Edgar Filing: China Precision Steel, Inc.

Part I - Financial Information

Item 1.	Financial Statements	4

	Condensed Consolidated Balance Sheets at, December 31, 2007 (unaudited) and June 30, 2007 (audited)	4

	Unaudited Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2007 and 2006	5

	Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2007 and 2006	6

	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the year ended June 30, 2007 (audited) and the six months ended December 31, 2007 (unaudited)	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30

Item 4.	Controls and Procedures	31

Part II - Other Information

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 3.	Defaults Upon Senior Securities	44

Item 4.	Submission of Matters to a Vote of Security Holders	44

Item 5.	Other Information	44

Item 6.	Exhibits	45

Signatures		46

ITEM 1. FINANCIAL STATEMENTS.

China Precision Steel, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

			(Unaudited)
			December 31,		June 30,
	Notes		2007		2007
			(Restated – see Note 19)
Assets

Current assets
Cash and equivalents			$	40,205,111	$	5,504,862
Accounts receivable
Trade, net of allowances of $955,086 and $273,461 at December 31, and June 30, 2007, respectively				19,888,272		8,242,044
Bank acceptance notes				15,383,562		-
Other				3,746,438		85,708
Inventories		5		10,671,635		15,723,704
Deposits				68,493		82,758
Prepaid expenses				326,065		-
Advances to suppliers, net of allowance of $2,368,805 and $3,502,184 at December 31, and June 30, 2007, respectively				10,256,715		11,699,918

Total current assets				100,546,291		41,338,994

Property and equipment
Land use rights				1,795,461		1,124,583
Property and equipment, net		6		32,305,573		29,238,227
Construction-in-progress		7		11,503,835		10,355,763

				45,604,869		40,718,573

Goodwill				99,999		99,999

Total assets			$	146,251,159	$	82,157,566

Liabilities and Stockholders' Equity

Current liabilities
Accounts payable and accrued liabilities			$	6,196,315	$	4,855,932
Advances from customers		8		3,807,354		1,720,812
Other taxes payables				3,571,039		816,553
Current income taxes payable				3,658,571		1,892,866
Deferred income taxes payable				-		1,064,028
Amounts due to directors		9		2,543,019		408,620
Current portion of long-term debt				3,086,758		6,163,445
Notes payable		10		16,713,720		9,842,520

Total current liabilities				39,576,776		26,764,776

Long-term debt, net of current portion shown above		11		2,315,069		6,878,714

Stockholders' equity:
Preferred stock: $0.001 par value, 8,000,000 shares authorized, no shares outstanding at December 31, and June 30, 2007;		14
Common stock: $0.001 par value, 62,000,000 shares authorized, 45,896,288 and 37,378,143 issued and outstanding December 31, and June 30, 2007		14		45,896		37,378
Additional paid-in capital		14		73,701,004		31,867,063
Accumulated other comprehensive income				4,277,019		2,192,160
Retained earnings				26,335,395		17,008,238

Total stockholders' equity				104,359,314		51,104,839

Amounts due from directors		9		-		(2,590,763	)

Total liabilities and stockholders' equity			$	146,251,159	$	82,157,566

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

China Precision Steel, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

For the Three and Six Months Ended December 31. 2007 and 2006

(Unaudited)

			Three Months Ended						Six Months Ended
			December 31,			December 31,			December 31,			December 31,
	Notes		2007			2006			2007			2006
			(Restated – see Note 19)						(Restated – see Note 19)
Revenues
Sales revenues			$	13,228,321		$	15,007,582		$	40,415,556		$	25,510,930
Cost of goods sold				8,528,852			11,594,852			28,773,987			18,394,950

Gross profit				4,699,469			3,412,730			11,641,569			7,115,980

Operating expenses
Selling expenses				180,744			64,693			281,449			104,390
Administrative expenses				846,220			498,737			1,332,596			684,925
Provision for bad debts				25,782			-			651,780			-
Depreciation and amortization expense				15,798			10,845			29,430			21,262

Total operating expenses				1,068,544			574,275			2,295,255			810,577

Income from continuing operations				3,630,925			2,838,455			9,346,314			6,305,403

Other income (expense)
Other revenues				783,255			-			792,410			-
Interest and finance costs				(316,860	)		(114,743	)		(759,001	)		(318,082	)

Total other income (expense)				466,395			(114,743	)		33,409			(318,082	)

Income from continuing operations before income tax				4,097,320			2,723,712			9,379,723			5,987,321

Provision for (benefit from) income tax		12
Current				610,869			(34,057	)		1,116,594			895,313
Deferred				-			389,604			(1,064,028	)		(85,405	)

Total income tax expense (benefit)				610,869			355,547			52,566			809,908

Net income before discontinued operations				3,486,451			2,368,165			9,327,157			5,177,413

Net income from discontinued operations		16		-			519,879			-			639,072

Net income			$	3,486,451		$	2,888,044		$	9,327,157		$	5,816,485

Basic earnings per share		15
From continuing operations			$	0.08		$	0.09		$	0.23		$	0.19
From discontinued operations			$	-		$	0.02		$	-		$	0.03
Total			$	0.08		$	0.11		$	0.23		$	0.22

Basic weighted average shares outstanding				43,031,346			26,981,916			40,204,745			26,981,916

Diluted earnings per share		15
From continuing operations			$	0.08		$	0.09		$	0.23		$	0.19
From discontinued operations			$	-		$	0.02		$	-		$	0.03
Total			$	0.08		$	0.11		$	0.23		$	0.22

Diluted weighted average shares outstanding				43,639,342			26,981,916			40,809,437			26,981,916

The Components of comprehensive income:
Net income			$	3,486,451		$	2,888,044		$	9,327,157		$	5,816,485
Foreign currency translation adjustment				1,179,322			557,213			2,084,859			654,985

Comprehensive income			$	4,665,773		$	3,445,257		$	11,412,016		$	6,471,470

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

China Precision Steel, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended December 31, 2007 and 2006

(Unaudited)

	2007			2006
	(Restated – see Note 19)

Cash flows from operating activities
Net Income	$	9,327,157		$	5,816,485
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Depreciation		992,570			617,405
Less income from discontinued operations - Oralabs, Inc		-			(639,072	)
Allowance for bad and doubtful debts		651,780			-
Net changes in assets and liabilities:
Accounts receivable, net		(31,266,517	)		4,059,814
Inventories		5,195,155			(8,207,665	)
Deposits		15,018			(3,661	)
Prepayments		(326,065	)		-
Advances to suppliers		1,549,672			(4,410,823	)
Accounts payable and accrued expenses		1,296,194			4,622,396
Advances from customers		2,070,883			2,919,124
Other taxes payable		2,747,055			(152,086	)
Current income taxes		1,748,480			937,307
Deferred income taxes		(1,064,028	)		(85,405	)

Net cash (used in) provided by operating activities		(7,062,646	)		5,473,819

Cash flows from investing activities
Purchases of property and equipment including construction in progress		(5,508,327	)		(10,212,328	)

Net cash (used in) investing activities		(5,508,327	)		(10,212,328	)

Cash flows from financing activities
Sale of common stock		44,433,222			-
Capital and restructuring contributions		-			558,797
Advances from directors, net		2,154,257			(3,237,243	)
Notes payable proceeds		16,446,667			7,748,990
Repayments of notes payable		(17,424,050	)		-

Net cash provided by financing activities		45,610,096			5,070,544

Effect of exchange rate		1,661,126			654,985

Net increase in cash		34,700,249			987,020

Cash and cash equivalents, beginning of period		5,504,862			186,955

Cash and cash equivalents, end of period	$	40,205,111		$	1,173,975

Supplemental disclosure of cash flow information

Interest paid	$	759,001		$	318,082
Taxes paid	$	-		$	-

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

China Precision Steel, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders' Equity

For the Year Ended June 30, 2007 and the Six Months Ended December 31, 2007

										Accumulated
							Additional			Other					Total
	Ordinary Shares						Paid-in			Comprehensive		Retained			Stockholders'
	Share			Amount			Capital			Income		Earnings			Equity
Balance at June 30, 2006		24,283,725			24,284			1,375,716			745,583		9,535,577			11,681,160

Sale of common stock		7,451,665			7,451			22,347,543			-		-			22,354,994
Syndication 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								6,775,776
Warrants issued for consulting		-			-			447,993			-		-			447,993
Capital contribution from waiver of dividend		-			-			3,953,794								3,953,794
Foreign currency translation adjustment		-			-			-			1,446,577		-			1,446,577
Net income		-			-			-			-		8,304,109			8,304,109
Less discontinued operations sold 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

Sale of common stock		7,100,000			7,100			44,498,650			-		-			44,505,750
Syndication fees		-			-			(72,528	)		-		-			(72,528	)
Make good shares		2,000,000			2,000			(2,000	)		-		-			-
Exercise of warrants		189,205			189			(189	)		-		-			-
Cancellation of stock		(771,060	)		(771	)		(2,589,992	)		-		-			(2,590,763	)
Foreign currency translation adjustment		-			-			-			2,084,859		-			2,084,859
Net income		-			-			-			-		9,327,157			9,327,157

Balance at December 31, 2007 (Unaudited and Restated)		45,896,288		$	45,896		$	73,701,004		$	4,277,019	$	26,335,395		$	104,359,314

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

China Precision Steel, Inc.

Notes to the Condensed Consolidated Financial Statements

1. Description of Business

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

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

PSHL, registered on April 30, 2002 in the Territory of the British Virgin Islands, had registered capital of $50,000 as of June 30, 2007 and 2006. 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 of 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 and on December 11, 2007, the authorized registered capital was further increased to $42,440,000. Pursuant to the document issued by the District Council to Xuhang Town Council on June 28, 2004, the equity transfers from China Chengtong Metal Group Limited and Eastreal Holdings Company Limited to PSHL 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.

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 accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and related notes. The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto for the year ended June 30, 2007.

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

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 December 31, 2007 and June 30, 2007, the Company had $955,086 and $273,461 of allowances for doubtful accounts, respectively.

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

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

Advances to Suppliers - In order to insure a steady supply of raw materials, the Company is required from time to time to make cash advances when placing its purchase orders. Cash advances are shown net of allowances for unrecoverable advances of $2,368,805 and $3,502,184 at, December 31, 2007 and June 30, 2007, respectively.

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 years
Office equipment		5 years
Motor vehicles		5 years
Machineries		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 six months ended December 31, 2007 and 2006, the Company capitalized $0 and $497,686, 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.

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

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

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

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

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

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 currencies are translated at the average rate of exchange during the reporting period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the market rate of exchange ruling at that date. The registered equity capital denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. All translation adjustments resulting from the translation of the financial statements into the reporting currency (“US Dollars”) are dealt with as an exchange fluctuation reserve in shareholders’ equity.

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

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 became 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.

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 amounts of unrecognized tax benefits as of December 31 and June 30, 2007, are not material to its results of operations, financial condition or cash flows. The Company also believes that the total amounts of unrecognized tax benefits as of December 31 and 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.

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

For the three and six months ended December 31, 2007, the Company’s pension cost charged to the statements of operations under the plan amounted to $72,059 and $132,658, respectively, all of which have been paid to the State Pension Fund (2006: $39,466 and $74,163, respectively).

Fair Value of Financial Instruments - The carrying amounts of certain financial instruments, including cash, accounts receivable, other receivables, accounts payable, accrued expenses, and other payables approximate their fair values as at December 31 June 30, 2007 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.

Recent Accounting Pronouncements

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

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands the required disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. Management is assessing the impact of the adoption of SFAS No. 157.

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.

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

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

4. Concentrations of Business and Credit Risk

The Company provides credit in the normal course of business. The Company performs ongoing credit evaluations of its customers and clients and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers and clients, historical trends, and other information. Trade accounts receivable totaled $19,888,272 and $8,242,044 as of December 31, 2007 and June 30, 2007, respectively.

The Company’s list of customers whose purchases exceeded 10% of total sales during the six months ended December 31, 2007 and 2006 is as follows:

Customers	December 31, 2007		% to sales		December 31, 2006		% to sales
Shanghai Changshuo Steel Company, Ltd		11,076,780		27
Shanghai Shengdejia Metal Products Limited		6,492,562		16
Shanghai Ruixuefeng Metals Co., Limited						9,254,127		36
Sinosteel Company Limited						3,219,796		13

5. Inventories

Inventory consisted of the following:

	December 31, 2007		June 30, 2007
Raw materials	$	3,560,539	$	13,026,530
Work in progress		2,403,644		—
Finished goods		4,707,452		2,697,174
	$	10,671,635	$	15,723,704

6. Property and Equipment

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

	December 31, 2007			June 30, 2007
Plant and machinery	$	19,053,914		$	21,087,245
Buildings		17,568,240			11,361,207
Motor vehicles		345,350			283,534
Office equipment		66,268			85,560
		37,033,772			32,817,546
Less: Accumulated depreciation		(4,728,199	)		(3,579,319	)
	$	32,305,573		$	29,238,227

Depreciation expense related to manufacturing is included as a component of cost of goods sold. During the three and six months ended December 31, 2007, depreciation totaling $483,482 and $961,462, respectively, was included as a component of cost of goods sold (2006: $345,669 and $596,143, respectively).

7. Construction-In-Progress

Construction-in-progress consisted of the following:

		December 31, 2007			June 30, 2007
Construction costs of plant and machinery		$	11,503,835		$	10,355,763

Construction-in-progress represents construction and installations of the new plant and machinery 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 or services rendered as of the balance sheets dates. Advances from customers for goods to be delivered or services to be rendered in the subsequent period are carried forward as deferred revenue. As of December 31, 2007 and June 30, 2007, there were advances from customers of $3,807,354 and $1,720,812, respectively.

9. Transactions with Related Parties

Amounts due to (from) directors are as follows:

Name	December 31, 2007		June 30, 2007
Wo Hing Li	$	2,120,596	$	(2,590,763	)
Hai Sheng Chen		422,423		408,619
	$	2,543,019	$	(2,182,144	)

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.

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

10. Short-Term Loans

Short-term loans consisted of the following:

	December 31, 2007		June 30, 2007
Bank 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

Bank loan dated August 1, 2007, due in one year with a interest rate of the Singapore Interbank Offered Rate (SIBOR) plus 3% (7.73% at December 31, 2007)		5,300,000		—

Bank loan dated August 1, 2007, due in one year with a interest rate of 13% over the standard market rate set by the People’s Bank of China for Renminbi loans, secured by land, buildings, plant and machinery (8.24% at December 31, 2007)		2,701,391		—

Bank loan dated July 26, 2007, due in one year 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, plant and machinery (8.38% at December 31, 2007)		8,712,329		—

	$	16,713,720	$	9,842,520

The weighted average interest rate on short-term loans at December 31, 2007 was 8.15%.

11. Long-Term Debts - Secured

	December 31, 2007		June 30, 2007
Long-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

Bank 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 (8.38% at December 31, 2007)		5,401,827		6,878,714

Total long-term debt		5,401,827		13,042,159
Less: Current portion of long-term debts		3,086,758		6,163,445

Long-term debts	$	2,315,069	$	6,878,714

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

2008	$	3,086,758
2009		2,315,069
2010
2011
2012
2013 and after
	$	5,401,827

12. Income Tax

For enterprise income tax 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%.

The tax holiday resulted in tax savings as follows:

	Three months ended December 31,				Six months ended December 31
	2007		2006		2007		2006
Tax savings	$	668,444	$	367,701	$	1,345,100	$	806,669

Benefit per share
Basic	$	0.01	$	0.01	$	0.07	$	0.03
Diluted	$	0.01	$	0.01	$	0.07	$	0.03

Significant components of the Group’s deferred tax assets and liabilities as of December 31, 2007 and June 30, 2007 are as follows:

Deferred tax liabilities:	December 31, 2007			June 30, 2007

Book depreciation in excess of tax depreciation	$	63,831		$	39,918

Temporary differences resulting from cash basis reporting for tax purposes		448,725			(1,103,946	)
Valuation allowance		(512,556	)		—

Net deferred income tax (liability)	$	—		$	(1,064,028	)

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

	Three months ended December 31,						Six months ended December 31,
	2007			2006			2007			2006
Computed tax at the federal statutory rate of 34%	$	1,393,089		$	926,062		$	3,189,106		$	2,035,689
Less adjustment to EIT statutory rate of 27%		(244,051	)		(190,660	)		(613,819	)		(419,112	)
Tax effect of US losses not deductible in PRC		130,275			-			216,768			-
Income not subject to tax		-			-			(330,361	)		-
Deferred taxes		-			-			(1,064,028	)		-
Benefit of tax holiday		(668,444	)		(379,855	)		(1,345,100	)		(806,669	)

Income tax expense per books	$	610,689		$	355,547		$	52,566		$	809,908

Income tax expense (benefit) consists of:

	Three months ended December 31,					Six months ended December 31,
	2007		2006			2007			2006
Income tax expense (benefit) for the current year - PRC	$	610,869	$	(34,057	)	$	1,116,594		$	895,313
Deferred income tax expense (benefit) - PRC				389,604			(1,064,028	)		(85,405	)
Income tax expense (benefit) per books	$	610,869	$	355,547		$	52,566		$	809,908

13. 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.

14. Equity

In connection with a Stock Purchase Agreement, dated February 16, 2007 (the “Stock Purchase Agreement”), 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. The value of the warrants was considered syndication fees and was recorded to additional paid-in capital.

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. The value of these was considered syndication fees in association with the Private Placement and was recorded to additional paid-in capital.

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

Information with respect to stock warrants outstanding is as follows:

Exercise Price		Outstanding June 30, 2007	Granted	Expired or Exercised		Outstanding December 31, 2007	Expiration Date
$	3.00	1,300,059	-0-	(275,000	)	1,025,059	02/22/2011
$	3.60	100,000	-0-	-0-		100,000	02/22/2010
$	8.45	-0-	1,420,000	-0-		1,420,000	11/06/2010
$	7.38	-0-	225,600	-0-		225,600	11/06/2010

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

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

The Company closed the Offering on November 6, 2007 (the “Closing Date”). The net proceeds of the offering were approximately $44 million, after deducting underwriting commissions and discounts and other fees and expenses relating to the offering. The warrants were valued at $5.3 million and were recorded to additional paid-in capital. The Company intends to use the net proceeds for repayment of certain existing bank debt in the amount of approximately $22 million, capital expenditures related to the completion of the second reverse rolling mill and annealing furnace and construction of the third reverse rolling mill and related capital expenditures in the amount of approximately $18 million, and the balance for general corporate purposes.

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

15. 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 six months ended December 31, 2007 , dilutive shares include outstanding warrants to purchase 1,025,059 shares of common stock at an exercise price of $3.00; 100,000 shares at an exercise price of $3.60; 1,420,000 shares at an exercise price of $8.45; and 225,600 shares at an exercise price of $7.38. There were no dilutive shares outstanding at December 31, 2006.

The following reconciles the components of the EPS computation:

	Income			Shares		Per Share
	(Numerator)			(Denominator)		Amount
For the three months ended December 31, 2007:
Net income	$	3,486,451
Less Net income from discontinued operations	$	—
Basic EPS income available to common shareholders	$	3,486,451			43,031,346	$	0.08
Effect of dilutive securities:
Warrants					607,996
Diluted EPS income available to common shareholders	$	3,486,451			43,639,342	$	0.08

For the three months ended December 31, 2006:
Net income	$	2,888,044
Less net income from discontinued operations	$	(519,879	)
Basic EPS income available to common shareholders	$	2,368,165			26,981,916	$	0.09
Effect of dilutive securities:
Warrants					—
Diluted EPS income available to common shareholders	$	2,368,165			26,981,916	$	0.09

	Income			Shares		Per Share
	(Numerator)			(Denominator)		Amount
For the six months ended December 31, 2007:
Net income	$	9,327,157
Less Net income from discontinued operations	$	—
Basic EPS income available to common shareholders	$	9,327,157			40,204,745	$	0.23
Effect of dilutive securities:
Warrants					604,692
Diluted EPS income available to common shareholders	$	9,327,157			40,809,437	$	0.23

For the six months ended December 31, 2006:
Net income	$	5,816,485
Less net income from discontinued operations	$	(639,072	)
Basic EPS income available to common shareholders	$	5,177,413			26,981,916	$	0.19
Effect of dilutive securities:
Warrants					—
Diluted EPS income available to common shareholders	$	5,177,413			26,981,916	$	0.19

16. 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. 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 three and six months ended December 31, 2007, and 2006 is as follows:

	Three months ended				Six months ended
	December 31,				December 31
	2007		2006		2007		2006
	($ ‘000)		($ ‘000)		($ ‘000)		($ ‘000)
Revenues	$	-0-	$	5,019	$	-0-	$	9,404
Income before tax		-0-		676		-0-		831
Income taxes		-0-		156		-0-		192
Income from discontinued operations	$	-0-	$	520	$	-0-	$	639

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

17. Commitments

As of, December 31, 2007, the Company had $4,235,722 in commitments for capital expenditures for contractual commitments of the construction projects related to expansion of Chengtong’s production facilities.

18. Other Events

On November 12, 20007, at the Annual Meeting of the Company’s shareholders, the Company’s shareholders approved the reincorporation of the Company in the state of Delaware. The reincorporation was effected on November 16, 2007 through a merger with and into the Company’s wholly-owned subsidiary.

19. Restatement

On May 14, 2008, the Company’s management determined that the Company’s financial statements for the three and six months ended December 31, 2007 contained certain errors that are primarily related to incorrect deduction of VAT from net sales and overstatement of deferred tax liability. Form 8-K was filed with the Securities and Exchange Commission on May 16, 2008 describing these errors in detail. The adjustments to the consolidated balance sheet, consolidated statement of operations, and consolidated statement of cash flows are summarized as follows:

China Precision Steel, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

	December 31,		December 31,			December 31,
	2007		2007			2007
	Initial Filing		Restatement			Restated

Assets

Current assets
Cash and equivalents	$	40,205,111	$	-		$	40,205,111
Accounts receivable
Trade, net of allowances of $955,086 and $273,461
at December 31, and June 30, 2007, respectively		19,888,272		-			19,888,272
Bank acceptance notes		15,383,562		-			15,383,562
Other		469,925		3,276,513			3,746,438
Inventories		10,671,635		-			10,671,635
Deposits		68,493		-			68,493
Prepaid expenses		326,065		-			326,065
Advances to suppliers, net of allowance of $2,368,805 and
$3,502,184 at December 31, and June 30, 2007,
respectively		10,256,715		-			10,256,715

Total current assets		97,269,778		3,276,513			100,546,291

Property and equipment
Land use rights		1,795,461		-			1,795,461
Property and equipment, net		32,305,573		-			32,305,573
Construction-in-progress		11,503,835		-			11,503,835

		45,604,869		-			45,604,869

Goodwill		99,999		-			99,999

Total assets	$	142,974,646	$	3,276,513		$	146,251,159

Liabilities and Stockholders' Equity

Current liabilities
Accounts payable and accrued liabilities	$	6,196,315	$	-		$	6,196,315
Advances from customers		3,807,354		-			3,807,354
Other taxes payables		2,946,169		624,870			3,571,039
Current income taxes payable		3,171,889		486,682			3,658,571
Deferred income taxes payable		1,981,121		(1,981,121	)		-
Amounts due to directors		2,543,019		-			2,543,019
Current portion of long-term debt		3,086,758		-			3,086,758
Notes payable		16,713,720		-			16,713,720

Total current liabilities		40,446,345		(869,569	)		39,576,776

Long-term debt, net of current portion shown above		2,315,069		-			2,315,069

Stockholders' equity:
Preferred stock: $0.001 per value, 8,000,000 shares
authorized, no shares outstanding at December 31, and
June 30, 2007;
Common stock: $0.001 par value, 62,000,000 shares
authorized, 45,896,288 and 37,378,143 issued and
outstanding December 31, and June 30, 2007		45,896		-			45,896
Additional paid-in capital		73,701,004		-			73,701,004
Accumulated other comprehensive income		4,196,499		80,520			4,277,019
Retained earnings		22,269,833		4,065,562			26,335,395

Total stockholders' equity		100,213,232		4,146,082			104,359,314

Amounts due from directors		-		-			-

Total liabilities and stockholders' equity	$	142,974,646	$	3,276,513		$	146,251,159

Unaudited Condensed Consolidated Statements of Operations

For the Three Months Ended December 31, 2007

	Three Months Ended December 31, 2007									Six Months Ended December 31, 2007
	Initial Filing			Restatement			Restated			Initial Filing			Restatement			Restated

Revenues
Sales revenues	$	11,913,718		$	1,314,603		$	13,228,321		$	37,226,416		$	3,189,140		$	40,415,556
Cost of goods sold		8,528,852			-			8,528,852			28,773,987			-			28,773,987

Gross profit		3,384,866			1,314,603			4,699,469			8,452,429			3,189,140			11,641,569

Operating expenses
Selling expenses		180,744			-			180,744			281,449			-			281,449
Administrative expenses		846,218			2			846,220			1,332,595			1			1,332,596
Provision for bad debts		25,782			-			25,782			651,780			-			651,780
Depreciation and amortization expense		15,798			-			15,798			29,430			-			29,430

Total operating expenses		1,068,542			2			1,068,544			2,295,254			1			2,295,255

Income from continuing operations		2,316,324			1,314,601			3,630,925			6,157,175			3,189,139			9,346,314

Other income (expense)
Other revenues		783,255			-			783,255			792,410			-			792,410
Interest and finance costs		(316,860	)		-			(316,860	)		(759,001	)		-			(759,001	)

Total other income (expense)		466,395			-			466,395			33,409			-			33,409

Income from continuing operations
before income tax		2,782,719			1,314,601			4,097,320			6,190,584			3,189,139			9,379,723

Provision for (benefit from) income tax
Current		194,873			415,996			610,869			11,896			1,104,698			1,116,594
Deferred		226,977			(226,977	)		-			917,093			(1,981,121	)		(1,064,028	)

Total income tax expense (benefit)		421,850			189,019			610,869			928,989			(876,423	)		52,566

Net income before discontinued operations		2,360,869			1,125,582			3,486,451			5,261,595			4,065,562			9,327,157

Net income from discontinued operations

Net income	$	2,360,869		$	1,125,582		$	3,486,451		$	5,261,595		$	4,065,562		$	9,327,157

Basic earnings per share
From continuing operations	$	0.05		$	0.03		$	0.08		$	0.13		$	0.10		$	0.23
From discontinued operations	$	-		$	-		$	-		$	-		$	-		$	-
Total	$	0.05		$	0.03		$	0.08		$	0.13		$	0.10		$	0.23

Basic weighted average shares outstanding		43,031,346			-			43,031,346			40,204,745			-			40,204,745

Diluted earnings per share
From continuing operations	$	0.05		$	0.03		$	0.08		$	0.13		$	0.10		$	0.23
From discontinued operations	$	-		$	-		$	-		$	-		$	-		$	-
Total	$	0.05		$	0.03		$	0.08		$	0.13		$	0.10		$	0.23

Diluted weighted average shares outstanding		43,639,342			-			43,639,342			40,809,437			-			40,809,437

The Components of comprehensive income:
Net income	$	2,360,869		$	1,125,582		$	3,486,451		$	5,261,595		$	4,065,562		$	9,327,157
Foreign currency translation adjustment		557,213			622,109			1,179,322			2,004,339			80,520			2,084,859

Comprehensive income	$	2,918,082		$	1,747,691		$	4,665,773		$	7,265,934		$	4,146,082		$	11,412,016

19. Restatement (continued)

Unaudited Condensed Consolidated Statements of Cash Flows
For the Three Months Ended December 31, 2007

	Initial Filing			Restatement			Restated

Cash flows from operating activities
Net Income	$	5,261,595		$	4,065,562		$	9,327,157
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Depreciation		992,570			-			992,570
Less income from discontinued operations - Oralabs, Inc		-			-			-
Allowance for bad and doubtful debts		651,780			-			651,780
Net changes in assets and liabilities:
Accounts receivable, net		(27,990,004	)		(3,276,513	)		(31,266,517	)
Inventories		5,195,155			-			5,195,155
Deposits		15,018			-			15,018
Prepayments		(326,065	)		-			(326,065	)
Advances to suppliers		1,549,672			-			1,549,672
Accounts payable and accrued expenses		1,296,194			-			1,296,194
Advances from customers		2,070,883			-			2,070,883
Other taxes payable		2,223,094			523,961			2,747,055
Current income taxes		1,261,798			486,682			1,748,480
Deferred income taxes		907,410			(1,971,438	)		(1,064,028	)

Net cash (used in) provided by operating activities		(6,890,900	)		(171,746	)		(7,062,646	)

Cash flows from investing activities
Purchases of property and equipment including construction in progress		(5,508,327	)		-			(5,508,327	)

Net cash (used in) investing activities		(5,508,327	)		-			(5,508,327	)

Cash flows from financing activities
Sale of common stock		44,433,222			-			44,433,222
Capital and restructuring contributions		-			-			-
Advances from directors, net		2,053,348			100,909			2,154,257
Notes payable proceeds		16,446,667			-			16,446,667
Repayments of notes payable		(17,424,050	)		-			(17,424,050	)

Net cash provided by financing activities		45,509,187			100,909			45,610,096

Effect of exchange rate		1,590,289			70,837			1,661,126

Net increase in cash		34,700,249			-			34,700,249

Cash and cash equivalents, beginning of period		5,504,862			-			5,504,862

Cash and cash equivalents, end of period	$	40,205,111		$	-		$	40,205,111

Supplemental disclosure of cash flow information

Interest paid	$	759,001		$	-		$	759,001
Taxes paid	$	-		$	-		$	-

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

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

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

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

Introduction

Management’s discussion and analysis of financial condition and results of operations is intended to help provide an understanding of China Precision Steel, Inc. 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 six months ended December 31, 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 three and six months ended December 31, 2007 and 2006. This discussion includes a brief description of significant transactions and events that have an impact on the comparability of the results being analyzed.

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

Overview of the 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.

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.

Results of Operations

Three Months Ended December 31, 2007 Compared to Three Months Ended December 31, 2006

Income from continuing operations before income tax increased by $1,373,608, or 50.4%, period-on-period to $4,097,320 for the three months ended December 31, 2007 from $2,723,712 for the three months ended December 31, 2006 and gross profit increased by $1,286,739, or 37.7%, period-on-period.

Gross Profit. Gross profits in absolute terms increased by $1,286,739, or 37.7%, period-on-period to $4,699,469 for the three months ended December 31, 2007 from $3,412,730 for the three months ended December 31, 2006, while gross profit margin increased to 35.5% for the three months ended December 31, 2007 from 22.7% for the three months ended December 31, 2006. The increase in gross profit margin principally resulted from production of higher quality products with more complexity and higher margins, which is also associated with longer production times and thus a lower volume.

Sales Revenues. Sales volume decreased by 5,624 metric tons, or 28.6%, period-on-period to 14,010 metric tons for the three months ended December 31, 2007 from 19,634 tons for the three months ended December 31, 2006. As a result, sales revenues decreased by $1,779,261, or 11.9%, period-on-period to $13,228,321 for the three months ended December 31, 2007 from $15,007,582 for the three months ended December 31, 2006. We believe that the decreases in sales and sales revenues are a direct result of changes in our sales mix during the quarter to focus on high quality high margin products, and thus less volume was produced due to the complexity and longer production times required for the higher margin products.

Average cost of production per ton increased to $609 for the three months ended December 31, 2007 compared to an average cost of production per ton of $591 for the three months ended December 31, 2006, representing an increase of $18 per ton, or 3%, period-on-period. The 1400 mm cold-roll mill which became operational at the beginning of October 2006 is now operating at approximately 50% of design capacity and will likely take two to three years to reach its maximum production capacity.

Sales by Product Line. A break-down of our sales by product line for the three months ended December 31, 2007 and 2006 is as follows:

	Three Months Ended December 31,
	2007						2006						Period-on-period
Product category	Quantity (tons)		$ Amount		% of sales		Quantity (tons)		$ Amount		% of sales		Qty. Variance

Low carbon cold-rolled		3,442		2,791,741		21.1		11,836		7,146,805		47.6		(8,394	)
Low carbon hard rolled		4,897		3,503,082		26.5		1,724		18,721		0.1		3,173
High-carbon cold-rolled		3,520		4,174,255		31.6		936		4,759,443		31.8		2,584
High-carbon hot-rolled		1,171		917,057		6.9		5,138		3,082,613		20.5		(3,967	)
Sales of Scrap Metal		—		251,146		1.9		—		—		—		—
Subcontracting income		980		1,591,040		12.0		—		—		—		980
Total		14,010		13,228,321		100.0		19,634		15,007,582		100

There were various changes in the break-down of sales among our product lines over the three months ended December 31, 2007 as we are now operating an additional mill and are in the process of developing new products and new markets. High-carbon hot-rolled steel products only accounted for 6.9% of the current sales mix at an average selling price of $783 per ton for the three months ended December 31, 2007 compared to 20.5 % of the sales mix at an average selling price per ton of $600 for the three months ended December 31, 2006. The lower priced low-carbon cold-rolled steel products accounted for 21.1 % of the current sales mix at an average selling price of $811 per ton for the three months ended December 31, 2007 compared to 47.6% of the sales mix at an average selling price per ton of $604 for the three months ended December 31, 2006. Low carbon hard-rolled steel, which is also our exported precision steel products, was 26.5% of sales during the three months ended December 31, 2006, accounted for $ 3,503,082, or 26.5%, of the current sales mix at an average selling price of $715 per ton for the three months ended December 31, 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 and margins . 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 as we continuously carry out R&D and strive to launch new products that could potentially lead to new segments and customers

	Three Months Ended December 31,
Average selling prices	2007		2006		Variance
	$		$		$			%
Low-carbon cold-rolled		811		604		207			34.3
Low-carbon hard rolled		715		11		704			> 100
High-carbon cold-rolled		1,186		5,085		(3,899	)		(76.7	)
High-carbon hot-rolled		783		600		183			30.5
Subcontracting income		1,624		—		1,624			100.0

The average unit selling price per ton generated increased to $944 per ton for the three months ended December 31, 2007 compared to the corresponding period in 2006 of $ 764 , representing an increase of $180, or 23.5%, period-on-period. This increase was due to changes in our sales mix during the quarter to focus on high quality high margin products, and thus less volume was produced due to the complexity and longer production times required for the higher margin products. Sales of high-carbon cold-rolled steel products have increased by 2,584 metric tons,or 276%, period-on-period to 3,520 metric tons for the three months ended December 31, 2007 compared to 936 metric tons for the three months ended December 31, 2006. While the volume of high-carbon cold-rolled steel increased, the average sales price declined $3,899, or 76.7%, to $1,186 in the three months ended December 31, 2007 as compared to an average selling of $5,085 in the three months ended December 31, 2006. This product accounted for $4,174,255, or 31.6%, of the total sales mix for the three months ended December 31, 2007 compared to $4,759,443, or 31.8%, of the sales mix for the three months ended December 31, 2006.

Sales Breakdown by Major Customer.

	Three Months Ended December 31
Customers	2007 ($ )			% to sales			2006 ($ )			% to sales

Shanghai Changshuo Steel Company Ltd		2,370,370			18				*			*
Shanghai Shengdejia Metal Products Limited		3,181,709			24				*			*
Beijing Beimo Aircraft Material Technology Ltd Co		85,468			1				*			*
Hangzhou Relian Company Limited		266,970			2			648,757			4
Shangdong Province Boxing County Longhua Material Limited		381,227			3				*			*
Shanghai Ruixuefeng Metals Co. Ltd			*			*		5,365,141			36
Nuoying International (HK) Co. Limited			*			*		1,582,510			11
Sinosteel Company Limited			*			*		2,137,467			14
Shanghai Xin Zhong Da Trading Co. Limited			*			*		933,762			6
		6,285,744			48			10,667,637			71
Others		6,942,577			52			4,339,945			29
Total		13,228,321			100			15,007,582			100

* Not major customers for the relevant periods

Sales revenues generated from the top five major customers as a percentage of total sales decreased to 48% for the three months ended December 31, 2007 as compared to 71% for the three months ended December 31, 2006. With the exception of Hangzhou Relian Company Limited, the top five major customers were different period-on-period. The change in customer mix reflects our shift in product focus during the course of the period.

	Three Months Ended December 31,
	2007		2006		Variance
	$		$		$			%
Cost of sales
- Raw materials		6,362,758		10,618,130		(4,255,372	)		(40.1	)
- Direct labor		167,926		184,467		(16,541	)		(8.9	)
- Factory overhead		1,998,168		792,255		1,205,913			152.2
		8,528,852		11,594,852		(3,066,000	)		(26.4	)

Cost per units sold									(28.6	)
Total units sold		14,010		19,634		(5,624	)
Average cost per unit sold		609		591		18			3.0

The raw materials cost component relative to sales revenues decreased to 48.1% for the three months ended December 31, 2007 compared to 70.7% for the three months ended December 31, 2006. This was attributable to production of higher profit margin products during the three months ended December 31, 2007 as compared to the same period in 2006.

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

· significant decreases in sales of low-carbon cold-rolled steel to 3,442 metric tons (compared to 11,836 metric tons for the three months ended December 31, 2006) were generated at an average selling price of $811 per ton (compared to $604 for the three months ended December 31, 2006) for the three months ended December 31, 2007;

· sales of 3,520 metric tons of high-carbon cold-rolled steel (compared to 936 metric tons for the three months ended December 31, 2006) generated at an average selling price of $1,186 per ton (compared to $5,085 per ton for the three months ended December 31, 2006) for the three months ended December 31, 2007; and

· sales of 4,897 metric tons of low-carbon hard-rolled steel at (compared to 1,724 for the three months ended December 31, 2006) generated at an average selling price of $715 per ton for the three months ended December 31, 2007.

The cost of raw materials consumed decreased by $4,255,372, or 40.1%, period-on-period to $6,362,758 for the three months ended December 31, 2007 from $10,618,130 for the three months ended December 31, 2006. This decrease was mainly attributable to decreases in sales volume by 5,624 metric tons, or 28.6%, period-on-period to 14,010 metric tons for the three months ended December 31, 2007 from 19,634 metric tons for the three months ended December 31, 2006 resulting in lower input of raw materials utilized in production. Average unit cost of raw materials per unit produced decreased by $87 per ton, or 16.1%, period-on-period to $454 per ton for the three months ended December 31, 2007 from $541 per ton for the three months ended December 31, 2006.

Expenses

Selling Expenses. Selling expenses increased by $116,051, or 179%, period-on-period, to $180,744 for the three months ended December 31, 2007 compared to the corresponding period in 2006 of $64,693. The increase was mainly attributable to increases in transportation, which rose by 287% period-on-period, due to our increased delivery charges of precision steel resulting from a broader customer base, especially exports where our standard contract terms are F.O.B. and we incur transportation costs to the port of shipment, plus loading costs , as well as an increase in the frequency of deliveries.

Administrative Expenses . Administrative expenses increased by $347,483, or 69.7%, period-on-period, to $846,220 for the three months ended December 31, 2007 compared to the comparable period in 2006. This increase was chiefly due to increases in costs associated with our NASDAQ listing and SEC compliance obligations. There were also increases in salaries and wages which were principally due to increases in the monthly salaries of the management staff as well as increase in average number of Chengtong staff.

Finance Costs . Net finance cost increased 176% period-on-period as a result of the increase in total interest expense by $202,117 for 2007 compared to $114,743 for 2006.

Six Months Ended December 31, 2007 Compared To Six Months Ended December 31, 2006

Income from continuing operations before income tax increased by $3,392,402, or 56.7%, period-on-period to $9,379,723 for the six months ended December 31, 2007 from $5,987,321 for the six months ended December 31, 2006 and gross profit increased by $4,525,589, or 63.5%, period-on-period.

Gross Profit

Gross profits in absolute terms increased by $4,525,589, or 63.5%, period-on-period to $11,641,569 for the six months ended December 31, 2007 from $7,115,980 for the six months ended December 31, 2006, while gross profit margin increased to 28.8% for the six months ended December 31, 2007 from 27.9% for the six months ended December 31, 2006. The increase in gross profits is mainly attributable to increase in sales during the six months ended December 31, 2007. The decrease in gross profit margin principally resulted from a change in sales mix over the six months ended December 31, 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 23,885 metric tons, or 80.9%, period-on-period to 53,378 metric tons for the six months ended December 31, 2007 from 29,493 tons for the six months ended December 31, 2006. As a result, sales revenues increased by $14,904,626, or 58.4%, period-on-period to $40,415,556 for the six months ended December 31, 2007 from $25,510,930 for the six months ended December 31, 2006. We believe that the increases in sales and sales revenues are a direct result of increases in our capacity and the continuous building of our brand both inside and outside China among users of precision steel products.

Average cost of production per ton decreased to $539 for the six months ended December 31, 2007 compared to an average cost of production per ton of $624 for the six months ended December 31, 2006, representing an decrease of $85 per ton, or 13.6%, period-on-period. The 1400 mm cold-roll mill which became operational in October 2006 is now operating at approximately 50% of design capacity. Greater production capacity and more flexibility in our sales mix has resulted in a decrease in the average cost of production during the six months ended December 31, 2007.

Sales by Product Line. A break-down of our sales by product line for the six months ended December 31, 2007 and 2006 is as follows:

	2007						2006						Period-on-period
Product category	Quantity (tons)		$ Amount		% of sales		Quantity (tons)		$ Amount		% of sales		Qty. Variance

Low carbon cold-rolled		17,762		11,896,272		29.4		17,819		10,813,463		42.4		(57	)
Low carbon hard rolled		7,284		5,111,386		12.6		—		—		—		7,284
High-carbon cold-rolled		12,456		18,861,130		46.7		2,178		9,625,855		37.7		10,278
High-carbon hot-rolled		5,254		2,370,060		5.9		7,516		4,892,024		19.2		(2,262	)
Sales of Scrap Metal		—		527,512		1.3		—		—		—		—
Subcontracting income		10,622		1,649,196		4.1		1,980		179,588		0.7		8,642
Total		53,378		40,415,556		100.0		29,493		25,510,930		100.0

There were various changes in the break-down of sales among our product lines over the six months ended December 31, 2007 as we are now operating an additional mill and are in the process of developing new markets. High-carbon hot-rolled steel products only accounted for 5.9% of the current sales mix at an average selling price of $451 per ton for the six months ended December 31, 2007 compared to 19.2 % of the sales mix at an average selling price per ton of $ 651 for the six months ended December 31, 2006. The lower priced low-carbon cold-rolled steel products accounted for 29.4 % of the current sales mix at an average selling price of $ 670 per ton for the six months ended December 31, 2007 compared to 42.4% of the sales mix at an average selling price per ton of $607 for the six months ended December 31, 2006. Low carbon hard-rolled steel, which was not sold during the six months ended December 31, 2006, accounted for $5,111,386, or 12.6%, of the current sales mix at an average selling price of $702 per ton for the six months ended December 31, 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 and margins. 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 as we continuously carry out R&D and strive to launch new products that could potentially lead to new segments and customers .

	Six Months Ended December 31,
Average selling prices	2007		2006		Variance
	$		$		$			%
Low-carbon cold-rolled		670		607		63			10.4
Low-carbon hard rolled		702		—		702			100.0
High-carbon cold-rolled		1,514		4,420		(2,906	)		(65.7	)
High-carbon hot-rolled		451		651		(200	)		(30.7	)
Subcontracting income		155		91		64			70.3

The average unit selling price per ton generated decreased to $757 per ton for the six months ended December 31, 2007 compared to the corresponding period in 2006 of $865, representing a decrease of $108, or 12.5%, period-on-period. This decrease was due to changes in the sales mix for the six months ended December 31, 2007 as compared to 2006. Sales of high-carbon cold-rolled steel products have increased by 10,278 metric tons, or 472%, period-on-period to 12,456 metric tons for the six months ended December 31, 2007 compared to 2,178 metric tons for the six months ended December 31, 2006. While the volume of high-carbon cold-rolled steel increased, the average sales price declined $2,906, or 65.7%, to $1,514 in the six months ended December 31, 2007 as compared to an average selling of $4,420 in the six months ended December 31, 2006. This product accounted for $18,861,130, or 46.7%, of the total sales mix for the six months ended December 31, 2007 compared to $9,625,855, or 37.7%, of the sales mix for the six months ended December 31, 2006.

Sales Breakdown by Major Customer

	Six Months Ended December 31
Customers	2007 ($ )			% to sales			2006 ($ )			% to sales

Shanghai Changshuo Steel Company Ltd		11,076,780			27				*			*
Shanghai Shengdejia Metal Products Limited		6,492,562			16				*			*
Beijing Beimo Aircraft Material Technology Ltd Co		1,843,650			5				*			*
Hangzhou Relian Company Limited		1,670,246			4			1,934,532			7
Shangdong Province Boxing County Longhua Material Limited		1,667,100			4				*			*
Shanghai Ruixuefeng Metals Co. Ltd			*			*		9,254,127			36
Nuoying International (HK) Co. Limited			*			*		1,708,265			7
Sinosteel Company Limited			*			*		3,219,796			13
Shanghai Xin Zhong Da Trading Co. Limited			*			*		1,507,757			6
		22,750,338			56			17,624,477			69
Others		17,665,218			44			7,886,453			31
Total		40,415,556			100			25,510,930			100

* Not major customers for the relevant periods

Sales revenues generated from the top five major customers as a percentage of total sales decreased to 56% for the six months ended December 31, 2007 as compared to 69% for the six months ended December 31, 2006. With the exception of Hangzhou Relian Company Limited, the top five major customers were different period-on-period. The change in customer mix reflects our shift in product focus during the course of the period.

Cost of Sales. Cost of sales increased by $10,379,037, or 56.4%, period-on-period to $28,773,987 for the six months ended December 31, 2007 from $18,394,950 for the six months ended December 31, 2006. Cost of sales represented 71.2% of sales revenues for the six months ended December 31, 2007 compared to 72.1% for the six months ended December 31, 2006. Average cost per ton sold decreased by $85, or 13.6%, period-on-period to $539 per ton for the six months ended December 31, 2007 from $624 per ton for the six months ended December 31, 2006. Meanwhile, the average selling price per ton decreased by $108 per ton, or 12.5%, period-on-period to $757 per ton for the six months ended December 31, 2007 from $865 per ton for the six months ended December 31, 2006.

	Six Months Ended December 31,
	2007		2006		Variance
	$		$		$			%
Cost of sales
- Raw materials		24,973,918		16,335,269		8,638,649			52.9
- Direct labor		346,011		336,392		9,619			2.9
- Factory overhead		3,454,058		1,723,289		1,730,769			100.4
		28,773,987		18,394,950		10,379,037			56.4

Cost per units sold
Total units sold		53,378		29,493		23,885			81.0
Average cost per unit sold		539		624		(85	)		(13.6	)

The raw materials cost component relative to sales revenues increased to 61.8% for the six months ended December 31, 2007 compared to 64% for the six months ended December 31, 2006. This was attributable to changes in the production mix of products with different gross margins in the six months ended December 31, 2007 as compared to the six months ended December 31, 2006. This mix of lower margin products, primarily produced in the first quarter, was related to a decision by management to reduce levels of raw materials inventory to a more healthy level.

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

· sales of 12,456 metric tons of high-carbon cold-rolled steel (compared to 2,178 metric tons for the six months ended December 31, 2006) were generated at an average selling price of $1,514 per ton (compared to $4,420 per ton for the six months ended December 31, 2006) for the six months ended December 31, 2007; and

· sales of 7,284 metric tons of low-carbon hard-rolled steel (compared to none for the six months ended December 31, 2006) was generated at an average selling price of $702 per ton for the six months ended December 31, 2007.

The cost of raw materials consumed increased by $8,638,649, or 52.9%, period-on-period to $24,973,918 for the six months ended December 31, 2007 from $16,335,269 for the six months ended December 31, 2006. This increase was mainly attributable to increases in sales volume by 23,885 metric tons, or 81%, period-on-period to 53,378 metric tons for the six months ended December 31, 2007 from 29,493 metric tons for the six months ended December 31, 2006 resulting in higher input of raw materials utilized in production. Average unit cost of raw materials per unit produced decreased by $86 per ton, or 15.5%, period-on-period to $468 per ton for the six months ended December 31, 2007 from $554 per ton for the six months ended December 31, 2006.

Manufacturing overhead costs increased by $1,730,769, or 100.4%, period-on-period to $3,454,058 for the six months ended December 31, 2007 from $1,723,289 for the six months ended December 31, 2006. The increase was mainly attributable to the combined effect of an increase in depreciation by $365,665, or 61.3%, period-on-period to $961,808 for the six months ended December 31, 2007 from $596,143 for the six months ended December 31, 2006, an increase in utilities by $413,956, or 161.6%, period-on-period to $670,043 for the six months ended December 31, 2007 from $256,087 for the six months ended December 31, 2006, and an increase in consumables by $684,404, or 181.7%, period-on-period to $1,061,171 for the six months ended December 31, 2007 from $376,767 for the six months ended December 31, 2006.

Expenses

Selling Expenses. Selling expenses increased by $177,059, or 170%, period-on-period, to $281,449 for the six months ended December 31, 2007 compared to the corresponding period in 2006 of $104,390. The increase was mainly attributable to increases in transportation, which rose by 444% period-on-period, due to our increased delivery charges of precision steel resulting from a broader customer base, especially exports where our standard contract terms are F.O.B. and we incur transportation costs to the port of shipment, plus loading costs , as well as an increase in the frequency of deliveries.

Administrative Expenses. Administrative expenses increased by $647,671, or 94.5%, period-on-period, to $1,332,596 for the six months ended December 31, 2007 compared to $684,925 in the comparable period in 2006. This increase was chiefly due to expenses relating to the Company’s SEC and NASDAQ compliance obligations. There were also increases in salaries and wages which were principally due to increases in the monthly salaries of the management staff as well as increase in average number of Chengtong staff.

Finance Costs. Net finance cost increased 138% period-on-period as a result of increases in total interest expense by $440,919 to $759,001 in 2007 compared to $318,082 for 2006.

Liquidity and Capital Resources

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

Net cash flows used in operating activities for the six months ended December 31, 2007 was $7,062,646 as compared with $5,473,819 provided by operating activities for the six months ended December 31, 2006, for a net decrease of $12,536,465. This increase was due primarily to an increase in bank acceptance notes not previously held at June 30, 2007.

Net cash flows used in investing activities for the six months ended December 31, 2007 was $5,508,327 as compared with $10,212,328 for the six months ended December 31, 2006. The decrease in investing activity was due to reduced construction during the six months ended December 31, 2007 as compared to the same period in 2006.

Net cash flows provided by financing activities for the six months ended December 31, 2007, was $45,610,096 as compared with $5,070,544 provided by financing activities for the six months ended December 31, 2006. The six months ended December 31, 2006 reflect borrowings which were incurred for expansion of the operations and to finance the construction-in-progress on new facilities. Repayments on advances from directors in 2006 partially offset the bank borrowings. During the six months ended December 31, 2007, the Company received $44 million in net proceeds from the sale of its equity securities, which will be used for repayment of certain bank debt, capital expenditures relating to the new facilities and working capital. Also during the six months ended December 31, 2007, a director cancelled stock in the amount of $2 million which was applied against amounts owed by the director at June 30, 20007.

Current Assets. Current assets increased significantly by $59,207,297, or 143%, period-on-period to $100,546,291 as of December 31, 2007 from $41,338,994 as of June 30, 2007, principally as a result of increases in cash and equivalents by $34,700,249, or 630%, period-on-period , as we raised gross proceeds of $44 million in November 2007 through the offering of our equity securities. Accounts receivable increased by $30,690,520, or 369%, period-on-period, offset by a decline in inventories of $5,052,069, or 32%, period-on-period. We also raised gross proceeds of $44 million in November of 2007 through offering of our equity securities.

Current Liabilities. Current liabilities increased by $13,444,157, or 50.2%, period-on-period to $39,576,776 as of December 31, 2007 from $26,764,776 as of June 30, 2007. The increase was due to increases in advances from customers, tax payables, provision for taxation and amounts due to directors and was mitigated by decreases in current portion of long-term debt.

As of December 31, 2007, we had $16,713,720 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 three months ended December 31, 2007, we invested $5,508,327 in property, production plants and equipment. We believe these capital investments increase our capacity, expand our product line, and reduce risks related to occupancy costs, thereby creating new opportunities to grow sales and control expenses.

During the current year, we expect to make additional investments in a new continuous annealing line and a new 1700mm cold roll mill at our facilities in Shanghai. We estimate that these investments could total up to $20 million. We intend to fund these investments through a combination of funds from operations, working capital, bank debt and the recent $47.9 million financing which was completed in November 2007. The actual combination of sources of funds will be dependant upon market conditions at the time of implementation.

Off-Balance Sheet Arrangements

For the three and six months ended December 31, 2007, we did not have any off-balance sheet arrangements.

Contractual Obligations

	At December 31, 2007 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:
Debt Obligations	$	23,078,655	$	20,601,531	$	2,477,124	$	—	$	—
Construction Commitments	4,270,236		4,270,236		—		—		—
	$	27,348,891	$	24,871,767	$	2,477,124	$	—	$	—

Loans

Bank and other loans decreased by $769,132, or 3.3% period-on-period to $22,115,547 as of December 31, 2007 from $22,884,679 as of June 30, 2007. The decrease was attributable to the partial payoff of outstanding loans.

Short-term bank loans

Short-term bank loans increased by $6,871,200 or 69.8%, period on period to $16,713,720 as of December 31, 2007 compared to $9,842,520 as of June 30, 2007.

Long-term bank loans

The current portion of long-term debt decreased 49.9% from $6,163,445 at June 30, 2007 to $3,086,758 at December 31, 2007. Long-term portion of bank loans decreased by $4,563,645, or 66.3%, period-on-period to $2,315,069 as of December 31, 2007 compared to $6,878,714 as of June 30, 2007.

Land Use Rights

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

Inflation

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

Foreign Currency Exchange Rates

The Group collects revenues from operations principally in the Chinese Renminbi. Except for limited exports to Thailand and the Philippines, all of our local sales revenues are collected in and substantially all of its expenses are paid in the Chinese Renminbi. We face foreign currency rate translation risk when 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.

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 December 31, 2007 the exchange rate was 7.2946 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 December 31, 2007, the Group’s outstanding financial instruments with foreign currency exchange rate risk exposure had an aggregate fair value of $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 $0.5 million at December 31, 2007.

Interest Rates

The Group is subject to interest rate risk on its non-derivative financial instruments. The Group does not hedge its interest rate risk. At December 31, 2007, the Group’s total bank debt outstanding was $ 22,115,547 , 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 $1.6 million. The impact of a 1% increase in interest rates will increase interest expense by approximately $ 220,000 . 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 December 31, 2007, the aggregate fair value of the Group’s financial instruments with exposure to interest rate risk was approximately $22 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 December 31, 2007.

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 December 31, 2007 and does not currently hedge its exposure to price fluctuations in the raw materials and energy required for the manufacture of its products.

ITEM 4. CONTROLS AND PROCEDURES.

(a) 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 December 31, 2007, the Company’s disclosure controls and procedures were not effective due to restatement of the financial statements for the quarterly period ended December 31, 2007 represented by this amended Form 10-Q/A, as described in the current report on Form 8-K filed by the Company with the SEC on May 16, 2008.

As the revisions to the financial statements involved complicated income tax matters as the Company reports in accordance to the generally accepted accounting principles of the U.S. but its operating subsidiaries are located in China and subject to a different income tax system, a thorough discussion was necessary before a conclusion on such matters could be reached. The delay was also partially caused by discontinuity as there had been a change of the Company's independent registered public accounting firm during the year. Management has been working diligently with both the Company's current and former independent registered public accounting firms to have the restatement filed as soon as practical. As stated in the Company's annual report on Form 10-K for the fiscal year ended June 30, 2008, management has considered the effect on the adequacy of the Company's disclosure controls and procedures in light of the restatements mentioned above and has determined that the Company's disclosure controls and procedures are effective as of June 30, 2008.

As described in the Original Filing, management also concluded that although no significant deficiencies or material weaknesses were found at December 31, 2007, additional controls and procedures were required to improve our recordkeeping systems 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 engaged an outside management consultant to review the Company’s overall financial and accounting systems, and to document and implement an accounting manual that would strengthen and improve the systems of controls, reconciliations, procedures, books and records. In addition, we are continuing our search for a senior financial executive with experience in U.S. GAAP and U.S. public company reporting and compliance obligations. We have also added additional resources to the accounting department that was still understaffed at December 31, 2007.

The disclosures controls and procedures contained herein have not been updated to reflect events, results or developments that have occurred after the Original Filing except for the amended disclosure contained in the second paragraph of Item 4(a) above.

(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 Quarterly 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.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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

ITEM 1A. RISK FACTORS.

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.

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:

· 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,

· 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 December 31, 2007, our total bank debt outstanding was $22.1 million, 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 $1.6 million. The impact of a 1% increase in interest rates will increase interest expense by approximately $220,000. 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.

At December 31, 2007, the aggregate fair value of our financial instruments with exposure to interest rate risk was approximately

$22 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 December 31, 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.

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 three months ended December 31, 2007 and 2006, sales revenues generated from the top five major customers amounted to 52% and 71% of total sales revenues, respectively; sales to the largest single customer for the same periods amounted to 24% and 36% of total sales revenues, respectively. We do not enter into long-term contracts with our customers, and therefore cannot be certain that sales to these customers will continue. The loss of any of our largest customers would likely have a material negative impact on our sales revenues and business.

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

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

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

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

· accurately forecasting demand,

· predicting volatility,

· timing volume sales to our customers,

· balancing our productive resources with product mix, and

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

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

· utilization rates of manufacturing lines,

· downtime due to product changeover,

· impurities in raw materials causing shutdowns, and

· maintenance of contaminant-free operations.

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

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

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

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

Unexpected equipment failures may lead to production curtailments or shutdowns.

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

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

All of our products are currently manufactured at our existing facilities located in the Jiading District in Shanghai, China. Fire fighting and disaster relief or assistance in China may not be as developed as in Western countries. While we maintain property damage insurance aggregating approximately $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;

· 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.

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 December 31, 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,

· freezes on commercial bank lending,

· 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:

· 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.

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.

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 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.

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 December 31, 2007, the exchange rate was 7.2946 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 December 31, 2007, our outstanding financial instruments with foreign currency exchange rate risk exposure had an aggregate fair value of $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 $0.5 million at December 31, 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.

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.

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

As of December 31 2007, 50.7% or 23,254,088 shares, of our issued and outstanding common stock was not owned by affiliates, of which 18,519,651 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. Recent rule changes adopted by the SEC will substantially reduce the holding period for restricted securities held by non-affiliates of SEC-reporting companies, such as us. The holding period for such securities will be reduced to six months when the rule changes become effective on February 15, 2008.

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 December 31, 2007 equal to approximately 46.6% of our voting securities. As a result, Wo Hing Li, through such stock ownership, exercises significant control over all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership in Wo Hing Li may also have the effect of delaying or preventing a change in control or other transactions that may otherwise be viewed as beneficial by shareholders other than Wo Hing Li.

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

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

We 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.

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

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

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

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 its audited financial statements for the year ended June 30, 2007 was less than US$10.4 million, the Company was required to issue the 2,000,000 shares of Common Stock to such investors. Such issuance was effected on October 15, 2007. No additional consideration was received by the Company in connection with this issuance of such shares of Common Stock.

Pursuant to a Placement Agency Agreement, dated October 31, 2007, between the Company and Roth Capital Partners LLC, in connection with the registered direct sale of the Company’s Common Stock and warrants, Roth Capital received, as partial compensation for its services, warrants to purchase an amount of Common Stock equal to 3.0% of the total number of shares of Common Stock sold in the Offering (the “Placement Warrants”), or 225,600 shares of Common Stock. Such Placement Warrants have an exercise price per share of 120% of the closing price per share of the Company’s Common Stock on the Closing Date, or $7.38, and are not exercisable prior to May 6, 2008. Thereafter, the Placement Warrants are exercisable at any time until the third anniversary of the date of issue. The net proceeds of the Offering were approximately $44 million, after deducting underwriting commissions and discounts and other fees and expenses relating to the Offering. The Company intends to use the net proceeds for repayment of certain existing bank debt, capital expenditures related to the completion of the second reverse rolling mill and annealing furnace and construction of the third reverse rolling mill and related capital expenditures in the amount of approximately $18 million, and the balance for general corporate purposes.

The above issuances of securities was made in reliance upon exemptions from the registration requirements of the Securities Act of 1933 in accordance with Section 4(2) and Regulation D thereunder.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

The Company submitted matters to a vote of its security holders through the solicitation of proxies. The content of these matters may be found in the Company’s Definitive Proxy Statement issued pursuant to Section 14(a) of the Securities Exchange Act of 1934, filed with the SEC on October 16, 2007 and incorporated herein by reference.

The annual meeting of the stockholders of the Company was held November 12, 2007 at the offices of Kirkpatrick & Lockhart Preston Gates Ellis LLP, 599 Lexington Avenue, New York, New York. All proposals submitted to shareholders were approved. The results of the voting were as follows:

Proposal 1 : Election of Directors

Name	For		Against
Wo Hing Li		29,593,064		146,600
Hai Sheng Chen		29,553,563		186,101
Tung Kuen Tsui		29,552,862		186,802
Che Kin Lui		29,553,365		186,299
David Peter Wong		29,553,621		186,043

Proposal 2 : Approval of change in state of incorporation from Colorado to Delaware by approving and adopting an Agreement and Plan of Merger providing for the merger of the Company into its wholly-owned subsidiary, China Precision Steel, Inc., a Delaware corporation:

For		Against			Abstain
24,171,529			27,986			4,272

Proposal 3 : Authority to issue an undetermined number of shares of Company Common Stock, shares of preferred stock convertible into Company Common Stock or warrants to purchase Company Common Stock, in an aggregate amount of up to 11,213,443 shares of Common Stock, in connection with capital raising activities over the next 12 months and prior to the next annual meeting of the Company’s Stockholders, at a price and on the terms to be determined by the Company’s Board of Directors:

For		Against			Abstain
23,948,330			229,672			25,785

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

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

Exhibit No.		Exhibit:

2.1		Certificate of Ownership and Merger (incorporated by reference to the Company’s Form 10-Q for the quarter ended September 30, 2007, Exhibit 2.1)

2.2		Agreement and Plan of Merger (incorporated by reference to the Company’s Form 10-Q for the quarter ended September 30, 2007, Exhibit 2.2)

3.1		Certificate of Incorporation (incorporated by reference to the Company’s Form 10-Q for the quarter ended September 30, 2007, Exhibit 3.1)

3.2		Bylaws (incorporated by reference to the Company’s Form 10-Q for the quarter ended September 30, 2007, Exhibit 3.2)

4.1		Specimen Certificate for Common Stock

4.2		Form of Warrant (incorporated herein by reference to the Company’s Form 8-K, dated February 16, 2007, Exhibit 4.2)

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 4.3)

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 4.4)

4.5		Form of Warrant, dated November 6, 2007 (incorporated by reference to the Company’s Form 8-K, dated November 1, 2007, Exhibit 4.5)

4.6		Form of Placement Warrant to Roth Capital Partners, LLC, dated November 6, 2007 (incorporated by reference to the Company’s Form 8-K, dated November 1, 2007, Exhibit 4.6)

10.1		Form of Subscription Agreement, dated November 1, 2007, among the Company and the Buyers (incorporated by reference to the Company’s Form 8-K, dated November 1, 2007, Exhibit 10.1)

21		List of Subsidiaries of the Company (incorporated herein by reference to the Company’s Form 10-K for the year ended June 30, 2007)

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

99.1		Report and Certification of Inspector of Elections, dated November 12, 2007

* Filed herewith

SIGNATURES

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

	CHINA PRECISION STEEL, INC.

Date: September 15, 2008	By:	/s/ Wo Hing Li
		Wo Hing Li
		President

EXHIBIT INDEX

Exhibit No.		Exhibits

2.1		Certificate of Ownership and Merger (incorporated by reference to the Company’s Form 10-Q for the quarter ended September 30, 2007, Exhibit 2.1)

2.2		Agreement and Plan of Merger (incorporated by reference to the Company’s Form 10-Q for the quarter ended September 30, 2007, Exhibit 2.2)

3.1		Certificate of Incorporation (incorporated by reference to the Company’s Form 10-Q for the quarter ended September 30, 2007, Exhibit 3.1)

3.2		Bylaws (incorporated by reference to the Company’s Form 10-Q for the quarter ended September 30, 2007, Exhibit 3.2)

4.1		Specimen Certificate for Common Stock (incorporated by reference to the Company’s Form 10-Q for the quarter ended December 31, 2007, Exhibit 4.1)

4.2		Form of Warrant (incorporated herein by reference to the Company’s Form 8-K, dated February 16, 2007, Exhibit 4.2)

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 4.3)

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 4.4)

4.5		Form of Warrant, dated November 6, 2007 (incorporated by reference to the Company’s Form 8-K, dated November 1, 2007, Exhibit 4.5)

4.6		Form of Placement Warrant to Roth Capital Partners, LLC, dated November 6, 2007 (incorporated by reference to the Company’s Form 8-K, dated November 1, 2007, Exhibit 4.6)

10.1		Form of Subscription Agreement, dated November 1, 2007, among the Company and the Buyers (incorporated by reference to the Company’s Form 8-K, dated November 1, 2007, Exhibit 10.1)

21		List of Subsidiaries of the Company (incorporated herein by reference to the Company’s Form 10-K for the year ended June 30, 2007)

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

99.1		Report and Certification of Inspector of Elections, dated November 12, 2007 (incorporated by reference to the Company’s Form 10-Q for the quarter ended December 31, 2007, Exhibit 99.1)

* Filed herewith