively
                
                
                9
                
                
                
                21,878,047
                
                
                
                33,027,365Total
      current assets
                
                
                
                
                
                
                84,031,751
                
                
                
                108,133,922Property,
      plant and equipmentProperty,
      plant and equipment, net
                
                
                10
                
                
                
                46,812,484
                
                
                
                39,199,305Deposits
      for plant and machinery
                
                
                
                
                
                
                8,348,496
                
                
                
                -Construction-in-progress
                
                
                11
                
                
                
                22,245,173
                
                
                
                16,476,45477,406,153
                
                
                
                55,675,759Intangible
      assets, net
                
                
                12
                
                
                
                1,871,211
                
                
                
                1,625,690Goodwill
                
                
                
                
                
                
                99,999
                
                
                
                99,999Total
      assets
                
                
                
                
                
                $
                163,409,114
                
                
                $
                165,535,370Liabilities
      and Stockholders' EquityCurrent
      liabilitiesShort-term
      loans
                
                
                13
                
                
                $
                22,489,031
                
                
                $
                17,465,799Accounts
      payable and accrued liabilities
                
                
                
                
                
                
                7,144,242
                
                
                
                12,047,981Advances
      from customers
                
                
                14
                
                
                
                1,742,944
                
                
                
                6,996,996Other
      taxes payables
                
                
                
                
                
                
                6,650,668
                
                
                
                3,976,239Current
      income taxes payable
                
                
                
                
                
                
                4,778,767
                
                
                
                4,742,387Total
      current liabilities
                
                
                
                
                
                
                42,805,652
                
                
                
                45,229,402Stockholders'
      equity:Preferred
      stock: $0.001 per value, 8,000,000 shares authorized, no shares
      outstanding at  June 30, 2009 and 2008
                
                
                15Common
      stock: $0.001 par value, 62,000,000 shares authorized, 46,562,955 and
      46,472,955 issued and outstanding June 30, 2009 and 2008,
      respectively
                
                
                15
                
                
                
                46,563
                
                
                
                46,473Additional
      paid-in capital
                
                
                15
                
                
                
                75,642,383
                
                
                
                75,372,488Accumulated
      other comprehensive income
                
                
                
                
                
                
                9,731,505
                
                
                
                9,295,658Retained
      earnings
                
                
                
                
                
                
                35,183,011
                
                
                
                35,591,349Total
      stockholders' equity
                
                
                
                
                
                
                120,603,462
                
                
                
                120,305,968Total
      liabilities and stockholders' equity
                
                
                
                
                
                $
                163,409,114
                
                
                $
                165,535,370





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


F-4





China
      Precision Steel, Inc. and SubsidiariesConsolidated
      Statements of OperationsFor
      the Years Ended June 30, 2009, 2008 and 2007Notes
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007RevenuesSales
      revenues
                    
                    
                    
                    
                    $
                    76,281,621
                    
                    
                    $
                    87,739,326
                    
                    
                    $
                    53,960,243Cost
      of goods sold
                    
                    
                    
                    
                    
                    68,549,426
                    
                    
                    
                    65,241,825
                    
                    
                    
                    38,925,987Gross
      profit
                    
                    
                    
                    
                    
                    7,732,195
                    
                    
                    
                    22,497,501
                    
                    
                    
                    15,034,256Operating
      expensesSelling
      expenses
                    
                    
                    
                    
                    
                    1,679,283
                    
                    
                    
                    608,060
                    
                    
                    
                    245,695Administrative
      expenses
                    
                    
                    
                    
                    
                    2,238,088
                    
                    
                    
                    2,758,536
                    
                    
                    
                    1,863,994Allowance
      for bad and doubtful debts
                    
                    
                    
                    
                    
                    3,831,478
                    
                    
                    
                    686,955
                    
                    
                    
                    3,775,645Depreciation
      and amortization expense
                    
                    
                    
                    
                    
                    196,793
                    
                    
                    
                    64,253
                    
                    
                    
                    44,375Total
      operating expenses
                    
                    
                    
                    
                    
                    7,945,642
                    
                    
                    
                    4,117,804
                    
                    
                    
                    5,929,709(Loss)/income
      from continuing operations
                    
                    
                    
                    
                    
                    (213,447
                    )
                    
                    
                    18,379,697
                    
                    
                    
                    9,104,547Other
      income (expense)Other
      revenues
                    
                    
                    
                    
                    
                    1,397,258
                    
                    
                    
                    2,006,777
                    
                    
                    
                    103,388Other
      expenses
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,362
                    )Interest
      and finance costs
                    
                    
                    
                    
                    
                    (1,228,665
                    )
                    
                    
                    (1,231,040
                    )
                    
                    
                    (312,222
                    )Total
      other income (expense)
                    
                    
                    
                    
                    
                    168,593
                    
                    
                    
                    775,737
                    
                    
                    
                    (210,196
                    )Net
      (loss)/income from continuing operations before income tax
                    
                    
                    
                    
                    
                    (44,854
                    )
                    
                    
                    19,155,434
                    
                    
                    
                    8,894,351Provision
      for/(benefit from) income tax
                    
                    
                    17Current
                    
                    
                    
                    
                    
                    
                    363,484
                    
                    
                    
                    1,636,351
                    
                    
                    
                    1,892,866Deferred
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    (1,064,028
                    )
                    
                    
                    (471,176
                    )Total
      income tax expense
                    
                    
                    
                    
                    
                    
                    363,484
                    
                    
                    
                    572,323
                    
                    
                    
                    1,421,690Net
      (loss)/income before discontinued operations
                    
                    
                    
                    
                    
                    
                    (408,338
                    )
                    
                    
                    18,583,111
                    
                    
                    
                    7,472,661Net
      income from discontinued operations
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    831,448Net
      (loss)/income
                    
                    
                    
                    
                    
                    $
                    (408,338
                    )
                    
                    $
                    18,583,111
                    
                    
                    $
                    8,304,109Basic
      (loss)/earnings per shareFrom
      continuing operations
                    
                    
                    
                    
                    
                    $
                    (0.01
                    )
                    
                    $
                    0.43
                    
                    
                    $
                    0.26From
      discontinued operations
                    
                    
                    
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    0.03Total
                    
                    
                    18
                    
                    
                    $
                    (0.01
                    )
                    
                    $
                    0.43
                    
                    
                    $
                    0.29Basic
      weighted average shares outstanding
                    
                    
                    
                    
                    
                    
                    46,561,229
                    
                    
                    
                    43,044,420
                    
                    
                    
                    28,438,313Diluted
      (loss)/earnings per shareFrom
      continuing operations
                    
                    
                    
                    
                    
                    $
                    (0.01
                    )
                    
                    $
                    0.43
                    
                    
                    $
                    0.26From
      discontinued operations
                    
                    
                    
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    0.03Total
                    
                    
                    18
                    
                    
                    $
                    (0.01
                    )
                    
                    $
                    0.43
                    
                    
                    $
                    0.29Diluted
      weighted average shares outstanding
                    
                    
                    
                    
                    
                    $
                    46,561,229
                    
                    
                    $
                    43,256,434
                    
                    
                    $
                    28,759,553The
      Components of comprehensive income:Net
      (loss)/income
                    
                    
                    
                    
                    
                    
                    (408,338
                    )
                    
                    
                    18,583,111
                    
                    
                    
                    8,304,109Foreign
      currency translation adjustment
                    
                    
                    
                    
                    
                    
                    435,847
                    
                    
                    
                    7,103,498
                    
                    
                    
                    1,446,577Comprehensive
      income
                    
                    
                    
                    
                    
                    $
                    27,509
                    
                    
                    $
                    25,686,609
                    
                    
                    $
                    9,750,686





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


F-5





China
      Precision Steel, Inc. and SubsidiariesConsolidated
      Statements of Changes in Stockholders' EquityFor
      the Years Ended June 30, 2009, 2008 and 2007AccumulatedAdditional
                  
                  
                  Other
                  
                  
                  
                  
                  
                  TotalOrdinary
      Shares
                  
                  
                  Paid-in
                  
                  
                  Comprehensive
                  
                  
                  Retained
                  
                  
                  Stockholders'Share
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Income
                  
                  
                  Earnings
                  
                  
                  EquityBalance
      at June 30, 2006
                  
                  $
                  24,283,723
                  
                  
                  $
                  24,284
                  
                  
                  $
                  1,375,716
                  
                  
                  $
                  745,583
                  
                  
                  $
                  9,535,577
                  
                  
                  $
                  11,681,160Sale
      of common stock
                  
                  
                  7,451,665
                  
                  
                  
                  7,451
                  
                  
                  
                  22,347,543
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  22,354,994Syndication
      fees
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,028,116
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,028,116
                  )Stock
      issued for syndication fees
                  
                  
                  2,798,191
                  
                  
                  
                  2,798
                  
                  
                  
                  (2,798
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Anti-dilution
      rights stock
                  
                  
                  827,962
                  
                  
                  
                  828
                  
                  
                  
                  (828
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Conversion
      of debt to stock
                  
                  
                  2,016,600
                  
                  
                  
                  2,017
                  
                  
                  
                  6,773,759
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,775,776Warrants
      issued for consulting
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  447,993
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  447,993Capital
      contributions from waiver of dividend
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,953,794
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,953,794Foreign
      currency translation adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,446,577
                  
                  
                  
                  -
                  
                  
                  
                  1,446,577Net
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,304,109
                  
                  
                  
                  8,304,109Less
      discontinued operation sold to former shareholder
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (831,448
                  )
                  
                  
                  (831,448
                  )Balance
      at June 30, 2007
                  
                  
                  37,378,141
                  
                  
                  
                  37,378
                  
                  
                  
                  31,867,063
                  
                  
                  
                  2,192,160
                  
                  
                  
                  17,008,238
                  
                  
                  
                  51,104,839Sale
      of common stock
                  
                  
                  7,100,000
                  
                  
                  
                  7,100
                  
                  
                  
                  44,498,650
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  44,505,750Syndication
      fees
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (130,468
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (130,468
                  )Make
      good shares
                  
                  
                  2,000,000
                  
                  
                  
                  2,000
                  
                  
                  
                  (2,000
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercise
      of warrants
                  
                  
                  765,872
                  
                  
                  
                  766
                  
                  
                  
                  1,729,235
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,730,001Cancellation
      of stock
                  
                  
                  (771,060
                  )
                  
                  
                  (771
                  )
                  
                  
                  (2,589,992
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,590,763
                  )Foreign
      currency translation adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,103,498
                  
                  
                  
                  -
                  
                  
                  
                  7,103,498Net
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  18,583,111
                  
                  
                  
                  18,583,111Balance
      at June 30, 2008
                  
                  
                  46,472,953
                  
                  
                  
                  46,473
                  
                  
                  
                  75,372,488
                  
                  
                  
                  9,295,658
                  
                  
                  
                  35,591,349
                  
                  
                  
                  120,305,968Transfer
      agent adjustment
                  
                  
                  2
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercise
      of warrants
                  
                  
                  90,000
                  
                  
                  
                  90
                  
                  
                  
                  269,895
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  269,985Foreign
      currency translation adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  435,847
                  
                  
                  
                  -
                  
                  
                  
                  435,847Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (408,338
                  )
                  
                  
                  (408,338
                  )Balance
      at June 30, 2009
                  
                  $
                  46,562,955
                  
                  
                  $
                  46,563
                  
                  
                  $
                  75,642,383
                  
                  
                  $
                  9,731,505
                  
                  
                  $
                  35,183,011
                  
                  
                  $
                  120,603,462





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


F-6





China
      Precision Steel, Inc. and SubsidiariesConsolidated
      Statements of Cash FlowsFor
      the Years Ended June 30, 2009, 2008 and 20072009
                      
                      
                      2008
                      
                      
                      2007Cash
      flows from operating activitiesNet
      (loss)/income
                      
                      $
                      (408,338
                      )
                      
                      $
                      18,583,111
                      
                      
                      $
                      8,304,109Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
      and amortization
                      
                      
                      3,565,422
                      
                      
                      
                      2,214,643
                      
                      
                      
                      1,527,211Less
      income from discontinued operations - Oralabs, Inc.
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (831,448
                      )Allowance
      for bad and doubtful debts
                      
                      
                      3,831,478
                      
                      
                      
                      686,955
                      
                      
                      
                      3,775,645Reversal
      of provision for doubtful accounts
                      
                      
                      (1,105,866
                      )
                      
                      
                      -
                      
                      
                      
                      -Warrants
      issued for consulting
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      447,993Net
      changes in assets and liabilities:Accounts
      receivable, net
                      
                      
                      3,016,777
                      
                      
                      
                      (30,186,787
                      )
                      
                      
                      5,523,369Inventories
                      
                      
                      1,601,568
                      
                      
                      
                      (511,151
                      )
                      
                      
                      (9,133,893
                      )Deposits
                      
                      
                      -
                      
                      
                      
                      82,758
                      
                      
                      
                      (3,504
                      )Prepaid
      expenses
                      
                      
                      (17,861
                      )
                      
                      
                      (58,105
                      )
                      
                      
                      -Advances
      to suppliers
                      
                      
                      12,163,423
                      
                      
                      
                      (19,898,096
                      )
                      
                      
                      (10,677,692
                      )Accounts
      payable and accrued liabilities
                      
                      
                      (4,944,049
                      )
                      
                      
                      6,704,028
                      
                      
                      
                      2,966,771Advances
      from customers
                      
                      
                      (5,278,228
                      )
                      
                      
                      5,103,242
                      
                      
                      
                      (229,495
                      )Other
      taxes payable
                      
                      
                      2,660,691
                      
                      
                      
                      3,077,622
                      
                      
                      
                      (188,367
                      )Current
      income taxes
                      
                      
                      19,995
                      
                      
                      
                      2,659,288
                      
                      
                      
                      1,892,866Deferred
      income taxes
                      
                      
                      -
                      
                      
                      
                      (1,064,028
                      )
                      
                      
                      (471,176
                      )Net
      cash provided by/(used in) operating activities
                      
                      
                      15,105,012
                      
                      
                      
                      (12,606,520
                      )
                      
                      
                      2,902,389Cash
      flows from investing activitiesDeposit
      for plant and machinery
                      
                      
                      (8,348,496
                      )
                      
                      
                      -
                      
                      
                      
                      -Purchase
      of goodwill
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (99,999
                      )Purchase
      of land use rights
                      
                      
                      (340,066
                      )
                      
                      
                      -
                      
                      
                      
                      -Purchase
      of property, plant and equipment including construction in
      progress
                      
                      
                      (16,642,038
                      )
                      
                      
                      (14,705,302
                      )
                      
                      
                      (9,896,145
                      )Net
      cash used in investing activities
                      
                      
                      (25,330,600
                      )
                      
                      
                      (14,705,302
                      )
                      
                      
                      (9,996,144
                      )Cash
      flows from financing activitiesExercise
      of common stock warrants
                      
                      
                      269,985
                      
                      
                      
                      1,730,001
                      
                      
                      
                      -Proceeds
      from sale of common stock
                      
                      
                      -
                      
                      
                      
                      44,375,282
                      
                      
                      
                      19,326,878Advances
      from/(to) directors, net
                      
                      
                      -
                      
                      
                      
                      (189,315
                      )
                      
                      
                      (7,610,426
                      )Short-term
      loan proceeds
                      
                      
                      5,050,727
                      
                      
                      
                      16,702,976
                      
                      
                      
                      10,040,633Repayments
      of short-term loans
                      
                      
                      (87,839
                      )
                      
                      
                      (24,421,766
                      )
                      
                      
                      (10,157,728
                      )Net
      cash provided by financing activities
                      
                      
                      5,232,873
                      
                      
                      
                      38,197,178
                      
                      
                      
                      11,599,357Effect
      of exchange rate
                      
                      
                      73,460
                      
                      
                      
                      2,178,624
                      
                      
                      
                      812,305Net
      (decrease)/increase in cash
                      
                      
                      (4,919,255
                      )
                      
                      
                      13,063,980
                      
                      
                      
                      5,317,907Cash
      and cash equivalents, beginning of year
                      
                      
                      18,568,842
                      
                      
                      
                      5,504,862
                      
                      
                      
                      186,955Cash
      and cash equivalents, end of year
                      
                      $
                      13,649,587
                      
                      
                      $
                      18,568,842
                      
                      
                      $
                      5,504,862Supplemental
      disclosure of cash flow information:Cash
      paid during the year for:Interest
                      
                      $
                      1,228,665
                      
                      
                      $
                      1,231,040
                      
                      
                      $
                      312,222Taxes
                      
                      $
                      343,508
                      
                      
                      
                      -
                      
                      
                      
                      -Major
      non-cash transactionsIssuance
      of 2,798,191 shares of common stock for syndication fees
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      8,394,573Issuance
      of 100,000 warrants for services
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      447,993Issuance
      of 1,216,667 warrants for syndication fees
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      2,770,349Contribution
      of director's loans to additional paid in capital
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      3,953,794Shareholders
      loans contributed for contributed construction costs
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      8,840,990




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


F-7




China
Precision Steel, Inc. and Subsidiaries


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




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





PSHL,
registered on April 30, 2002 in the Territory of the British Virgin Islands, had
registered capital of $50,000 as of June 30, 2009 and 2008. 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, the People’s Republic of China (the
“PRC”), with a registered capital of $3,220,000 and a defined period of
existence of 50 years from July 2, 2002 to July 1, 2052. Chengtong was
classified as a Sino-foreign joint venture enterprise with limited liability. On
August 22, 2005, the authorized registered capital of Chengtong was increased to
$15,220,000 and on December 11, 2007, it was further increased to $42,440,000.
Pursuant to document issued by the District Council to Xuhang Town Council on
June 28, 2004, the equity transfers from China Chengtong Metal Group Limited and
Eastreal Holdings Company Limited to PSHL were approved and the transformation
of Chengtong from a Sino-foreign joint investment enterprise to a wholly foreign
owned enterprise (WFOE) was granted.





In the
year ended June 30, 2007, we added three indirect subsidiaries to our corporate
structure. On April 9, 2007, we purchased Shanghai Tuorong Precision Strip
Company Limited, or Tuorong, through PSHL. The sole activity of Tuorong is the
ownership of a land use right with respect to facilities utilized by Chengtong.
On April 10, 2007, PSHL purchased the entire equity interest in Blessford
International Limited, a British Virgin Islands company, for a cash
consideration of $100,000. Blessford International Limited does not conduct any
business, but it owns a single subsidiary, Shanghai Blessford Alloy Company
Limited (“Shanghai Blessford”), that is a wholly-foreign owned enterprise with
limited liability. Shanghai Blessford was registered on February 24, 2006 in
Shanghai, the PRC, with a registered capital of $12,000,000 and a defined period
of existence of 50 years from February 24, 2006 to February 23, 2056. On May 27,
2008, the authorized registered capital was increased to $22,000,000. We intend
to hold Blessford International 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 sale of cold-rolled and hot-rolled precision steel products and
plates for downstream applications in the automobile industry (components and
spare parts), kitchen tools and functional parts of electrical appliances. Raw
materials, hot-rolled de-scaled (pickled) steel coils, will go through certain
cold reduction processing procedures to give steel rolls and plates in different
cuts and thickness for deliveries in accordance with customers’ specifications.
Specialty precision steel offers specific control of thickness, shape, width,
surface finish and other special quality features that compliment the emerging
need for highly engineered end use applications. Precision steel pertains to the
precision of measurements and tolerances of the above factors, especially
thickness tolerance.


F-8


China
Precision Steel, Inc. and Subsidiaries


Notes
to the Consolidated Financial Statements





2.    
Basis of Preparation of Financial Statements





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





The
consolidated balance sheets as of June 30, 2009 and 2008 include CPSL, PSHL,
Blessford International, Chengtong, Shanghai Blessford, and Tuorong. The
consolidated statements of operations for the years ended June 30, 2009 and 2008
includes CPSL, PSHL, Blessford International, Chengtong, Shanghai Blessford and
Tuorong for the full year. The consolidated statement of operations for the year
ended June 30, 2007 includes CPSL, PSHL, Chengtong and Tuorong for the full
year, and Blessford International and Shanghai Blessford from April 9, 2007.
Intercompany items have been eliminated.




3.  Summary of Significant Accounting
Policies





The
following is a summary of significant accounting policies:





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





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




Allowance for Doubtful Accounts -The Company maintains an allowance for doubtful accounts based on its
assessment of the collectability of the accounts receivable. Management
determines the collectability of outstanding accounts by maintaining regular
communication with such customers and obtaining confirmation of their intent to
fulfill their obligations to the Company. Management also considers past
collection experience, our relationship with customers and the impact of current
economic conditions on our industry and market. However, we note that the
continuation or intensification of the current global economic crisis may have
negative consequences on the business operations of our customers and adversely
impact their ability to meet their financial obligations.  At March
31, 2009, approximately 42% of our accounts receivable were past due over 180
days.  To reserve for potentially uncollectible accounts receivable,
for the year ended June 30, 2009, our management has made a 50% provision for
all accounts receivable that are over 180 days past due and full provision for
all accounts receivable over 1 year past due.  From time to time, we
will review these credit periods, along with our collection experience and the
other factors discussed above, to evaluate the adequacy of our allowance for
doubtful accounts, and to make changes to the allowance, if
necessary.  If our actual collection experience or other conditions
change, revisions to our allowances may be required, including a further
provision which could adversely affect our operating income, or write back of
provision when estimated uncollectible accounts are actually
collected.  At June 30, 2009 and 2008, the Company had $830,127 and
$1,033,479 of allowances for doubtful accounts, respectively.





Bad debts
are written off for past due balances over two years or when it becomes known to
management that such amount is uncollectible.  Provision for bad debts
recognized for the year ended June 30, 2009 and 2008 were $3,831,478 and
$686,955, respectively. The current year charge reflects a provision for
doubtful accounts due to a dispute between the Company and one of our customers
regarding a special stainless steel product processed by the Company and
delivered to the customer during the third and fourth quarters of the year ended
June 30, 2008. Revenues for these products were initially recognized as services
had been rendered and goods had been delivered in accordance to the terms of the
contract, collectability was reasonably assured and management had no reason to
believe that the customer would object to the goods and services
provided.  However, in the months following such delivery, a dispute
arose during the use of such products by the customer, which was followed by
discussions between the Company and the customer regarding the technical aspects
of the products and the possibility of reprocessing. After a few rounds of
negotiation with the customer regarding the products and payment, our management
determined that this accounts receivable was uncollectible. The Company does not
have any other accounts receivable related to this product.


F-9


China
Precision Steel, Inc. and Subsidiaries


Notes
to the Consolidated Financial Statements





Our
management is continually working to ensure that any known uncollectible amounts
are immediately written off as bad debt against outstanding
balances.




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





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





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





Advances to Suppliers -In
order to insure a steady supply of raw materials, the Company is required from
time to time to make cash advances to its suppliers when placing purchase
orders, for a guaranteed minimum delivery quantity at future times when raw
materials are required. The advance is seen as a deposit to suppliers and
guarantees our access to raw materials during periods of shortages and market
volatility, and is therefore considered an important component of our
operations.  Contracted raw materials are priced at prevailing market
rates agreed by us with the suppliers prior to each delivery date. Advances to
suppliers are shown net of an allowance which represents potentially
unrecoverable cash advances at each balance sheet date. Such allowances are
based on an analysis of past raw materials receipt experience and the
credibility of each supplier according to its size and background. In general,
we don’t provide allowances against advances paid to those PRC state-owned
companies as there is minimal risk of default. Our allowances for advances to
suppliers are subjective critical estimates that have a direct impact on
reported net earnings, and are reviewed quarterly at a minimum to reflect
changes from our historic raw materials receipt experience and to ensure the
appropriateness of the allowance in light of the circumstances present at the
time of the review.  It is reasonably possible that the Company’s
estimate of the allowance will change, such as in the case when the Company
becomes aware of a supplier’s inability to deliver the contracted raw materials
or meet its financial obligations. As of June 30, 2009 and 2008, the Company had
allowances of advances to suppliers of $1,631,557 and $2,522,837,
respectively.





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





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





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





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


F-10


China
Precision Steel, Inc. and Subsidiaries


Notes
to the Consolidated Financial Statements





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





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





Capitalized Interest - The
Company capitalizes interest cost on borrowings incurred during the new
construction or upgrade of qualified assets. Capitalized interest is added to
the cost of the underlying assets and is amortized over the useful lives of the
assets. During the years ended June 30, 2009, 2008 and 2007, the Company
capitalized $32,967, nil and $826,101, respectively, of 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 use rights cost, development expenditure, professional fees
and the interest expenses capitalized during the course of construction for the
purpose of financing the project. Upon completion and readiness for use of the
project, the cost of construction-in-progress is to be transferred to property,
plant and equipment.





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





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





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





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





Advances from
Customers -
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.





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 US dollars (“USD”). The consolidated balance sheets have been
translated into USD at the exchange rates prevailing at each balance sheet date.
The consolidated statements of operations and cash flows have been translated
using the weighted-average exchange rates prevailing during the periods of each
statement.


F-11


China
Precision Steel, Inc. and Subsidiaries


Notes
to the Consolidated Financial Statements





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 are dealt with as other
comprehensive income in shareholders’ equity.





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





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





United
States





China
Precision Steel, Inc. is subject to United States federal income tax at a tax
rate of 34%. No provision for current income taxes in the United States has been
made as China Precision Steel, Inc. had no taxable income in fiscal years 2009,
2008 and 2007.





BVI





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





PRC





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





Enterprise
income tax





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





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


F-12


China
Precision Steel, Inc. and Subsidiaries


Notes
to the Consolidated Financial Statements





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





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





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





Based on
all known facts and circumstances and current tax law, the Company believes that
the total amount of unrecognized tax benefits as of June 30, 2009, is not
material to its results of operations, financial condition or cash flows. The
Company also believes that the total amount of unrecognized tax benefits as of
June 30, 2009, if recognized, would not have a material effect on its effective
tax rate. The Company further believes that there are no tax positions for which
it is reasonably possible, based on current Chinese tax law and policy, that the
unrecognized tax benefits will significantly increase or decrease over the next
12 months producing, individually or in the aggregate, a material effect on the
Company’s results of operations, financial condition or cash flows.





Value
added tax





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





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





Retirement Benefit Costs -
According to the PRC regulations on pension, Chengtong and Shanghai Blessford
contribute to a defined contribution retirement scheme organized by the
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.


F-13


China
Precision Steel, Inc. and Subsidiaries


Notes
to the Consolidated Financial Statements





For the
years ended June 30, 2009, 2008 and 2007, the Company’s pension cost charged to
the statements of operations under the plan amounted to $263,931, $175,939 and
$149,179, 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 June 30, 2009 and June 30,
2008 because of the relatively short-term maturity of these
instruments.  For short-term loans, the carrying amount is assumed to
approximate fair value based on the current rates at which the Group could
borrow funds with similar remaining maturities.





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





4.  Concentrations
of Business and Credit Risk





The
Company’s list of customers whose purchases exceeded 10% of total sales during
the years ended June 30, 2009, 2008 and 2007 is as follows:





Customers
                    
                    2009
                    
                    
                    % to
                      sales
                    
                    
                    2008
                    
                    
                    % to
                      sales
                    
                    
                    2007
                    
                    
                    % to
                      salesSalzgitter
      Mannesmann International GMBH
                    
                    
                    14,275,799
                    
                    
                    
                    19
                    %Shanghai
      Changshuo Steel Company, Ltd
                    
                    
                    10,999,692
                    
                    
                    
                    14
                    %
                    
                    
                    18,513,819
                    
                    
                    
                    21
                    
                    
                    
                    5,428,110
                    
                    
                    
                    10Shanghai
      Bayou Industrial Co. Ltd
                    
                    
                    -
                    *
                    
                    
                    -
                    *
                    
                    
                    10,494,752
                    
                    
                    
                    12
                    
                    
                    
                    -
                    *
                    
                    
                    -
                    *Shanghai
      Shengdejia Metal Co. Ltd
                    
                    
                    -
                    *
                    
                    
                    -
                    *
                    
                    
                    10,414,545
                    
                    
                    
                    12
                    
                    
                    
                    -
                    *
                    
                    
                    -
                    *Shanghai
      Ruixuefeng Metals Co., Limited
                    
                    
                    -
                    *
                    
                    
                    -
                    *
                    
                    
                    -
                    *
                    
                    
                    -
                    *
                    
                    
                    12,192,219
                    
                    
                    
                    23




The
Company’s list of suppliers whose sales to us exceeded 10% of our total
purchases during the years ended June 30, 2009, 2008 and 2007 is as
follows:





Suppliers
                
                2009
                
                
                % to
                  consumption
                
                
                2008
                
                
                % to
                  consumption
                
                
                2007
                
                
                % to
                  consumptionBaoSteel
      Steel Products Trading Co. Ltd
                
                
                15,805,702
                
                
                
                21
                
                
                
                16,439,918
                
                
                
                30
                
                
                
                4,633,054
                
                
                
                14Hangzhou
      Relian Company Limited
                
                
                -
                *
                
                
                -
                *
                
                
                11,050,813
                
                
                
                20
                
                
                
                8,5988,117
                
                
                
                25Shanghai
      Pinyun Steel Co., Limited
                
                
                9,349,480
                
                
                
                13
                
                
                
                10,025,183
                
                
                
                18
                
                
                
                6,355,445
                
                
                
                19Shanghai
      Changshuo Steel Company Ltd
                
                
                -
                *
                
                
                -
                *
                
                
                -
                *
                
                
                -
                *
                
                
                3,408,301
                
                
                
                10





Our
management continues to take appropriate actions to perform ongoing business and
credit reviews of our customers to reduce our exposure to new and recurring
customers who have been deemed to pose a high credit risk to our business based
on their commercial credit reports, our collection history, and our perception
of the risk posed by their geographic location. We have recently halted all our
direct sales to customers located in the Philippines as we consider the
associated credit risk to be relatively high. Based on publicly available
reports, such as that issued by A.M. Best, there is a high risk that financial
volatility may erupt in that country due to inadequate reporting standards, a
weak banking system or asset markets and/or poor regulatory structure. We expect
to resume such exports when conditions improve.


F-14




China
Precision Steel, Inc. and Subsidiaries


Notes
to the Consolidated Financial Statements





5.  Accounts
Receivable





The
Company provides credit in the normal course of business. The Company performs
ongoing credit evaluations of its domestic and international customers and
clients and maintains allowances for bad and doubtful accounts based on factors
surrounding the credit risk of specific customers and clients, historical
trends, and other information. Trade accounts receivable, net totaled
$25,140,834 and $33,783,074 as of June 30, 2009 and 2008,
respectively.





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





6.  Valuation and
Qualifying Accounts





Description
                
                Balance at
                  Beginning
                  of Year
                
                
                Additions
                  Charged to
                  Costs and
                  Expenses
                
                
                Deductions/
                  Write-offs
                  Charged to
                  Allowance
                
                
                Exchange
                  Difference
                
                
                Balance at
                  End of
                  YearAllowance
      for Doubtful Accounts (Trade):Year
      ended June 30, 2007
                
                $
                138,837
                
                
                $
                273,461
                
                
                $
                (146,816
                )
                
                $
                7,979
                
                
                $
                273,461Year
      ended June 30, 2008
                
                
                273,461
                
                
                
                686,955
                
                
                
                —
                
                
                
                73,063
                
                
                
                1,033,479Year
      ended June 30, 2009
                
                
                1,033,479
                
                
                
                3,831,478
                
                
                
                (4,041,850
                )
                
                
                7,020
                
                
                
                830,127Allowance
      for Doubtful Accounts (Suppliers):Year
      ended June 30, 2007
                
                
                —
                
                
                
                3,502,184
                
                
                
                (1,232,856
                )
                
                
                —
                
                
                
                2,269,328Year
      ended June 30, 2008
                
                
                2,269,328
                
                
                
                —
                
                
                
                —
                
                
                
                253,509
                
                
                
                2,522,837Year
      ended June 30, 2009
                
                
                2,522,837
                
                
                
                —
                
                
                
                (899,140
                )
                
                
                7,860
                
                
                
                1,631,557Valuation
      Allowance for Deferred Tax Assets:Year
      ended June 30, 2007
                
                
                252,853
                
                
                
                610,512
                
                
                
                —
                
                
                
                —
                
                
                
                863,365Year
      ended June 30, 2008
                
                
                863,365
                
                
                
                1,096,262
                
                
                
                —
                
                
                
                89,207
                
                
                
                2,048,834Year
      ended June 30, 2009
                
                
                2,048,834
                
                
                
                1,623,373
                
                
                
                —
                
                
                
                2,201
                
                
                
                3,674,408




F-15


China
Precision Steel, Inc. and Subsidiaries


Notes
to the Consolidated Financial Statements





7.  Condensed
Financial Information of Parent Company





Payments
of dividends may be subject to some restrictions due to the fact that the
operating activities are conducted in subsidiaries residing in the PRC. The laws
and regulations of the PRC currently permit the payment of dividends only out of
accumulated profits as determined in accordance with Chinese accounting
standards and regulations. Our subsidiaries in the PRC are also required to set
aside a portion of their after tax profits according to Chinese accounting
standards and regulations to fund certain reserve funds. Currently, our
subsidiaries in China are the only sources of revenues or investment holdings
for the payment of dividends. If they do not accumulate sufficient profits under
Chinese accounting standards and regulations to first fund certain reserve funds
as required, we will be unable to pay any dividends. We currently intend to
retain any future earnings for use in the operation and expansion of our
business. No cash dividends have been paid to the parent company for the last
three fiscal years. In accordance with Rule 504/4.08 (e) (3) of Regulation S-X,
the following are condensed parent company only financial statements as of and
for the two years ended June 30, 2009 and 2008.





CHINA
PRECISION STEEL, INC.


CONDENSED
PARENT COMPANY ONLY BALANCE SHEETS


JUNE 30,
2009 AND 2008





2009
                        
                        
                        2008Current
      assets:Cash
      and cash equivalents
                        
                        $
                        3,154,569
                        
                        
                        $
                        4,333,911Prepayments
                        
                        
                        65,165
                        
                        
                        
                        72,463Total
      current assets
                        
                        
                        3,219,734
                        
                        
                        
                        4,406,374Property,
      plant and equipment
                        
                        
                        1,838
                        
                        
                        
                        1,459Investments
      in subsidiaries, reported on equity method
                        
                        
                        53,905,117
                        
                        
                        
                        52,689,184Advances
      to subsidiaries
                        
                        
                        63,633,339
                        
                        
                        
                        63,588,435Total
      assets
                        
                        $
                        120,760,028
                        
                        
                        $
                        120,685,452Current
      liabilities:Accounts
      payable
                        
                        $
                        152,000
                        
                        
                        $
                        298,105Accrued
      expenses
                        
                        
                        4,566
                        
                        
                        
                        81,379Total
      current liabilities
                        
                        
                        156,566
                        
                        
                        
                        379,484Stockholders'
      equity:Common
      stock, $.001 par value; 62,000,000 shares authorized;46,562,955
      and 46,472,955 shares issued and outstandingat
      June 30, 2009 and 2008, respectively
                        
                        
                        46,563
                        
                        
                        
                        46,473Additional
      paid-in capital
                        
                        
                        75,642,383
                        
                        
                        
                        75,372,488Accumulated
      other comprehensive income
                        
                        
                        9,731,505
                        
                        
                        
                        9,295,658Retained
      earnings
                        
                        
                        35,183,011
                        
                        
                        
                        35,591,349Total
      stockholders' equity
                        
                        
                        120,603,462
                        
                        
                        
                        120,305,968Total
      liabilities and stockholders' equity
                        
                        $
                        120,760,028
                        
                        
                        $
                        120,685,452




F-16


China
Precision Steel, Inc. and Subsidiaries


Notes
to the Consolidated Financial Statements





CHINA
PRECISION STEEL, INC.


CONDENSED
PARENT COMPANY ONLY STATEMENTS OF OPERATIONS


FOR THE
YEARS ENDED JUNE 30, 2009 AND 2008





2009
                  
                  
                  2008SALES
                  
                  $
                  —
                  
                  
                  $
                  —OPERATING
      AND ADMINISTRATIVE EXPENSES:General
      and administrative expenses
                  
                  
                  1,228,537
                  
                  
                  
                  2,223,394Loss
      from operations
                  
                  
                  (1,228,537
                  )
                  
                  
                  (2,223,394
                  )OTHER
      INCOME/(EXPENSE):Interest
      income
                  
                  
                  40,113
                  
                  
                  
                  221,866Equity
      in earnings of consolidated subsidiaries
                  
                  
                  780,086
                  
                  
                  
                  20,251,567(LOSS)/INCOME
      BEFORE INCOME TAXES
                  
                  
                  (408,338
                  )
                  
                  
                  18,250,039BENEFIT
      FROM/(PROVISION FOR) INCOME TAXES
                  
                  
                  -
                  
                  
                  
                  333,072NET
      (LOSS)/INCOME
                  
                  $
                  (408,338
                  )
                  
                  $
                  18,583,111The
      components of comprehensive income:Net
      (loss)/income
                  
                  $
                  (408,338
                  )
                  
                  $
                  18,583,111Foreign
      currency translation adjustment
                  
                  
                  435,847
                  
                  
                  
                  7,103,498COMPREHENSIVE INCOME
                  
                  $
                  27,509
                  
                  
                  $
                  25,686,609




F-17


China
Precision Steel, Inc. and Subsidiaries
 Notes
to the Consolidated Financial Statements
 
 CHINA
PRECISION STEEL, INC.
 CONDENSED
PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS
 FOR THE
YEARS ENDED JUNE 30, 2009 AND 2008
 
 2009
                  
                  
                  2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss)/income
                  
                  $
                  (408,338
                  )
                  
                  $
                  18,583,111Adjustments
      to reconcile net income to operating activities -Depreciation
                  
                  
                  340
                  
                  
                  
                  -Equity
      in earnings of consolidated subsidiaries
                  
                  
                  (780,086
                  )
                  
                  
                  (20,251,567
                  )Net
      changes in assets and liabilitiesPrepayments
                  
                  
                  7,298
                  
                  
                  
                  (72,463
                  )Due
      to Oralabs
                  
                  
                  -
                  
                  
                  
                  (441,377
                  )Accounts
      payable
                  
                  
                  (222,918
                  )
                  
                  
                  377,979Net
      cash used in operating activities
                  
                  
                  (1,403,704
                  )
                  
                  
                  (1,804,317
                  )CASH
      FLOWS USED IN INVESTING ACTIVITIES:Purchase
      of fixed assets
                  
                  
                  (719
                  )
                  
                  
                  (1,459
                  )Advances
      to subsidiary
                  
                  
                  (44,904
                  )
                  
                  
                  (41,999,999
                  )Net
      cash used in investing activities
                  
                  
                  (45,623
                  )
                  
                  
                  (42,001,458
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from sale of common stock
                  
                  
                  -
                  
                  
                  
                  44,375,282Proceeds
      from exercise of warrants
                  
                  
                  269,985
                  
                  
                  
                  1,730,001Net
      cash provided by financing activities
                  
                  
                  269,985
                  
                  
                  
                  46,105,283NET
      (DECREASE)/INCREASE IN CASH AND EQUIVALENTS
                  
                  
                  (1,179,342
                  )
                  
                  
                  2,299,508CASH
      AND CASH EQUIVALENTS, BEGINNING OF YEAR
                  
                  
                  4,333,911
                  
                  
                  
                  2,034,403CASH
      AND CASH EQUIVALENTS, END OF YEAR
                  
                  $
                  3,154,569
                  
                  
                  $
                  4,333,911SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Interest
      paid, net of capitalized amounts
                  
                  $
                  -
                  
                  
                  $
                  -Income
      taxes paid
                  
                  $
                  -
                  
                  
                  $
                  -
  F-18
  China
Precision Steel, Inc. and Subsidiaries
 Notes
to the Consolidated Financial Statements
 
 8.  Inventories
 
 As of
June 30, 2009 and 2008, inventories consisted of the following:
 
 At cost:
                      
                      June 30,
                        2009
                      
                      
                      June 30,
                        2008Raw materials
                      
                      $
                      8,846,663
                      
                      
                      $
                      8,376,173Work
      in progress
                      
                      
                      2,818,832
                      
                      
                      
                      3,247,093Finished
      goods
                      
                      
                      2,191,341
                      
                      
                      
                      3,918,801Consumable
      items
                      
                      
                      2,418,234
                      
                      
                      
                      2,273,020$
                      16,275,070
                      
                      
                      $
                      17,815,087
 
 Costs of
finished goods include direct labor, direct materials, and production overhead
before the goods are ready for sale.
 
 Consumable
items represent parts used in our cold rolling mills and other equipment that
need to be replaced from time to time when necessary to ensure optimal operating
results, such as bearings and rollers.
 
 Inventories
amounting to $4,841,235 were pledged for short-term loans totaling $22,489,031
as of June 30, 2009.
 
 9.  Advances
to Suppliers
 
 Cash
advances are shown net of allowances of $1,631,557 and$2,522,837 as of June 30,
2009 and 2008, respectively.
 
 The
majority of our advances to suppliers greater than 180 days as of June 30, 2009
is attributable to our advances to a single supplier, a subsidiary of a
state-owned company in the PRC. We believe that advances paid to state-owned
companies are ultimately collectible because they are backed by the full faith
and credit of the PRC government. As such, we generally do not provide
allowances against such advances.
 
 10.  Property,
Plant and Equipment
 
 Property,
plant and equipment, stated at cost less accumulated depreciation, consisted of
the following:
 
 June 30,
                        2009
                      
                      
                      June 30,
                        2008Plant
      and machinery
                      
                      $
                      33,331,681
                      
                      
                      $
                      22,725,528Buildings
                      
                      
                      21,806,219
                      
                      
                      
                      21,685,208Motor
      vehicles
                      
                      
                      534,652
                      
                      
                      
                      379,885Office
      equipment
                      
                      
                      404,695
                      
                      
                      
                      185,16156,077,247
                      
                      
                      
                      44,975,782Less:
      Accumulated depreciation
                      
                      
                      (9,264,763
                      )
                      
                      
                      (5,776,477
                      )$
                      46,812,484
                      
                      
                      $
                      39,199,305
 
 Depreciation
expense related to manufacturing is included as a component of cost of goods
sold. During the years ended June 30, 2009, 2008 and 2007, depreciation totaling
$3,547,453,
$2,018,105 and $1,482,836,
respectively, was included as a component of cost of goods sold.
 
 Plant and
machinery and buildings amounting to $55,137,900 (June 30, 2008: $17,827,400)
were pledged for short-term loans totaling $22,489,031.
  F-19
  China
Precision Steel, Inc. and Subsidiaries
 Notes
to the Consolidated Financial Statements
 
 11.  Construction-In-Progress
 
 As of
June 30, 2009 and 2008, construction-in-progress consisted of the
following:
 
 June 30,
                        2009
                      
                      
                      June 30,
                        2008Construction
      costs
                      
                      $
                      22,245,173
                      
                      
                      $
                      16,476,454
 
 Construction-in-progress
represents construction and installations of a cold-rolling mill and annealing
furnaces.
 
 12.  Intangible
Assets
 
 Land use
right amounting to $1,861,093 (June 30, 2008: $555,943) were pledged for
short-term loans totaling $22,489,031.
 
 The
Company acquired land use rights in August 2004 and December 2006 for 50 years
that both expire in December 2056. 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 ended June 30, 2009
for the remaining lease period.
 
 Amortizable
intangible assets of the Company are reviewed when there are triggering events
to determine whether their carrying value has become impaired, in conformity
with SFAS No. 144. The Company also re-evaluates the periods of amortization to
determine whether subsequent events and circumstances warrant revised estimates
of useful lives.
 
 13.  Short-Term
Loans
 
 Short-term
loans consisted of the following:
 
 June 30,
                          2009
                        
                        
                        June 30,
                          2008Bank
      loan agreement dated August 1, 2008, due in one year with an interest rate
      of the Singapore Interbank Offered Rate (“SIBOR”) plus 3% (3.6% at June
      30, 2009) (Note 10)
                        
                        
                        5,300,000
                        
                        
                        
                        5,300,000Bank
      loan agreement dated August 1, 2008, due in one year with an interest rate
      at 115% of the standard market rate set by the People’s Bank of China for
      Renminbi loans (6.11% at June 30, 2009) (Note 10)
                        
                        
                        2,915,238
                        
                        
                        
                        2,886,952Bank
      loan agreement dated June 26, 2008, due July 31, 2009 with an interest
      rate at 115% of the standard market rate set by the People’s Bank of China
      for Renminbi loans (6.11% at June 30, 2009) (Note 10)
                        
                        
                        14,273,793
                        
                        
                        
                        9,278,847$
                        22,489,031
                        
                        
                        $
                        17,465,799
 The above
bank loans outstanding as at June 30, 2009 have been renewed at an interest rate
of 1.15 times of the standard market rate set by the People's Bank of China for
Renminbi loans and at SIBOR plus 3% for USD loans, due on July 31, 2010, and are
secured by inventories, land use rights, buildings and plant and machinery, and
guaranteed by PSHL and Mr. Wo Hing Li. In addition, pursuant to a bank loan
agreement entered into between the Company and Raiffeisen Zentralbank Österreich
AG ("RZB"), Mr. Li undertakes to maintain a shareholding percentage in the
Company of not less than 33.4% unless otherwise agreed to with
RZB.
  F-20
  China
Precision Steel, Inc. and Subsidiaries
 Notes
to the Consolidated Financial Statements
 
 The
weighted-average interest rate on short-term loans as of June 30, 2009 and 2008
was 5.52% and 7.72%, respectively.
 
 14. Advances from
Customers
 
 Advances
from customers represent advance cash receipts from new customers and for which
goods have not been delivered or services have not been 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.
 
 15.  Equity
 
 Pursuant
to Section 5.1 of the Stock Purchase Agreement, the Company agreed to reserve
for issuance to investors in the private placement an aggregate of 2,000,000
shares of Common Stock if the Company’s net income for the fiscal year ended
June 30, 2007 was less than US$10.4 million, as set forth in the Company’s
audited financial statements as filed with the SEC in the Company’s Annual
Report on Form 10-K for that fiscal year. As the Company’s net income as set
forth in its audited financial statements for the year ended June 30, 2007 was
less than US$10.4 million, the Company was required to issue the 2,000,000
shares of Common Stock to such investors. Such issuance was effected on October
15, 2007. No additional consideration was received by the Company in connection
with this issuance of shares of Common Stock.
 
 In
conjunction with the audit of the Group’s financial statements for the year
ended June 30, 2007, certain post-closing adjustments were made for Tuorong. In
light of such adjustments and consistent with the purposes and intentions of the
Debt Reduction Agreement, dated February 13, 2007, as amended on February 20,
2007, it was determined that 771,060 shares of the Company’s Common Stock issued
to directors pursuant to the Debt Reduction 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 dated November 1, 2007 (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 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 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 the net proceeds were
recorded to additional paid-in capital. The intended usage of the net proceeds
was for repayment of certain bank debt, capital expenditure, and general
corporate purposes. During the year ended June 30, 2008, long-term bank loans of
$13,042,159 were paid off, and a progress payment of $7,016,729 was made in
relation to the construction of the third cold rolling mill. During the year
ended June 30, 2009, we invested an additional $13,423,016 in construction in
progress and property, production plants and equipment in relation to the third
cold rolling mill and expansion of the Shanghai Blessford production
facilities.
 
 On the
Closing Date, pursuant to a Placement Agency Agreement entered into between the
Company and Roth Capital Partners LLC on October 31, 2007, Roth Capital received
an amount in cash equal to 7.0% of the gross proceeds of the Offering and
warrants to purchase an amount of Common Stock equal to 3.0% of the total number
of shares of Common Stock sold in the Offering (the “Placement Warrants”), or
225,600 shares of Common Stock valued at $887,504, and this amount was recorded
as syndication fees offsetting additional paid-in capital. Such Placement
Warrants have an exercise price per share of 120% of the closing price per share
of the Company’s Common Stock on the Closing Date, or $7.38, and were not
exercisable prior to May 6, 2008. Thereafter, the Placement Warrants are
exercisable at any time until the third anniversary of the date of
issue.
  F-21
  China
Precision Steel, Inc. and Subsidiaries
 Notes
to the Consolidated Financial Statements
 
 16.  Stock
Warrants
 
 In
connection with a Stock Purchase Agreement dated February 16, 2007 for the
Company’s private placement offerings (the “Private Placement”), on February 22,
2007, the Company issued warrants to the placement agents to purchase an
aggregate of 1,300,059 shares of Common Stock as partial compensation for
services rendered in connection with the Private Placement valued at $2,770,349.
The value of the warrants was considered syndication fees and was recorded to
additional paid-in capital. 851,667 of these warrants have been exercised during
the year ended June 30, 2008.
 
 On
February 22, 2007, the Company issued warrants to purchase up to 100,000 shares
of Common Stock to the Company's then investor relations consultants valued at
$447,993. The value of these was considered syndication fees in association with
the Private Placement and was recorded to additional paid-in
capital.
 
 On
November 6, 2007, in connection with the Subscription Agreement, the Company
issued to certain institutional accredited investors warrants to purchase
1,420,000 shares of Common Stock valued at $5,374,748, and Roth Capital
Partners, LLC, as placement agent, received warrants to purchase 225,600 shares
of Common Stock valued at $887,504. These amounts were recorded as syndication
fees offsetting additional paid-in capital.
  Information
with respect to stock warrants outstanding is as follows:
 
 Exercise
                              Price
                            
                            Outstanding
                              June 30, 2008
                            
                            Granted
                            
                            Expired or
                              Exercised
                            
                            Outstanding
                              June 30,
                              2009
                            
                            Expiration Date$
                            3.00
                            
                            
                            448,392
                            
                            -0-
                            
                            
                            (90,000
                            )
                            358,392
                            
                            February 22, 2011$
                            3.60
                            
                            
                            100,000
                            
                            -0-
                            
                            
                            -0-
                            
                            100,000
                            
                            February 22, 2010$
                            8.45
                            
                            
                            1,420,000
                            
                            -0-
                            
                            
                            -0-
                            
                            1,420,000
                            
                            May 5, 2013$
                            7.38
                            
                            
                            225,600
                            
                            -0-
                            
                            
                            -0-
                            
                            225,600
                            
                            November 5, 2010
 
 17.  Income
Taxes
 
 For PRC
enterprise income tax reporting purposes, the Company is required to compute a
10% salvage value when computing depreciation expense and add back the allowance
for doubtful debts. For financial reporting purposes, the Company does not take
into account a 10% salvage value when computing depreciation
expenses.
 
 The tax
holiday resulted in tax savings as follows:
 
 Years ended June 30,2009
                    
                    
                    2008
                    
                    
                    2007Tax
      savings
                    
                    $
                    661,293
                    
                    
                    $
                    3,191,292
                    
                    
                    
                    1,190,366Benefit
      per shareBasic
                    
                    $
                    0.01
                    
                    
                    $
                    0.07
                    
                    
                    $
                    0.04Diluted
                    
                    $
                    0.01
                    
                    
                    $
                    0.07
                    
                    
                    $
                    0.04
  F-22
  China
Precision Steel, Inc. and Subsidiaries
 Notes
to the Consolidated Financial Statements
 
 Significant
components of the Group’s deferred tax assets as of June 30, 2009 and 2008 are
as follows:
 Deferred tax assets:
                
                June 30
                  2009
                
                
                June 30,
                  2008Net
      operating loss carried forward
                
                $
                1,823,487
                
                
                $
                1,159,765Temporary
      differences resulting from allowances
                
                
                1,850,921
                
                
                
                889,069Total
      deferred income tax assets
                
                $
                3,674,408
                
                
                $
                2,048,834Valuation
      allowance
                
                
                (3,674,408
                )
                
                
                (2,048,834
                )$
                —
                
                
                $
                —
  The
Company has not recognized a deferred tax liability in respect of the
undistributed earnings of its foreign subsidiaries of approximately
US$11,737,101 as of June 30, 2009 because the Company currently plans to
reinvest those unremitted earnings such that the remittance of the undistributed
earnings of those foreign subsidiaries to the Company will be postponed
indefinitely. A deferred tax liability will be recognized when the Company no
longer plans to permanently reinvest undistributed earnings.
 
 A
reconciliation of the provision for income taxes with amounts determined by the
U.S. federal income tax rate to income tax expense per books is as
follows.
  Year ended June 30,2009
                        
                        
                        2008
                        
                        
                        2007Computed tax at
      the federal statutory rate of 34%
                        
                        $
                        (15,251
                        )
                        
                        $
                        6,512,849
                        
                        
                        $
                        3,024,079Adjustments
      for PRC entities taxed at different rates
                        
                        
                        (102,385
                        )
                        
                        
                        (1,687,507
                        )
                        
                        
                        (622,604
                        )Valuation
      allowance
                        
                        
                        1,
      144,438
                        
                        
                        
                        665,736
                        
                        
                        
                        210,581Income
      not subject to tax
                        
                        
                        (2,025
                        )
                        
                        
                        (330,361
                        )
                        
                        
                        -Deferred
      taxes
                        
                        
                        -
                        
                        
                        
                        (1,064,028
                        )
                        
                        
                        -Overprovision
      in prior year
                        
                        
                        -
                        
                        
                        
                        (333,074
                        )
                        
                        
                        -Benefit
      of tax holiday
                        
                        
                        (661,293
                        )
                        
                        
                        (3,191,292
                        )
                        
                        
                        (1,190,366
                        )Income
      tax expense per books
                        
                        $
                        363,484
                        
                        
                        $
                        572,323
                        
                        
                        $
                        1,421,690
 
 Income
tax expense consists of:
 Year ended June 30,2009
                      
                      
                      2008
                      
                      
                      2007Income
      tax expense for the year - PRC
                      
                      $
                      363,484
                      
                      
                      $
                      1,636,351
                      
                      
                      $
                      1,892,866Deferred
      income tax benefit - PRC
                      
                      
                      —
                      
                      
                      
                      (1,064,028
                      )
                      
                      
                      (471,176
                      )Income
      tax expense per books
                      
                      $
                      363,484
                      
                      
                      $
                      572,323
                      
                      
                      $
                      1,421,690
  F-23
  China
Precision Steel, Inc. and Subsidiaries
 Notes
to the Consolidated Financial Statements
 
 18.  Earnings/(loss)
Per Share
 
 SFAS No.
128 requires a reconciliation of the numerator and denominator of the basic and
diluted earnings/(loss) per share (EPS) computations.
 
 For the
year ended June 30, 2009, warrants to purchase 358,392 shares of common stock at
an exercise price of $3.00; 100,000 shares at an exercise price of $3.60;
1,420,000 shares at an exercise price of $8.45 and 225,600 shares at an exercise
price of $7.38 were not included as their effect would have been anti-dilutive,
however, these securities could potentially dilute basic earnings per share in
the future. For the year ended June 30, 2008, dilutive shares include
outstanding warrants to purchase 1,025,059 shares of common stock at an exercise
price of $3.00 and 100,000 shares at an exercise price of $3.60. Warrants to
purchase 1,420,000 shares at an exercise price of $8.45 and 225,600 shares at an
exercise price of $7.38 were not included as their effect would have been
anti-dilutive, however, these securities could potentially dilute basic earnings
per share in the future. For the year ended June 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)
                            
                            AmountFor
      the year ended June 30, 2009:Net
      loss
                            
                            $
                            (408,338
                            )Basic
      EPS (loss)/income available to common shareholders
                            
                            $
                            (408,338
                            )
                            46,561,229
                            
                            $
                            (0.01
                            )Effect
      of dilutive securitiesDiluted
      EPS (loss)/income available to common shareholders
                            
                            $
                            (408,338
                            )
                            46,561,229
                            
                            $
                            (0.01
                            )For
      the year ended June 30, 2008:Net
      income
                            
                            $
                            18,583,111Basic
      EPS income available to common shareholders
                            
                            $
                            18,583,111
                            
                            43,044,420
                            
                            $
                            0.43Effect
      of dilutive securities:Warrants
                            
                            
                            
                            
                            212,014Diluted
      EPS income available to common shareholders
                            
                            $
                            18,583,111
                            
                            43,256,434
                            
                            $
                            0.43For
      the year ended June 30, 2007:Net
      income
                            
                            $
                            8,304,109Less
      net income from discontinued operations
                            
                            $
                            (831,448
                            )Basic
      EPS income available to common shareholders
                            
                            $
                            7,472,661
                            
                            28,438,313
                            
                            $
                            0.26Effect
      of dilutive securities:Warrants
                            
                            
                            
                            
                            321,240Diluted
      EPS income available to common shareholders
                            
                            $
                            7,472,661
                            
                            28,759,553
                            
                            $
                            0.26
 
 19.  Capital
Commitments
 
 As of
June 30, 2009, the Company had contractual commitments of $2,496,669 (June 30,
2008: $11,231,670) for the construction of a cold rolling mill and annealing
furnaces.
 
 20.  Impairment
 
 We
determine impairment of long-lived assets, including property, plant and
equipment and amortizable intangible assets, by measuring the estimated
undiscounted future cash flows generated by these assets, comparing the result
to the assets’ carrying values and adjust the assets to the lower of its
carrying value or fair value and charging current operations for the measured
impairment. The determination of the undiscounted future cash flows and fair
value of these assets are subject to significant judgment.
  F-24
  China
Precision Steel, Inc. and Subsidiaries
 Notes
to the Consolidated Financial Statements
 
 The
recent decline in market cap and stock price has triggered an impairment test
under SFAS No. 144, an impairment test was performed for the year ended June 30,
2009 and no impairment charges were recognized for the relevant year. As of June
30, 2009, the Company expects these assets to be fully recoverable based on the
result of the impairment test.Goodwill amounting to
$99,999 as at June 30, 2009 was considered immaterial and not tested for
impairment in accordance with SFAS No. 142.
 
 21.  Business
Segment Information
 
 Operations
for the Company are summarized below by geographic area:
 
 Year Ended June 30, 2009PRC
                                
                                
                                Foreign
                                
                                
                                TotalRevenue
                                
                                $
                                55,230,435
                                
                                
                                $
                                21,051,186
                                
                                
                                $
                                76,281,621%
      of sales
                                
                                
                                72
                                
                                
                                
                                28
                                
                                
                                
                                100
 
 Year Ended June 30, 2008PRC
                                        
                                        
                                        Foreign
                                        
                                        
                                        TotalRevenue
                                        
                                        $
                                        71,779,911
                                        
                                        
                                        $
                                        15,959,415
                                        
                                        
                                        $
                                        87,739,326%
      of sales
                                        
                                        
                                        82
                                        
                                        
                                        
                                        18
                                        
                                        
                                        
                                        100
 
 Year Ended June 30, 2007PRC
                    
                    
                    Foreign
                    
                    
                    TotalRevenue
                    
                    $
                    53,177,408
                    
                    
                    $
                    782,835
                    
                    
                    $
                    53,960,243%
      of sales
                    
                    
                    90
                    
                    
                    
                    10
                    
                    
                    
                    100
 
 22.  Quarterly
Data - Unaudited
 
 The
following table sets forth certain information regarding the Company’s results
of operations for each full quarter within the fiscal years ended June 30,
2009 and 2008:
 
 Quarter EndedJune 30,
                  
                  
                  March 31,
                  
                  
                  December 31,
                  
                  
                  September 30,Fiscal
      2009:Revenues
                  
                  $
                  25,734,034
                  
                  
                  $
                  7,623,209
                  
                  
                  $
                  17,573,959
                  
                  
                  $
                  25,350,419Gross
      profit/(loss)
                  
                  
                  2,310,244
                  
                  
                  
                  (1,982,043
                  )
                  
                  
                  3,451,337
                  
                  
                  
                  3,952,658Income/(loss)
      from continuing operations before income tax
                  
                  
                  2,239,299
                  
                  
                  
                  (3,036,649
                  )
                  
                  
                  (2,293,859
                  )
                  
                  
                  3,046,355Net
      income/(loss)
                  
                  
                  2,209,362
                  
                  
                  
                  (3,518,453
                  )
                  
                  
                  (1,974,981
                  )
                  
                  
                  2,875,734Basic
      earnings/(loss) per share
                  
                  $
                  0.05
                  
                  
                  $
                  (0.08
                  )
                  
                  $
                  (0.04
                  )
                  
                  $
                  0.06Diluted
      earnings/(loss) per share
                  
                  $
                  0.05
                  
                  
                  $
                  (0.08
                  )
                  
                  $
                  (0.04
                  )
                  
                  $
                  0.06Fiscal
      2008:Revenues
                  
                  $
                  28,550,266
                  
                  
                  $
                  18,773,504
                  
                  
                  $
                  13,228,321
                  
                  
                  $
                  27,187,235Gross
      profit
                  
                  
                  5,481,438
                  
                  
                  
                  5,374,494
                  
                  
                  
                  4,699,469
                  
                  
                  
                  6,942,100Income
      from continuing operations before income tax
                  
                  
                  5,594,188
                  
                  
                  
                  4,181,523
                  
                  
                  
                  4,097,320
                  
                  
                  
                  5,282,403Net
      income
                  
                  
                  5,618,054
                  
                  
                  
                  3,637,900
                  
                  
                  
                  3,486,451
                  
                  
                  
                  5,840,706Basic
      earnings per share
                  
                  $
                  0.12
                  
                  
                  $
                  0.08
                  
                  
                  $
                  0.08
                  
                  
                  $
                  0.16Diluted
      earnings per share
                  
                  $
                  0.12
                  
                  
                  $
                  0.08
                  
                  
                  $
                  0.08
                  
                  
                  $
                  0.15
  F-25
  China
Precision Steel, Inc. and Subsidiaries
 Notes
to the Consolidated Financial Statements
 
 Earnings
per share amounts for each quarter are required to be computed independently. As
a result, their sum may not equal the basic and diluted earnings per share for
the year.
 
 23.  Recent
Accounting Pronouncements
 
 FASB
recently issued the following standards which the Company reviewed to determine
the potential impact on our financial statements upon adoption.
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) will change the accounting
for business combinations. Under SFAS No. 141(R), an acquiring entity will
be required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited exceptions. SFAS
No. 141(R) will change the accounting treatment and disclosure for certain
specific items in a business combination. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. SFAS No. 141(R) will impact the Company in the event of
any future acquisition.
  In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51” (“SFAS No. 160”). SFAS No. 160 establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years
beginning on or after December 15, 2008. The Company does not believe that
SFAS No. 160 will have a material impact on its consolidated financial
statements.
  In April
2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of
the Useful Life of Intangible Assets” (“FAS 142-3”), which amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
“Goodwill and Other Intangible Assets” (“SFAS No. 142”).  The intent
of this FSP is to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected cash
flows used to measure the fair value of the asset under SFAS No. 141(R),
“Business Combinations,” and other U.S. generally accepted accounting
principles.  This FSP is effective for fiscal years beginning after
December 15, 2008 (the Company’s fiscal year 2010), and interim periods
within those fiscal years.  The Company does not believe the adoption
of FSP 142-3 will have a material impact on the Company’s consolidated financial
position, results of operations and cash flows.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles" (“SFAS No. 162”).  This statement identifies
the sources of accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements of
non-governmental entities that are presented in conformity with US GAAP. The
provisions of SFAS No. 162 become effective 60 days following the SEC's approval
of the amendment to AU Section 411, "The Meaning of Presents Fairly in
Conformity with Generally Accepted Accounting Principles" by the Public Company
Accounting Oversight Board.  The adoption of this statement is not
expected to have a material effect on the Company’s future reported financial
position or results of operations.
 
 In May
2008, the FASB issued FASB Statement No. 163, “Accounting for Financial
Guarantee Insurance Contracts” (“FASB No. 163”). The new standard clarifies how
FASB Statement No. 60, “Accounting and Reporting by Insurance Enterprises”,
applies to financial guarantee insurance contracts issued by insurance
enterprises, including the recognition and measurement of premium revenue and
claim liabilities. It also requires expanded disclosures about financial
guarantee insurance contracts. FASB No. 163 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and all
interim periods within those fiscal years, except for disclosures about the
insurance enterprise’s risk-management activities, which are effective the first
period (including interim periods) beginning after May 23, 2008. Except for the
required disclosures, earlier application is not permitted. The standard is not
applicable to this Company.
  F-26
  China
Precision Steel, Inc. and Subsidiaries
 Notes
to the Consolidated Financial Statements
 
 In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active” (“FAS 157-3”).
This FSP clarifies the application of FASB Statement No. 157, “FairValueMeasurements”, in a market that is not
active and provides an example to illustrate key considerations in determining
the fair value of a financial asset when the market for that financial asset is
not active. FAS 157-3 was effective upon issuance. The adoption of FAS 157-3
will not impact our consolidated financial statements in any material
respect.
 
 In
December 2008, the FASB issued FSP No. FAS 132 (R)-1,“Employers’
Disclosures about Postretirement Benefit Plan Assets, an amendment of FASB
Statement No. 132” (revised 2003) ("FSP No. 132 (R)-1"). It provides guidance on
an employer’s disclosures about plan assets, including: how investment
allocation decisions are made and factors that are pertinent to an understanding
of investment policies and strategies; the major categories of plan assets; the
inputs and valuation techniques used to measure the fair value of plan assets;
the effect of fair value measurements using significant unobservable inputs
(level 3) on changes in plan assets for the period, and significant
concentrations of risks within plan assets. FSP 132 (R)-1 is effective for
fiscal years ending after December 15, 2009. We are currently assessing the
potential impact that adoption of this standard may have on our financial
statements.
  In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments”. It requires the fair
value for all financial instruments within the scope of SFAS No. 107,
“Disclosures about Fair Value of Financial Instruments” ("SFAS No. 107"), to be
disclosed in the interim periods as well as in annual financial
statements.  This standard is effective for the quarter ending after
June 15, 2009.  We are currently assessing the potential impact that
adoption of this standard may have on our financial statements.
  In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly”. It clarifies the objective and
method of fair value measurement even when there has been a significant decrease
in market activity for the asset being measured. This standard is effective for
the quarter ending after June 15, 2009. We are currently assessing the
potential impact that adoption of this standard may have on our financial
statements.
 
 In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation
of Other-Than-Temporary Impairments”. The objective of an other-than-temporary
impairment analysis under existing U.S. GAAP is to determine whether the holder
of an investment in a debt or equity security for which changes in fair value
are not regularly recognized in earnings (such as securities classified as
held-to-maturity or available-for-sale) should recognize a loss in earnings when
the investment is impaired. An investment is impaired if the fair value of the
investment is less than its amortized cost basis. This FSP amends the
other-than-temporary impairment guidance in U.S. GAAP for debt securities to
make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements. This FSP does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities. We are currently assessing the potential impact that adoption of
this standard may have on our financial statements.
 
 In May
2009, the FASB issued SFAS No. 165, “SubsequentEvents”, which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. We have adopted the provisions of
SFAS No. 165, which became effective for interim and annual reporting
periods ending after June 15, 2009.
  F-27
  China
Precision Steel, Inc. and Subsidiaries
 Notes
to the Consolidated Financial Statements
 
 In
June 2009, the FASB issued SFAS No. 167, “Amendments to FASB
Interpretation No. 46(R)”, which amends FASB
Interpretation No. 46 (revised December 2003) to address the
elimination of the concept of a qualifying special purpose entity. SFAS No. 167
also replaces the quantitative-based risks and rewards calculation for
determining which enterprise has a controlling financial interest in a variable
interest entity with an approach focused on identifying which enterprise has the
power to direct the activities of a variable interest entity and the obligation
to absorb losses of the entity or the right to receive benefits from the entity.
Additionally, SFAS No. 167 provides more timely and useful information about an
enterprise’s involvement with a variable interest entity. SFAS No. 167 will
become effective in July 2010. The Company is currently evaluating whether this
standard will have an impact on the Company consolidated financial
statements.
 
 In
June 2009, the FASB issued SFAS No. 168, “The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles”. SFAS No. 168 will become the single source of authoritative
nongovernmental GAAP, superseding existing FASB, American Institute of Certified
Public Accountants (AICPA), EITF, and related accounting literature. SFAS No.
168 reorganizes the thousands of GAAP pronouncements into roughly 90 accounting
topics and displays them using a consistent structure. Also included is relevant
SEC guidance organized using the same topical structure in separate sections.
SFAS No. 168 will be effective for financial statements issued for reporting
periods that end after September 15, 2009. This will have an impact on the
Company’s financial statement disclosures since all future references to
authoritative accounting literature will be referenced in accordance with SFAS
No. 168.
 
 24.  Subsequent
Events
 
 Management
has evaluated subsequent events from June 30, 2009 to September 26, 2009, the
date which our financial statements have been issued and were available to be
issued, and has concluded that no material subsequent events have occurred since
June 30, 2009 that required recognition or disclosure in our current year
financial statements.  Subsequent events that may occur after
September 26, 2009 have not been evaluated.
  F-28
 
 EXHIBIT
INDEX
 
 Exhibit No.
                
                Description3.1
                
                Certificate
      of Incorporation of the Company (incorporated herein by reference to Annex
      2 to the Company’s Definitive Proxy Statement filed on October 16,
      2007)3.2
                
                Bylaws
      of the Company (incorporated herein by reference to Annex 3 to the
      Company’s Definitive Proxy Statement filed on October 16,
      2007)4.1
                
                Form
      of Warrant, dated November 6, 2007 (incorporated herein by reference to
      Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November
      1, 2007)4.2
                
                Warrant,
      dated November 6, 2007, issued to Roth Capital Partners LLC (incorporated
      herein by reference Exhibit 4.2 to the Company’s Current Report on Form
      8-K filed on November 1, 2007)4.3
                
                Form
      of Warrant, dated February 2007 (incorporated herein by reference to
      Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on February
      22, 2007)4.4
                
                Warrant,
      dated February 22, 2007, issued to Belmont Capital Group Limited
      (incorporated herein by reference Exhibit 4.2 to the Company’s Current
      Report on Form 8-K filed on February 22, 2007)4.5
                
                Warrant,
      dated February 22, 2007, issued to CCG Elite Investor Relations
      (incorporated herein by reference to Exhibit 4.3 to the Company’s Current
      Report on Form 8-K filed on February 22, 2007)10.21
                
                Form
      of Subscription Agreement, dated November 1, 2007 (incorporated herein by
      reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
      filed on November 1, 2007)10.22
                
                Form
      of Placement Agency Agreement, dated October 31, 2007 (incorporated herein
      by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
      filed on November 1, 2007)10.23
                
                Form
      of Stock Purchase Agreement, dated February 16, 2007 (incorporated herein
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
      filed on February 22, 2007)10.24
                
                Form
      of Limited Standstill Agreement (incorporated herein by reference to
      Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February
      22, 2007)10.25
                
                Redemption
      Agreement, dated December 28, 2006 (incorporated herein by reference to
      Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January
      4, 2007)10.26
                
                Tax
      Indemnity Agreement, dated December 28, 2006 (incorporated herein by
      reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
      filed on January 4, 2007)10.27
                
                Equipment
      Mortgage Agreement between Chengtong and Raiffeisen Zentralbank Österreich
      AG, dated January 12, 2005 (incorporated herein by reference to Exhibit
      10.4 to the Company’s Current Report on Form 8-K filed on January 4,
      2007)10.28
                
                Mortgage
      Agreement on Immovables between Shanghai Tuorong Precision Strip Company
      Limited and Raisffesien Zentralbank Öesterreich AG, dated January 12, 2005
      (incorporated herein by reference to Exhibit 10.5 to the Company’s Current
      Report on Form 8-K filed on January 4, 2007)10.29
                
                Letter
      of Offer between Shanghai Chengtong Precision Strip CompanyLimited and
      Raiffeisen Zentralbank Österreich AG, dated October 14, 2004 (incorporated
      herein by reference to Exhibit 10.6 to the Company’s Current Report on
      Form 8-K filed on January 4, 2007)10.30
                
                Amendment
      No. 1 to Letter of Offer between Shanghai Chengtong Precision Strip
      CompanyLimited and Raiffeisen Zentralbank Österreich AG, dated December
      28, 2004 (incorporated herein by reference to Exhibit 10.7 to the
      Company’s Current Report on Form 8-K filed on January 4,
    2007)
  
 
 Exhibit No.
                
                Description10.31
                
                Amendment
      No. 2 to Letter of Offer between Shanghai Chengtong Precision Strip
      CompanyLimited and Raiffeisen Zentralbank Österreich AG, dated May 10,
      2005 (incorporated herein by reference to Exhibit 10.8 to the Company’s
      Current Report on Form 8-K filed on January 4, 2007)10.32
                
                Amendment
      No. 3 to Letter of Offer between Shanghai Chengtong Precision Strip
      CompanyLimited and Raiffeisen Zentralbank Österreich AG,  dated July
      26, 2005 (incorporated herein by reference to Exhibit 10.9 to the
      Company’s Current Report on Form 8-K filed on January 4,
    2007)10.33
                
                Deed
      of Release, dated February 13, 2007, from Wo Hing Li, in favor of the
      Company, Partner Success Holdings Limited and Shanghai Chengtong Precision
      Strip Company Limited (incorporated herein by reference to Exhibit 10.2 to
      the Company’s Current Report on Form 8-K filed on February 13,
      2007)10.34
                
                Debt
      Reduction Agreement, dated February 13, 2007, by and among the Company, Wo
      Hing Li and Partner Success Holdings Limited (incorporated herein by
      reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
      filed on February 13, 2007)10.35
                
                Amendment
      to the Debt Reduction Agreement, dated February 20, 2007, by and among the
      Company, Wo Hing Li and Partner Success Holdings Limited (incorporated
      herein by reference to Exhibit 10.4 to the Company’s Current Report on
      Form 8-K filed on February 22, 2007)10.36
                
                China
      Precision Steel, Inc. 2006 Omnibus Long Term Incentive Plan (incorporated
      herein by reference to Exhibit 10.3 to the Company’s Current Report on
      Form 8-K filed on January 4, 2007)10.37
                
                2006
      Director Stock Plan, dated March 1, 2006 (incorporated herein by reference
      to Annex 3 to the Company’s Definitive Proxy Statement filed on November
      22, 2006)10.38
                
                Executive
      Employment Agreement, dated as of January 1, 2007, between the Company and
      Wo Hing Li (incorporated herein by reference to Exhibit 10.1 to the
      Company’s Quarterly Report on Form 10-Q filed on May 11,
    2009)10.39
                
                Executive
      Employment Agreement, dated as of January 1, 2007, between the Company and
      Leada Tak Tai Li (incorporated herein by reference to Exhibit 10.2 to the
      Company’s Quarterly Report on Form 10-Q filed on May 11,
    2009)10.40
                
                Executive
      Employment Agreement, dated as of January 1, 2007, between the Company and
      Hai Sheng Chen (incorporated herein by reference to Exhibit 10.3 to the
      Company’s Quarterly Report on Form 10-Q filed on May 11,
    2009)21
                
                Subsidiaries
      of the Registrant (incorporated herein by reference to Exhibit 21 to the
      Company’s Annual Report on Form 10-K filed on September 15,
      2008)23.1*
                
                Consent
      of Murrell, Hall, McIntosh & Co., PLLP23.2*
                
                Consent
      of Moore Stephens31.1*
                
                Certifications
      of Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2*
                
                Certifications
      of Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1*
                
                Certification
      of Chief Executive Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2*
                
                Certification
      of Chief Financial Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
 
 *Filed
herewith.