**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-K/A**


(Amendment
      No. 1)


**** **(Mark
      one)**




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




**For
      the fiscal year ended June 30, 2007**


**OR**




**o**
            **TRANSITION REPORT PURSUANT
              TO SECTION
              13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)**





**For
      the transition period from __________ to __________**




**Commission
      File Number 000-23039**




**CHINA
      PRECISION STEEL, INC.**


(Exact
      name of registrant as specified in its charter)


**Colorado**
              
              **14-1623047**(State
                  or other jurisdiction of
              
              (I.R.S.
                  Employerincorporation
                  or organization)
              
              Identification
                  No.)







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





**+1-852-8543-8223**(Registrant’s
                telephone number, including area
                code)




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


**Name
                    of Exchange****Title
                      of
                      Class**
                
                **On
                    Which Registered****Common
                    Stock, par value $.001**
                
                **The
                    NASDAQ Capital
                    Market**





**Securities
      registered pursuant to Section 12(g) of the 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 o No þ




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 o No þ




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









Indicate
      by check mark 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 attachment to
      this Form 10-K. o




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




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





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




The
      aggregate market value of the 5,585,256 shares of voting stock and non-voting
      common stock held by non-affiliates of the registrant as of December 31, 2006
      was $60,041,502, based upon the last sale price of the registrant’s common stock
      on December 29, 2006 (the last business day of the registrant’s most recently
      completed second fiscal quarter) of $10.75 per share, as reported by the NASDAQ
      Stock Market, Inc. On September 30, 2007, there were 37,378,143 shares of common
      stock, par value $.001 per share, issued and outstanding and no shares of
      preferred stock, par value $.001 per share, issued and outstanding.




**Annual
      Meeting and Record Dates**




Our
      Annual Meeting of Shareholders will be held on Monday, November 12, 2007 at
      10:30 a.m., Eastern Time, at the offices of Kirkpatrick & Lockhart Preston
      Gates Ellis LLP, 599 Lexington Avenue, New York, New York 10022. The record
      date
      for the Annual Meeting is September 28, 2007 and all shareholders of record
      at
      the close of business on that day will be entitled to vote at the Annual
      Meeting.




**Our
      Website**




Our
      Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
      on
      Form 8-K and amendments to those reports filed or furnished pursuant to Section
      13(a) or 15(d), as well as reports filed or furnished pursuant to Section 16,
      of
      the Securities Exchange Act of 1934 are available through our website
      (www.chinaprecisionsteelinc.com **** under
      the
“Investor Relations” caption) free of charge as soon as reasonably practicable
      after we electronically file such material with, or furnish it to, the
      Securities and Exchange Commission (“SEC”).




Information
      relating to corporate governance at China Precision Steel, Inc., including
      our
      Code of Conduct and information concerning our executive officers, directors
      and
      Board committees (including committee charters), and transactions in our
      securities by directors and officers, is available on or through our website
      at
      www.chinaprecisionsteelinc.com **** under
      the
“Corporate Governance” caption in the “Investor Relations” section.




We
      are
      not including any information on our website as part of, or incorporating it
      by
      reference into, our Form 10-K.







**DOCUMENTS
      INCORPORATED BY REFERENCE** .


Portions
      of the registrant’s Proxy Statement for its 2007 Annual Meeting are incorporated
      by reference into Part III herein.








**CHINA
      PRECISION STEEL, INC.**




**FORM
      10-K**


**FOR
      THE FISCAL YEAR ENDED JUNE 30, 2007**




**TABLE
      OF CONTENTS**


**PAGE****PART
                I**ITEM
                1.
            BUSINESS
            4ITEM
                1A.
            RISK
                FACTORS
            17ITEM
                1B.
            UNRESOLVED
                STAFF COMMENTS
            34ITEM
                2.
            PROPERTIES
            34ITEM
                3.
            LEGAL
                PROCEEDINGS
            34ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            34**PART
                II**ITEM
                5.
            MARKET
                FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
                PURCHASES OF EQUITY SECURITIES
            35ITEM
                6.
            SELECTED
                FINANCIAL DATA
            38ITEM
                7.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS
            39ITEM
                7A.
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            51ITEM
                8.
            FINANCIAL
                STATEMENTS AND SUPPLEMENTARY DATA
            54ITEM
                9.
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE
            81ITEM
                9A.
            CONTROLS
                AND PROCEDURES
            81ITEM
                9B.
            OTHER
                INFORMATION
            81**PART
                III**ITEM
                10.
            DIRECTORS,
                EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
            82ITEM
                11.
            EXECUTIVE
                COMPENSATION
            82ITEM
                12.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS
            82ITEM
                13.
            CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
            82ITEM
                14
            PRINCIPAL
                ACCOUNTING FEES AND SERVICES
            82**PART
                IV**ITEM
                15
            EXHIBITS
                AND FINANCIAL STATEMENT SCHEDULES
            83





**SIGNATURES****EXHIBITS**




1


**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.  2
  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.
  3
 **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
        subsidiary, Shanghai Chengtong Precision Strip Co., Limited, or Chengtong.
        Most
        of our sales are made domestically in China; however, during fiscal 2007,
        we began exporting our cold-rolled steel products to Nigeria, Thailand,
        Indonesia and the Philippines. 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 of medium and high carbon hot-rolled steel strips not
        exceeding 7.5 mm fineness. Our process puts hot-rolled de-scaled (pickled)
        steel
        coils through a cold-rolling mill, utilizing our patented systems and high
        technology reduction processing procedures, to make steel coils and sheets
        in
        customized thicknesses, according to customer specifications. Currently,
        our
        specialty precision products are mainly used in the manufacture of automobile
        parts and components, plane friction discs, appliances, food packaging
        materials, saw blades, textile needles, microelectronics, packing and
        containers.
  As
        of
        June 30, 2007, we had an annual production capacity of approximately 115,000
        metric tons. **** We
        have
        been increasing our production capacity for cold-rolled precision steel as
        demand in China outpaces domestic supply. We began production with our second
        cold-rolled mill, which has a production design capacity of 150,000 metric
        tons,
        in October 2006, and we plan to commence construction of our third mill in
        2008,
        which has an equivalent design capacity. Each mill takes approximately three
        to
        four years to reach full operating capacity. As of June 30,2007, the second
        mill
        was operating at 30% capacity and is expected to reach 50% capacity by the
        end
        of calendar year 2007.
  Our
        Directors believe that the increased annual production capacity of approximately
        300,000 metric tons from the second and third mills will be fully utilized
        within three to four years after commencement of operation. These facilities
        will focus on the production of high carbon, high strength cold-rolled steel
        products and the production of more complex precision steel products that
        cannot
        be manufactured in our current rolling mill. Our first rolling mill, which
        has
        an operating capacity of 70,000 metric tons, will continue to primarily
        manufacture low carbon cold-rolled steel products.
  During
        the fiscal years ended June 30, 2007, 2006 and 2005, we earned net income
before
        discontinued operations of $7,472,661, $7,514,101 and $6,366,411, respectively.
        The discontinued operations represent those of OraLabs, Inc. which was spun
        off
        from the Company in December of 2006. At June 30, 2007, we had total
        assets of $82,157,566. Chengtong currently has approximately 280 employees,
        including 30 senior management and technical staff members, and leases 20,000
        square meters of production facilities in Jiading District, Shanghai, on
        four
        acres of property.
  4
  **Corporate
        History and Structure**
  We
        are a
        Colorado company and 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 Partner Success Holdings Limited, or PSHL,
        a
        British Virgin Islands business 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.
  Our
        business is conducted principally through Chengtong, in Shanghai, China.
        Chengtong is a wholly foreign owned enterprise, or WFOE, under Chinese law.
  Our
        corporate headquarters are located at 8 th Floor,
        Teda Building, 87 Wing Lok Street, Sheung Wan, Hong Kong, and our telephone
        number is (011) 852-2543-8223. Our agent for service of process in the United
        States is The Corporation Company, 1675 Broadway, Suite 1200, Denver, Colorado
        80202. Our common stock is listed on The NASDAQ Capital Market under the
        symbol
“CPSL.” Although we maintain a website at www.chinaprecisionsteelinc.com ,
        we do
        not intend that information available on our website be incorporated into
        this
        filing. As used herein, the “Group” refers to the Company, PSHL and Chengtong on
        a consolidated basis.
  **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:
  **·**
            *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, saw blades, textile needles, microelectronics,
                packing and containers, 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.
                Our lower cost base allows us to sell our products at an average
                of 10%
                below our international competitors with shorter delivery time and
                in
                accordance with customer specifications. 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.  5
  ·
            *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 26.4% in 2007. The
                average
                gross margin of our high carbon steel products are 20-40% and 10-30%
                for
                our low carbon steel products. We will provide additional services
                such as
                heat treatment and cutting 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 passed directly to our
                customers.  ·
            *Expand
                Manufacturing Capacity*.
                We will increase our production capacity by adding a third cold-rolled
                mill with a design capacity of 150,000 metric tons in 2008. This
                will
                increase our total production design capacity to approximately 400,000
                metric tons. The rolling mill installed in 2006, together with the
                third
                mill, will produce high carbon, high strength, cold-rolled steel
                products
                and more complex precision steel products.  ·
            *Compete
                Internationally*.We
                intend to expand our exports to compete in the international marketplace.
                We believe 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. In addition, we are not
                aware
                of any other company that currently manufactures high strength and
                ultra-thin cold-rolled steel with a width of 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
                Chief Executive Officer, Wo Hing Li, and the General Manager of Chengtong,
                Hai Sheng Chen. Their experience in business operations and in Chinese
                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 International Iron and Steel Institute, China is the largest steel
        producing country, producing approximately one-third of the world’s steel. In
        2006, China produced 418.8 million metric tons of steel, up 17.7% from 2005.
        World Steel Dynamics estimates that China’s steel demand for 2007 will be 429
        million metric tons and will reach 732 million metric tons by 2017, while
        global
        steel demand is projected to be 1,248 million metric tons and 1,829 million
        metric tons, respectively.
  China
        has
        increased its steel exports from 7 million metric tons in 2003 to 43 million
        metric tons in 2006, making it the number one ranked steel exporter globally.
        Even though the amount exported accounts for only 9% of China’s total 2006
        production, Chinese steel exports accounted for 17% of the global steel trade
        in
        2006. Notably, while China is a net exporter of crude steel, it is a net
        importer of higher value precision steel and ultra-thin steel products such
        as
        those produced by Chengtong.
  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 sheets). 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
        sheets.
        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.
  6
  Based
        upon estimates from World Steel Dynamics, we believe that the Chinese market
        for
        cold-rolled steel coil and sheets will be approximately 58 million metric
        tons
        in 2007 and increasing to 78 million metric tons by 2010. During the same
        period, domestic capacity is estimated to increase from 56 million metric
        tons
        in 2007 to 84.7 million metric tons by 2010. Shortfalls in capacity have
        been
        filled to date by imports principally from Korea, Japan, the European Union
        and
        the United States. However, China is expected to have excess domestic capacity
        beginning in 2008 and, as a result, is expected to increase its exports of
        these
        products.
  The
        Chinese government has historically provided a subsidy by means of a 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. A 5% rebate
        applies to 76 products including cold-rolled, galvanized, specialty and
        stainless steel. The rebate has been eliminated for 83 products, including
        hot-rolled, thin plate, steel wire, section, bar and H-beam. Most Chinese
        steel
        exporters have passed on the additional tax to their customers, with little
        adverse impact due to the overall favorable cost structure for Chinese steel
        products.
  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. The Company believes 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 three years, Chengtong believes
        that it has begun to develop and establish itself as a nationally recognized
        brand in China. Despite having exported some 7,158 tons of precision steel
        products to Thailand and the Philippines during the year ended June 30, 2007,
        Chengtong is not yet an internationally recognized brand for specialty precision
        steel products.
  As
        of
        June 30, 2007, Chengtong produced approximately 40 high precision steel products
        covering a range of over one hundred specifications. The Company currently
        produces high strength and ultra-thin cold-rolled precision steel coils and
        sheets with reduced thickness ranging from 7.5 mm to 0.03 mm. The Company
        also
        provides heat treatment and cutting and slitting of medium and high carbon
        hot-rolled steel strips not exceeding 7.5 mm fineness. Chengtong’s precision
        steel products and services can be categorized into four major
        categories:
  **Categories**
              
              **Uses**
              
              **Thickness**1.
                  Low carbon steel (cold-rolled, acid wash)
              
              Food
                  packaging, dry batteries, ceiling coverings, electronic devices,
                  kitchen
                  tools
              
              0.03-7.5mm2.
                  Medium and high carbon steel (cold-rolled, hard-rolled)
              
              Automobile
                  components, grinding pieces, saw blades, weaving needles, spring
                  and
                  mechanism components
              
              0.03-7.5mm3.
                  Chrome stainless steel
              
              Kitchen
                  tools, automobile components
              
              0.5-7.5mm4.
                  Steel services
              
              Heat
                  treatment of hot-rolled steel coils; cutting and slitting
  7
  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 proprietary patented technology process. The
        finished products have a reduced thickness ranging from 7.5 mm to 0.03 mm,
        or approximately one-third as thin as the average strand of human
        hair, and a width between 1000 mm to 1400 mm. We also provide heat treatment
        and
        cutting and slitting services for medium and 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 strength
        and ultra-thin cold-rolled steel with a width of or exceeding 1400 mm.
  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), food packaging materials,
        electric motors, microelectronics and 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, and has low cost and 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.
  ***Sales
        and Marketing***
  Our
        high
        precision steel products are sold directly to the end-users in various parts
        of
        China. Due to the nature of the industry, 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.
  All
        of
        Chengtong’s production is based on confirmed sales orders. Generally, an initial
        deposit (approximately 30% of the aggregate contracted sales amount) is pre-paid
        when the contract is signed. Chengtong has approximately 200 major customers
        who
        are primarily located in East China. As a domestic manufacturer, Chengtong’s
        location in Shanghai is particularly advantageous for meeting with customers
        to
        discuss product design. 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 expanding into the lucrative markets in Guangdong
        Province, where there is a heavy concentration of light industries, and into
        the
        Northeastern region of China, where the automotive industries are
        concentrated.
  8
  Below
        is
        a list of Chengtong’s principal customers during the years ended June 30, 2007,
        and 2006:
  ***Principal
                  Customers***
              
              ***2007***
              
              ***%
                  to sales***
              
              ***2006***
              
              ***%
                  to sales***Shanghai
                  Ruixuefeng Metals Co. Ltd
              
              
              12,192,219
              
              
              23
              
              
              4,634,521
              
              
              13Shanghai
                  Changshuo Steel Company Ltd
              
              
              5,428,110
              
              
              10
              
              
              -*
              
              
              -*China
                  Railway Materials Shanghai Company
              
              
              3,498,770
              
              
              6
              
              
              -*
              
              
              -*Hangzhou
                  Relian Company Limited
              
              
              3,323,981
              
              
              6
              
              
              -*
              
              
              -*Sinosteel
                  Company Limited
              
              
              3,251,450
              
              
              6
              
              
              -*
              
              
              -*Jiangsu
                  Kaiteer Industrial Stove Co. Ltd
              
              
              -*
              
              
              -*
              
              
              5,212,171
              
              
              15Shanghai
                  Yiyi Industrial Co. Ltd
              
              
              -*
              
              
              -*
              
              
              4,305,918
              
              
              12Ningbo
                  Eco and Tech Shuntong Trading Co.
              
              
              -*
              
              
              -*
              
              
              2,042,191
              
              
              6Shanghai
                  Bayou Industrial Co. Ltd
              
              
              -*
              
              
              -*
              
              
              1,555,204
              
              
              427,694,530
              
              
              51
              
              
              17,750,005
              
              
              51***Others***
              
              
              26,265,713
              
              
              49
              
              
              17,131,136
              
              
              49**Total**
              
              
              53,960,243
              
              
              100
              
              
              34,881,141
              
              
              100
  **
        Not
        major customers for the relevant years*
  **Production
        Facilities**
  *Rolling
        Mills* *.* As
        of
        June 30, 2007, Chengtong had an annual production design capacity of
        approximately 250,000 metric tons, comprised of:
  ·
            one
                1100 mm 12-high cold-rolled reversing mill, with a design capacity
                of
                100,000 metric tons, and  ·
            one
                1400 mm 12-high cold-rolling reversing mill, with a design capacity
                of
                150,000 metric tons.  Construction
        of a third mill, a 1700 mm 12-high cold-rolling reversing mill, is expected
        to
        commence in 2008. This mill will have a design capacity of 150,000 metric
        tons,
        increasing our total production design capacity to approximately 400,000
        metric
        tons. The production facilities for the 1400 mm rolling mill were completed
        in
        August 2006 and added approximately 10,000 square meters of production area.
        The
        production facilities relating to the 1400 mm and 1700 mm mills will primarily
        focus on high carbon, high strength cold-rolled steel products and more complex
        precision steel products that cannot be manufactured in our 1100 mm rolling
        mill, which will primarily manufacture low carbon cold-rolled steel products.
  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 metric tons. However, it is now operating at its
        full
        production capacity of 70,000 metric tons since it is manufacturing products
        that are more complex than those contemplated by the original design. The
        1400
        mm rolling mill, which began production in October 2006, was operating at
        30% of
        its 150,000 metric ton design capacity at June 30, 2007 and is expected to
        reach
        its full operating capacity by the end of calendar year 2009.
  9
  *Hydrogen
        Annealing Furnace* .
        Our
        annealing furnace is the most advanced steel annealing furnace currently
        in
        China and automatically controls the complete annealing process. The furnace
        uses pure hydrogen as protective gas to make the steel surface very 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 machine, a 1000 mm cutting and slitting line and a 1200 mm tension
        leveller.
 
 **Raw
        Materials**
 
 We
        are
        not dependent on any one single supplier for supply of hot-rolled de-scaled
        (pickled) coils and steel sheet. Several steelmakers supply hot-rolled de-scaled
        (pickled) coils and steel sheets to Chengtong. High carbon steel materials
        are
        imported from Korea. Chengtong’s principal supplier for low carbon materials is
        Hangzhou Relian Company Limited. The principal suppliers of low carbon
        steel to Chengtong as of June 30, 2007 are as
        follows:
 
 ***Suppliers***
              
              ***2007***
              
              ***2006***Hangzhou
                  Relian Company Limited
              
              
              8,598,117
              
              
              -*Shanghai
                  Pinyun Steel Co., Limited
              
              
              6,355,445
              
              
              -*BaoSteel
                  Trading Co. Ltd
              
              
              4,633,054
              
              
              7,138,845Shanghai
                  Changshuo Steel Company Ltd
              
              
              3,408,301
              
              
              -*Shanghai
                  Bao Gang Dev Co. Ltd
              
              
              2,917,010
              
              
              1,389,221Ningbo
                  Dongming Co. Ltd
              
              
              -*
              
              
              5,902,211Shangahi
                  Baixing Co. Ltd
              
              
              -*
              
              
              1,642,024Shanghai
                  Tianxing Co. Ltd
              
              
              -*
              
              
              1,025,94625,911,927
              
              
              17,098,247**Total
                  direct materials consumed**
              
              
              33,809,809
              
              
              21,417,919%
                  of major suppliers to total consumption
              
              
              77
              %
              
              80
              %
 
  Based
        upon information obtained by us from the CMI, in 2006 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
        in 2005 and 2006. The CMI website may be viewed in English and the website
        URL
        is www.metal.net.cn. As of June 1, 2007, there is a Chinese export tax of
        5% on
        exports of raw materials, including the hot-rolled de-scaled coils and steel
        sheets used by Chengtong. This has reduced the price of domestic steel as
        supply
        has increased.
  The
        prices of steel rolls are very competitive, very volatile and dependent on
        supply and demand. To provide some protection from the pressure and volatility
        of the market (i.e., to minimize the amount of purchases that Chengtong must
        make at high prices during the high demand seasons), Chengtong makes bulk
        purchases after taking into account customers’ orders on hand whenever steel
        prices are considered to be lower in the market. Prices are negotiated with
        each
        order Chengtong places, enabling Chengtong to pass on price adjustments to
        its
        customers. As steel rolls have an extremely long shelf-life, obsolescence
        is not
        a major concern and Chengtong may build up its inventory during such periods
        when prices are low.
  10
  **Competition**
  Our
        business is concentrated in the niche ultra-thin cold-rolled precision steel
        and
        high-carbon, high strength cold-rolled steel and low carbon super-thin
        cold-rolled steel processing and is not in direct competition with large
        Chinese
        steelmakers such as BaoSteel Group Corporation and Maan Steel Group. China’s
        large steelmakers concentrate on the production of hot-rolled de-scaled
        (pickled) steel coils and steel sheets from iron ore imported from Brazil
        and
        Australia. Steel sheets produced by these steelmakers are then supplied as
        raw
        materials to high precision steel manufacturers, such as Chengtong, for cold
        reduction processing to the desired thickness. Cold-rolled products are then
        sold to manufacturers and other customers in the appliance and automobile
        industries.
  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. 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 1700 mm with the planned addition of
        the
        third cold-rolling mill). Consequently, Longteng’s products have different
        applications and are sold in different market segments than ours and are
        not
        considered to be direct competitors. In addition, we compete with imports
        from
        Ton Yi Industrial Corp. in Taiwan and Shinwha Special Steel Co., Limited
        in
        Korea, as well as CEW, a German steelmaker. 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. Chengtong is currently the only supplier
        of high
        carbon, high strength products with a thickness up to 7.5 mm. We are not
        aware
        of any other Chinese manufacturer processing high carbon cold-rolled steel
        products with this specification.
  The
        low
        carbon precision cold-rolled steel products in the thickness range between
        0.1
        to 0.2 mm is 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 company currently competing in
        this
        specific low carbon segment in the global market that is from a non-Japanese
        background.
  **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 precedents. 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.
  11
  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 on one hand
        while incentives are given to other sectors.
  *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 (“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.
  *Environment* .
        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.
  12
  We
        believe that the current production and operating activities of Chengtong
        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, Chengtong’s 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.
  *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, respectively. 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.
  13
  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.
 
 *Enterprise
        Income Tax* .
        The
        Enterprise Income Tax Law was passed on March 16, 2007, and becomes effective
        on
        January 1, 2008. The new law introduces fundamental changes to the Chinese
        tax
        system for both domestic and foreign-owned entities. A new unified general
        income tax of 25% will be applicable to enterprises in China.
 
 Previously,
        certain entities, such as Chengtong, were entitled to preferential tax
        advantages in China, commonly referred to as “tax holidays.” Under the tax
        holiday regime, entities received a full exemption on the enterprise income
        tax
        generated in the first two years after recovery of previous losses and a
        one-half reduction of the tax rate for the next three years. Entities subject
        to
        a “tax holiday” prior to January 1, 2008, are expected to be able to retain the
        benefits of the reduced rates for the remaining term.
 
 *Labor
        Contract Law* .
        The new
        Labor Contract Law will take 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.
 
 **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 Shanghai Chengtong Precision Strip Co., Limited and
        Shanghai Te’an-Yikai Bearing Co., Limited. The patented bearing is installed in
        the Company’s existing cold-roll mill and, together with the Company’s internal
        know-how complementary to the patented bearing, the Company believes it
        addresses a number of issues associated with the bearing lubrication in
        cold-rolling and ensures smooth and effective operation of the cold-roll
        mill.
        There is no direct or indirect affiliation between the Company and Shanghai
        Te’an-Yikai Bearing Co, Limited. The Company 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 the Company has the exclusive right
        to
        the application of the technology.
  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. Chengtong also protects its 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.
  14
  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 its 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.
  **Research
        and Development**
  As
        of
        June 30, 2007, we had three experienced engineers and technicians in the
        Research and Development Department. The Research and Development Department
        focuses on the manufacturing of ultra-thin, high-strength cold-rolled steel
        strip and the advancement and improvement in manufacturing technique for
        cold-rolled steel rolls with a ratio of width to thickness at 10,000 times.
        In
        addition to the traditional research and development activities, our engineers
        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
        2008.
  **Quality
        Control**
  Following
        the accreditation of the International Organization for Standardization (“ISO”)
        Technical Standards (“TS”) 16949 on October 8, 2004, Chengtong implemented the
        Quality Handbook in October 2004. This Quality Handbook was prepared on the
        basis and standards of the ISO/TS16949 specifications and 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.
  **Taxes**
  As
        a
        wholly foreign-owned enterprise, 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 enterprise income tax to a rate of
        13.5%
        for the next 3 years. The full tax exemption for the enterprise income tax
        expired on December 31, 2005 and the right to a one-half reduction on the
        enterprise income tax will expire on December 31, 2008.
  15
  As
        discussed above under “Regulation,” the Enterprise Tax Law will take effect on
        January 1, 2008. Under this law, a unified tax of 25% will be applicable
        to most
        enterprises, including Chengtong. We believe, however, that due to the
        preferential rates to which Chengtong is currently entitled, it will not
        be
        subject to the 25% tax rate until January 1, 2009. In addition, Chengtong
        is
        reviewing the feasibility of entering into certain contractual arrangements
        prior to December 31, 2007 which are designed to extend its preferential
        tax
        treatment for an additional five years. There can be no assurance that such
        arrangements will be feasible or consummated nor, if consummated, that such
        arrangements will receive the desired preferential tax treatment.
  **Employees**
  As
        of
        June 30, 2007, we had a total of 280 employees. Our management team is comprised
        of 30 employees overseen by a General Manager and an Assistant General Manager.
        Our production employees are not subject to collective bargaining agreements.
  Each
        employee must enter into multiple employment contracts, including a
        non-competition agreement, with Chengtong 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 up to 70% of their base salary and calculated on the basis of the quality
        of the products produced and volume.
  Chengtong’s
        employees are currently not entitled to participate in our 2006 Omnibus
        Long-Term Incentive Plan. Benefits are mandated by the Chinese government
        and
        include social security, pension benefits, and medical insurance. These benefits
        are paid in full by us and equate to approximately 45% of our annual salary
        expenditures.
  **Property**
  Chengtong
        leases for $1 per month the existing 20,000 square meters of production and
        office facilities in Jiading District, Shanghai on 4 acres of property held
        by
        its wholly-owned subsidiary, Shanghai Tuorong Precision Steel Company Limited,
        which became a wholly-owned subsidiary of the Company in April 2007. There
        is no
        formal tenancy agreement between Chengtong and Tuorong Precision for this
        lease.
  16
  **ITEM
        1A. RISK FACTORS**
  ***We
        operate in a highly competitive environment in which there are numerous factors
        which can influence our business, financial position or results of operations
        and which can also cause the market value of our common stock to decline.
        Many
        of these factors are beyond our control and therefore, are difficult to predict.
        The following section sets forth what we believe to be the principal risks
        that
        could affect us, our business or our industry, and which could result in
        a
        material adverse impact on our financial results or cause the market price
        of
        our common stock to fluctuate or decline.***
  **Risks
        Relating to the Company’s Business**
  ***Steel
        consumption is cyclical and worldwide overcapacity in the steel industry
        and the
        availability of alternative products has resulted in intense competition,
        which
        may have an adverse effect on our profitability and cash
        flow.***
  Steel
        consumption is highly cyclical and generally follows general economic and
        industrial conditions both worldwide and in various smaller geographic areas.
        The steel industry has historically been characterized by excess world supply.
        This has led to substantial price decreases during periods of economic weakness,
        which have not been offset by commensurate price increases during periods
        of
        economic strength. Substitute materials are increasingly available for many
        steel products, which may further reduce demand for steel. Additional
        overcapacity or the use of alternative products could have a material adverse
        effect upon our results of operations.
  ***Rapidly
        growing demand and supply in China and other developing economies may result
        in
        additional excess worldwide capacity and falling steel prices, which could
        adversely impact our results.***
  Over
        the
        last several years steel consumption in China and other developing economies
        such as India has increased at a rapid pace. Steel companies have responded
        by
        developing plans to rapidly increase steel production capability in these
        countries and entered into long-term contracts with iron ore suppliers in
        Australia and Brazil. Steel production, especially in China, has been expanding
        rapidly and could be in excess of Chinese demand depending on continuing
        growth
        rates. Because China is now the largest worldwide steel producer, any
        significant excess in Chinese capacity could have a major impact on domestic
        and
        international steel trade and prices.
  ***Environmental
        compliance and remediation could result in substantially increased capital
        requirements and operating costs.***
  Our
        operating subsidiary, Chengtong, is subject to numerous Chinese provincial
        and
        local laws and regulations relating to the protection of the environment.
        These
        laws continue to evolve and are becoming increasingly stringent. The ultimate
        impact of complying with such laws and regulations is not always clearly
        known
        or determinable because regulations under some of these laws have not yet
        been
        promulgated or are undergoing revision. Our consolidated business and operating
        results could be materially and adversely affected if Chengtong were required
        to
        increase expenditures to comply with any new environmental regulations affecting
        its operations.
  ***We
        may require additional capital in the future and we cannot assure that capital
        will be available on reasonable terms, if at all, or on terms that would
        not
        cause substantial dilution to stockholdings.***
  The
        development of high quality specialty precision steel requires substantial
        funds. Sourcing external capital funds for product development and requisite
        capital expenditures are key factors that have and may in the future constrain
        our growth, production capability and profitability. To achieve the next
        phase
        of our corporate growth, increased production capacity, successful product
        development and additional external capital will be necessary. There can
        be no
        assurance that such capital will be available in sufficient amounts or on
        terms
        acceptable to us, if at all. Any sale of a substantial number of additional
        shares of common stock or securities convertible into common stock will cause
        dilution to the holders of our common stock and could also cause the market
        price of our common stock to decline.
  17
  ***We
        face significant competition from competitors who have greater resources
        than we
        do, and we may not have the resources necessary to successfully compete with
        them.***
  We
        are
        one of a few manufacturers of specialty precision steel products in China.
        Differences in the type and nature of the specialty precision steel products
        in
        China’s steel industry are relatively small, and, coupled with intense
        competition from international and local suppliers, to a limited extent,
        consumers’ demand can be price sensitive. Competitors may increase their market
        share through pricing strategies that adversely impact our business. Our
        business is in an industry that is becoming increasingly competitive and
        capital
        intensive, and competition comes from manufacturers located in China as well
        as
        from international competition. Our competitors may have financial resources,
        staff and facilities substantially greater than ours and we may be at a
        competitive disadvantage compared with larger companies.
  ***We
        produce a limited number of products and may not be able to respond quickly
        to
        significant changes in the market or new market
        entrants.***
  Cold-rolled
        specialty precision steel is a relatively new industry in China; Chinese
        manufacturers of durable goods previously relied solely on imports from Japan,
        Korea, the European Union and the United States. We believe the average quality
        and standards of products of China’s high precision steel industry lags behind
        the international norm. During the last three years, we have developed a
        nationally recognizable brand, however, we are not yet an internationally
        recognizable brand for our specialty steel products. Although we offer more
        than
        40 high precision steel products, there are many other specialty precision
        steel
        products of similar nature in the market, even though none currently compete
        directly with our products. If there are significant changes in market demands
        and/or competitive forces, we may not be able to change our product mix or
        adapt
        our production equipment quickly enough to meet customers’ needs. Under such
        circumstances, our narrow band of precision steel products and/or new market
        entrants may negatively impact our financial performance.
  ***Increased
        imports of steel products into China could negatively affect domestic steel
        prices and demand levels and reduce profitability of domestic producers,
        including Chengtong.***
  Through
        June 2007, China’s total production of cold-rolled steel sheets increased
        approximately 54% over the comparable period in 2006. However, domestic
        production continues to be insufficient to meet demand. As a result, China
        continues to import a significant portion of its steel products. Foreign
        competitors may have lower labor costs, and are often owned, controlled or
        subsidized by their governments, which allows their production and pricing
        decisions to be influenced by political and economic policy considerations
        as
        well as prevailing market conditions. Import levels may also be impacted
        by
        decisions of government agencies, under trade laws. Increases in future levels
        of imported steel could negatively impact future market prices and demand
        levels
        for our precision steel products.
  ***We
        are dependent on our Chinese manufacturing operations to generate the majority
        of our income and profits, and the deterioration of any current favorable
        local
        conditions may make it difficult or prohibitive to continue to operate or
        expand
        in China.***
 
 Our
        current manufacturing operations are located in China, our administrative
        offices are in Hong Kong and we have additional establishments in the British
        Virgin Islands. The geographical distances between these facilities create
        a
        number of logistical and communications challenges, including time differences
        and differences in the cultures in each location, which makes communication
        and
        effective cooperation more difficult.  In addition, because of the location
        of the manufacturing facilities in China, our operations in China could be
        affected by, among other things:
  18
  ·
            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.
 
 In
        China,
        Chengtong is subject to numerous national, provincial and local governmental
        regulations, all of which can limit our ability to react to market pressures
        in
        a timely or effective way, thus causing us to lose business or miss
        opportunities to expand our business. These include, among others, regulations
        governing:
 
 ·
            environmental
                and waste management,  19
  ·
            our
                relationship with our employees, including: wage and hour requirements,
                working and safety conditions, citizenship requirements, work permits
                and
                travel restrictions,  ·
            property
                ownership and use in connection with our leased facilities in China,
                and  ·
            import
                restrictions, currency restrictions and restrictions on the volume
                of
                domestic sales.  ***The
        end-use markets for certain of our products are highly competitive and customers
        are willing to accept substitutes for our products which could reduce our
        results of operations.***
  Buyers
        of
        certain cold-rolled steel products are in highly competitive markets.
        Cold-rolled precision steel competes with other materials, such as aluminum,
        plastics, composite materials and glass, among others, for industrial and
        commercial applications. Customers have demonstrated a willingness to substitute
        other materials for cold-rolled steel. The willingness of our customers to
        accept substitutes for cold-rolled steel products could have a material adverse
        effect on our financial results.
  ***We
        may not be able to pass on to customers the increases in the costs of our
        raw
        materials, particularly crude steel*** **.**
 
 We
        require substantial amounts of raw materials in our business, consisting
        principally of steel slabs and strip steel. Any substantial increases in
        the
        cost of crude steel could adversely affect our financial condition and results
        of operations. The availability and price of crude steel depends on a number
        of
        factors outside our control, including general economic conditions, domestic
        and
        international supply and tariffs. Increased domestic and worldwide demand
        for
        crude steel has had and will continue to have the effect of increasing the
        prices that we pay for these raw materials, thereby increasing our cost of
        sales. Generally, there is a potential time lag between changes in prices
        under
        our purchase contracts and the point when we can implement a corresponding
        change under our sales contracts with our customers. As a result, we can
        be
        exposed to fluctuations in the price of raw materials, since, during the
        time
        lag period, we may have to temporarily bear the additional cost of the change
        under our purchase contracts, which could have a material adverse effect
        on our
        profitability. If raw material prices were to increase significantly without
        a
        commensurate increase in the market value of our products, our financial
        condition and results of operations would be adversely affected.
 
 ***Although
        we are dependent on a steady flow of raw materials for our operations, we
        do not
        have in place long-term supply agreements for all of our material
        requirements.***
  We
        rely
        on several suppliers to provide us with the raw materials used in our
        operations, although a substantial portion of our raw material requirements
        is
        met by BaoSteel Trading Co., Ltd. We do not currently have long-term supply
        contracts with any particular supplier, including BaoSteel Trading Co., Ltd.,
        to
        assure a continued supply of the raw materials we need. While we maintain
        good
        relationships with these suppliers, the supply of raw materials may nevertheless
        be interrupted on account of events outside our control, which will negatively
        impact our operations.
 
 ***We
        have substantial indebtedness with floating interest rates and the cost of
        our
        borrowings may increase.***
  We
        are
        subject to interest rate risk on our non-derivative financial instruments.
        We do
        not hedge our interest rate risk. At June 30, 2007, our total bank debt
        outstanding was $22,884,679, all of which was interest-bearing. Substantially
        all of the bank debt was floating-rate debt with interest rates which vary
        with
        changes in the standard rate set by the People’s Bank of China. A change in the
        interest rate or yield of fixed rate debt will only impact the fair value
        of
        such debt, while a change in the interest rate of floating rate, or variable
        rate, debt will impact interest expense as well as the amount of cash required
        to service such debt. To the extent interest rates increase, we will be liable
        for higher interest payments to its lenders. For the current financial year,
        annual interest on loans is anticipated to be approximately $1.8 million.
        The
        impact of a 1% increase in interest rates will increase interest expense
        by
        approximately $240,000. As our short-term borrowings mature, we will be required
        to either repay or refinance these borrowings. An increase in short-term
        interest rates at the time that we seek to refinance short-term borrowings
        may
        increase the cost of borrowings, which may adversely affect our earnings
        and
        cash available for distribution to our stockholders.
  20
  At
        June
        30, 2007, the aggregate fair value of our financial instruments with exposure
        to
        interest rate risk was approximately $23 million. The potential change in
        fair
        value for these financial instruments from an adverse 10% change in quoted
        interest rates across all maturities, often referred to as a parallel shift
        in
        the yield curve, would be approximately $0.1 million at June 30,
        2007.
  ***The
        loss of any key executive or our failure to attract and retain key personnel
        could adversely affect our future performance, strategic plans and other
        objectives.***
  The
        loss
        or failure to attract and retain key personnel could significantly impede
        our
        future performance, including product development, strategic plans, marketing
        and other objectives. Our success depends to a substantial extent not only
        on
        the ability and experience of our senior management, but particularly upon
        our
        Chairman, Wo Hing Li; the General Manager of Chengtong, Hai Sheng Chen; and
        Chief Financial Officer, Leada Tak Tai Li. We do not currently have in place
        key
        man life insurance on Wo Hing Li, Hai Sheng Chen or Leada Tak Tai Li. To
        the
        extent that the services of these officers and directors would be unavailable
        to
        us, we would be required to recruit other persons to perform the duties
        performed by Wo Hing Li, Hai Sheng Chen and Leada Tak Tai Li. We may be unable
        to employ other qualified persons with the appropriate background and expertise
        to replace these officers and directors on terms suitable to us.
  ***We
        may not be able to retain, recruit and train adequate management and production
        personnel. We rely heavily on those personnel to help develop and execute
        our
        business plans and strategies, and if we lose such personnel, it would reduce
        our ability to operate effectively.***
 
 Our
        continued operations are dependent upon our ability to identify and recruit
        adequate management and production personnel in China. We require trained
        graduates of varying levels and experience and a flexible work force of
        semi-skilled operators. Many of our current employees come from the more
        remote
        regions of China as they are attracted by the wage differential and prospects
        afforded by Shanghai and our operations. With the economic growth currently
        being experienced in China, competition for qualified personnel is substantial,
        and there can be no guarantee that a favorable employment climate will continue
        and that wage rates we must offer to attract qualified personnel will enable
        us
        to remain competitive internationally. The inability to attract such personnel
        or the increased cost of doing so could reduce our competitive advantage
        relative to other precision steel producers, reducing or eliminating our
        growth
        in revenues and profits.
 
 ***We
        may not be able to protect adequately our intellectual property from
        infringement or unauthorized use by third parties.***
  Except
        for a patent on the Environment-Conscious Mill Bearing with Inner Circular
        Lubrication, we have no patents or licenses that protect our intellectual
        property. Unauthorized parties may attempt to copy aspects of our processes
        and
        know-how or to obtain and use information that we regard as proprietary.
        Policing unauthorized use of our processes and know-how is difficult. Our
        experienced key engineers and management staff are extensively involved in
        all facets of research, design, craftwork, styling and development of the
        specialty precision products. Potential risks on the divulgence of skills
        and
        the development of new products increase should these employees resign, as
        we
        rely heavily on them. Chengtong has elected to protect internally developed
        know-how and production processes (such as system pressure, cleanliness of
        the
        lubrication, temperature control, appropriate allocation of oil supply and
        retrieving, which are vital in providing a radical solution to the difficulties
        associated with lubricating rolling mills’ backing bearing) by requiring all key
        personnel (production engineers and management staff) to sign non-disclosure
        and
        confidentiality contracts. However, this means of protecting our proprietary
        rights may not be adequate. In addition, the laws of some foreign countries
        do
        not protect our proprietary rights as extensively as do U.S. laws. Our failure
        to protect adequately our proprietary rights may allow third parties to
        duplicate our products, production processes or develop functionally equivalent
        or superior technology. In addition, our competitors may independently develop
        similar technologies or design around our proprietary intellectual
        property.
  21
  ***We
        are subject to risks associated with changing technology and manufacturing
        techniques, which could place us at a competitive
        disadvantage.***
 
 The
        successful implementation of our business strategy requires us to continuously
        evolve our existing products and services and introduce new products and
        services to meet customers’ needs. Our designs and products are characterized by
        stringent performance and specification requirements that mandate a high
        degree
        of manufacturing and engineering expertise. We believe that our customers
        rigorously evaluate our services and products on the basis of a number of
        factors, including, but not limited to:
 
 ·
            quality,  ·
            price
                competitiveness,  ·
            technical
                expertise and development capability,  ·
            innovation,  ·
            reliability
                and timeliness of delivery,  ·
            product
                design capability,  ·
            operational
                flexibility,  ·
            customer
                service, and  ·
            overall
                management.  Our
        success depends on our ability to continue to meet our customers’ changing
        requirements and specifications with respect to these and other criteria.
        There
        can be no assurance that we will be able to address technological advances
        or
        introduce new designs or products that may be necessary to remain competitive
        within the precision steel industry.
  ***We
        depend upon our largest customers for a significant portion of our sales
        revenue, and we cannot be certain that sales to these customers will continue.
        If sales to these customers do not continue, then our sales may decline and
        our
        business may be negatively impacted.***
  We
        currently supply high precision steel products to 12 major customers in the
        Chinese domestic market. For the years ended June 30, 2007 and 2006, sales
        revenues generated from the top five major customers amounted to 51% and
        50% of
        total sales revenues, respectively; sales to the largest single customer
        for the same periods amounted to 23% and 15% 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.
  22
  ***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.
  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.
  23
  ***Our
        production facilities are subject to risks of power shortages which may
        adversely affect our ability to meet our customers’ needs and reduce our
        revenues.***
  Many
        cities and provinces in China have suffered serious power shortages since
        the
        second quarter of 2004. Many of the regional grids do not have sufficient
        power
        generating capacity to fully satisfy the increased demand for electricity
        driven
        by continual economic growth and persistent hot weather. Local governments
        have
        occasionally required local factories to temporarily shut down their operations
        or reduce their daily operational hours in order to reduce local power
        consumption levels. To date, our operations have not been affected by those
        administrative measures. However, there is a risk that our operations may
        be
        affected by those administrative measures in the future, thereby causing
        material production disruption and delay in delivery schedule. In such event,
        our business, results of operation and financial conditions could be materially
        adversely affected. We do not have any back-up power generation system. Although
        we have not experienced any power outages in the past, we may be adversely
        affected by power outages in the future.
  ***Unexpected
        equipment failures may lead to production curtailments or
        shutdowns.***
  Interruptions
        in our production capabilities will adversely affect our production costs,
        products available for sales and earnings for the affected period. In addition
        to equipment failures, our facilities are also subject to the risk of
        catastrophic loss due to unanticipated events such as fires, explosions or
        violent weather conditions. Our manufacturing processes are dependent upon
        critical pieces of equipment, such as our various cold-rolling mills, as
        well as
        electrical equipment, such as transformers, and this equipment may, on occasion,
        be out of service as a result of unanticipated failures. We have experienced
        and
        may in the future experience material plant shutdowns or periods of reduced
        production as a result of such equipment failures.
  ***Our
        insurance may not be adequate if our production facilities were destroyed
        or
        significantly damaged as a result of fire or some other natural
        disaster.***
  All
        of
        our products are currently manufactured at our existing facilities located
        in
        the Jiading District in Shanghai, China. Fire fighting and disaster relief
        or
        assistance in China may not be as developed as in Western countries. While
        we
        maintain property damage insurance aggregating approximately $18.5 million
        covering our raw materials, finished goods, equipment and buildings and another
        $10.5 million insurance against equipment breakdown, we do not maintain business
        interruption insurance. Material damage to, or the loss of, our production
        facilities due to fire, severe weather, flood or other act of God or cause,
        even
        if insured, could have a material adverse effect on our financial condition,
        results of operations, business and prospects.
  ***Our
        limited operating history may not serve as an adequate basis to judge our
        future
        prospects and results of operations.***
  Our
        limited operating history may not provide a meaningful basis on which to
        evaluate our business. Although our revenues have grown rapidly since inception,
        we might not be able to maintain our profitability or we may incur net losses
        in
        the future. We expect that our operating expenses will increase as we expand.
        Any significant failure to realize anticipated revenue growth could result
        in
        significant operating losses. We will continue to encounter risks and
        difficulties frequently experienced by companies at a similar stage of
        development, including our potential failure to:
  ·
            Implement
                our business model and strategy and adapt and modify them as
                needed;  ·
            Manage
                our expanding operations and product
                offerings;  ·
            Maintain
                adequate control of our expenses;  24
  ·
            Anticipate
                and adapt to changing conditions in the precision steel markets in
                which
                we operate as well as the impact of any changes in government regulation;
                and  ·
            Anticipate
                mergers and acquisitions involving our competitors, technological
                developments and other significant competitive and market
                dynamics.  Our
        business, business prospects and results of operations will be affected if
        we
        are not successful in addressing any or all of these risks and
        difficulties.
  ***Failure
        to comply with the U.S. Foreign Corrupt Practices Act could subject us to
        penalties and other adverse consequences.***
 
 We
        are
        subject to the U.S. Foreign Corrupt Practices Act, which generally prohibits
        United States companies from engaging in bribery or other prohibited payments
        to
        foreign officials for the purpose of obtaining or retaining business. In
        addition, we are required to maintain records that accurately and fairly
        represent our transactions and have an adequate system of internal accounting
        controls. Foreign companies, including some that may compete with us, are
        not
        subject to these prohibitions, and therefore may have a competitive advantage
        over us. Corruption, extortion, bribery, pay-offs, theft and other fraudulent
        practices occur from time-to-time in the PRC, and our executive officers
        and
        employees have not been subject to the U.S. Foreign Corrupt Practices Act
        prior
        to the completion of the Stock Exchange Agreement in December 2006. We can
        make
        no assurance that our employees or other agents will not engage in such conduct
        for which we might be held responsible. If our employees or other agents
        are
        found to have engaged in such practices, we could suffer severe penalties
        and
        other consequences that may have a material adverse effect on our business,
        financial condition and results of operations.
 
 ***You
        may experience difficulties in effecting service of legal process, enforcing
        foreign judgments or bringing original actions in China based upon U.S. laws,
        including the federal securities laws or other foreign laws against us or
        our
        management.***
 
 Substantially
        all of our current operations are conducted in China. Moreover, all but one
        of
        our directors and all of our officers are nationals and residents of China
        or
        Hong Kong. All or substantially all of the assets of these persons are located
        outside the United States. As a result, it may not be possible to effect
        service
        of process within the United States or elsewhere outside of China or Hong
        Kong
        upon these persons. In addition, uncertainty exists as to whether the courts
        of
        China or Hong Kong would recognize or enforce judgments of U.S. courts obtained
        against us or our officers and/or directors predicated upon the civil liability
        provisions of the securities law of the United States or any state thereof,
        or
        be competent to hear original actions brought in China or Hong Kong against
        us
        or such persons predicated upon the securities laws of the United States
        or any
        state thereof.
  25
  **Risks
        Relating to China**
  ***We
        face significant risks if the Chinese government changes its policies, laws,
        regulations, tax structure or its current interpretations of its laws, rules
        and
        regulations relating to our operations in China.***
  Chengtong’s
        manufacturing facility is located in Shanghai, China. As of June 30, 2007,
        substantially all of our assets are located in China and, except for a small
        volume of exports, all of our sales revenues are generated in China. Our
        results
        of operations, financial state of affairs and future growth are, to a
        significant degree, subject to China’s economic, political and legal development
        and related uncertainties. Our operations and results could be materially
        affected by a number of factors, including, but not limited to:
  ·
            changes
                in policies by the Chinese government resulting in changes in laws
                or
                regulations or the interpretation of laws or regulations,  ·
            confiscatory
                taxation,  ·
            changes
                in employment restrictions,  ·
            restrictions
                on imports and sources of supply,  ·
            import
                duties,  ·
            corruption,  ·
            currency
                revaluation, and  ·
            the
                expropriation of private enterprise.  Over
        the
        past several years, the Chinese government has pursued economic reform policies
        including the encouragement of private economic activities and greater economic
        decentralization. If the Chinese government does not continue to pursue its
        present policies that encourage foreign investment and operations in China,
        or
        if these policies are either not successful or are significantly altered,
        then
        our business could be adversely affected. Chengtong could even be subject
        to the
        risk of nationalization, which could result in the total loss of our
        stockholders’ investment. Following the Chinese government’s policy of
        privatizing many state-owned enterprises, the Chinese government has attempted
        to augment its revenues through increased tax collection. Continued efforts
        to
        increase tax revenues could result in increased taxation expenses being incurred
        by us. Economic development may be limited as well by the imposition of
        austerity measures intended to reduce inflation, the inadequate development
        of
        infrastructure and the potential unavailability of adequate power and water
        supplies, transportation and communications.
  ***Chinese
        laws and regulations governing our current business operations are sometimes
        vague and uncertain. Any changes in such Chinese laws and regulations may
        have a
        material and adverse effect on our business.***
  China’s
        legal system is a civil law system based on written statutes, in which system
        decided legal cases have little value as precedents unlike the common law
        system
        prevalent in the United States. There are substantial uncertainties regarding
        the interpretation and application of Chinese laws and regulations, including
        but not limited to the laws and regulations governing our business, or the
        enforcement and performance of our arrangements with customers in the event
        of
        the imposition of statutory liens, death, bankruptcy and criminal proceedings.
        The Chinese government has been developing a comprehensive system of commercial
        laws, and considerable progress has been made in introducing laws and
        regulations dealing with economic matters such as foreign investment, corporate
        organization and governance, commerce, taxation and trade. However, because
        these laws and regulations are relatively new, and because of the limited
        volume
        of published cases and judicial interpretation and their lack of force as
        precedents, interpretation and enforcement of these laws and regulations
        involve
        significant uncertainties. New laws and regulations that affect existing
        and
        proposed future businesses may also be applied retroactively. We are considered
        a foreign person or foreign funded enterprise under Chinese laws, and as
        a
        result, we are required to comply with Chinese laws and regulations. We cannot
        predict what effect the interpretation of existing or new Chinese laws or
        regulations may have on our businesses. If the relevant authorities find
        us in
        violation of Chinese laws or regulations, they would have broad discretion
        in
        dealing with such a violation, including, without limitation:
  26
  ·
            levying
                fines;  ·
            revoking
                our business and other licenses;  ·
            requiring
                that we restructure our ownership or operations;
                and  ·
            requiring
                that we discontinue any portion or all of our
                business.  ***Our
        business, results of operations and overall profitability are linked to the
        economic, political and social conditions in China.***
 
 Substantially
        all of our business, assets and operations are located in China. The economy
        of
        China differs from the economies of most developed countries in many respects,
        including government involvement, level of development, growth rate, control
        of
        foreign exchange, and allocation of resources. The economy of China has been
        transitioning from a planned economy to a more market-oriented economy. Although
        the Chinese government has implemented measures recently emphasizing the
        utilization of market forces for economic reform, the reduction of state
        ownership of productive assets and the establishment of sound corporate
        governance in business enterprises, a substantial portion of productive assets
        in China is still owned by the Chinese government. In addition, the Chinese
        government continues to play a significant role in regulating industry by
        imposing industrial policies. It also exercises significant control over
        China’s
        economic growth through the allocation of resources, controlling payment
        of
        foreign currency-denominated obligations, setting monetary policy and providing
        preferential treatment to particular industries or companies. Therefore,
        the
        Chinese government’s involvement in the economy may affect our business
        operations, results of operations and our financial condition.
  ***A
        slowdown or other adverse developments in the Chinese economy may materially
        and
        adversely affect our customers, demand for our services and our
        business.***
 
 All
        of
        our operations are conducted in China and substantially all of our revenues
        are
        generated from sales to businesses operating in China. Although the Chinese
        economy has grown significantly in recent years, such growth may not continue.
        We do not know how sensitive we are to a slowdown in economic growth or other
        adverse changes in Chinese economy which may affect demand for precision
        steel
        products. A slowdown in overall economic growth, an economic downturn or
        recession or other adverse economic developments in China may materially
        reduce
        the demand for our products and in turn reduce our results of operations
        and our
        productivity.
  27
  ***Inflation
        in China could negatively affect our profitability and
        growth.***
 
 While
        the
        Chinese economy has experienced rapid growth, such growth has been uneven
        among
        various sectors of the economy and in different geographical areas of the
        country. Rapid economic growth can lead to growth in the money supply and
        rising
        inflation. If prices for our products rise at a rate that is insufficient
        to
        compensate for the rise in the costs of raw materials, it may have an adverse
        effect on our profitability. In order to control inflation in the past, the
        Chinese government has imposed controls on bank credits, limits on loans
        for
        fixed assets and restrictions on state bank lending. Such an austerity policy
        can lead to a slowing of economic growth. In October 2004, the People’s Bank of
        China, China’s central bank, raised interest rates for the first time in nearly
        a decade and indicated in a statement that the measure was prompted by
        inflationary concerns in the Chinese economy. Repeated increases in interest
        rates by the central bank will likely slow economic activity in China which
        could, in turn, materially increase our costs and also reduce demand for
        our
        products.
 
 ***Controversies
        affecting China’s trade with the United States could depress our stock
        price.***
  While
        China has been granted permanent most favored nation trade status in the
        United
        States through its entry into the World Trade Organization, controversies
        and
        trade disagreements between the United States and China may arise that have
        a
        material adverse effect upon our stock price. Political or trade friction
        between the United States and China, whether or not actually affecting its
        business, could also materially and adversely affect the prevailing market
        price
        of our common stock.
  ***We
        may have difficulty establishing adequate management, legal and financial
        controls in China, which could impair our planning processes and make it
        difficult to provide accurate reports of our operating results.***
 
 China
        historically has not followed Western style management and financial reporting
        concepts and practices, and its access to modern banking, computer and other
        control systems has been limited.  We may have difficulty in hiring and
        retaining a sufficient number of qualified employees to work in China in
        these
        areas. As a result of these factors, we may experience difficulty in
        establishing management, legal and financial controls, collecting financial
        data
        and preparing financial statements, books of account and corporate records
        and
        instituting business practices that meet Western standards, making it difficult
        for management to forecast its needs and to present the results of our
        operations accurately at all times.
 
 ***Imposition
        of trade barriers and taxes may reduce our ability to do business
        internationally, and the resulting loss of revenue could harm our profitability.***
 
 We
        may
        experience barriers to conducting business and trade in our targeted emerging
        markets in the form of delayed customs clearances, customs duties and tariffs.
        In addition, we may be subject to repatriation taxes levied upon the exchange
        of
        income from local currency into foreign currency, substantial taxes of profits,
        revenues, assets and payroll, as well as value-added tax. The markets in
        which we plan to operate may impose onerous and unpredictable duties, tariffs
        and taxes on our business and products, and there can be no assurance that
        this
        will not reduce the level of sales that we achieve in such markets, which
        would
        reduce our revenues and profits.
  28
 ***There
        can be no guarantee that China will comply with the membership requirements
        of
        the World Trade Organization, which could leave us subject to retaliatory
        actions by other governments and reduce our ability to sell our products
        internationally.***
 
 China
        has
        agreed that foreign companies will be allowed to import most products into
        any
        part of China.  In the sensitive area of intellectual property rights,
        China has agreed to implement the trade-related intellectual property agreement
        of the Uruguay Round. There can be no assurances that China will implement
        any
        or all of the requirements of its membership in the World Trade Organization
        in
        a timely manner, if at all.  If China does not fulfill its obligations to
        the World Trade Organization, we may be subject to retaliatory actions by
        the
        governments of the countries into which we sell our products, which could
        render
        our products less attractive, thus reducing our revenues and
        profits.
 
 ***Our
        labor costs are likely to increase as a result of changes in Chinese labor
        laws.***
  We
        have
        recently experienced an increase in the cost of labor. Recent changes in
        Chinese
        labor laws that are effective January 1, 2008 are likely to increase costs
        further and impose restrictions on our relationship with our employees. There
        can be no assurance that the labor laws will not change further or that their
        interpretation and implementation will vary, which may have a material adverse
        effect upon our business and results of operations.
  ***We
        currently receive preferential tax treatment under Chinese law which will
        expire
        in 2008 and may negatively impact our profitability.***
  Prior
        to
        the adoption of the PRC Enterprise Income Tax Law on March 16, 2007 (the
“EIT
        Law”), Chinese income tax law provided that any foreign-invested enterprise
        engaged in manufacturing and scheduled to operate for not less than 10 years
        was
        entitled to receive an exemption from the entire central government income
        tax
        for the two years beginning with its first profitable year and receive a
        50%
        reduced income tax in the third through fifth years. As a wholly foreign
        owned
        enterprise, Chengtong has been entitled to such preferential tax treatment.
        The
        full tax exemption for the enterprise income tax expired on December 31,
        2005
        and the one-half reduction on the enterprise profit tax to 13.5% will expire
        on
        December 31, 2008. After such tax holidays, our profits will be subject to
        the
        full tax rate of 25%, effective as of January 1, 2008 in accordance with
        the EIT
        Law passed in 2007. If we are unable to increase gross income by an amount
        greater than that needed to offset the loss of this preferential tax treatment,
        such a condition could have a material adverse effect on the results of its
        operations.
  Under
        the
        EIT Law, a uniform tax rate of 25.0% has been adopted for all enterprises
        (including foreign-invested enterprises) and several tax incentives enjoyed
        by
        foreign-invested enterprises have been cancelled. However, for foreign-invested
        enterprises established before the promulgation of the EIT Law, a five-year
        transition period is provided during which reduced rates will apply but
        gradually be phased out. Since the PRC government has not announced
        implementation measures for the transitional policy with regards to such
        preferential tax rates, we cannot reasonably estimate the financial impact
        of
        the new tax law to us at this time. Further, any future increase in the
        enterprise income tax rate applicable to us or other adverse tax treatments
        would have a material adverse effect on our results of operations and financial
        condition.
  29
  ***Fluctuations
        in exchange rates of the Renminbi, or RMB, could adversely affect the value
        of
        and dividends, if any, payable on shares of our common stock or otherwise
        impact
        our operations and profitability.***
  We
        collect revenue from operations principally in the Chinese Renminbi. Except
        for
        recent exports to Nigeria, Thailand, Indonesia and the Philippines, all of
        our
        local sales revenues are collected in and substantially all of its expenses
        are
        paid in the Chinese Renminbi. We face foreign currency rate translation risk
        when Chengtong’s results are translated to U.S. Dollars, as well as foreign
        currency rate transaction risk with respect to sales outside of China and
        with
        respect to financial instruments denominated in foreign currencies. The results
        of operations denominated in foreign currency are translated at the average
        rate
        of exchange during the reporting period. Assets and liabilities denominated
        in
        foreign currencies at the balance sheet date are translated at the market
        rate
        of exchange ruling at that date. The registered equity capital denominated
        in
        the functional currency is translated at the historical rate of exchange
        at the
        time of capital contribution.
  The
        Chinese Renminbi remained stable against the U.S. Dollar at approximately
        8.28
        RMB to 1.00 U.S. Dollar for several years until July 21, 2005 when the Chinese
        currency regime was altered, with a 2.1% revaluation versus the U.S. Dollar.
        This move initially valued the Renminbi at 8.11 per U.S. Dollar. The Renminbi
        is
        no longer linked to the U.S. currency but rather to a basket of currencies
        with
        a 0.3% margin of fluctuation. However, there remains international pressure
        on
        the Chinese government to adopt an even more flexible currency policy. As
        of
        October 10, 2007, the exchange rate was 7.51 RMB to 1.00 U.S. Dollar. The
        exchange rate of Renminbi is subject to changes in China’s government policies
        which are, to a large extent, dependent on the economic and political
        development both internationally and locally and the demand and supply of
        Renminbi in the domestic market. There can be no assurance that such exchange
        rate will continue to remain stable in the future amongst the volatility
        of
        currencies, globalization and the unstable economies in recent years.
  Since
        (i)
        our income and profit are mainly denominated in Renminbi, and (ii) the payment
        of dividends, if any, will be in U.S. Dollars, any exchange fluctuation of
        the
        Renminbi against other foreign currencies would adversely affect the value
        of
        the shares and dividends payable to shareholders, in foreign currency terms.
        For
        example, to the extent that we need to convert U.S. Dollars we receive from
        an
        offering of our securities into Renminbi for our operations, if the Renminbi
        appreciates against the U.S. Dollar, the Renminbi equivalent of the US Dollar
        we
        convert would be reduced. Conversely, if we decide to convert our Renminbi
        into
        U.S. Dollars for the purpose of making payments for dividends on our common
        stock or for other business purposes and the U.S. Dollar appreciates against
        the
        Renminbi, the U.S. Dollar equivalent of the Renminbi we convert would be
        reduced. In addition, appreciation of the Renminbi could make our products
        more
        expensive relative to those of our competitors or increase our profitability
        in
        U.S. Dollar terms.
  At
        June
        30, 2007, our outstanding financial instruments with foreign currency exchange
        rate risk exposure had an aggregate fair value of $7.5 million (including
        our
        non-U.S. Dollar denominated debt). The potential increase in the fair values
        of
        these instruments resulting from a 10% adverse change in quoted foreign currency
        exchange rates would be approximately $0.75 million at June 30,
        2007.
  ***The
        ability of our Chinese operating subsidiary to pay certain foreign currency
        obligations, including dividends, may be restricted due to foreign exchange
        control regulations of China.***
  The
        ability of Chengtong to pay dividends may be restricted due to the foreign
        exchange control policies and availability of cash balances. Since substantially
        all of our operations are conducted in China and a majority of our revenues
        are
        generated in China, a significant portion of our revenue earned and currency
        received are denominated in Renminbi.
  30
  The
        Chinese government imposes controls on the convertibility of Renminbi into
        foreign currencies and, in certain cases, the remittance of currency out
        of
        China. Renminbi is currently not a freely convertible currency. Shortages
        in the
        availability of foreign currency may restrict our ability to remit sufficient
        foreign currency to pay dividends, if any, on our common stock or otherwise
        satisfy foreign currency denominated obligations. Under existing Chinese
        foreign
        exchange regulations, payments of current account items, including profit
        distributions, interest payments and expenditures from the transaction, can
        be
        made in foreign currencies without prior approval from the State Administration
        of Foreign Exchange by complying with certain procedural requirements. However,
        approval from appropriate governmental authorities is required where Renminbi
        is
        to be converted into foreign currency and remitted out of China to pay capital
        expenses such as the repayment of bank loans denominated in foreign
        currencies.
  The
        Chinese government may also at its discretion restrict access in the future
        to
        foreign currencies for current account transactions. If the foreign exchange
        control system prevents us from obtaining sufficient foreign currency to
        satisfy
        our currency demands, we may not be able to pay certain of our expenses as
        they
        come due.
 
 **Risks
        Relating to Our Common Stock**
  ***The
        market price for shares of our common stock could be volatile and could
        decline.***
  Our
        common stock is listed on The NASDAQ Capital Market under the symbol “CPSL.” The
        market price for the shares of our common stock may fluctuate in response
        to a
        number of factors, many of which are beyond our control. In some cases, these
        fluctuations may be unrelated to our operating performance. Many companies
        with
        Chinese operations have experienced dramatic volatility in the market prices
        of
        their common stock. We believe that a number of factors, both within and
        outside
        of our control, could cause the price of our common stock to fluctuate, perhaps
        substantially. Factors such as the following could have a significant adverse
        impact on the market price of our common stock:
  ·
            our
                ability to obtain additional financing and, if available, the terms
                and
                conditions of the financing;  ·
            our
                financial position and results of
                operations;  ·
            period-to-period
                fluctuations in our operating results;  ·
            changes
                in estimates of our performance by any securities
                analysts;  ·
            substantial
                sales of our common stock pursuant to Rule 144 or
                otherwise;  ·
            new
                regulatory requirements and changes in the existing regulatory
                environment;  ·
            the
                issuance of new equity securities in a future
                offering;  ·
            changes
                in interest rates; and  ·
            general
                economic, monetary and other national conditions, particularly in
                the U.S.
                and China.  31
  ***The
        trading market in our common stock is limited and illiquid and may cause
        volatility in the market price.***
  As
        of
        June 30, 2007, 37.4%, or 13,964,883 shares, of our issued and outstanding
        common
        stock was not owned by affiliates, of which 10,338,729 were unrestricted
        and
        free to trade. The market price for our common stock is subject to volatility
        and holders of common stock may be unable to resell their shares at or near
        their original purchase price or at any price. In the absence of an active
        trading market:
  ·
            investors
                may have difficulty buying and selling;  ·
            market
                visibility for our common stock may be limited;
                and  ·
            a
                lack of visibility for our common stock may have a depressive effect
                on
                the market for our common stock.  ***Shares
        eligible for future sale may adversely affect the market price of our common
        stock, as the future sale of a substantial amount of outstanding stock in
        the
        public marketplace could reduce the price of our common
        stock.***
  From
        time
        to time, certain of our stockholders may be eligible to sell all or some
        of
        their shares of common stock by means of ordinary brokerage transactions
        in the
        open market, pursuant to Rule 144 promulgated under the Securities Act, subject
        to certain limitations or otherwise. In general, pursuant to Rule 144, a
        stockholder (or stockholders whose shares are aggregated) who has satisfied
        a
        one-year holding period may, under certain circumstances, sell within any
        three-month period a number of securities which does not exceed the greater
        of
        1% of the then outstanding shares of common stock or the average weekly trading
        volume of the class during the four calendar weeks prior to such sale. Rule
        144
        also permits, under certain circumstances, the sale of securities, without
        any
        limitations, by a non-affiliate of our company that has satisfied a two-year
        holding period. Any substantial sale of common stock pursuant to Rule 144
        or
        pursuant to a resale prospectus may have an adverse effect on the market
        price
        of our common stock.
  ***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, 2007 equal
        to
        approximately 59% 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.
  32
  ***We
        may incur significant costs to ensure compliance with U.S. corporate governance
        and accounting requirements.***
  We
        may
        incur significant costs associated with our public company reporting
        requirements, costs associated with applicable corporate governance
        requirements, including requirements under the Sarbanes-Oxley Act of 2002
        and
        other rules implemented by the SEC and requirements in connection with the
        listing of our common stock on The NASDAQ Capital Market. We expect all of
        these
        applicable rules and regulations to increase our legal and financial compliance
        costs and to make some activities more time-consuming and costly. We also
        expect
        that these applicable rules and regulations may make it more difficult and
        more
        expensive for us to obtain director and officer liability insurance and we
        may
        be required to accept reduced policy limits and coverage or incur substantially
        higher costs to obtain the same or similar coverage. As a result, it may
        be more
        difficult for us to attract and retain qualified individuals to serve on
        our
        board of directors or as executive officers.
  ***Our
        officers and directors have limited experience with the regulatory requirements
        for U.S. public companies, which could impair our ability to satisfy public
        company filing requirements and could increase our securities compliance
        costs.***
 
 All
        of
        our officers and most of our directors do not have any prior experience as
        officers and directors of a U.S. publicly traded company, or in complying
        with
        the regulatory requirements applicable to a U.S. public company. As a result,
        we
        could have difficulty satisfying the regulatory requirements applicable to
        U.S.
        public companies, which could adversely affect the market for our common
        stock.
        At present, we rely upon outside experts to advise us on matters relating
        to
        financial accounting and public company reporting. While we believe that
        it will
        be possible to satisfy our public company reporting requirements through
        the use
        of third party experts, our general and administrative costs will remain
        higher
        until we have developed or acquired internal expertise in these
        matters
 
 ***Standards
        for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 are uncertain,
        and if we fail to comply in a timely manner, our business could be harmed
        and
        our stock price could decline.***
  Rules
        adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
        require annual assessment of our internal control over financial reporting,
        and
        attestation of our assessment by our independent registered public accountants.
        The standards that must be met for management to assess the internal control
        over financial reporting as effective are complex, and require significant
        documentation, testing and possible remediation to meet the detailed standards
        and impose significant additional expenses on us. We may encounter problems
        or
        delays in completing activities necessary to make an assessment of our internal
        control over financial reporting. In addition, the attestation process required
        of our independent registered public accountants is new, and we may encounter
        problems or delays in completing the implementation of any requested
        improvements and receiving an attestation of our assessment by our independent
        registered public accountants. If we cannot assess our internal control over
        financial reporting as effective, or our independent registered public
        accountants are unable to provide an unqualified attestation report on such
        assessment, investor confidence and share value may be negatively
        impacted.
  33
  **** ***We
        do not foresee paying cash dividends in the foreseeable
        future.***
  We
        have
        not paid cash dividends on our stock, and we do not plan to pay cash dividends
        on our stock in the foreseeable future.
  **ITEM
        1B. UNRESOLVED STAFF COMMENTS**
  None.
  **ITEM
        2. PROPERTIES**
  Through
        Chengtong, we lease for $1 per month the existing 20,000 square meters of
        production and office facilities in Jiading District, Shanghai on four acres
        of
        property held by our wholly-owned subsidiary, Shanghai Tuorong Precision
        Strip
        Company Limited.
  **ITEM
        3. LEGAL PROCEEDINGS**
  None.
  **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
  No
        matters were submitted to a vote of the security holders during the fourth
        quarter of the fiscal year ended June 30, 2007.
  34
  **PART
        II**
  **ITEM
        5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
        PURCHASES OF EQUITY SECURITIES**
  **Market
        for Common Stock**
 
 Our
        Common Stock has been quoted for trading on the NASDAQ Capital Market under
        the
        symbol “CPSL” since December 29, 2006 and was previously quoted for trading on
        that market under the symbol “OLAB.” The following table sets forth, for the
        periods indicated, the available high and low bid quotations for the Common
        Stock by quarter for the twelve month periods ended June 30, 2007 and June
        30,
        2006, as reported by The NASDAQ Capital Market. Quotations reflect inter-dealer
        prices, without retail mark-up, mark-down or commissions and may not represent
        actual transactions.
 
 Year
                  Ended June 30, 2007*
              Year
                  Ended June 30, 2006Quarter
                  ended
              High
              Low
              High
              LowOctober
                  31
              $
                  7.84
              $2.51
              $3.19
              $2.00December
                  31
              $13.73
              $5.34
              $4.02
              $1.49March
                  31
              $16.58
              $5.68
              $2.97
              $1.50June
                  30
              $
                  6.66
              $2.71
              $8.97
              $1.65
 _____________________
 *On
        December 29, 2006, our Common Stock began to trade under the symbol “CPSL”
following the consummation of the Stock Exchange Agreement with Partner Success
        Holdings Limited on December 28, 2006.
 
 On
        October 10, 2007, the closing bid price of our Common Stock on The NASDAQ
        Capital Market was $10.44 per share.
 
 **Record
        Holders**
 
 There
        were approximately 6,054 beneficial holders of our Common Stock as of September
        30, 2007.
 
 **Dividends**
 
 We
        have
        not paid dividends on our Common Stock and do not presently plan to pay
        dividends on our Common Stock for the foreseeable future. We plan to retain
        all
        net earnings, if any, to fund the development of our business. Our Board
        of
        Directors has sole discretion over the declaration and payment of future
        dividends, subject to the availability of sufficient funds to pay dividends.
        Any
        future dividends will depend upon our profitability, financial condition,
        cash
        requirements, future prospects, general business condition, the terms of
        our
        debt agreements which currently restrict the payment of dividends and other
        factors our Board of Directors believes are relevant.
  35
 
 **Securities
        Authorized for Issuance Under Equity Compensation Plans**
 
 Plan
                  Category
              Number
                  of
                securities
                  issued
                upon
                  exercise of
                outstanding
                options,
                  warrants
                and
                  rights
              Weighted-average
                exercise
                  price of
                outstanding
                options,
                  warrants
                and
                  rights
              Number
                  of
                securities
                remaining
                available
                  for future
                issuance
                  under
                equity
                compensation
                plans
                  (excluding
                securities
                  reflected
                in
                  column (a))(a)
              (b)
              (c)Equity
                compensation
                plans
                  approved by
                security
                  holders
              0
              N/A
              2,165,220
  36
  **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, 2002,
        through and including June 30, 2007, 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, 2002, 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, 2002,
        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”.
 
 **COMPARISON
        OF CUMULATIVE TOTAL RETURN**
 
 
  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
        of
        1933, as amended, or the Exchange Act, except to the extent we specifically
        incorporate it by reference into such a filing.
 
 **Issuer
        Purchases of Equity Securities**
 
 We
        made
        no purchases of our Common Stock in the fourth quarter ended June 30,
        2007.
  37
  **ITEM
        6. SELECTED FINANCIAL DATA**
  Selected
        consolidated financial data are set forth below as of June 30, 2007 and for
        the
        years ended June 30, 2003, 2004, 2005, 2006 and 2007 and should be read in
        conjunction with our audited consolidated financial statements and related
        notes
        thereto, and “Management’s Discussion and Analysis of Financial Condition and
        Results of Operations,” which are included elsewhere in this Form 10-K. 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.
 
 **Year
                  Ended June 30,****2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003****(In
                  thousands, except share and per share amounts)**Statement
                  of Operations DataSales
                  revenues
              
              $
              53,960
              
              $
              34,881
              
              $
              53,145
              
              
              17,417
              
              
              2,282Cost
                  of goods sold
              
              
              38,926
              
              
              24,892
              
              
              45,562
              
              
              16,410
              
              
              2,229Gross
                  profit
              
              
              15,034
              
              
              9,989
              
              
              7,583
              
              
              1,007
              
              
              53Income(loss)
                  from continuing operations
              
              
              7,473
              
              
              7,514
              
              
              6,366
              
              
              199
              
              
              (255
              )Net
                  income (loss) from discontinued operations
              
              
              831
              
              
              900
              
              
              (341
              )
              
              (369
              )
              
              517Net
                  income (loss)
              
              $
              8,304
              
              $
              8,415
              
              $
              6,026
              
              
              (170
              )
              
              262Income(loss)
                  per share from continuing operationsBasic
              
              $
              0.26
              
              $
              0.31
              
              $
              0.26
              
              $
              0.01
              
              $
              (0.01
              )Diluted
              
              $
              0.26
              
              $
              0.31
              
              $
              0.26
              
              $
              0.01
              
              $
              (0.01
              )Income(loss)
                  per share from discontinued operationsBasic
              
              $
              0.03
              
              $
              0.04
              
              $
              (0.01
              )
              $
              (0.02
              )
              $
              0.02Diluted
              
              $
              0.03
              
              $
              0.04
              
              $
              (0.01
              )
              $
              (0.02
              )
              $
              0.02Net
                  income(loss)Basic
              
              $
              0.29
              
              $
              0.35
              
              $
              0.25
              
              $
              (0.01
              )
              $
              0.01Diluted
              
              $
              0.29
              
              $
              0.35
              
              $
              0.25
              
              $
              (0.01
              )
              $
              0.01Shares
                  used in per share calculationBasic
              
              
              28,438,313
              
              
              24,283,725
              
              
              24,283,725
              
              
              24,283,725
              
              
              24,283,725Diluted
              
              
              28,759,553
              
              
              24,283,725
              
              
              24,283,725
              
              
              24,283,725
              
              
              24,283,725Balance
                  Sheet Data (at period end)Current
                  assets
              
              $
              41,339
              
              $
              23,154
              
              $
              13,028
              
              $
              7,468
              
              $
              3,392Total
                  assets
              
              $
              82,158
              
              $
              45,571
              
              $
              25,489
              
              $
              12,371
              
              $
              6,619Working
                  Capital
              
              $
              14,574
              
              $
              (7,584
              )
              $
              (1,326
              )
              $
              (4,020
              )
              $
              (95
              )Long-term
                  debt
              
              $
              6,878
              
              $
              3,152
              
              $
              7,713
              
              $
              -
              
              $
              2,415Total
                  Stockholder’s equity
              
              $
              51,104
              
              $
              11,681
              
              $
              3,421
              
              $
              883
              
              $
              614
  38
  **ITEM
        7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATION**
 
 *This
        Annual Report on Form 10-K contains statements that constitute “forward looking
        statements” within the meaning of Section 21E of the Securities Exchange Act of
        1934, as amended, and Section 27A of the Securities Act of 1933, as amended.
        The
        words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,”
“intend,” and similar expressions are intended to identify forward-looking
        statements. These statements appear in a number of places in this document
        and
        include statements regarding the intent, belief or expectation of the Company,
        our directors or its officers with respect to events, conditions, and financial
        trends that may affect our future plans of operations, business strategy,
        operating results, and financial position. Persons reviewing this Annual
        Report
        on Form 10-K are cautioned that any forward-looking statements are not
        guarantees of future performance and are subject to risks and uncertainties
        and
        that actual results may differ materially from those included within the
        forward-looking statements as a result of various factors. More information
        on
        these risks and uncertainties, many of which are beyond our control, is set
        forth under Part II, Item 1A, “Risk Factors,” in this Annual Report.*
  *While
        these forward-looking statements, and any assumptions upon which they are
        based,
        are made in good faith and reflect the Company’s current judgment regarding the
        direction of our business, actual results will almost always vary, sometimes
        materially, from any estimates, predictions, projections, assumptions or
        other
        future performance suggested herein. We undertake no responsibility or
        obligation to update publicly these forward-looking statements, but may do
        so in
        the future in written or oral statements. Investors should take note of any
        future statements made by us or on our behalf.*
  **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, 2007 and are important in understanding the results
                of
                operations and financial condition or disclose known
                trends.  ·
            **Results
                of Operations**-
                This section provides an analysis of our results of operations for
                the
                fiscal year ended June 30, 2007. 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, 2007. Included in this section is a discussion
                of the
                Group’s outstanding debt and the financial capacity available to fund the
                Group’s future commitments and
                obligations.  ***OVERVIEW
        OF THE COMPANY’S BUSINESS***
  We
        are a
        niche and high value-added steel processing company principally engaged in
        the
        manufacture and sale of high precision cold-rolled steel products, in the
        provision of heat treatment and in the cutting of medium and high-carbon
        hot-rolled steel strips. We use commodity steel to create a specialty premium
        steel intended to yield above-average industry gross margins. Specialty
        precision steel pertains to the precision of measurements and tolerances
        of
        thickness, shape, width, surface finish and other special quality features
        of
        highly-engineered end-use applications.
  39
  We
        produce and sell precision ultra-thin and high strength cold-rolled steel
        products ranging from 7.5 mm to 0.03 mm. We also provide heat treatment and
        cutting of medium and high-carbon hot-rolled steel strips not exceeding 7.5
        mm
        fineness. Our process puts hot-rolled de-scaled (pickled) steel coils through
        a
        cold-rolling mill, utilizing our patented systems and high technology reduction
        processing procedures, to make steel coils and sheets in customized thicknesses
        according to customer specifications. Currently, our specialty precision
        products are mainly used in the manufacture of automobile parts and components,
        plane friction discs, appliances, food packaging materials, saw blades, textile
        needles, microelectronics, and packing containers.
  We
        conduct our operations principally in China through our wholly-owned operating
        subsidiary, Shanghai Chengtong Precision Strip Co., Limited, or Chengtong,
        which, in turn, is a wholly owned subsidiary of our direct subsidiary, Partner
        Success Holdings Limited, or PSHL. Most of our sales are made domestically
        in
        China; however, during fiscal 2007, we began exporting our cold-rolled
        steel products to Indonesia and the Philippines and, to a lesser extent,
        Nigeria
        and Thailand. We intend to expand into additional overseas markets in the
        future, subject to suitable market conditions and favorable regulatory controls.
  Over
        the
        course of the past two years, we have begun to alter our product mix to meet
        market demands in our primary market, China, as well as to expand into overseas
        markets. We continue to focus on the production of higher margin products,
        although we have increased production of certain of our lower margin products
        due to market demand. These changes in our strategy have created increased
        capital requirements as we have sought to construct additional rolling mills
        to
        accommodate our planned growth. In addition, our workforce has increased
        and, in
        particular, we have faced a growing need for experienced executive and technical
        staff.
  Our
        market is highly competitive, although we have focused on a niche market
        that we
        consider allows us to compete effectively as we continue to grow our business.
        We face significant competition for raw materials, especially crude steel,
        and
        our financial results may be impacted by changes in the market prices for
        these
        materials. Given our size, we do not have the ability to influence the prices
        at
        which we must purchase raw materials. However, the nature of our products
        enable
        us to pass on all or part of the price fluctuations in raw materials to our
        customers.
  In
        the
        year ended June 30, 2007, we added three indirect subsidiaries to our corporate
        structure. On April 9, 2007, we purchased Shanghai Tuorong Precision Strip,
        Limited, or Tuorong, through PSHL. The sole activity of Tuorong is the ownership
        of a land use right with respect to facilities leased to Chengtong. On April
        10,
        2007, PSHL purchased for nominal consideration Blessford International Limited,
        a British Virgin Islands company. Blessford International Limited does not
        conduct any business, but it owns a single subsidiary, Shanghai Blessford
        Alloy
        Company Limited, that is a wholly-foreign owned enterprise chartered in China.
        We intend to hold Blessford International Limited as a shell subsidiary that
        may
        be used in the future to facilitate optimization of the structure of the
        Group’s
        activities.
  40
  ***RESULTS
        OF OPERATIONS***
  ***Fiscal
        Year 2007 versus Fiscal Year 2006***
  Net
        income before tax decreased by $110,461 or 1.3% year-on-year to $8,304,109
        for
        the year ended June 30, 2007 from $8,414,570 for the year ended June 30,
        2006,
        even though gross profit increased by $5,045,269 or 50.5% year-on-year. The
        decrease in net income is mainly attributable to the creation of an allowance
        for doubtful accounts in the amount of $3,775,645. The Company created this
        partial reserve against advances to suppliers where the goods ordered were
        not
        received within ninety days of the advance.
  **Gross
        Profit**
  Gross
        profits in absolute terms increased by $5,045,269 or 50.5% year-on-year to
        $15,034,256 for the year ended June 30, 2007 from $9,988,987 for the year
        ended
        June 30, 2006, while gross profit margin decreased to 27.9% for the year
        ended
        June 30, 2007 from 28.6% for the year ended June 30, 2006. The increase in
        gross
        profits is mainly attributable to a 56.4% year-on-year increase in sales
        revenues in relation to a 58.7% year-on-year increase in cost of sales. The
        decrease in gross profit margin principally resulted from a change in sales
        mix
        over the year ended June 30, 2007, which produced increased sales of lower
        margin low-carbon steel products, and an increase in the cost of
        sales.
  ***Sales
        Revenues.*** Sales
        volume increased by 24,861 metric tons or 59% year-on-year to 67,021 metric
        tons
        for the year ended June 30, 2007 from 42,160 tons for the year ended June
        30,
        2006 and, as a result, sales revenues increased by $19,079,102 or 54.7%
        year-on-year to $53,960,243 for the year ended June 30, 2007 from $34,881,141
        for the year ended June 30, 2006. 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 in China among users of precision steel products.
  Production
        volume increased by 23,591 metric tons or 54% year-on-year to 67,112 metric
        tons
        at an average cost of production per ton of $580 for the year ended June
        30,
        2007 compared to 43,521 metric tons at an average cost of production per
        ton of
        $574 for the year ended June 30, 2006, representing an increase of $6 per
        ton,
        or 1% year-on-year. The new 1400 mm cold-roll mill became operational at
        the
        beginning of October 2006, and it will likely take two to three years for
        the
        mill to reach its maximum production capacity.
 
 **Sales
        by Product Line** **.** A
        break-down of our sales by product line for the years ended June 30, 2007
        and
        2006 is as follows:
  ***2007***
              
              ***2006******Product
                  category***
              
              *Quantity*
                *(tons)*
              
              *$
                  Amount*
              
              *%
                  of sales*
              
              *Quantity*
                *(tons)*
              
              *$
                  Amount*
              
              *%
                  of*
                *sales*
              
              *Year-on-year
                  Qty. Variance*Low
                  carbon cold-rolled
              
              
              37,066
              
              
              22,081,636
              
              
              41
              
              
              22,540
              
              
              11,482,265
              
              
              33
              
              
              14,526Low
                  carbon acid wash
              
              
              14
              
              
              5,732
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              14Low
                  carbon hard rolled
              
              
              1,149
              
              
              782,835
              
              
              1
              
              
              3,238
              
              
              1,652,638
              
              
              5
              
              
              (2,089
              )High-carbon
                  cold-rolled
              
              
              5,287
              
              
              5,529,717
              
              
              10
              
              
              6,531
              
              
              15,347,852
              
              
              44
              
              
              (1,244
              )High-carbon
                  hot-rolled
              
              
              11,918
              
              
              9,176,414
              
              
              17
              
              
              9,851
              
              
              6,398,386
              
              
              18
              
              
              2,067High
                  end cold-rolled
              
              
              865
              
              
              14,618,831
              
              
              27
              
              
              -
              
              
              -
              
              
              -
              
              
              865Sales
                of Scrap Metal
              
              
              
              
              
              851,742
              
              
              2
              
              
              -
              
              
              -
              
              
              -Subcontracting
                  income
              
              
              10,722
              
              
              922,534
              
              
              2
              
              
              -
              
              
              -
              
              
              -
              
              
              10,722Total
              
              
              67,021
              
              
              53,960,243
              
              
              100
              %
              
              42,160
              
              
              34,881,141
              
              
              100
              
              
              24,861
  41
 The
        break-down of sales among our product lines changed significantly over the
        year
        ended June 30, 2007. High-carbon cold-rolled steel products only accounted
        for
        10% of the current sales mix at an average selling price of $1,057 per ton
        for
        the year ended June 30, 2007 compared to 43% of the sales mix at an average
        selling price per ton of $2,279 for the year ended June 30, 2006. The lower
        priced low-carbon cold-rolled steel products accounted for 40% of the current
        sales mix at an average selling price of $602 per ton for the year ended
        June
        30, 2007 compared to $11,753,969 or 34% of the sales mix at an average selling
        price per ton of $521 for the year ended June 30, 2006. A new product line,
        high
        end cold-rolled steel, which was not sold during the year ended June 30,
        2006,
        accounted for $14,778,422 or 27% of the current sales mix at an average selling
        price of $17,085 per ton for the year ended June 30, 2007.
  We
        strive
        to find an appropriate sales mix that provides us with the stability and
        cash
        flows of the low-carbon cold-rolled steel products along with the higher
        margin
        provided by high-carbon cold-rolled products. Management continues to take
        appropriate action to optimize our product mix without adversely affecting
        overall sales volume. Management believes that there are high barriers to
        entry
        in the Chinese domestic precision steel industry and that our unique
        capabilities give us a competitive advantage to grow sales of higher margin
        products.
  ***Average
                  selling prices***
              
              ***2007***
              
              ***2006***
              
              ***Variance****$*
              
              *$*
              
              *$*
              
              *%*Low-carbon
                  cold-rolled
              
              
              602
              
              
              521
              
              
              81
              
              
              16
              %Low-carbon
                  acid wash
              
              
              415
              
              
              -
              
              
              415
              
              
              100
              %Low-carbon
                  hard rolled
              
              
              689
              
              
              522
              
              
              167
              
              
              32
              %High-carbon
                  cold-rolled
              
              
              1,057
              
              
              2,279
              
              
              (1,222
              )
              
              (56
              %)High-carbon
                  hot-rolled
              
              
              778
              
              
              665
              
              
              113
              
              
              17
              %High-end
                  cold-rolled
              
              
              17,090
              
              
              -
              
              
              17,090
              
              
              100
              %Subcontracting
                  income
              
              
              87
              
              
              -
              
              
              87
              
              
              100
              %
 
 The
        average unit selling price per ton generated decreased to $814 per ton for
        the
        year ended June 30, 2007 compared to the corresponding period in 2006 of
        $827,
        representing a decrease of $13 or 1.6% year-on-year. This decrease was due
        to an
        increase in sales volume of low-carbon cold-rolled steel when we changed
        our
        sales mix. Sales of low-carbon cold-rolled steel products have increased
        by
        14,526 metric tons or 64% year-on-year to 37,066 metric tons for the year
        ended
        June 30, 2007 compared to 22,540 metric tons for the year ended June 30,
        2006.
        This product accounted for $22,081,636 or 41% of the total sales mix for
        the
        year ended June 30, 2007 compared to $11,482,265 or 33% of the sales mix
        for the
        year ended June 30, 2006.
 
 **Geographical
        Breakdown of Sales** .
 
 *Year
                  ended June 30, 2007*
              
              *Year
                  ended June 30, 2006*
              
              *Variance****Market
                  mix***
              *$*
              *Qty*
              *Unit
                  cost*
              
              *$*
              *Qty*
              *Unit
                  cost*
              
              *Qty*
              *%*
              *Unit
                  cost*
              *%****Local
                  sales***
              49,299,273
              59,863
              819
              
              34,881,141
              42,160
              847
              
              17,703
              42
              (28)
              (3)***Export
                  sales***Philippines
              2,919,304
              4,598
              635
              
              -
              -
              -
              
              4,598
              100
              635
              100Thailand
              1,741,666
              2,560
              680
              
              -
              -
              -
              
              2,560
              100
              680
              100*Subtotal*
              4,660,970
              7,158
              651
              
              -
              -
              -
              
              7,158
              100
              651
              100**Total**
              53,960,243
              67,021
              801
              
              34,881,141
              42,160
              847
              
              24,861
              59
              (46)
              (5)
  42
 
 Sales
        in
        the Philippines and Thailand totaled $4,660,970 on 7,158 metric tons for
        the
        year ended June 30, 2007, compared to no sales in those countries for the
        year
        ended June 30, 2006. However, the average selling price generated for export
        sales to these countries was $651 per ton compared to an average of $819
        per ton
        for sales within China due to the fact that the Company’s export sales consist
        predominantly of low-carbon cold-rolled products.
 
 Sales
        revenues from existing domestic (China) customers increased by $14,418,132
        or
        43% year-on-year to $49,299,273 for the year ended June 30, 2007 from
        $34,881,141 for the year ended June 30, 2006. Sales volume increased by 17,703
        metric tons or 42% year-on-year to 59,863 metric tons for the year ended
        June
        30, 2007 compared to 42,160 metric tons for the year ended June 30,
        2006.
 
 Within
        19
        major cities/provinces in China, the Company generated average sales revenues
        of
        $2,826,188 per city/province and average sales volume of 3,527 tons for the
        year
        ended June 30, 2007 compared to $2,231,658 and 2,635 tons for the year ended
        June 30, 2006, representing an increase in the average of $594,530 and 892
        tons.
        However, the Company continues to rely on four major cities and/or provinces
        (Shanghai, Zhejiang, Beijing and Jiangsu) for most of its sales volume.
        Customers in those jurisdictions represented 75% of total sales revenues
        for the
        year ended June 30, 2007 compared to 83% for the year ended June 30, 2006.
        Sales
        from each of these four jurisdictions averaged $10,098,584 with an average
        sales
        volume of 12,496 metric tons for the year ended June 30, 2007 compared to
        average sales revenues of $7,391,005 and average volume of 8,507 metric tons
        for
        the year ended June 30, 2006.
 
 **Sales
        Breakdown by Major Customer.**
  ***Customers***
              ***2007
                  ($)***
              ***%
                  to sales***
              ***2006
                  ($)***
              ***%
                  to sales***Shanghai
                  Ruixuefeng Metals Co. Ltd
              12,192,219
              23
              4,634,521
              13Shanghai
                  Changshuo Steel Company Ltd
              5,428,110
              10
              -*
              -*China
                  Railway Materials Shanghai Company
              3,498,770
              6
              -*
              -*Hangzhou
                  Relian Company Limited
              3,323,981
              6
              -*
              -*Sinosteel
                  Company Limited
              3,251,450
              6
              -*
              -*Jiangsu
                  Kaiteer Industrial Stove Co. Ltd
              -*
              -*
              5,212,171
              15Shanghai
                  Yiyi Industrial Co. Ltd
              -*
              -*
              4,305,918
              12Ningbo
                  Eco and Tech Shuntong Trading Co. Ltd
              -*
              -*
              2,042,191
              6Shanghai
                  Bayou Industrial Co. Ltd
              -*
              -*
              1,555,204
              427,694,530
              51
              17,750,005
              51Others
              26,265,713
              49
              17,131,136
              49**Total**
              53,960,243
              100
              34,881,141
              100
 **
        Not
        major customers for the relevant years*
  Sales
        revenues generated from the top five major customers as a percentage of total
        sales remained at 51% for the year ended June 30, 2006. With the exception
        of
        Shanghai Ruixuefeng Metals 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 period.
  43
 **Cost
        of Sales**
  ***2007***
              
              ***2006***
              
              ***Variance***$
              
              $
              
              $
              
              %**Cost
                  of sales**-
                  Raw materials
              
              
              33,809,809
              
              
              21,417,919
              
              
              12,391,890
              
              
              58-
                  Direct labor
              
              
              635,885
              
              
              415,852
              
              
              220,033
              
              
              53-
                  Factory overhead
              
              
              4,480,293
              
              
              3,142,658
              
              
              1,337,635
              
              
              4338,925,987
              
              
              24,892,154
              
              
              14,033,833
              
              
              56**Cost
                  per units sold**Total
                  units sold
              
              
              67,021
              
              
              42,160
              
              
              24,861
              
              
              59Average
                  cost per unit sold
              
              
              581
              
              
              590
              
              
              (11
              )
              
              (2
              )
 
 Cost
        of
        sales increased by $14,033,833 or 56% year-on-year to $38,925,987 for the
        year
        ended June 30, 2007 from $24,892,154 for the year ended June 30, 2006. Cost
        of
        sales represented 72% of sales revenues for the year ended June 30, 2007
        compared to 71% for the year ended June 30, 2006. Average cost per ton sold
        decreased by $11 or 2% year-on-year to $581 per ton for the year ended June
        30,
        2007 from $590 per ton for the year ended June 30, 2006. Meanwhile, the average
        selling price per ton decreased by $46 per ton or 5% year-on-year to $801
        per
        ton for the year ended June 30, 2007 from $847 per ton for the year ended
        June
        30, 2006.
  The
        raw
        materials cost component relative to sales revenues increased to 63% for
        the
        year ended June 30, 2007 compared to 61% for the year ended June 30, 2006.
        This
        was attributable to increases in the average purchase price of raw materials
        per
        unit produced by $12 or 2% year-on-year to $504 for the year ended June 30,
        2007
        compared to $492 for the year ended June 30, 2006. Management believes that
        increases in the purchase price of raw materials were due to the excess of
        demand over supply of raw materials due to significant increases in
        infrastructure projects in China.
  Management
        believes that the increase in cost of sales is represented by the combined
        effect of:
 
 ·
            significant
                increases in sales of low-carbon cold-rolled steel to 37,066 metric
                tons
                (compared to 22,540 metric tons for the year ended June 30, 2006)
                was
                generated at an average selling price of $602 per ton (compared to
                $521for the year ended June 30, 2006)
                for the year ended June 30, 2007;  ·
            sales
                of 11,918 metric tons of high-carbon hot-rolled steel (compared to
                9,851
                metric tons for the year ended June 30, 2006) generated at an average
                selling price of $778 per ton (compared to $665 per ton for the year
                ended
                June 30, 2006) for the year ended June 30, 2007;
                and  ·
            sales
                of 865 metric tons of high end cold-rolled steel at (compared to
                none for
                the year ended June 30, 2006) generated at an average selling price
                of
                $17,090 per ton for the year ended June 30,
                2007.  44
  The
        cost
        of raw materials consumed increased by $12,391,890 or 58% year-on-year to
        $33,809,809 for the year ended June 30, 2007 from $21,417,919 for the year
        ended
        June 30, 2006. This increase was mainly attributable to increases in production
        volume by 23,591 metric tons or 54% year-on-year to 67,112 metric tons for
        the
        year ended June 30, 2007 from 43,521 metric tons for the year ended June
        30,
        2006 resulting in higher input of raw materials utilized in production. Average
        unit cost of raw materials per unit produced increased by $12 per ton or
        2%
        year-on-year to $504 per ton for the year ended June 30, 2007 from $492 per
        ton
        for the year ended June 30, 2006.
  Average
        unit cost of raw materials consumed based on precision products sold was
        $504
        per ton for the year ended June 30, 2007 compared to $508 per ton for the
        year
        ended June 30, 2006 and average unit cost of raw materials consumed based
        on
        precision products produced was $504 per ton for the year ended June 30,
        2007
        compared to $492 per ton for the year ended June 30, 2006. The increase in
        the
        quantity of raw materials consumed was directly attributable to differences
        in
        sales volume.
  Manufacturing
        overhead costs increased by $1,337,635 or 43% year-on-year to $4,480,293
        for the
        year ended June 30, 2007 from $3,142,658 for the year ended June 30, 2006.
        The
        increase was mainly attributable to the combined effect of an increase in
        depreciation by $809,198 or 103% year-on-year to $1,593,055 for the year
        ended
        June 30, 2007 from $783,857 for the year ended June 30, 2006, an increase
        in
        utilities by $310,850 or 55% year-on-year to $876,681 for the year ended
        June
        30, 2007 from $565,831 for the year ended June 30, 2006, and an increase
        in
        subcontracting fees paid by $425,732 or 93% year-on-year to $883,812 for
        the
        year ended June 30, 2007 from $458,080 for the year ended June 30,
        2006.
  **Expenses**
  **Selling
        Expenses** .
        Selling
        expenses increased by $123,475, or 101% year-on-year, to $245,695 for the
        year
        ended June 30, 2007 compared to the corresponding period in 2006 of $122,220.
        The increase was mainly attributable to increases in transportation, which
        rose
        by 2,440% year-on-year, due to our increased delivery charges of precision
        steel
        resulting from a broader customer base, including exports, as well as an
        increase in the frequency of deliveries. In response to these rising costs,
        Chengtong has adopted a policy of requiring all new customers to provide
        for
        transportation and delivery of goods.
  **Administrative
        Expenses.** **** Administrative
        expenses increased by $1,358,230 or 269% year-on-year, to $1,863,994 for
        the
        year ended June 30, 2007 compared to the comparable period in 2006. This
        increase was chiefly due to increases in the amortization of intangible assets,
        listing fees relating to the Company’s admission to the NASDAQ Capital Market,
        directors’ remuneration, and salaries and wages. The increase in directors’
remuneration was mainly attributable to the initial distribution of remuneration
        to two directors of PSHL totaling $200,000. Increases in salaries and wages
        were
        principally due to increases in the average number of Chengtong
        staff.
  **Finance
        Costs** .
        Net
        finance cost increased 12% year-on-year as a result of increases in total
        interest expense by $897,162, or 88% year-on-year. These increases in interest
        expenses were mitigated by increases in capitalized interest of $873,122,
        or
        116% year-on-year. We benefited from an exchange rate translation gain due
        to
        the fluctuation of the U.S. dollar to the Renminbi over the period, as well
        as
        an exchange difference arising from the increment in registered capital of
        Chengtong during the year.
  ***Fiscal
        Year 2006 versus Fiscal Year 2005***
  Net
        income before tax increased by $2,682,864 or 42.1% year-on-year to $9,049,305
        for the year ended June 30, 2006 from $6,366,441 for the year ended June
        30,
        2005. The increase in net income was attributable to increased margins as
        a
        result of a shift in focus to higher-margin high carbon cold rolled steel
        products during the year ended June 30, 2006.
  45
  **Gross
        Profit**
  Gross
        profits in absolute terms increased by $2,406,456 or 31.7% year-on-year to
        $9,988,987 for the year ended June 30, 2006 from $7,582,531 for the year
        ended
        June 30, 2005, while gross profit margin increased to 28% for the year ended
        June 30, 2006 from 14.3% for the year ended June 30, 2005. The increase in
        gross
        profits notwithstanding a decrease in sales was mainly attributable to the
        increase in gross profit margin. During the year, the Company was able to
        sell a
        greater quantity of higher-margin products.
  Sales
        revenues decreased by $18,263,460 or 34.4% year-on-year to $34,881,141 for
        the
        year ended June 30, 2006 from $53,144,601 for the year ended June 30, 2005.
        We
        believe that the decrease in sales was attributable to our shifting our focus
        to
        high precision steel products, which have a longer production time during
        that
        period. We also suspended production of low-carbon pickled steel and produced
        much less lower margin, low-carbon cold rolled steel during that
        period.
 
 **Sales
        by Product Line.**
  Our
        sales
        mix also changed significantly during fiscal year 2006. Low carbon hard rolled
        steel products were 5% of the current sales mix at an average selling price
        of
        $522 per ton for the year ended June 30, 2006, compared to 45% for the prior
        year. As the company began to specialize in production of higher gross profit
        margin products which require more time and precision to produce, we
        significantly decreased sales of low carbon cold rolled steel products by
        32,407
        tons, or 91%, to 3,238 tons for the year ended June 30, 2006, compared to
        35,645
        tons for the year ended June 30, 2005. This also resulted in lower production
        capacities as measured in tons of production. However, the average selling
        price
        per ton increased by an average of $128 per ton, or 18%, to $847 per ton
        for the
        year ended June 30, 2006, compared to $719 per ton for the year ended June
        30,
        2005. This increase in average price mitigated the decrease in sales volume
        arising from changes to the sales/production mix with concentration on high
        carbon cold-rolled steel and high carbon hot-rolled steel making up 62% of
        the
        sales mix compared to 27% for the year ended June 30, 2005.
  46
   **Sales
        Breakdown by Major Customer.**
  ***Customers***
              ***2006
                  ($)***
              ***%
                  to sales***
              ***2005
                  ($)***
              ***%
                  to sales***Jiangsu
                  Kaiteer Industrial Stove Co. Ltd
              5,212,171
              15
              14,880,488
              28Shanghai
                  Ruixuefeng Metals Co. Ltd
              4,634,521
              13
              4,251,568
              8Shanghai
                  Yiyi Industrial Co. Ltd
              4,305,918
              12
              9,034582
              17Ningbo
                  Eco and Tech Shuntong Trading Co. Ltd
              2,042,191
              6
              -*
              -*Shanghai
                  Bayou Industrial Co. Ltd
              1,555,204
              4
              -*
              -*BaoSteel
                  Trading Co. Ltd
              -*
              -*
              6,048,153
              11Shanghai
                  Bayou Industrial Co. Ltd
              -*
              -*
              2,579,680
              5Hangzhou
                  Xinri Steel Materials Co. Ltd
              -*
              -*
              3,888,720
              7Huangshi
                  Dongshan Steel Industry Co. Ltd
              -*
              -*
              3,143,596
              6Jiashan
                  Zhongwei Co. Ltd
              -*
              -*
              3,076,274
              617,750,005
              50
              46,903,061
              88Others
              17,131,136
              50
              6,241,541
              12**Total**
              34,881,141
              100
              53,144,602
              100
 **
        Not
        major customers for the relevant years*
  Sales
        revenues generated from the top five major customers as a percentage of total
        sales decreased to 50% for the year ended June 30, 2006 compared to 88% for
        the
        year ended June 30, 2005. The customer mix was fairly consistent from year
        to
        year, but major customers such as BaoSteel Trading Co. Ltd and Hangzhou Xinri
        Steel Materials Co. Ltd. decreased purchases for the year ended June 30,
        2006.
        This was likely the result of the Company’s shift in product mix to higher
        margin precision steel products during the year.
  **Cost
        of Sales**
  Cost
        of
        goods decreased by $20,669,916, or 45%, to $24,892,154 for the year ended
        June
        30, 2006, from $45,562,070 in 2005. The decrease is due in part to a 34%
        decrease in sales combined with a 23% per ton average decrease in raw materials
        costs. Average
        unit cost of raw materials decreased by $58 per ton or 10% year-on-year to
        $508
        per ton for the year ended June 30, 2006, compared to $566 per ton for 2005.
  **Expenses**
  **Selling
        Expenses** .
        Selling
        expenses increased by $35,628, or 41%, to $122,220 for the year ended June
        30,
        2006, compared to $86,592 for the year ended June 30, 2005. The increase
        was due
        to increases in wages of $13,609, welfare expenses of $4,891, traveling expense
        of $12,078 and other costs of $5,050.
  **Administrative
        Expenses.** **** Administrative
        expenses decreased by $38,407, or 7%, to $505,764 for the year ended June
        30,
        2006, compared to $544,171 for the year ended June 30, 2005. The decrease
        was
        due to increases in legal and professional expenses of $163,286 offset by
        decreases in directors’ remuneration of $199,546.
  47
  **Finance
        Costs** .
        For the
        years ended June 30, 2006 and 2005, PSHL incurred $1,021,607 and $508,313
        respectively, in interest and financing costs associated with debt. Interest
        cost of $749,914 incurred during the year ended June 30, 2006 were capitalized
        as part of the construction-in-progress leaving $271,693 in interest expense.
        This increase was due primarily to increased borrowings to finance the
        construction in progress and plant and machinery, specifically for the purpose
        of increasing production capacity.
  ***LIQUIDITY
        AND CAPITAL RESOURCES***
  Our
        business is capital intensive and requires substantial expenditures for,
        among
        other things, the purchase and maintenance of equipment used in our operations.
        Our short-term and long-term liquidity needs arise primarily from capital
        expenditures, working capital requirements and principal and interest payments
        related to our outstanding indebtedness. We have met these liquidity
        requirements with cash provided by operations, equity financing, and bank
        debt.
  Current
        assets .
        Current
        assets increased significantly by $18,184,879 or 78.5% year-on-year to
        $41,338,994 as of June 30, 2007 from $23,154,115 as of June 30, 2006 principally
        as a result of increases in cash and equivalents by $5,317,907 or 2,844%
        year-on-year, inventory by $9,439,794 or 150% year-on-year and net advances
        to
        suppliers by $8,561,159 or 273% year-on-year. We also raised gross proceeds
        of
        $22,354,995 in February of 2007 through the private sale of our common
        stock.
  Current
        liabilities .
        Current
        liabilities decreased by $3,973,173 or 12.9% year-on-year to $26,764,776
        as of
        June 30, 2007 from $30,737,911 as of June 30, 2006. The decrease was due
        to
        decreases in advances from customers, tax payables and amounts due to directors
        and was mitigated by increases in accounts payable, other payables, short-term
        loans and provision for taxation.
  As
        of
        June 30, 2007, we had $9,842,520 in short term bank debt. We expect to refinance
        such debt during the current year, but we cannot assure you that we will
        be able
        to do so on terms favorable to the Company or at all.
  Capital
        Expenditures. ** During
        the year ended June 30, 2007, we invested $22,245,494 in property, production
        plants and equipment, which included additions to buildings of $8,606,050
        and
        plants and machinery of $13,639,444. In addition, the Group obtained a land
        use
        right with respect to its facilities at No. 123 Lao Dong Road, Jia Ding
        District, Xuhang Town, Shanghai through the acquisition of all the registered
        equity in Tuorong at an acquisition cost of $2,119,981 on April 9, 2007.
        We
        believe these capital investments increase our capacity, expand our product
        line, and reduce risks related to occupancy costs, thereby creating new
        opportunities to grow sales and control expenses.
  During
        the current year, we expect to make additional investments in a new hydrogen
        annealing furnace and a new 1700mm cold roll mill at our facilities in Jia
        Ding.
        We estimate that these investments could total up to $18 million. We intend
        to
        fund these investments through a combination of funds from operations, working
        capital, bank debt and the sale of debt and/or equity securities. The actual
        combination of sources of funds will be dependant upon market conditions
        at the
        time of implementation.
  ***OFF-BALANCE
        SHEET ARRANGEMENTS***
  For
        the
        year ended June 30, 2007, we did not have any off-balance sheet
        arrangements.
  48
  ***CONTRACTUAL
        OBLIGATIONS***
  ****
              
              **Payments Due By Period****(in thousands)**
              
              **Total**
              
              **Fiscal Year**
                **2008**
              
              **Fiscal**
                **Years**
                **2009-2010**
              
              **Fiscal**
                **Years**
                **2011-2012**
              
              **Fiscal Year**
                **2013 and**
                **Beyond**Contractual
                  obligations:Long-Term
                  Debt Obligations
              
              $
              
              
              $
              19,407,916
              
              $
              8,254,000
              
              $
              —
              
              $
              —Construction
                  Commitments
              
              
              
              
              
              4,414,714
              
              
              —
              
              
              —
              
              
              —$
              
              
              $
              23,822,630
              
              $
              8,254,000
              
              $
              —
              
              $
              —
  **Bank
        Debt**
  Bank
        and
        other loans increased by $950,383 or 4.2% year-on-year to $22,884,409 as
        of June
        30, 2007 from $21,934,026 as of June 30, 2006. The increase was attributable
        to
        the inception of other loans and additional draw-downs of long-term bank
        loans.
  ***Short-term
        bank loans***
  Short-term
        loans increased by $958,721 or 5% year-on-year to $19,213,708 as of June
        30,
        2007 from $18,254,987 as of June 30, 2006.
 
 Other
        loans decreased by $20,152 year-on-year to $9,842,520 as of June 30, 2007
        from
        $9,862,672 as of June 30, 2006 solely due to a loan of $2,767,192 (RMB
        21,086,000) extended by DaLong Medical & Technology (Shenzhen) Co.,
        Limited.
 
 Hai
        Sheng
        Chen, an officer and director of the Company, provided an unsecured loan
        to
        Chengtong in 2003 with a maximum drawdown of $656,168 (RMB 5,000,000) for
        business development purposes. The loan is interest free and has no fixed
        terms
        of repayment. No further drawdown on this loan was made during the year,
        and as
        of June 30, 2007, $408,620 (RMB 3,357,000) remained outstanding.
 
 ***Long-term
        bank loans***
 
 Long-term
        bank loans increased by $970,805 or 12% year-on-year to $13,042,159 as of
        June
        30, 2007 compared to $12,070,354 as of June 30, 2006.
 
 **Land
        Use Rights**
  Tuorong
        has 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 term of 50 years at a cost of $472,441.
        Additionally, Chengtong has agreed to purchase a land use right from the
        Shanghai Labor and Economic Development Council with respect to a
        27.4- acre
        parcel for a lease period of 50 years at a cost of $497,795.
        In connection with the aforementioned land use rights, Tuorong entered into
        a
        Compensation Agreement with the Shanghai Municipal Housing, Land and Resource
        Management Bureau to pay an aggregate amount of $831,680.
  49
  **Inflation**
  We
        believe that inflation has not had a material effect on our results of
        operations. We generally manufacture our products to match orders from our
        customers. Due to the specialized nature of our products, we are able to
        purchase raw materials based upon customer orders. This operating model allows
        us to effectively pass along fluctuations in the price of raw materials to
        our
        customers. For commonly used raw materials, we purchase larger quantities
        when
        we believe prices are likely to increase in the short term in order to minimize
        the impact of any such price increase.
  ***CRITICAL
        ACCOUNTING POLICIES AND ESTIMATES***
  The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States requires our management to make
        assumptions, estimates and judgments that affect the amounts reported in
        the
        financial statements, including the notes thereto, and related disclosures
        of
        commitments and contingencies, if any. We consider our critical accounting
        policies to be those that require the more significant judgments and estimates
        in the preparation of financial statements, including the
        following:
  ·
            *Functional
                Currency and Translating Financial Statements*--
                The consolidated financial statements have been prepared in accordance
                with accounting principles generally accepted in the United States
                of
                America. Our functional currency is Chinese Renminbi; however, the
                accompanying consolidated financial statements have been expressed
                in USD.
                The consolidated balance sheets have been translated into USD at
                the
                exchange rates prevailing at each balance sheet date. The consolidated
                statements of operations and cash flows have been translated using
                the
                weighted-average exchange rates prevailing during the periods of
                each
                statement.  **·**
            *Advances
                to Suppliers and from Customers*-
                As is common practice in China, Chengtong will often make advance
                payments
                to its suppliers for materials, or receive advance payments from
                its
                customers. In some cases, the same party may be both a supplier to,
                and
                customer of, Chengtong. In such cases, Chengtong may make an advance
                to a
                third party as supplier and receive an advance from the same party
                as a
                customer. Chengtong’s practice is to offset such amounts against each
                other. We have established an allowance for doubtful accounts as
                a reserve
                against advances made to suppliers to the extent that the related
                goods
                are not received within ninety (90) days of the advance.  **·**
            *Other
                Policies*-
                Other accounting policies used by the Company are set forth in the
                notes
                accompanying our financial statements.  ***RECENT
        ACCOUNTING PRONOUNCEMENTS***
  In
        June
        2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
        in
        Income Taxes—an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
        provides guidance for recognizing and measuring uncertain tax positions,
        as
        defined in SFAS 109, Accounting for Income Taxes. FIN 48 prescribes a threshold
        condition that a tax position must meet for any of the benefit of the uncertain
        tax position to be recognized in the financial statements. Guidance is also
        provided regarding de-recognition, classification and disclosure of these
        uncertain tax positions. FIN 48 is effective for fiscal years beginning after
        December 15, 2006. The adoption of FIN 48 did not have a material impact
        on our
        financial position, results of operations or cash flows.
  In
        September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157 addresses how companies should measure fair value
        when they are required to use a fair value measure for recognition or disclosure
        purposes under generally accepted accounting principles. SFAS No. 157 defines
        fair value, establishes a framework for measuring fair value and expands
        the
        required disclosures about fair value measurements. SFAS No. 157 is effective
        for fiscal years beginning after November 15, 2007, with earlier adoption
        permitted. Management is assessing the impact of the adoption of SFAS No.
        157.
  50
  In
        September 2006, the FASB issued Statement No. 158, “Employers’ Accounting for
        Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”), an
        amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 requires
        (a) recognition of the funded status (measured as the difference between
        the
        fair value of the plan assets and the benefit obligation) of a benefit plan
        as
        an asset or liability in the employer’s statement of financial position, (b)
        measurement of the funded status as of the employer’s fiscal year-end with
        limited exceptions, and (c) recognition of changes in the funded status in
        the
        year in which the changes occur through comprehensive income. The requirement
        to
        recognize the funded status of a benefit plan and the disclosure requirements
        are effective as of the end of the fiscal year ending after December 15,
        2006.
        The requirement to measure the plan assets and benefit obligations as of
        the
        date of the employer’s fiscal year-end statement of financial position is
        effective for fiscal years ending after December 15, 2008. SFAS No. 158 has
        no
        current applicability to the Company’s financial statements.
  In
        September 2006, the Securities and Exchange Commission issued Staff Accounting
        Bulletin No. 108 (“SAB No. 108”). SAB No. 108 addresses how the effects of prior
        year uncorrected misstatements should be considered when quantifying
        misstatements in current year financial statements. SAB No. 108 requires
        companies to quantify misstatements using a balance sheet and income statement
        approach and to evaluate whether either approach results in quantifying an
        error
        that is material in light of relevant quantitative and qualitative factors.
        When
        the effect of initial adoption is material, companies will record the effect
        as
        a cumulative effect adjustment to beginning of year retained earnings and
        disclose the nature and amount of each individual error being corrected in
        the
        cumulative adjustment. Complying with the requirements of SAB No. 108 had
        no
        impact on the Company’s financial statements.
  In
        February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities” (“SFAS No. 159”), an amendment of
        FASB Statement No. 115. SFAS No. 159 addresses how companies should measure
        many
        financial instruments and certain other items at fair value. The objective
        is to
        mitigate volatility in reported earnings caused by measuring related assets
        and
        liabilities differently without having to apply complex hedge accounting
        provisions. SFAS No. 159 is effective for fiscal years beginning after November
        15, 2007, with earlier adoption permitted. Management is assessing the impact
        of
        the adoption of SFAS No. 159.
  **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**
  The
        Group
        collects revenues from operations principally in the Chinese Renminbi. Except
        for limited exports to Thailand and the Philippines, all of our local sales
        revenues are collected in and substantially all of its expenses are paid
        in the
        Chinese Renminbi. We face foreign currency rate translation risk when
        Chengtong’s results are translated to U.S. Dollars, as well as foreign currency
        rate transaction risk with respect to sales outside of China and with respect
        to
        financial instruments denominated in foreign currencies. Our results of
        operations denominated in foreign currency are translated at the average
        rate of
        exchange during the reporting period. Assets and liabilities denominated
        in
        foreign currencies at the balance sheet date are translated at the market
        rate
        of exchange ruling at that date. The registered equity capital denominated
        in
        the functional currency is translated at the historical rate of exchange
        at the
        time of capital contribution.
  51
  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 29, 2007 the exchange rate was 7.62 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, 2007, the Group’s outstanding financial instruments with foreign currency
        exchange rate risk exposure had an aggregate fair value of $7.5 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 $.75 million
        at
        June 30, 2007.
  **Interest
        Rates**
  The
        Group
        is subject to interest rate risk on its non-derivative financial instruments.
        The Group does not hedge its interest rate risk. At June 30, 2007, the
        Group’s total bank debt outstanding was $24,010,963, all of which was
        interest-bearing. Substantially all of the bank debt was floating-rate debt
        with
        interest rates which vary with changes in the standard rate set by the People’s
        Bank of China. A change in the interest rate or yield of fixed rate debt
        will
        only impact the fair value of such debt, while a change in the interest rate
        of
        floating rate, or variable rate, debt will impact interest expense as well
        as
        the amount of cash required to service such debt. To the extent interest
        rates
        increase, we will be liable for higher interest payments to its lenders.
        For the
        current financial year, annual interest on loans is anticipated to be
        approximately $1.8 million. The impact of a 1% increase in interest rates
        will
        increase interest expense by approximately $240,000. As our short-term
        borrowings mature, it will be required to either repay or refinance these
        borrowings. An increase in short-term interest rates at the time that we
        seek to
        refinance short-term borrowings may increase the cost of borrowings, which
        may
        adversely affect our earnings and cash available for distribution to its
        shareholders.
  At
        June 30, 2007, the aggregate fair value of the Group’s financial
        instruments with exposure to interest rate risk was approximately $23 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
        $.1
        million at June 30, 2007.
  52
  **Commodity
        Prices**
  The
        steel
        coils and other raw materials used by Chengtong, require large amounts of
        raw
        materials - iron ore or other iron containing material, steel scrap, coke
        and
        coal - as well as large amounts of energy to produce. Additionally, Chengtong
        also uses large amounts of energy in its operations. Over the last several
        years, prices for raw materials and energy, in particular natural gas and
        oil,
        have increased significantly. In many cases these price increases have been
        at a
        greater percentage than price increases for the sale of steel products.
  The
        Group
        has no open derivative commodity instruments as of June 30, 2007 and does
        not currently hedge its exposure to price fluctuations in the raw materials
        and
        energy required for the manufacture of its products.
   53
 **ITEM
          8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**
  **Report
          of Independent Registered Public Accounting Firm**
  **Consolidated
          Balance Sheet**
  **Consolidated
          Statement of Operations**
  **Consolidated
          Statement of Changes in Shareholders’ Equity**
  **Consolidated
          Statement of Cash Flows**
  **Notes
          to Consolidated Financial Statements**
             54
 **REPORT
            OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 We
            have
            audited the accompanying consolidated balance sheets of China Precision
            Steel,
            Inc. and Subsidiaries (the “Company”) as of June 30, 2007 and 2006 and the
            related consolidated statements of operations, stockholders’ equity and cash
            flows for the years ended June 30, 2007, 2006, and 2005. 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 audits.
 
 We
            conducted our audits 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
            audits provide a reasonable basis for our opinion.
 
 In
            our
            opinion, the consolidated financial statements referred to above present
            fairly,
            in all material respects, the consolidated financial position of China
            Precision
            Steel, Inc. and Subsidiaries as of June 30, 2007 and 2006, and the consolidated
            results of their operations and cash flows for the years ended June 30,
            2007,
            2006, and 2005 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
  55
 
 **China
                    Precision Steel, Inc. and Subsidiaries****Consolidated
                    Balance Sheets****June
                    30,**
                
                **June
                    30,****2007**
                
                **2006****Assets****Current
                    assets**Cash
                    and equivalents
                
                $
                5,504,862
                
                $
                186,955Accounts
                    receivableTrade,
                    net of allowances of $273,461 and $138,837at
                    June 30, 2007 and 2006, respectively
                
                
                8,242,044
                
                
                13,399,003Other
                
                
                85,708
                
                
                69,913Inventory
                
                
                15,723,704
                
                
                6,283,910Deposits
                
                
                82,758
                
                
                75,575Advances
                    to suppliers, net of allowance of $3,502,184 and$0
                    at June 30,
                
                
                11,699,918
                
                
                3,138,759**Total
                    current assets**
                
                
                41,338,994
                
                
                23,154,115**Property
                    and equipment**Land
                    use rights
                
                
                1,124,583
                
                
                -Property
                    and equipment, net
                
                
                29,238,227
                
                
                8,664,417Construction-in-progress
                
                
                10,355,763
                
                
                13,752,95440,718,573
                
                
                22,417,371**Goodwill**
                
                
                99,999
                
                
                -**Total
                    assets**
                
                $
                82,157,566
                
                $
                45,571,486**Liabilities
                    and Stockholders' Equity****Current
                    liabilities**Accounts
                    payable and accrued liabilities
                
                $
                4,855,932
                
                $
                1,801,466Advances
                    from customers
                
                
                1,720,812
                
                
                1,859,773Other
                    taxes payables
                
                
                816,553
                
                
                862,914Current
                    income taxes payable
                
                
                1,892,866
                
                
                -Deferred
                    income taxes payable
                
                
                1,064,028
                
                
                1,535,204Amounts
                    due to directors
                
                
                408,620
                
                
                5,896,943Current
                    portion of long-term debt
                
                
                6,163,445
                
                
                8,918,939Notes
                    payable
                
                
                9,842,520
                
                
                9,862,672**Total
                    current liabilities**
                
                
                26,764,776
                
                
                30,737,911**Long-term
                    debt, net of current portion shown above**
                
                
                6,878,714
                
                
                3,152,415**Stockholders'
                    equity:**Preferred
                    stock: $0.001 per value, 8,000,000 sharesauthorized,
                    no shares outstanding at June 30, 2007 and 2006Ordinary
                    stock: $0.001 par value, 62,000,000 sharesauthorized,
                    37,378,143 and 24,283,725 issued andoutstanding
                    June 30, 2007 and 2006
                
                
                37,378
                
                
                24,284Additional
                    paid-in capital
                
                
                31,867,063
                
                
                1,375,716Accumulated
                    other comprehensive income
                
                
                2,192,160
                
                
                745,583Retained
                    earnings
                
                
                17,008,238
                
                
                9,535,577**Total
                    stockholders' equity**
                
                
                51,104,839
                
                
                11,681,160**Amounts
                    due from directors**
                
                
                (2,590,763
                )
                
                -**Total
                    liabilities and stockholders' equity**
                
                $
                82,157,566
                
                $
                45,571,486
  The
                    accompanying notes are an integral part of these financial
                    statements.
  56
 
 **China
                    Precision Steel, Inc. and Subsidiaries****Consolidated
                    Statements of Operations****For
                    the Years Ended June 30. 2007, 2006 and 2005**
  **2007**
                
                **2006**
                
                **2005****Revenues**Sales
                    revenues
                
                $
                53,960,243
                
                $
                34,881,141
                
                $
                53,144,601Cost
                    of goods sold
                
                
                38,925,987
                
                
                24,892,154
                
                
                45,562,070**Gross
                    profit**
                
                
                15,034,256
                
                
                9,988,987
                
                
                7,582,531**Operating
                    expenses**Selling
                    expenses
                
                
                245,695
                
                
                122,220
                
                
                86,592Administrative
                    expenses
                
                
                1,863,994
                
                
                505,764
                
                
                544,171Provision
                    for bad debts
                
                
                3,775,645
                
                
                -
                
                
                -Depreciation
                    and amortization expense
                
                
                44,375
                
                
                40,005
                
                
                142,127**Total
                    operating expenses**
                
                
                5,929,709
                
                
                667,989
                
                
                772,890**Income
                    from continuing operations**
                
                
                9,104,547
                
                
                9,320,998
                
                
                6,809,641**Other
                    income (expense)**Other
                    revenues
                
                
                103,388
                
                
                -
                
                
                12,077Other
                    expenses
                
                
                (1,362
                )
                
                -
                
                
                -Interest
                    and finance costs
                
                
                (312,222
                )
                
                (271,693
                )
                
                (455,277
                )**Total
                    other income (expense)**
                
                
                (210,196
                )
                
                (271,693
                )
                
                (443,200
                )**Net
                    income from continuing operations****before
                    income tax**
                
                
                8,894,351
                
                
                9,049,305
                
                
                6,366,441**Provision
                    for (benefit from) income tax**Current
                
                
                1,892,866
                
                
                -
                
                
                -Deferred
                
                
                (471,176
                )
                
                1,535,204
                
                
                -Total
                    income tax expense
                
                
                1,421,690
                
                
                1,535,204
                
                
                -**Net
                    income before discontinued operations**
                
                
                7,472,661
                
                
                7,514,101
                
                
                6,366,441**Net
                    income from discontinued operations**
                
                
                831,448
                
                
                900,469
                
                
                (340,586
                )**Net
                    income**
                
                $
                8,304,109
                
                $
                8,414,570
                
                $
                6,025,855**Basic
                    earnings per share**From
                    continuing operations
                
                $
                0.26
                
                $
                0.31
                
                $
                0.26From
                    discontinued operations
                
                $
                0.03
                
                $
                0.04
                
                $
                (0.01
                )Total
                
                $
                0.29
                
                $
                0.35
                
                $
                0.25**Basic
                    weighted average shares outstanding**
                
                
                28,438,313
                
                
                24,283,725
                
                
                24,283,725**Diluted
                    earnings per share**From
                    continuing operations
                
                $
                0.26
                
                $
                0.31
                
                $
                0.26From
                    discontinued operations
                
                $
                0.03
                
                $
                0.04
                
                $
                (0.01
                )Total
                
                $
                0.29
                
                $
                0.35
                
                $
                0.25**Diluted
                    weighted average shares outstanding**
                
                
                28,759,553
                
                
                24,283,725
                
                
                24,283,725**The
                    Components of comprehensive income:**Net
                    income
                
                $
                8,304,109
                
                $
                8,414,570
                
                $
                6,025,855Foreign
                    currency translation adjustment
                
                
                1,446,577
                
                
                745,583
                
                
                -**Comprehensive
                    income**
                
                $
                9,750,686
                
                $
                9,160,153
                
                $
                6,025,855
  The
                    accompanying notes are an integral part of these financial
                    statements.
  57
   **China
                    Precision Steel, Inc. and Subsidiaries****Consolidated
                    Statements of Changes in Stockholders' Equity****For
                    the Years Ended June 30, 2007, 2006 and
                    2005**
  **Accumulated****Additional**
                
                **Other**
                
                
                
                **Total****Ordinary
                    Shares**
                
                **Paid-in**
                
                **Comprehensive**
                
                **Retained**
                
                **Stockholders'****Share**
                
                **Amount**
                
                **Capital**
                
                **Income**
                
                **Earnings**
                
                **Equity**Balance
                    at June 30, 2004
                
                
                50,000
                
                
                50,000
                
                
                950,000
                
                
                -
                
                
                (3,904,855
                )
                
                (2,904,855
                )Effects
                    of recapitalization
                
                
                24,233,725
                
                
                (25,716
                )
                
                425,716
                
                
                -
                
                
                (400,000
                )
                
                -Net
                    income for the year
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                6,025,855
                
                
                6,025,855Less
                    discontinued operationssold
                    to former shareholder
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                300,476
                
                
                300,476Balance
                    at June 30, 2005
                
                
                24,283,725
                
                
                24,284
                
                
                1,375,716
                
                
                -
                
                
                2,021,476
                
                
                3,421,476Foreign
                    currency translationadjustment
                
                
                -
                
                
                -
                
                
                -
                
                
                745,583
                
                
                -
                
                
                745,583Net
                    income for the year
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                8,414,570
                
                
                8,414,570Less
                    discontinued operationssold
                    to former shareholder
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (900,469
                )
                
                (900,469
                )Balance
                    at June 30, 2006
                
                
                24,283,725
                
                
                24,284
                
                
                1,375,716
                
                
                745,583
                
                
                9,535,577
                
                
                11,681,160Sale
                    of common stock
                
                
                7,451,665
                
                
                7,451
                
                
                22,347,543
                
                
                -
                
                
                -
                
                
                22,354,994Syndication
                    fees
                
                
                -
                
                
                -
                
                
                (3,028,116
                )
                
                -
                
                
                -
                
                
                (3,028,116
                )Stock
                    issued for syndication fees
                
                
                2,798,191
                
                
                2,798
                
                
                (2,798
                )
                
                -
                
                
                -
                
                
                -Anti-dilution
                    rights stock
                
                
                827,962
                
                
                828
                
                
                (828
                )
                
                -
                
                
                -
                
                
                -Conversion
                    of debt to stock
                
                
                2,016,600
                
                
                2,017
                
                
                6,773,759
                
                
                
                
                
                
                
                
                6,775,776Warrants
                    issued for consulting
                
                
                -
                
                
                -
                
                
                447,993
                
                
                -
                
                
                -
                
                
                447,993Capital
                    contribution fromwaiver
                    of dividend
                
                
                -
                
                
                -
                
                
                3,953,794
                
                
                
                
                
                
                
                
                3,953,794Foreign
                    currency translationadjustment
                
                
                -
                
                
                -
                
                
                -
                
                
                1,446,577
                
                
                -
                
                
                1,446,577Net
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                8,304,109
                
                
                8,304,109Less
                    discontinued operationssold
                    to former shareholder
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (831,448
                )
                
                (831,448
                )Balance
                    at June 30, 2007
                
                
                37,378,143
                
                $
                37,378
                
                $
                31,867,063
                
                $
                2,192,160
                
                $
                17,008,238
                
                $
                51,104,839
  The
                    accompanying notes are an integral part of these financial
                    statements.
 
 58
  **China
                    Precision Steel, Inc. and Subsidiaries****Consolidated
                    Statements of Cash Flows****For
                    the Years ended June 30, 2007, 2006 and 2005**
  **2007**
                
                **2006**
                
                **2005****Cash
                    flows from operating activities****Net
                    Income**
                
                $
                8,304,109
                
                $
                8,414,570
                
                $
                6,025,855**Adjustments
                    to reconcile net income to net cash provided by****(used
                    in) operating activities**Depreciation
                
                
                1,527,211
                
                
                823,862
                
                
                507,710Less
                    income from discontinued operations - Oralabs, Inc
                
                
                (831,448
                )
                
                (900,469
                )
                
                340,586Provision
                    for doubtful accounts
                
                
                3,775,645
                
                
                -
                
                
                -Warrants
                    issued for consulting
                
                
                447,993
                
                
                -
                
                
                -**Net
                    changes in assets and liabilities:**Accounts
                    receivable, net
                
                
                5,523,369
                
                
                (6,790,827
                )
                
                (5,808,987
                )Inventories
                
                
                (9,133,893
                )
                
                (4,018,854
                )
                
                5,931Advances
                    to suppliers
                
                
                (10,677,692
                )
                
                (1,440,047
                )
                
                (185,323
                )Deposits
                
                
                (3,504
                )
                
                (75,575
                )
                
                -Accounts
                    payable and accrued expenses
                
                
                2,966,771
                
                
                435,337
                
                
                655,076Advances
                    from customers
                
                
                (229,495
                )
                
                1,296,647
                
                
                (2,000,883
                )Deferred
                    income taxes
                
                
                (471,176
                )
                
                1,135,204
                
                
                -Current
                    income taxes
                
                
                1,892,866
                
                
                -
                
                
                -Taxes
                    payable
                
                
                (188,367
                )
                
                670,313
                
                
                312,300**Net
                    cash provided by operating activities**
                
                
                2,902,389
                
                
                (449,839
                )
                
                (147,735
                )**Cash
                    flows from investing activities**Purchase
                    of goodwill
                
                
                (99,999
                )
                
                -
                
                
                -Purchases
                    of fixed assets including construction in progress
                
                
                (9,896,145
                )
                
                (10,049,870
                )
                
                (4,833,001
                )**Net
                    cash (used in) investing activities**
                
                
                (9,996,144
                )
                
                (10,049,870
                )
                
                (4,833,001
                )**Cash
                    flows from financing activities**Advances
                    to Directors, net
                
                
                (7,610,426
                )
                
                (1,763,994
                )
                
                (320,041
                )Notes
                    payable proceeds
                
                
                10,040,633
                
                
                13,245,762
                
                
                14,318,444Repayments
                    of notes payable
                
                
                (10,157,728
                )
                
                (4,251,719
                )
                
                (6,122,131
                )Proceeds
                    from sale of common stock
                
                
                19,326,878
                
                
                -
                
                
                -**Net
                    cash provided by financing activities**
                
                
                11,599,357
                
                
                7,230,049
                
                
                7,876,272**Effect
                    of exchange rate**
                
                
                812,305
                
                
                323,289
                
                
                -**Net
                    increase (decrease) in cash**
                
                
                5,317,907
                
                
                (2,946,371
                )
                
                2,895,536**Cash
                    and cash equivalents, beginning of year**
                
                
                186,955
                
                
                3,133,326
                
                
                237,790**Cash
                    and cash equivalents, end of year**
                
                $
                5,504,862
                
                $
                186,955
                
                $
                3,133,326
  The
                    accompanying notes are an integral part of these financial
                    statements.
  59
  
 **China
                    Precision Steel, Inc. and Subsidiaries****Consolidated
                    Statements of Cash Flows****For
                    the Years ended June 30, 2007, 2006 and 2005**
  **2007**
                
                **2006**
                
                **2005****Supplemental
                    disclosure of cash flow information**Interest
                    paid
                
                $
                312,222
                
                $
                395,134
                
                $
                202,955Taxes
                    paid
                
                $
                -
                
                $
                -
                
                $
                -Issuance
                    of 2,798,191 shares of stock for syndication fees
                
                $
                8,394,573
                
                $
                -
                
                $
                -Issuance
                    of 100,000 warrants for services
                
                $
                447,993
                
                $
                -
                
                $
                -Issuance
                    of 1,216,667 warrants for syndication fees
                
                $
                2,770,349
                
                $
                -
                
                $
                -Contribution
                    of director's loans to additional paid in capital
                
                $
                3,953,794
                
                $
                -
                
                $
                -Shareholder
                    loans for contributed construction costs
                
                $
                8,840,990
                
                $
                -
                
                $
                -
  The
                    accompanying notes are an integral part of these financial
                    statements.
  60
  **China
          Precision Steel, Inc.**
 
 ·
              Notes
                  to the Consolidated Financial Statements  
 **1.** **Description
          of Business**
 
 On
          December 28, 2006, China Precision Steel, Inc. (the “Company”) under its former
          name, Oralabs Holding Corp., issued 25,363,002 shares of its common stock
          in
          exchange for 100% of the registered capital of Partner Success Holdings
          Limited,
          a British Virgin Islands Business Company (“PSHL”) pursuant to a Stock Exchange
          Agreement, dated March 31, 2006. Subsequent to the closing of that transaction,
          on December 28, 2006, the Company redeemed 3,629,350 shares of its common
          stock
          in exchange for all of the common stock of Oralabs, Inc., a wholly-owned
          operating subsidiary. The Company issued 100,000 shares of its common stock
          to
          Oralabs, Inc. in exchange for $450,690, and received additional cash payments
          in
          the aggregate amount of $108,107 in payment of an estimated $558,797 tax
          liability to be incurred by the Company in connection with the spin off
          of
          Oralabs, Inc. and the supplement payment received. The Company then changed
          its
          name to China Precision Steel, Inc.
 
 These
          transactions were treated for financial reporting purposes as a
          recapitalization, with prior Oralabs, Inc. operating activities reflected
          on the
          statements of operations as income (loss) from discontinued operations.
          The
          $558,797 estimated tax liability incurred in connection with the spin off
          of
          Oralabs, Inc. was treated as a transaction cost for financial reporting
          purposes
          and was treated as a reduction in additional paid in capital to the extent
          of
          the additional cash received which was also $558,797. See Note 15 of Notes
          to
          Condensed Consolidated Financial Statements.
 
 PSHL,
          registered on April 30, 2002 in the Territory of the British Virgin Islands,
          had
          registered capital of $50,000 as of June 30, 2006 and 2005. It has three
          wholly-owned subsidiaries, Shanghai Chengtong Precision Strip Company Limited
          (“Chengtong”), Shanghai Tuorong Precision Strip Co., Limited (“Tuorong”), and
          Blessford International Limited (“Blessford”).
  In
          the
          year ended June 30, 2007, we added three indirect subsidiaries to our corporate
          structure. On April 9, 2007, we purchased Shanghai Tuorong Precision Strip,
          Limited, or Tuorong, through PSHL. The sole activity of Tuorong is the
          ownership
          of a land use right with respect to facilities utilized by Chengtong. On
          April
          10, 2007, PSHL purchased for $100,000 Blessford International Limited,
          a British
          Virgin Islands company. Blessford International Limited does not conduct
          any
          business, but it owns a single subsidiary, Shanghai Blessford Alloy Company
          Limited, that is a wholly-foreign owned enterprise chartered in China. We
          intend
          to hold Blessford International Limited as a shell subsidiary that may
          be used
          in the future to facilitate optimization the tax structure of the Group’s
          activities .
  
 Chengtong
          was registered on July 2, 2002 in Shanghai, in the People’s Republic of China
          (“PRC”) with a registered capital of $3,220,000 and a defined period of
          existence of 50 years from July 2, 2002 to July 1, 2052. Chengtong was
          classified as a Sino-foreign joint venture enterprise with limited liabilities.
          On August 22, 2005, the authorized registered capital was increased to
          $15,220,000. Pursuant to the document issued by the District Council to
          Xuhang
          Town Council on June 28, 2004, the equity transfers from China Chengtong
          Metal
          Group Limited and Eastreal Holdings Company Limited to PSHL was approved
          and the
          transformation of Chengtong from a Sino-foreign joint investment enterprise
          to a
          wholly foreign owned enterprise (WFOE) was granted.
 
 As
          used
          herein, the “Group” refers to the Company, PSHL and Chengtong, Tuorong and
          Blessford on a consolidated basis.
  61
 
 The
          Company’s principal activities are conducted through its principal subsidiary,
          Chengtong. Chengtong, is a niche precision steel processing company principally
          engaged in the manufacture and sales of cold-rolled and hot-rolled precision
          steel products and plates for down stream applications in the automobile
          industry (components and spare parts), kitchen tools and functional parts
          of
          electrical appliances. Raw materials, hot-rolled de-scaled (pickled) steel
          coils, will go through certain cold reduction processing procedures to
          give
          steel rolls and plates in different cuts and thickness for deliveries in
          accordance with customers’ specifications. Specialty precision steel offers
          specific control of thickness, shape, width, surface finish and other special
          quality features that compliment the emerging need for highly engineered
          end use
          applications. Precision steel pertains to the precision of measurements
          and
          tolerances of the above factors, especially thickness tolerance.
 
 **2.** **Basis
          of Preparation of Financial Statements**




The
        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 paragraph “Foreign
        Currency” below).
  The
        accompanying financial statements differ from the financial statements used
        for
        statutory purposes in PRC in that they reflect certain adjustments, recorded
        on
        the entities’ books, which are appropriate to present the financial position,
        results of operations and cash flows in accordance with US GAAP. The principal
        adjustments are related to revenue recognition, foreign currency translation,
        deferred taxation, consolidation, and depreciation and valuation of property
        and
        equipment and intangible assets.
 
 **3.** **Summary
        of Significant Accounting Policies**
 
 The
        following is a summary of significant accounting policies:
 
 **Cash
        and Equivalents -** The **** Company
        considers all highly liquid debt instruments purchased with maturity period
        of
        three months or less to be cash equivalents. The carrying amounts reported
        in
        the accompanying consolidated balance sheet for cash and cash equivalents
        approximate their fair value.
 
 **Accounts
        Receivable -** The
        Company provides an allowance for doubtful accounts equal to the estimated
        uncollectible amounts. It is reasonably possible that the Company’s estimate of
        the allowance will change. At June 30, 2007 and 2006, the Company had $273,461
        and $138,837 of allowances for doubtful accounts, respectively.
 
 **Inventory** **-** **** Inventory
        is stated at the lower of cost or market. Cost is determined using the weighted
        average method. Market value represents the estimated selling price in the
        ordinary course of business less the estimated costs necessary to complete
        the
        sale.
 
 The
        cost
        of inventories comprises all costs of purchases, costs of conversion and
        other
        costs incurred in bringing the inventories to their present location and
        condition. The costs of conversion of inventories include fixed and variable
        production overheads, taking into account the stage of completion.
 
 **Advances
        to Suppliers -** In
        order
        to insure a steady supply of raw materials, the Company is required from
        time to
        time to make cash advances when placing its purchase orders. Cash advances
        are
        shown net of allowances for unrecoverable advances of $3,502,184 and $0 at
        June
        30, 2007 and 2006 respectively.
  62
  **Property,
        Plant and Equipment -** Property,
        plant and equipment are stated at cost less accumulated depreciation. The
        cost
        of an asset comprises its purchase price and any directly attributable costs
        of
        bringing the asset to its present working condition and location for its
        intended use.
 
 Depreciation
        is computed on a straight-line basis over the estimated useful lives of the
        related assets for financial reporting purposes. The estimated useful lives
        for
        significant property and equipment are as follows:
 Buildings
                25
                    yearsOffice
                    equipment
                5
                    yearsMotor
                    vehicles
                5
                    yearsMachineries
                10
                    years
 
 Repairs
        and maintenance costs are normally charged to the statement of operations
        in the
        year in which they are incurred. In situations where it can be clearly
        demonstrated that the expenditure has resulted in an increase in the future
        economic benefits expected to be obtained from the use of the asset, the
        expenditure is capitalized as an additional cost of the asset.
 
 Property,
        plant and equipment are evaluated annually for any impairment in value. Where
        the recoverable amount of any property and equipment is determined to have
        declined below its carrying amount, the carrying amount is reduced to reflect
        the decline in value. There were no property and equipment impairments
        recognized during the years ended June 30, 2007 and 2006 .
 
 **Capitalized
        Interest -** The
        Company capitalizes interest cost on borrowings incurred during the new
        construction or upgrade of qualified assets. Capitalized interest is added
        to
        the cost of the underlying assets and is amortized over the useful lives
        of the
        assets. During the years ended June 30, 2007, 2006. and 2005, the Company
        capitalized $826,101, $749,914 and $0, respectively, of interest to
        construction-in-progress.
 
 **Construction-in-Progress** -
        Properties currently under development are accounted for as
        construction-in-progress. Construction-in-progress is recorded at acquisition
        cost, including land rights cost, development expenditure, professional fees
        and
        the interest expenses capitalized during the course of construction for the
        purpose of financing the project. Upon completion and readiness for use of
        the
        project, the cost of construction-in-progress is to be transferred to properties
        held for sale.
 
 Construction-in-progress
        is valued at the lower of cost or market. Management evaluates the market
        value
        of its properties on a quarterly basis by comparing selling prices of its
        properties with those of other equivalent properties in the vicinity offered
        by
        other developers reduced by anticipated selling costs and associated taxes.
        In
        the case of construction-in-progress, management takes into consideration
        the
        estimated cost to complete the project when making the lower of cost or market
        calculation.
 
 **Contingent
        Liabilities and Contingent Assets**  **-** A
        contingent liability is a possible obligation that arises from past events
        and
        whose existence will only be confirmed by the occurrence or non-occurrence
        of
        one or more uncertain future events not wholly within the control of the
        Company. It can also be a present obligation arising from past events that
        is
        not recognized because it is not probable that outflow of economic resources
        will be required or the amount of obligation cannot be measured
        reliably.
  63
  A
        contingent liability is not recognized but is disclosed in the notes to the
        financial statements. When a change in the probability of an outflow occurs
        so
        that outflow is probable, they will then be recognized as a
        provision.
 
 A
        contingent asset is a possible asset that arises from past events and whose
        existence will be confirmed only by the occurrence or non-occurrence of one
        or
        more uncertain events not wholly within the control of the Company.
 
 Contingent
        assets are not recognized but are disclosed in the notes to the financial
        statements when an inflow of economic benefits is probable. When inflow is
        virtually certain, an asset is recognized.
 
 **Advances
        from customers**  **-** Revenue
        from the sale of goods or services is recognized at the time that goods are
        delivered or services are rendered. Receipts in advance for goods to be
        delivered or services to be rendered in the subsequent year are carried forward
        as deferred revenue.
 
 **Revenue
        Recognition** **-** **** Revenue
        from the sale of goods and services is recognized on the transfer of risks
        and
        rewards of ownership, which generally coincides with the time when the goods
        are
        delivered to customers and the title has passed and services have been rendered
        and invoiced. Revenue is reported net of all VAT taxes. Other income is
        recognized when it is earned.
 
 **Foreign
        Currencies** - The
        Company’s principal country of operations is in the PRC. The financial position
        and results of operations of the Company are determined using the local currency
        ("Renminbi" or "Yuan") as the functional currency. The results of operations
        denominated in foreign currency are translated at the average rate of exchange
        during the reporting period. Assets and liabilities denominated in foreign
        currencies at the balance sheet date are translated at the market rate of
        exchange ruling at that date. The registered equity capital denominated in
        the
        functional currency is translated at the historical rate of exchange at the
        time
        of capital contribution. All translation adjustments resulting from the
        translation of the financial statements into the reporting currency (“US
        Dollars”) are dealt with as an exchange fluctuation reserve in shareholders’
equity.
 
 **Taxation
        -** Taxation
        on overseas profits has been calculated on the estimated assessable profits
        for
        the year at the rates of taxation prevailing in the country in which the
        Company
        operates.
 
 Provision
        for the PRC enterprise income tax is calculated at the prevailing rate based
        on
        the estimated assessable profits less available tax relief for losses brought
        forward **.** The
        Company does not accrue taxes on unremitted earnings from foreign operations
        as
        it is the Company’s intention to invest these earnings in the foreign operations
        indefinitely **.**
 
 *Enterprise
        income tax*
 
 Under
        the
        Provisional Regulations of the People’s Republic of China Concerning Income Tax
        on Enterprises promulgated by the State Council which came into effect on
        January 1, 1994, income tax is payable by enterprises at a rate of 33% of
        their
        taxable income. Preferential tax treatment may, however, be granted pursuant
        to
        any law or regulations from time to time promulgated by the State Council.
        Specialty state companies’ enterprise income tax rate was reduced to 27%. The
        Group is currently enjoying a 50% reduction in the statutory rates due to
        the
        classification of Chengtong as a “Wholly Foreign Owned Enterprise”. This reduced
        rate applies to the fiscal years ended June 30, 2007, 2008, and 2009. Subsequent
        to June 30, 2009, Chengtong will be subject to enterprise income taxes at
        the
        prevailing statutory rates. The Enterprise Income Tax Law was passed on March
        16, 2007, and becomes effective on January 1, 2008. The new law introduces
        fundamental changes to the Chinese tax system for both domestic and
        foreign-owned entities. A new unified general income tax of 25% will be
        applicable to enterprises in China. Entities subject to a “tax holiday” prior to
        January 1, 2008, are expected to be able to retain the benefits of the reduced
        rates for the remaining term.
  64
  Deferred
        tax assets and liabilities are recognized for the future tax consequences
        attributable to differences between the financial statement carrying amounts
        of
        existing assets and liabilities and their respective tax bases. Deferred
        tax
        assets, including tax loss and credit carry forwards, and liabilities are
        measured using enacted tax rates expected to apply to taxable income in the
        years in which those temporary differences are expected to be recovered or
        settled. The effect on deferred tax assets and liabilities of a change in
        tax
        rates is recognized in income in the period that includes the enactment date.
        Deferred income tax expense represents the change during the period in the
        deferred tax assets and deferred tax liabilities. The components of the deferred
        tax assets and liabilities are individually classified as current and
        non-current based on their characteristics. Deferred tax assets are reduced
        by a
        valuation allowance when, in the opinion of management, it is more likely
        than
        not that some portion or all of the deferred tax assets will not be
        realized.
 
 In
        2006,
        the Financial Accounting Standards Board (FASB) issued FIN 48, which clarifies
        the application of SFAS 109 by defining a criterion that an individual income
        tax position must meet for any part of the benefit of that position to be
        recognized in an enterprise’s financial statements and provides guidance on
        measurement, derecognition, classification, accounting for interest and
        penalties, accounting in interim periods, disclosure and transition. In
        accordance with the transition provisions, the company adopted FIN 48 effective
        January 1, 2007.
 
 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, 2007, 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, 2007, if recognized, would not have a material effect on its effective
        tax rate. The Company further believes that there are no tax positions for
        which
        it is reasonably possible, based on current Chinese tax law and policy, that
        the
        unrecognized tax benefits will significantly increase or decrease over the
        next
        12 months producing, individually or in the aggregate, a material effect
        on the
        company’s results of operations, financial condition or cash flows.
 
 *Value
        added tax*
 
 The
        Provisional Regulations of the People’s Republic of China Concerning Value Added
        Tax promulgated by the State Council came into effect on January 1, 1994.
        Under
        these regulations and the Implementing Rules of the Provisional Regulations
        of
        the People’s Republic of China Concerning Value Added Tax, value added tax is
        imposed on goods sold in or imported into the PRC and on processing, repair
        and
        replacement services provided within the PRC.
 
 Value
        added tax payable in the PRC is charged on an aggregated basis at a rate
        of 13%
        or 17% (depending on the type of goods involved) on the full price collected
        for
        the goods sold or, in the case of taxable services provided, at a rate of
        17% on
        the charges for the taxable services provided, but excluding, in respect
        of both
        goods and services, any amount paid in respect of value added tax included
        in
        the price or charges, and less any deductible value added tax already paid
        by
        the taxpayer on purchases of goods and services in the same financial
        year.
  65
  **Retirement
        Benefit Costs** -
        According to the PRC regulations on pension, Chengtong contributes to a defined
        contribution retirement scheme organized by municipal government in the province
        in which Chengtong was registered and all qualified employees are eligible
        to participate in the scheme. Contributions to the scheme are calculated
        at
        23.5% of the employees’ salaries above a fixed threshold amount and the
        employees contribute 2% to 8%, while Chengtong contributes the balance
        contribution of 21.5%% to 15.5%. The Group has no other material obligation
        for
        the payment of retirement benefits beyond the annual contributions under
        this
        scheme.
 
 For
        the
        years ended June 30, 2007, 2006 and 2005 the Company’s pension cost charged to
        the statements of operations under the plan amounted to $149,179, $54,285
        and
        $27,729, respectively, all of which have been paid to the State Pension Fund.
 
 **Fair
        Value of Financial Instruments -** The
        carrying amounts of certain financial instruments, including cash, accounts
        receivable, other receivables, accounts payable, accrued expenses, and other
        payables approximate their fair values as at March 31, 2007 and June 30,
        2006
        because of the relatively short-term maturity of these instruments.
 
 **Adjustments** -
        In the
        opinion of management, all adjustments that are necessary for a fair
        presentation for the periods presented have been reflected as required by
        Regulation S-X, Rule 10-01. All such adjustments are of a normal, recurring
        nature.
 
 **Use
        of Estimates**  **-** The
        preparation of financial statements in accordance with generally accepted
        accounting principles require management to make estimates and assumptions
        that
        affect reported amounts of assets and liabilities and disclosure of contingent
        assets and liabilities at the date of the financial statements and reported
        amounts of revenues and expenses during the reporting period. Actual results
        could differ from those estimates.
 
 **Reclassifications
        -** Certain
        reclassifications have been made to the prior years' financial statements
        to
        conform to the current year presentation. These reclassifications had no
        effect
        on previously reported results of operations or retained earnings.
 
 **Recent
        Accounting Pronouncements** - ******
 
 The
        Financial Accounting Standards Board recently issued the following standards
        which the Company reviewed to determine the potentialimpact on our financial
        statements upon adoption.
 
 In
        June
        2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
        in
        Income Taxes—an Interpretation of FASB Statement No. 109 ("FIN 48").
        FIN 48 provides guidance for recognizing and measuring uncertain tax positions,
        as defined in SFAS 109, Accounting for Income Taxes. FIN 48 prescribes a
        threshold condition that a tax position must meet for any of the benefit
        of the
        uncertain tax position to be recognized in the financial statements. Guidance
        is
        also provided regarding de-recognition, classification and disclosure of
        these
        uncertain tax positions. FIN 48 iseffective for fiscal years beginning after
        December 15, 2006. The adoption of FIN 48 did not have a material impact on
        our financial position, results of operations or cash flows.
 
 In
        September 2006, the FASB issued Statement No. 157, "Fair Value
        Measurements" ("SFAS No. 157"). SFAS No. 157 addresses how
        companies should measure fair value when they are required to use a fair
        value
        measure for recognition or disclosure purposes under generally accepted
        accounting principles. SFAS No. 157 defines fair value, establishes a
        framework for measuring fair value and expands the required disclosures about
        fair value measurements. SFAS No. 157 is effective for fiscal years
        beginning after November 15, 2007, with earlier adoption permitted.
        Management is assessing the impact of the adoption of SFAS No. 157.
  66
  In
        September 2006, the FASB issued Statement No. 158, "Employers' Accounting
        for Defined Benefit Pension and Other Postretirement Plans"
        ("SFAS No. 158"), an amendment of FASB Statements No. 87, 88, 106
        and 132(R). SFAS No. 158 requires (a) recognition of the funded
        status (measured as the difference between the fair value of the plan assets
        and
        the benefit obligation) of a benefit plan as an asset or liability in the
        employer's statement of financial position, (b) measurement of the funded
        status as of the employer's fiscal year-end with limited exceptions, and
        (c) recognition of changes in the funded status in the year in which the
        changes occur through comprehensive income. The requirement to recognize
        the
        funded status of a benefit plan and the disclosure requirements are effective
        as
        of the end of the fiscal year ending after December 15, 2006. The
        requirement to measure the plan assets and benefit obligations as of the
        date of
        the employer's fiscal year-end statement of financial position is effective
        for
        fiscal years ending after December 15, 2008. SFAS No. 158 has no
        current applicability to the Company's financial statements.
  In
        September 2006, the Securities and Exchange Commission issued Staff Accounting
        Bulletin No. 108 ("SAB No. 108"). SAB No. 108
        addresses how the effects of prior year uncorrected misstatements should
        be
        considered when quantifying misstatements in current year financial statements.
        SAB No. 108 requires companies to quantify misstatements using a
        balance sheet and income statement approach and to evaluate whether either
        approach results in quantifying an error that is material in light of relevant
        quantitative and qualitative factors. When the effect of initial adoption
        is
        material, companies will record the effect as a cumulative effect adjustment
        to
        beginning of year retained earnings and disclose the nature and amount of
        each
        individual error being corrected in the cumulative adjustment. Complying
        with
        the requirements of SAB No. 108 had no impact on the Company's financial
        statements.
 
 In
        February 2007, the FASB issued Statement No. 159, "The Fair Value Option
        for Financial Assets and Financial Liabilities" ("SFAS No. 159"), an
        amendment of FASB Statement No. 115. SFAS No. 159 addresses how
        companies should measure many financial instruments and certain other items
        at
        fair value. The objective is to mitigate volatility in reported earnings
        caused
        by measuring related assets and liabilities differently without having to
        apply
        complex hedge accounting provisions. SFAS No. 159 is effective for
        fiscal years beginning after November 15, 2007, with earlier adoption
        permitted. Management is assessing the impact of the adoption of
        SFAS No. 159.
 
 **4.** **Concentrations
        of Business and Credit Risk**
 
 Chengtong
        provides credit in the normal course of business. Chengtong performs ongoing
        credit evaluations of its customers and clients and maintains allowances
        for
        doubtful accounts based on factors surrounding the credit risk of specific
        customers and clients, historical trends, and other information. Trade accounts
        receivable totaled $8,242,044 and $13,399,003 as of June 30, 2007 and 2006,
        respectively.
  67
 
 Chengtong’s
        list of customers whose purchases exceeded 10% of total sales during the
        years
        June 30, 2007, 2006, and 2005 were as follows:
 
 *Customers*
              
              *2007*
              
              *%
                  to sales*
              
              *2006*
              
              *%
                  to sales*
              
              *2005*
              
              *%
                  to sales*Shanghai
                  Ruixuefeng Metals Co., Limited
              
              
              12,192,219
              
              
              23
              
              
              4,634,521
              
              
              13
              
              
              --
              
              
              --Shanghai
                  Changshuo Steel Company, Ltd
              
              
              5,428,110
              
              
              10
              
              
              --
              
              
              --
              
              
              --
              
              
              --Shanghai
                  Yiyi Industrial Limited
              
              
              --
              
              
              --
              
              
              4,305,918
              
              
              12
              
              
              --
              
              
              --Jiangsu
                  Kaiteer Industrial Stove Limited
              
              
              --
              
              
              --
              
              
              5,212,171
              
              
              15
              
              
              --
              
              
              --BaoSteel
                  Trading Co. Ltd
              
              
              --
              
              
              --
              
              
              -
              
              
              -
              
              
              6,048,153
              
              
              11
 
 Payments
        of dividends may be subject to some restrictions due to the fact that the
        operating activities are conducted in subsidiaries residing in the Peoples
        Republic of China; therefore in accordance with Rule 504/4.08(e)(3) of
        Regulation S-X, the following are condensed parent company only financial
        statements for the two years ended June 30, 2007.
  68
  **4.
        Concentrations of Business and Credit Risk (Continued)**
 
 CHINA
        PRECISION STEEL, INC.
 CONDENSED
        PARENT COMPANY ONLY BALANCE SHEETS
 JUNE
        30,
        2007 AND 2006
 2007
                
                2006Cash
                    and cash equivalents
                
                $
                2,034,403
                
                $
                400,000Investment
                    in subsidiary, reported on equity method
                
                
                20,765,197
                
                
                11,681,160Advances
                    to subsidiary
                
                
                28,748,121
                
                
                -Total
                    assets
                
                $
                51,547,721
                
                $
                12,081,160Current
                    liabilities:Accounts
                    payable
                
                $
                1,505
                
                $
                -Taxes
                    payable
                
                
                -
                
                
                400,000Refund
                    due to Oralabs, Inc.
                
                
                441,377
                
                
                -Total
                    current liabilities
                
                
                442,882
                
                
                400,000Stockholders'
                    equity:Ordinary
                    stock, $.001 par value; 62,000,000 shares authorized;37,378,143
                    and 24,283,725 shares issued and outstandingat
                    June 30, 2007 and 2006, respectively
                
                
                37,378
                
                
                24,284Additional
                    paid-in capital
                
                
                31,867,063
                
                
                1,375,716Retained
                    earnings
                
                
                19,200,398
                
                
                10,281,160Total
                    stockholders' equity
                
                
                51,104,839
                
                
                11,681,160Total
                    liabilities and stockholders' equity
                
                $
                51,547,721
                
                $
                12,081,160
 
 69
 
 **4.
        Concentrations of Business and Credit Risk (Continued)**
 
 CHINA
        PRECISION STEEL, INC.
 CONDENSED
        PARENT COMPANY ONLY INCOME STATEMENTS
 FOR
        THE
        YEARS ENDED JUNE 30, 2007 AND 2006
 2007
                
                2006SALES
                
                $
                --
                
                $
                --OPERATING
                    AND ADMINISTRATIVEEXPENSES:General
                    and administrative expenses
                
                
                883,316
                
                
                --Income
                    from operations
                
                
                (883,316
                )
                
                --OTHER
                    INCOME (EXPENSE):Interest
                    income
                
                
                103,388Equity
                    in earnings of unconsolidated subsidiary
                
                
                9,084,037
                
                
                7,514,101INCOME
                    BEFORE INCOME TAXES
                
                
                8,304,109
                
                
                7,514,101(PROVISION
                    FOR) BENEFIT FROMINCOME
                    TAXES
                
                
                --
                
                
                --NET
                    INCOME
                
                $
                8,304,109
                
                $
                7,514,101
 
 70
 
 **4.
        Concentrations of Business and Credit Risk (Continued)**
 
 CHINA
        PRECISION STEEL, INC.
 CONDENSED
        PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS
 FOR
        THE
        YEARS ENDED JUNE 30, 2007 AND 2006
  2007
                
                2006CASH
                    FLOWS FROM OPERATING ACTIVITIES:Net
                    income
                
                $
                8,304,109
                
                $
                7,514,101Adjustments
                    to reconcile net income to operating activities -Warrants
                    issued for consulting
                
                
                447,993Less:
                    Equity in earnings of unconsolidated subsidiary
                
                
                (9,034,087
                )
                
                (7,514,101
                )Net
                    changes in assets and liabilitiesDue
                    to Oralabs
                
                
                441,377Accounts
                    Payable
                
                
                1,505
                
                
                --Net
                    cash (used in) operating activities
                
                
                160,897
                
                
                --CASH
                    FLOWS FROM INVESTING ACTIVITIES:CASH
                    FLOWS FROM FINANCING ACTIVITIES:Proceeds
                    from sale of common stock
                
                
                19,328,878
                
                
                --Advances
                    to subsidiary
                
                
                (17,455,372
                )
                
                --Net
                    cash provided by financing activities
                
                
                1,873,506
                
                
                --Effect
                    of exchange rate change on cash and cash equivalents
                
                
                --
                
                
                --NET
                    INCREASE (DECREASE) IN CASH AND EQUIVALENTS
                
                
                2,034,403
                
                
                --CASH
                    AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                
                
                --
                
                
                --CASH
                    AND CASH EQUIVALENTS, END OF PERIOD
                
                $
                2,034,403
                
                $
                --SUPPLEMENTAL
                    DISCLOSURES OF CASH FLOW INFORMATION:Interest
                    paid, net of capitalized amounts
                
                $
                --
                
                $
                --Income
                    taxes paid
                
                $
                --
                
                $
                --Issuance
                    of 2,798,191 shares of stock for syndication fees
                
                $
                8,394,573
                
                $
                --Issuance
                    of 100,000 warrants for services
                
                $
                447,993
                
                $
                --Issuance
                    of 1,216,667 warrants for syndication fees
                
                $
                2,770,349
                
                $
                --Contribution
                    of directors advance to additional paid in capital
                
                $
                3,953,794
                
                $
                --
  China
          Precision Steel, Inc.
 Notes
          to
          Condensed Parent Company Only Financial Statements
 
 Note
          1 -
          These condensed parent company only financial statements should be read
          in
          connection with the Company’s consolidated financial statements and notes
          thereto.
 71
 
 **5.** **Inventories**
 
 As
        of
        June 30, 2007 and June 30, 2006 inventory consisted of the
        following:
 
 June
                  30,
                2007
              
              June
                  30,
                2006Raw
                  materials
              
              $
              13,026,530
              
              $
              3,688,773Work
                  in progress
              
              
              --
              
              
              573,465Finished
                  goods
              
              
              2,697,174
              
              
              2,021,672$
              15,723,704
              
              $
              6,283,910
 
 **6.** **Property,
        Plant and Equipment**
 
 Property,
        plant and equipment, stated at cost less accumulated depreciation, consisted
        of
        the following:
 
 **June
                  30,**
                **2007**
              
              **June
                  30,**
                **2006**Plant
                  and machinery
              
              $
              21,087,245
              
              $
              7,526,395Buildings
              
              
              11,361,207
              
              
              2,755,157Motor
                  vehicles
              
              
              283,534
              
              
              239,219Office
                  equipment
              
              
              85,560
              
              
              51,28132,817,546
              
              
              10,572,052Less:
                  Accumulated depreciation
              
              
              (3,579,319
              )
              
              (1,907,635
              )$
              29,238,227
              
              $
              8,664,417
 
 As
        of
        June 30, 2007, property, plant and equipment at a net book value of $29,041,518,
        along with all construction-in-progress, had been pledged as securities on
        loans
        with combined outstanding balances of $22,884,679.
 
 Depreciation
        expense related to manufacturing is included as a component of cost of goods
        sold. During the years ended June 30, 2007, 2006 and 2005, depreciation totaling
        $1,482,836, $783,857 and $408,918, respectively, was included as a component
        of
        cost of goods sold.
  72
  **7.** **Construction-In-Progress**
 
 As
        of
        June 30, 2007 and 2006, construction-in-progress consisted of the
        following:
 
 **June
                  30,**
                **2007**
              
              **June
                  30,**
                **2006**Construction
                  costs of plant and machinery
              
              $
              10,355,763
              
              $
              7,059,943Construction
                  on factory building (Phase 2)
              
              
              --
              
              
              6,693,011$
              10,355,763
              
              $
              13,752,954
 
 Construction-in-progress
        represents construction and installations of the new plant and machinery
        and
        administration and factory buildings.
 
 **8.** **Advances
        from Customers**
 
 Advances
        from customers represent advance cash receipts from new customers and for
        which
        goods have not been delivered as of the balance sheets dates. Advances from
        customers for goods to be delivered or services to be rendered in the subsequent
        year are carried forward as deferred revenue. As of June 30, 2007 and 2006,
        there were advances from customers of $1,720,812 and $1,859,773,
        respectively.
 
 **9.** **Transactions
        with Related Parties**
 
 Amounts
        due to (from) directors as of June 30, 2007 and 2006 are as
        follows:
 
 Name
              
              June
                  30, 2007
              
              June
                  30, 2006Wo
                  Hing Li
              
              $
              (2,590,763
              )
              $
              5,464,907Hai
                  Sheng Chen
              
              
              408,620
              
              
              432,036$
              (2,182,143
              )
              $
              5,896,943
 
 Amounts
        due are unsecured, non-interest bearing and have no fixed repayment terms.
 
 Wo
        Hing
        Li, a director and the President of the Company, executed an agreement with
        the
        Company and certain other parties, dated as of February 13, 2007, as amended
        (the “Debt Conversion Agreement”), such that, upon the occurrence of the
        transfer to Chengtong of Tuorong, he contributed $3,953,794 as additional
        paid
        in capital to the Company and agreed to convert current debt outstanding
        and
        payable to him of $6,775,776 into shares of the Company's common stock at
        a
        price of $3.36 per share. This transaction was completed on May 19, 2007.
When
        Chengtong acquired Tuorong, Tuorong had a preexisting receivable from Wo
        Hing
        Li, and the Group offset remaining amounts owed to Wo Hing Li against this
        receivable.
  73
  **10.** **Short-Term
        Loans**
 
 Short-term
        loans consisted of the following:
 
 June
                  30,
                2007
              
              June
                  30,
                2006Bank
                  loan dated September 22, 2005, due December 31, 2007 with a interest
                  rate
                  of 15% over the standard market rate set by the People’s Bank of China for
                  Renminbi loans, secured by land, buildings and machinery
              
              $
              9,842,520
              
              $
              4,119,850Bank
                  loan dated December 14, 2004, rolled over October 21, 2005, due
                  in one
                  year with a interest rate of 5.58%, guaranteed by a related
                  company
              
              
              -
              
              
              1,248,439Bank
                  loan dated December 14, 2004, rolled over November 11, 2005, due
                  in one
                  year with a interest rate of 5.58%, guaranteed by a related
                  company
              
              
              -
              
              
              1,248,439Bank
                  loan dated December 12, 2005, due in one year with a interest rate
                  of
                  5.58%, guaranteed by a related company
              
              
              -
              
              
              1,747,815Bank
                  loan dated May 19, 2006, due in one year with a interest rate of
                  5.85%,
                  guaranteed by a related company
              
              
              -
              
              
              1,498,129$
              9,842,520
              
              $
              9,862,672
 
 **11.** **Long-Term
        Debts - Secured**
 
 June
                  30,
                2007
              
              June
                  30,
                2006Long-term
                  debts:Bank
                  loan dated October 14, 2004, due July 31, 2007, at an interest
                  rate of 3%
                  over the 10% of the standard market rate set by the People’s Bank of China
                  for Renminbi loans, secured by land, buildings and machinery
              
              $
              6,163,445
              
              $
              7,973,215Bank
                  loan dated September 22, 2005, due August 31, 2009, at an interest
                  rate of
                  15% the standard market rate set by the People’s Bank of China for
                  Renminbi loans, secured by land, buildings and machinery
              
              
              6,878,714
              
              
              4,098,139Total
                  long-term debt
              
              
              13,042,159
              
              
              12,071,354Less:
                  Current portion of long-term debts
              
              
              6,163,445
              
              
              8,918,939Long-term
                  debts
              
              $
              6,878,714
              
              $
              3,152,415
  
 74
 
 Maturities
        on long-term debt for each of the next five years and thereafter are as
        follows:
 2008
                
                $
                6,163,4452009
                
                
                6,878,7142010
                
                
                --2011
                
                
                --2012
                
                
                --$
                13,042,159
 
 **12.** **Income
        Tax**
 
 For
        EIT
        reporting purposes, the Company reports income and expenses on a tax basis
        and
        is required to compute a 10% salvage value when computing depreciation expense.
        For financial reporting purposes, the Company reports income and expenses
        on the
        accrual basis and does not take into account a 10% salvage value when computing
        depreciation expense.
 
 No
        accrual for deferred taxes was required for the fiscal year ended June 30,
        2005
        as the Group benefited from Chengtong’s 100% tax holiday during the two fiscal
        years ended June 30, 2006 and all material timing differences would reverse
        within one year with the exception of depreciation which resulted in a small
        deferred tax asset which was deemed to be immaterial by the Company and was
        not
        recorded at that time.
 
 As
        of
        June 30, 2006, Chengtong had utilized all of its 100% tax holiday, therefore
        any
        timing differences reversing within the next three years would be taxed at
        50%
        of the statutory rate of 27%. Therefore, it was necessary for the Group to
        record a deferred income tax liability and offsetting deferred income tax
        expense of $1,535,203 as of June 30, 2006.
 
 The
        tax
        holiday resulted in tax savings as follows:
   Years
                  ended
                June
                  30,2007
              
              2006
              
              2005Tax
                  savings
              
              $
              1,191,743
              
              $
              1,221,656
              
              
              1,718,939Benefit
                  per shareBasic
              
              $
              .04
              
              $
              .05
              
              $
              .07Diluted
              
              $
              .04
              
              $
              .05
              
              $
              .07
  As
        explained above, there were not significant deferred tax assets or liabilities
        as of June 30, 2005. Significant components of the Group’s deferred tax assets
        and liabilities as of June 30, 2007 and 2006 are as follows:
 Deferred
                    tax assets:
                
                June
                    30, 2007
                
                June
                    30, 2006Book
                    depreciation in excess of tax depreciation
                
                $
                43,460
                
                $
                25,753Deferred
                    tax liabilityTiming
                    differences resulting form cash basis reporting
                  for
                    tax purposes
                
                
                (1,107,488
                )
                
                (1,560,957
                )Net
                    deferred income tax (liability)
                
                $
                (1,064,028
                )
                $
                (1,535,204
                )
  A
              reconciliation of the provision for income taxes with amounts determined
              by the
              U.S. federal income tax rate to income before income taxes is as
              follows.
 Year
                        Ended June 30,2007
                    
                    2006
                    
                    2005Computed
                        tax at the federal statutory rate of 34%
                    
                    $
                    3,024,079
                    
                    $
                    3,076,764
                    
                    $
                    2,164,590Less
                        adjustment to EIT statutory rate of 27%
                    
                    
                    (622,604
                    )
                    
                    (633,452
                    )
                    
                    (445,651
                    )Benefit
                        of tax holiday
                    
                    
                    (979,785
                    )
                    
                    (908,108
                    )
                    
                    1,718,939Income
                        tax expense per books
                    
                    $
                    1,421,690
                    
                    $
                    1,535,204
                    
                    $
 
 75
  **13.** **Stock
        Exchange Agreement**
 
 On
        March
        31, 2006, the Company entered into a Stock Exchange Agreement (the “Agreement”)
        under which all of the issued and outstanding shares of PSHL would be acquired
        by it in consideration for the issuance to the owner of PSHL and his designees
        (the “PSHL Shareholder”) of common stock representing a 94% ownership interest
        in the Company (the “Share Exchange")
 
 On
        December 27, 2006, the Company held its annual meeting of shareholders (the
        “Annual Meeting”). At the Annual Meeting, shareholders owning a majority of the
        issued and outstanding shares of the Company approved:
 
 ·
              the
                  Share Exchange;
 
 ·
              the
                  Redemption (as defined below);
 
 ·
              a
                  2006 Directors Option Plan and the and the issuance to non-employee
                  directors of 300,000 shares of the Company’s common
                  stock;
 
 ·
              the
                  issuance of an undetermined number of shares of the Company’s common
                  stock, shares of preferred stock convertible into the common stock
                  or
                  warrants to purchase the common stock, in an aggregate amount of
                  up to
                  22,600,000 shares of common stock, in connection with potential
                  equity
                  financing from time to time;
 
 ·
              the
                  sale to OraLabs, Inc., the Company’s wholly-owned subsidiary, of up to
                  100,000 shares of the Company’s common stock to satisfy a tax indemnity
                  obligation of OraLabs, Inc. in connection with the Redemption;
  ·
              the
                  amendment to the Company’s Articles of Incorporation to change its name
                  from OraLabs Holding Corp. to China Precision Steel, Inc. and to
                  increase
                  the number of authorized shares of common stock to
                  62,000,000;
 
 ·
              the
                  Amendment to the Company’s Articles of Incorporation to increase the
                  number of authorized shares of preferred stock to
                  8,000,000;
  ·
              the
                  election of Mr. Wo Hing Li and Mr. Hai Sheng Chen as executive
                  directors
                  and Mr. Che Kin Lui, Mr. David Peter Wong, and Mr. Tung Kuen Tsui,
                  the
                  individuals designated by PSHL, as independent non-executive directors
                  of
                  the Company;
  ·
              the
                  approval of the Company’s 2006 Omnibus Long-Term Incentive Plan that will
                  allow the Company to grant an aggregate of 2,165,220 shares of
                  its common
                  stock through stock options and restricted stock awards to qualified
                  key
                  employees; and
 
 ·
              the
                  ratification of the appointment of Murrell, Hall, McIntosh & Co., PLLP
                  as the Company’s independent registered public accounting firm for fiscal
                  year 2006.
  76
  Pursuant
        to the Agreement the Company entered into a Redemption Agreement, dated December
        28, 2006 (the “Redemption Agreement”), with its President, Gary H. Schlatter,
        individually (“Schlatter”), whereby the Company redeemed (the “Redemption”)
        3,629,350 shares of its outstanding common stock owned by Schlatter in exchange
        for all of the issued and outstanding shares of OraLabs, Inc., the Company’s
        wholly owned subsidiary. OraLabs, Inc. purchased 100,000 shares of the Company’s
        common stock and paid certain amounts in cash to the Company to satisfy a
        tax
        indemnity obligation of OraLabs, Inc. in connection with the
        Redemption.
 
 On
        December 28, 2006, the Company and PSHL closed on the Share Exchange and
        the
        Company’s name was changed to China Precision Steel, Inc. At the Closing, the
        Company issued to the sole owner of PSHL and his designees an aggregate of
        25,363,002 shares of common stock (2,698,191 shares of which were issued
        for
        services rendered in connection with the upcoming private placement and were
        treated as offering costs for financial reporting purposes), which constitutes
        94% of its total issued and outstanding common stock of the Company. Upon
        the
        consummation of the Share Exchange, each of PSHL and Chengtong became
        wholly-owned subsidiaries of the Company.
 
 Prior
        to
        the closing, the Company issued 300,000 shares to its non-employee directors,
        Mr. Michael I. Friess and Mr. Robert C. Gust, pursuant to the Company’s 2006
        Directors Option Plan. The cost of these 300,000 shares valued at $1,566,000
        was
        treated as a transaction cost and taken against additional paid in capital.
 
 At
        the
        Closing, Mr. Gary H. Schlatter, Mr. Michael I. Friess and Mr. Robert C. Gust
        resigned as directors of the Company and were replaced by Mr. Wo Hing Li
        and Mr.
        Hai Sheng Chen, as executive directors, and Mr. Che Kin Lui, Mr. David Peter
        Wong, and Mr. Tung Kuen Tsui, as independent non-executive directors.. Further,
        Gary H. Schlatter and Michael I. Friess resigned as officers of the Company
        and
        Wo Hing Li was appointed the President of the Company and Leada Tak Tai Li
        the
        Chief Financial Officer, Secretary and Treasurer of the Company.
 
 **14.** **Shanghai
        Tuorong Precision Strip Co., Ltd. Purchase**
 
 On
        April
        9, 2007, approval was received from the Shanghai Business and Commercial
        Administration Authority, Jiading Districut Board, to transfer all of the
        share
        capital of Shanghai Tuorong Precision Strip Co., Ltd. to Chengtong. The total
        purchase price was $2,119,981 and was allocated as follows:
 Current
                    assets
                
                $
                247,385Land
                    use rights
                
                
                1,124,583Inter-company
                    accounts receivable
                
                
                1,385,450Liabilities
                    assumed
                
                
                (637,437
                )$
                2,119,981
 
 **15.** **Blessford
        International, Limited**
 
 On
        April
        10, 2007, the Company purchased for $100,000 Blessford International Limited,
        a
        British Virgin Islands company. Blessford International Limited does not
        conduct
        any business, but it owns a single subsidiary, Shanghai Blessford Alloy Company
        Limited, that is a wholly-foreign owned enterprise chartered in China. The
        purchase price was allocated $1 to cash and $99,999 to goodwill.
  77
 
 **16.** **Equity**
 
 On
        February 22, 2007, the Company issued 7,451,665 shares of its common stock
        for $3.00 per share in a Private Placement in reliance upon exemptions from
        the
        registration requirements of the Act provided by Section 4(2) of the Act
        and
        Regulation D and Regulation S thereunder, and in reliance on similar exemptions
        under the applicable state securities laws, to certain institutional accredited
        and other investors.  The net proceeds to the Company from the private
        placement were $18,905,653. The Company also issued 100,000 shares to the
        U.S.
        placement agent in the Private Placement as partial compensation. In
        addition, each of the U.S. and International placement agents received an
        amount
        in cash equal to 5% of the gross proceeds
  On
        February 22, 2007, the Company issued 827,963 shares to certain existing
        shareholders pursuant to pre-existing anti-dilution rights triggered by the
        Private Placement in reliance upon exemptions from the registration
        requirements of the Act provided by Section 4(2) of the Act and Regulation
        D and
        Regulation S thereunder and in reliance upon exemptions from applicable state
        securities laws. The shareholders receiving these additional shares acquired
        their original shares along with the anti-dilution rights for services rendered
        in connection with the private placement and were treated as offering costs
        for
        financial reporting purposes.
 
 On
        May
        18, 2007 the Company issued 2,016,600 shares for conversion of debt to Wo
        Hing
        Li, the Company’s Chairman and Chief Executive Officer, of
        $6,775,776.
  78
  In
        connection with the Private Placement, on February 22, 2007, the Company
        issued warrants to the placement agents to purchase an aggregate
        of 1,300,059 shares of Common Stock as partial compensation for services
        rendered in connection with the Private Placement.
 
 On
        February 22, 2007, the Company issued warrants to purchase up to 100,000
        shares
        of Common Stock to the Company's investor relations consultants valued at
        $447,993.
 
 Information
        with respect to stock warrants outstanding are as follows:
 
 ExercisePrice
              
              Outstanding
                June
                  30, 2006
              
              Granted
              
              Expired
                  orExercised
              
              OutstandingJune
                  30, 2007
              
              ExpirationDate$3.00
              
              
              -0-
              
              
              1,300,059
              
              
              -0-
              
              
              1,300,059
              
              
              02/22/2011$3.60
              
              
              -0-
              
              
              100,000
              
              
              -0-
              
              
              100,000
              
              
              02/22/2010
  The
          Company has entered into an agreement with a
          financial advisor to act as the exclusive financial advisor with respect
          to
          certain of  the Company’s private placement offerings. The agreement
          calls for cash fees equal to (10% of) of the gross proceeds of the first
          $25
          million and eight percent (8%) of the gross proceeds of the other $25 million
          thereafter received from the sale of securities. In respect of any capital
          raised in excess of $50 million or following the consummation of the offering
          of
          $50 million contemplated, the Company would pay in cash a fee equal to
          nine
          percent (9%) of the gross proceeds after the first $50 million has been
          raised.
  After
          the closing of any applicable offering, the
          Company will issue to the advisor warrants to purchase shares equivalent
          to
          eight and one half percent (8.5%) of the securities issued at the closing
          share
          price in the Offering. The Warrants will be exercisable into the same class
          of
          common stock as issued as part of the Offering, have a strike price equal
          to
          100% of the Company’s common stock on the closing date of the Offering and have
          a term of 3 years. In the event that warrants are issued as part of the
          offering, the terms and conditions of the Warrants shall be the same as
          investor
          warrants.
  Pursuant
          to the terms of this agreement and in
          connection with the private placement offering of February 22, 2007 the
          advisor
          was paid 10% of the proceeds of and 1,300,059 shares of common stock were
          issued. These fees were treated as syndication costs and charged against
          additional paid-in capital.
 **17.** **Earnings
        Per Share**
 
 SFAS
        128
        requires a reconciliation of the numerator and denominator of the basic and
        diluted earnings per share (EPS) computations.
 
 For
        the
        year ended 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
        warrants to purchase 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, 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
              
              $
              1,396,217
              
              
              28,759,553
              
              $
              0.26For
                  the year ended June 30, 2006:Net
                  income
              
              $
              8,414,570Less
                  net income from discontinued operations
              
              $
              (900,469
              )Basic
                  EPS income available to common shareholders
              
              $
              7,514,101
              
              
              24,283,725
              
              $
              0.31Effect
                  of dilutive securities:Warrants
              
              
              --
              
              
              --Diluted
                  EPS income available to common shareholders
              
              $
              7,514,101
              
              
              24,283,725
              
              $
              0.31For
                  the year ended June 30, 2005:Net
                  income
              
              $
              6,025,855Add
                  net loss from discontinued operations
              
              $
              340,586Basic
                  EPS income available to common shareholders
              
              $
              6,366,441
              
              
              24,283,725
              
              $
              0.26Effect
                  of dilutive securities:Warrants
              
              
              --
              
              
              --Diluted
                  EPS income available to common shareholders
              
              $
              6,366,441
              
              
              24,283,725
              
              $
              0.26
  79
  **18.** **Discontinued
        Operations**
 
 The
        operations of Oralabs Inc prior to December 28, 2006 are shown in the financial
        statements as income from discontinued operations as these operations were
        transferred to a former shareholder in exchange for the redemption of his
        common
        stock as described further in Note 14 of Notes to Consolidated Financial
        Statements, above. The consolidated financial statements have been reclassified
        to conform to discontinued operations presentation for all historical periods
        presented.
 
 Summarized
        selected financial information for discontinued operations for the years
        ended
        June 30, 2007, 2006 and 2005 is as follows:
  Years
                  ended:**June
                  30,**
              
              **June
                  30,**
              
              **June
                  30,****2007**
              
              **2006**
              
              **2005**Revenues
              
              $
              9,404,000
              
              $
              16,380,000
              
              $
              12,464,000Income
                  before tax
              
              
              831,000
              
              
              972,000
              
              
              (462,000
              )Income
                  taxes
              
              
              192,000
              
              
              538,000
              
              
              (135,000
              )Income
                  from discontinued operations
              
              $
              639,000
              
              $
              434,000
              
              $
              (597,000
              )
  As
        of
        June 30, 2007, there were no assets or liabilities associated with OraLabs,
        Inc.
 
 **19.** **Commitments**
 
 As
        of
        June 30, 2007, the Company had $4,414,714, in commitments for capital
        expenditures for contractual commitments of the construction projects related
        to
        expansion of Chengtong’s production facilities.
  **20.**  **Subsequent
          events**
 
 Pursuant
          to Section 5.1 of the Stock Purchase Agreement, dated February 16, 2007,
          the
          Company agreed to reserve for issuance to investors in the private placement
          an
          aggregate of 2,000,000 shares of Common Stock if the Company’s net income for
          the fiscal year ending June 30, 2007 was less than US$10.4 million, as
          set forth
          in the Company’s audited financial statements as filed with the SEC in the
          Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007. As
          the Company’s net income as set forth in these audited financial statements was
          less than US$10.4 million, the Company is required to issue the 2,000,000
          shares
          of Common Stock to such investors.
 
 In
          conjunction with the Company’s final audit of the Tuorong acquisition, certain
          post-closing adjustments were required. In light of such adjustments and
          consistent with the purposes and intentions of the Debt Reduction Agreement,
          dated February 13, 2007, as amended February 20, 2007, it was determined
          that
          771,060 shares of the Company’s Common Stock issued to directors pursuant to
          such Agreement would be required to be cancelled in order to eliminate
          the
          $2,590,763 reflected on the June 30, 2007 audited financial statements
          as
          amounts due from directors.
 
 The
          net
          effect of these transactions on earnings per share had they been retroactively
          applied to these audited financial statements would have been a reduction
          in
          basic and diluted earnings per share of $(0.01).
    80
  **ITEM
        9.**  **CHANGES
        IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE**
 
 None.
  **ITEM
        9A. CONTROLS AND PROCEDURES**
  (a) **Evaluation
        of Disclosure Controls and Procedures** .
        An
        evaluation was performed, under the supervision and with the participation
        of
        Company management, including the Chief Executive Officer (CEO) and the Chief
        Financial Officer (CFO), of the effectiveness of the design and operation
        of the
        Company’s disclosure controls and procedures (as defined in Rules 13a-14(c) and
        15d-14(c) under the Exchange Act). Based on that evaluation, management,
        including the CEO and CFO, has concluded that, as of June 30, 2007, the
        Company’s disclosure controls and procedures were adequate to ensure that
        information required to be disclosed in reports that the Company files or
        submits under the Exchange Act has been recorded, processed, summarized and
        reported in accordance with the rules and forms of the SEC.
  However,
        management also concluded that, although no significant deficiencies or material
        weaknesses were found, additional controls and procedures were required to
        improve the recordkeeping systems at Chengtong to ensure timely and effective
        reporting of information. In addition, management also concluded that additional
        financial personnel were required, particularly at the executive level, with
        experience with U.S. public companies and an appropriate level of knowledge,
        experience and training in the application of generally accepted accounting
        principles in the United States.
  To
        address these concerns, we intend to engage a consultant to evaluate our
        internal controls and procedures and to assist us in making improvements
        to the
        quality of our controls, policies and procedures. In addition, we have initiated
        a search for a senior financial executive with experience with U.S. GAAP
        and
        U.S. public company reporting and compliance obligations.
  We
        do not
        consider that the deficiencies and weaknesses that we have identified jeopardize
        the quality of our financial statements for the period under review or for
        prior
        periods.
   (b) **Changes
        in Internal Control over Financial Reporting** .
  There
        were no changes in our internal controls over financial reporting (as such
        term
        is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) during
        the
        period under review that materially affected, or are reasonably likely to
        material affect, our internal control over financial reporting.
  This
        Annual Report does not include a report of management’s assessment regarding
        internal control over financial reporting or an attestation report by our
        registered public accounting firm due to a transition period established
        by the
        rules of the SEC.
 
 **ITEM
        9B. OTHER INFORMATION**
  None.
  81
  **PART
        III**
  **Item
        10. Directors, Executive Officers and Corporate Governance**
  The
        information required by this Item 10 is incorporated by reference from our
        definitive proxy statement for our 2007 annual meeting of stockholders, which
        will be filed no later than October 28, 2007 (120 days after June 30, 2007).
  **Item
        11. Executive Compensation**
  The
        information required by this Item 11 is incorporated by reference from our
        definitive proxy statement for our 2007 annual meeting of stockholders, which
        will be filed no later than October 28, 2007 (120 days after June 30, 2007).
  **Item
        12. Security Ownership of Certain Beneficial Owners and Management**
  The
        information required by this Item 12 is incorporated by reference from our
        definitive proxy statement for our 2007 annual meeting of stockholders, which
        will be filed no later than October 28, 2007 (120 days after June 30, 2007).
  **Item
        13. Certain Relationships and Related Transactions and Director Independence**
  The
        information required by this Item 13 is incorporated by reference from our
        definitive proxy statement for our 2007 annual meeting of stockholders, which
        will be filed no later than October 28, 2007 (120 days after June 30, 2007).
  **Item
        14. Principal Accountant Fees and Services**
  The
        information required by this Item 14 is incorporated by reference from our
        definitive proxy statement for our 2007 annual meeting of stockholders, which
        will be filed no later than October 28, 2007 (120 days after June 30,
        2007).
  82
  **PART
        IV**
  **ITEM
        15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**
  Exhibit
        List:
  (1)  Financial
        Statements and Schedules: See “Index to Consolidated Financial Statements” at
        Item 8 of this Annual Report on Form 10-K. Schedules not included herein
        are omitted because they are not applicable or the required information appears
        in the accompanying Consolidated Financial Statements or Notes
        thereto.
  (2)  The
        list
        below sets out the exhibits required by Item 601 of Regulation S-K to be
        filed
        as a part of this Form 10-K. The Exhibit Index following the signature page
        to
        this Annual Report on Form 10-K identifies those documents which are exhibits
        filed herewith or incorporated by reference.
 
 **EXHIBIT
                  NO.**
              
              **DESCRIPTION**3.1
              
              Amended
                  and Restated Articles of Incorporation (incorporated herein by
                  reference
                  to the Company’s Form 8-K, dated January 4, 2007, Exhibit
                  3.1)3.2
              
              Second
                  Amended and Restated Bylaws (incorporated herein by reference to
                  the
                  Company’s Form 10-KSB, dated March 31, 1999, Exhibit
                  3.1.II)4.1
              
              Specimen
                  Certificate for Common Stock (incorporated herein by reference
                  to the
                  Company’s Form 10-Q for the quarterly period ended December 31, 2006,
                  dated February 13, 2007, Exhibit 3.1)4.2
              
              Form
                  of Warrant (incorporated herein by reference to the Company’s Form 8-K,
                  dated February 16, 2007, Exhibit 4.1)4.3
              
              Warrant,
                  dated February 22, 2007, to Belmont Capital Group Limited (incorporated
                  herein by reference to the Company’s Form 8-K, dated February 16, 2007,
                  Exhibit 4.2)4.4
              
              Warrant,
                  dated February 22, 2007, to CCG Elite Investor Relations
                  (incorporated herein by reference to the Company’s Form 8-K, dated
                  February 16, 2007, Exhibit 4.3)10.1
              
              Redemption
                  Agreement, dated December 28, 2006 (incorporated herein by reference
                  to
                  the Company’s Form 8-K, dated January 4, 2007, Exhibit
                  10.1)
  83
  **EXHIBIT
                  NO.**
              
              **DESCRIPTION**10.2
              
              Tax
                  Indemnity Agreement, dated December 28, 2006 (incorporated herein
                  by
                  reference to the Company’s Form 8-K, dated January 4, 2007, Exhibit
                  10.2)10.3
              
              2006
                  Long Term Incentive Plan (incorporated herein by reference to the
                  Company’s Form 8-K, dated January 4, 2007, Exhibit
                  10.3)10.4
              
              2006
                  Director Stock Plan, dated March 1, 2006 (incorporated herein by
                  reference
                  to the Company’s Definitive Proxy Statement, dated November 27, 2006,
                  Annex 3)10.5
              
              Equipment
                  Mortgage Agreement between Chengtong and Raiffeisen Zentralbank
Österreich
                  AG, dated January 12, 2005 (incorporated herein by reference to
                  the
                  Company’s Form 8-K, dated January 4, 2007, Exhibit
                  10.4)10.6
              
              Mortgage
                  Agreement on Immovables between Shanghai Tuorong Precision Steel
                  Company
                  Limited and Raisffesien Zentralbank Öesterreich AG, dated January 12, 2005
                  (incorporated herein by reference to the Company’s Form 8-K, dated January
                  4, 2007, Exhibit 10.5)10.7
              
              Letter
                  of Offer between Chengtong and Raiffeisen Zentralbank Österreich AG, dated
                  October 14, 2004 (incorporated herein by reference to the Company’s Form
                  8-K, dated January 4, 2007, Exhibit 10.6)10.8
              
              Amendment
                  No. 1 to Letter of Offer between Chengtong and Raiffeisen Zentralbank
                  Österreich AG, dated December 28, 2004 (incorporated herein by reference
                  to the Company’s Form 8-K, dated January 4, 2007, Exhibit
                  10.7)10.9
              
              Amendment
                  No. 2 to Letter of Offer between Chengtong and Raiffeisen Zentralbank
                  Österreich AG, dated May 10, 2005 (incorporated herein by reference
                  to the
                  Company’s Form 8-K, dated January 4, 2007, Exhibit
                  10.8)10.10
              
              Amendment
                  No. 3 to Letter of Offer between Chengtong and Raiffeisen Zentralbank
                  Österreich AG,  dated July 26, 2005 (incorporated herein by reference
                  to the Company’s Form 8-K, dated January 4, 2007, Exhibit
                  10.9)10.11
              
              Debt
                  Reduction Agreement, dated February 13, 2007, by and among the
                  Company, Wo
                  Hing Li and Partner Success Holdings Limited (incorporated herein
                  by
                  reference to the Company’s Form 8-K, dated February 13, 2007, Exhibit
                  10.1)
  84
  **EXHIBIT
                  NO.**
              
              **DESCRIPTION**10.12
              
              Deed
                  of Release, dated February 13, 2007, from Wo Hing Li, in favor
                  of the
                  Company, Partner Success Holdings Limited and Shanghai Chengtong
                  Precision
                  Strip Co., Ltd. (incorporated herein by reference to the Company’s Form
                  8-K, dated February 13, 2007, Exhibit 10.2)10.13
              
              Amendment
                  to the Debt Reduction Agreement, dated February 20, 2007, by and
                  among the
                  Company, Wo Hing Li and Partner Success Holdings Limited (incorporated
                  herein by reference to the Company’s Form 8-K, dated February 16, 2007,
                  Exhibit 10.4)10.14
              
              Form
                  of Stock Purchase Agreement, by and among the Company and the Investors,
                  dated February 16, 2007 (incorporated herein by reference to the
                  Company’s
                  Form 8-K, dated February 16, 2007, Exhibit 10.1)10.15
              
              Form
                  of Limited Standstill Agreement (incorporated herein by reference
                  to the
                  Company’s Form 8-K, dated February 16, 2007, Exhibit
                  10.2)21
              
              Subsidiaries
                  of the Registrant22
              
              Published
                  report regarding matters submitted to vote of security holders
(Incorporated
                  herein by reference to the Company’s Quarterly Report on Form 10-Q for the
                  quarter ended December 31, 2006, dated February 13, 2007, Exhibit
                  99.1)23.1
              
              Consent
                  of Murrell Hall McIntosh & Co. LLP.31.1
              
              Certification
                  of President pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
                  Exchange Act.31.2
              
              Certification
                  of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
                  of the
                  Securities Exchange Act.32
              
              Certification
                  of President and Chief Financial Officer Pursuant to 18 U.S.C.
                  Section
                  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                  Act of
                  2002.
  85
 
 **SIGNATURES**
  Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, the registrant has duly caused this Amendment No. 1 to the Annual Report
        on Form 10-K to be signed on its behalf by the undersigned, thereunto duly
        authorized.
  CHINA
        PRECISION STEEL, INC.
  By: 
        /s/ Wo Hing Li
 
 Name: Wo
        Hing Li
 Title:  
        Chief Executive Officer
 Date:  
        October 15, 2007
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, this Amendment
        No. 1 to the Annual Report on Form 10-K has been signed below by the
        following persons on behalf of the registrant and in the capacities and on
        the
        dates indicated.
 
 SIGNATURE
              
              TITLE
              
              DATEChief
                  Executive Officer (Principal Executive Officer),/s/
                Wo Hing Li
              
              President
                  and Director
              
              October
                  15, 2007Wo
                  Hing LiChief
                  Financial Officer,Secretary
                  and Treasurer/s/
                Leada
                Tak Tai Li
              
              (Principal
                  Financial Officer)
              
              October
                  15, 2007Leada
                  Tak Tai Li/s/
Hai
                Sheng Chen
              
              General
                  Manager, Director
              
              October
                  15, 2007Hai
                  Sheng Chen/s/
Che
                Kin Lui
              
              Director
              
              October
                  15, 2007Che
                  Kin Lui/s/
David
                Peter Wong
              
              Director
              
              October
                  15, 2007David
                  Peter Wong/s/
                Tung Kuen Tsui
              
              Director
              
              October
                  15, 2007Tung
                  Kuen Tsui
  86
  **EXHIBIT INDEX
        (A)**
 **for
        the fiscal year ended June 30, 2007**
  **EXHIBIT
                  NO.**
              
              **DESCRIPTION**3.1
              
              Amended
                  and Restated Articles of Incorporation (incorporated herein by
                  reference
                  to the Company’s Form 8-K, dated January 4, 2007, Exhibit
                  3.1)3.2
              
              Second
                  Amended and Restated Bylaws (incorporated herein by reference to
                  the
                  Company’s Form 10-KSB, dated March 31, 1999, Exhibit
                  3.1.II)4.1
              
              Specimen
                  Certificate for Common Stock (incorporated herein by reference
                  to the
                  Company’s Form 10-Q for the quarterly period ended December 31, 2006,
                  dated February 13, 2007, Exhibit 3.1)4.2
              
              Form
                  of Warrant (incorporated herein by reference to the Company’s Form 8-K,
                  dated February 16, 2007, Exhibit 4.1)4.3
              
              Warrant,
                  dated February 22, 2007, to Belmont Capital Group Limited (incorporated
                  herein by reference to the Company’s Form 8-K, dated February 16, 2007,
                  Exhibit 4.2)4.4
              
              Warrant,
                  dated February 22, 2007, to CCG Elite Investor Relations
                  (incorporated herein by reference to the Company’s Form 8-K, dated
                  February 16, 2007, Exhibit 4.3)10.1
              
              Redemption
                  Agreement, dated December 28, 2006 (incorporated herein by reference
                  to
                  the Company’s Form 8-K, dated January 4, 2007, Exhibit
                  10.1)10.2
              
              Tax
                  Indemnity Agreement, dated December 28, 2006 (incorporated herein
                  by
                  reference to the Company’s Form 8-K, dated January 4, 2007, Exhibit
                  10.2)10.3
              
              2006
                  Long Term Incentive Plan (incorporated herein by reference to the
                  Company’s Form 8-K, dated January 4, 2007, Exhibit
                  10.3)10.4
              
              2006
                  Director Stock Plan, dated March 1, 2006 (incorporated herein by
                  reference
                  to the Company’s Definitive Proxy Statement, dated November 27, 2006,
                  Annex 3)10.5
              
              Equipment
                  Mortgage Agreement between Chengtong and Raiffeisen Zentralbank
Österreich
                  AG, dated January 12, 2005 (incorporated herein by reference to
                  the
                  Company’s Form 8-K, dated January 4, 2007, Exhibit
                  10.4)
   87
  10.6
              
              Mortgage
                  Agreement on Immovables between Shanghai Tuorong Precision Steel
                  Company
                  Limited and Raisffesien Zentralbank Öesterreich AG, dated January 12, 2005
                  (incorporated herein by reference to the Company’s Form 8-K, dated January
                  4, 2007, Exhibit 10.5)10.7
              
              Letter
                  of Offer between Chengtong and Raiffeisen Zentralbank Österreich AG, dated
                  October 14, 2004 (incorporated herein by reference to the Company’s Form
                  8-K, dated January 4, 2007, Exhibit 10.6)10.8
              
              Amendment
                  No. 1 to Letter of Offer between Chengtong and Raiffeisen Zentralbank
                  Österreich AG, dated December 28, 2004 (incorporated herein by reference
                  to the Company’s Form 8-K, dated January 4, 2007, Exhibit
                  10.7)10.9
              
              Amendment
                  No. 2 to Letter of Offer between Chengtong and Raiffeisen Zentralbank
                  Österreich AG, dated May 10, 2005 (incorporated herein by reference
                  to the
                  Company’s Form 8-K, dated January 4, 2007, Exhibit
                  10.8)10.10
              
              Amendment
                  No. 3 to Letter of Offer between Chengtong and Raiffeisen Zentralbank
                  Österreich AG,  dated July 26, 2005 (incorporated herein by reference
                  to the Company’s Form 8-K, dated January 4, 2007, Exhibit
                  10.9)10.11
              
              Debt
                  Reduction Agreement, dated February 13, 2007, by and among the
                  Company, Wo
                  Hing Li and Partner Success Holdings Limited (incorporated herein
                  by
                  reference to the Company’s Form 8-K, dated February 13, 2007, Exhibit
                  10.1)10.12
              
              Deed
                  of Release, dated February 13, 2007, from Wo Hing Li, in favor
                  of the
                  Company, Partner Success Holdings Limited and Shanghai Chengtong
                  Precision
                  Strip Co., Ltd. (incorporated herein by reference to the Company’s Form
                  8-K, dated February 13, 2007, Exhibit 10.2)10.13
              
              Amendment
                  to the Debt Reduction Agreement, dated February 20, 2007, by and
                  among the
                  Company, Wo Hing Li and Partner Success Holdings Limited (incorporated
                  herein by reference to the Company’s Form 8-K, dated February 16, 2007,
                  Exhibit 10.4)10.14
              
              Form
                  of Stock Purchase Agreement, by and among the Company and the Investors,
                  dated February 16, 2007 (incorporated herein by reference to the
                  Company’s
                  Form 8-K, dated February 16, 2007, Exhibit 10.1)10.15
              
              Form
                  of Limited Standstill Agreement (incorporated herein by reference
                  to the
                  Company’s Form 8-K, dated February 16, 2007, Exhibit
                  10.2)
  88
  21
              
              Subsidiaries
                  of the Registrant22
              
              Published
                  report regarding matters submitted to vote of security holders
(Incorporated
                  herein by reference to the Company’s Quarterly Report on Form 10-Q for the
                  quarter ended December 31, 2006, dated February 13,
                  2007, Exhibit 99.1)23.1
              
              Consent
                  of Murrell Hall McIntosh & Co. LLP.31.1
              
              Certification
                  of President pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
                  Exchange Act.31.2
              
              Certification
                  of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
                  of the
                  Securities Exchange Act.32
              
              Certification
                  of President and Chief Financial Officer Pursuant to 18 U.S.C.
                  Section
                  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                  Act of
                  2002.
 
 89