Special Note Regarding Forward Looking Statements

This quarterly report contains forward-looking statements relating to us that are based on the beliefs of our management as well as assumptions made by, and information currently available to, our management. When used in this Report, the words "anticipate," "believe," "estimate," "expect," "intend," "plan" and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. These statements reflect management's current view of us concerning future events and are subject to certain risks, uncertainties and assumptions, including among many others: plans to expand our exports outside of China; plans to increase our production capacity and the anticipated dates that such facilities may commence operations; our ability to obtain additional funding for our continuing operations and to fund our expansion; our ability to meet our financial projections for any financial year; our ability to retain our key executives and to hire additional senior management; continued growth of the Chinese economy and industries demanding our products; our ability to produce and sell cold-rolled precision steel products at high margins; our ability to secure at acceptable prices the raw materials we need to produce our products; political changes in China that may impact our ability to produce and sell our products in our target markets; general business conditions and competitive factors, including pricing pressures and product development; changes in our relationships with customers and suppliers; and other risks and uncertainties. Should any of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this Report as anticipated, estimated or expected. We undertake no obligation to publicly release any revisions to the forward-looking statements after the date of this document. You should carefully review the risk factors described in other documents we file from time to time with the U.S. Securities and Exchange Commission, including our Annual Report on Form 10-K for our fiscal year ended June 30, 2009.

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 September 30, 2009 (unaudited) and June 30, 2009, the end of its prior fiscal year, and its unaudited consolidated results of operation for the three month periods ended September 30, 2009 and 2008.

Use of Terms

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

Where You Can Find Additional Information

We file annual, quarterly and other reports, proxy statements and other information with the SEC. You may obtain and copy any document we file with the SEC at the SEC's public reference room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the SEC's public reference facilities by calling the SEC at 1-800-SEC-0330. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC at its principal office at 100 F Street, NE, Room 1580, Washington, D.C. 20549-1004. The SEC maintains an Internet website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our SEC filings, including exhibits filed therewith, are accessible through the Internet at that website. You may also request a copy of our SEC filings, at no cost to you, by writing or telephoning us at: China Precision Steel, Inc., Room B, 18th Floor, Teda Building, 87 Wing Lok Street, Sheungwan, Hong Kong, People's Republic of China, attention Corporate Secretary, telephone 852-2543-2290. We will not send exhibits to the documents, unless the exhibits are specifically requested and you pay our fee for duplication and delivery.

Overview of Our Business

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

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

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

First Quarter Financial Performance Highlights

During the first fiscal quarter of 2010, we continued to see slower demand and lower steel prices compared to same period a year ago as a result of the impact of the persisting global economic crisis. There were decreases in order and sales volume over the three months ended September 30, 2009 as we are faced with multiple challenges due to the global economic downturn. We have seen weaker demand and reduced orders from existing customers, especially in the high-carbon cold-rolled steel segment, which are mainly used in auto components manufacturing, due to excess capacity and high inventory levels in the industry. Excess capacity, low industrial concentration and a lack of access to natural resources have long plagued China's steel sector, and these problems have been exacerbated by the impact of the global financial and economic crisis. Our two cold-rolling mills are now operating at approximately 70% utilization rate due to reduced orders on hand.

During the period ended September 30, 2009, we sold a total of 22,293 tons of products, a decrease of 1,923 tons from 24,216 tons during the same period a year ago, due to slower demand and reduced orders on hand. We believe that such decrease was mainly caused by decreases in product orders from auto components manufacturers and from the Chinese auto industry that experienced weak demand and excess capacity during the period ended September 30, 2009. Lower sales and high raw material costs have led to a gross profit of $703,359 and a net loss of $275,191 for the period ended September 30, 2009.

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

Although the series of measures adopted by the Chinese government to promote economic growth have achieved some results, it is currently unclear whether and to what extent the economic stimulus measures and other actions taken or contemplated by the Chinese government and other governments throughout the world will mitigate the effects of the crisis on the industries that affect our business. We expect to continue to experience volatilities in demands in both domestic and international markets in the foreseeable future. Furthermore, deteriorating economic conditions, including business layoffs, downsizing, industry slowdowns and other similar factors that affect our customers could have further negative consequences on our business operations. For the foreseeable future, we expect a continuation of weak demand and volatility in both domestic and international markets across all product segments, and significantly adverse impacts on our gross margin due to a decrease in sales of our high margin high carbon cold rolled steel used mainly in auto components manufacturing. However, due to the nature of our niche segment and high-end products, we have been able to keep quality customers and negotiate new contracts with a total of 5 new customers during the period. Management continues to be in talks with potential customers whose past orders we had been unable to fill due to full capacity. If these talks are successful, we could see additional sales from a broadened customer base which would further mitigate the impact of the current global slowdown on our business and results of operations. Total company backlog as of September 30, 2009 was $9,462,867.

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

The following are some financial highlights for the first quarter:

· Revenues: Our revenues were approximately $17 million for the first quarter, a decrease of 32.8% from last year.

· Gross Margin: Gross margin was 4.1% for the first quarter, as compared to 15.6% in 2009.

· Income/(loss) from operations before tax: Loss from operations before tax was approximately $0.3 million for the first quarter, as compared to income from operations before tax of $3.0 million last year.

· Net Income/(loss): Net loss was approximately $0.3 million for the first quarter, a decrease of 105.5% from a net income of approximately $2.9 million last year.

· Fully diluted Income/(loss) per share: Fully diluted loss per share was $0.01 for the first quarter compared to a fully diluted earnings per share of $0.06 last year.

Results of Operations

The following table sets forth key components of our results of operations for the periods indicated, in USD and as a percentage of revenues.

Comparison of Three Months Ended September 30, 2009 and September 30, 2008

                                                Thee Months ended               Thee Months ended
                                               September 30, 2009              September 30, 2008
                                                               % of                            % of
                                              Amount         Revenues         Amount         Revenues
Revenues                                   $ 17,041,989          100.0     $ 25,350,419          100.0
Cost of sales (including depreciation
and amortization)                            16,338,630           95.9       21,397,761           84.4
Gross profit                                    703,359            4.1        3,952,658           15.6
Selling and marketing expenses                   31,809            0.2          211,298            0.8
Administrative expenses                         578,698            3.4          462,100            1.8
Allowance for bad and doubtful debts            117,117            0.7                -              -
Depreciation and amortization expense            43,738            0.3           26,203            0.1
(Loss)/income from operations                   (68,003 )         (0.4 )      3,253,057           12.8
Total other expense, net                       (208,421 )         (1.2 )       (206,702 )         (0.8 )
Income taxes                                     (1,233 )         (0.0 )        170,621            0.7
Net (loss)/income                          $   (275,191 )         (1.6 )   $  2,875,734           11.3
Basic earnings (loss) per share            $      (0.01 )          N/A     $       0.06            N/A
Diluted earnings (loss) per share          $      (0.01 )          N/A     $       0.06            N/A

Sales Revenues

Sales volume decreased by 1,923 tons, or 7.9%, period-on-period to 22,293 tons for the period ended September 30, 2009 from 24,216 tons for the period ended September 30, 2008 and, as a result, sales revenues decreased by $8,308,430, or 32.8%, period-on-period to $17,041,989 for the period ended September 30, 2009 from $25,350,419 for the period ended September 30, 2008. The decrease in sales revenues is mainly attributable to a decrease in demand for high-carbon cold-rolled products used in automobile components production due to the slowdown of the automobile industry, as well as lower average sale prices during the period ended September 30, 2009.

Sales by Product Line

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

                                                                   Three Months Ended September 30,
                                                       2009                                            2008                            Period-on-
                                      Quantity           $             % of                                  $             % of       period Qty.
Product Category                       (tons)          Amount         Sales        Quantity (tons)         Amount         Sales         Variance
Low carbon hard rolled                    4,560        3,064,585           18                 3,621        4,152,532           16              939 )
Low carbon cold-rolled                   10,633        6,361,255           37                10,809       10,983,414           43             (176 )
High-carbon hot-rolled                    1,981        1,556,728            9                 1,412        1,918,278            8              569
High-carbon cold-rolled                   2,497        4,321,739           25                 2,600        3,445,509           14             (103 )
Subcontracting income                     2,622        1,648,876           10                 5,774        4,678,819           18           (3,152 )
Sales of scrap metal                          -           88,806            1                     -          171,867            1                -

There were different trends of demand across various product categories during the period ended September 30, 2009. High-carbon cold-rolled steel products accounted for 25% of the current sales mix at an average selling price of $1,731 per ton for the period ended September 30, 2009, compared to 14% of the sales mix at an average selling price per ton of $1,326 for the period ended September 30, 2008. The products in this category are mainly used in the automobile industry and the decrease in sales volume period-on-period was less compared to most other product categories as the Chinese government's automobile stimulus policies rolled out, which increased demand. Low-carbon cold-rolled steel products accounted for 37% of the current sales mix at an average selling price of $598 per ton for the period ended September 30, 2009, compared to 43% of the sales mix at an average selling price per ton of $1,016 for the period ended September 30, 2008. Low-carbon hard-rolled steel products accounted for 18% of the current sales mix at an average selling price of $672 per ton for the period ended September 30, 2009, compared to 16% of the sales mix at an average selling price per ton of $1,147 for the period ended September 30, 2008. Subcontracting income revenues decreased to $1,648,876, or 10%, of the sales mix for the period ended September 30, 2009 as compared to $4,678,819, or 18%, of the sales mix for the period ended September 30, 2008.

                                           Three Months Ended September 30,
                                       2009            2008           Variance
           Average Selling Prices       ($)            ($)         ($)        (%)
           Low-carbon hard rolled          672          1,147       (475 )     (41 )
           Low-carbon cold-rolled          598          1,016       (418 )     (41 )
           High-carbon hot-rolled          786          1,358       (572 )     (42 )
           High-carbon cold-rolled       1,731          1,326        405        31
           Subcontracting income           629            810       (181 )     (22 )

The average selling price per ton decreased to $764 for the period ended September 30, 2009, compared to the corresponding period in 2008 of $1,047, representing a decrease of $283, or 27%, period-on-period. This decrease was mainly due to decreases in steel prices and therefore selling prices due to volatilities in the industry. Other than for high-carbon cold rolled steel products, there were decreases in average selling prices across all product categories during the period.

Sales Breakdown by Major Customer

                                                          Three Months Ended September 30,
                                                       2009                              2008
Customers                                       $            % of Sales           $            % of Sales
Shanghai Changshuo Stainless Steel Co.,
Ltd.                                          3,848,354               23        3,414,685               13
Shaoxing Wancheng Metal Plate Co., Ltd.       1,768,383               10                *                *
Zhangjiagang Gangxing Innovative
Construction Material Co., Ltd.               1,735,287               10        1,527,211                6
Unimax & Far Corporation                      1,069,184                6                *                *
SUMEC International Technology Co., Ltd.      1,046,660                6                *                *
Shanghai Bayou Industrial Co., Ltd.                   *                *        2,961,211               12
Salzgitter Mannesmann International GMBH              *                *        2,392,869                9
Jiangsu Sumec International Trading Co.,
Ltd.                                                  *                *        1,667,454                7
                                              9,467,868               55       11,963,430               47
Others                                        7,574,121               45       13,386,989               53
Total                                        17,041,989              100       25,350,419              100

* Not major customers for the relevant years

Sales revenues generated from our top five major customers as a percentage of total sales increased to 55% for the period ended September 30, 2009, compared to 47% for the period ended September 30, 2008. Sales to three new major customers, Shaoxing Wancheng Metal Plate Co, Ltd., Unimax and Far Corporation and SUMEC International Technology Co., Ltd., for the three months accounted for 22% of our sales revenues. The change in customer mix reflects management's continuous efforts in expanding our customer base and geographical coverage during the course of the quarter.

Cost of Goods Sold

Cost of sales decreased by $5,059,131, or 23.6%, period-on-period to $16,338,630 for the period ended September 30, 2009, from $21,397,761 for the period ended September 30, 2008. Cost of sales represented 95.8% of sales revenues for the period ended September 30, 2009 compared to 84.4% for the period ended September 30, 2008. Average cost per unit sold decreased to $733 for the period ended September 30, 2009, compared to an average cost per unit sold of $884 for the period ended September 30, 2008, representing an decrease of $151 per ton, or 17%, period-on-period.

                                                 Three Months Ended September 30,
                                         2009             2008                Variance
                                         ($)              ($)              ($)           (%)
Cost of goods sold
- Raw materials                        14,305,303       18,767,711       (4,462,408 )     (24 )
- Direct labor                             97,832          142,214          (44,382 )     (31 )
- Manufacturing overhead                1,935,495        2,487,836         (552,341 )     (22 )
                                       16,338,630       21,397,761       (5,059,131 )     (24 )

Cost per unit sold
Total units sold (tons)                    22,293           24,216           (1,923 )      (8 )
Average cost per unit sold ($/ton)            733              884             (151 )     (17 )

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

· a decrease in cost of raw materials per unit sold of $133, or 17.2%, from $775 for the period ended September 30, 2008 compared to $642 for the period ended September 30, 2009;

· a decrease in direct labor per unit sold of $2, or 25.3%, from $6 for the period ended September 30, 2008 compared to $4 for the period ended September 30, 2009;

· a decrease in factory overhead per unit sold of $16, or 15.5%, from $103 for the period ended September 30, 2008 compared to $87 for the period ended September 30, 2009.

The cost of raw materials consumed decreased by $4,462,408, or 23.8%, period-on-period, to $14,305,303 for the period ended September 30, 2009 from $18,767,711 for the period ended September 30, 2008. This decrease was mainly due to the decreases in total units sold as well as the decrease in average raw material cost per unit sold.

Direct labor costs decreased by $44,382, or 31.2%, period-on-period, to $97,832 for the period ended September 30, 2009, from $142,214 for the period ended September 30, 2008. The decrease was due to the decrease in total units sold during the period and therefore less labor costs.

Manufacturing overhead costs decreased by $552,341, or 22.2%, period-on-period, to $1,935,495 for the period ended September 30, 2009, from $2,487,836 for the period ended September 30, 2008. The decrease was mainly attributable to the combined effect of a decrease in utilities of $183,392, or 27.0%, period-on-period to $494,870 for the period ended September 30, 2009, from $678,262 for the period ended September 30, 2008, and a decrease in low consumables by $416,174 or 60.7%, period-on-period to $269,466 for the period ended September 30, 2009, from $685,640 for the period ended September 30, 2008.

Gross Profit

Gross profit in absolute terms decreased by $3,249,299, or 82.2%, period-on-period, to $703,359 for the period ended September 30, 2009, from $3,952,658 for the period ended September 30, 2008, while gross profit margin decreased to 4.1% for the period ended September 30, 2009, from 15.6% for the period ended September 30, 2008. The decrease in gross profit is mainly attributable to a 32.8% period-on-period decrease in sales revenues, as well as a decrease in gross margin which principally resulted from a decrease in average selling prices due to the decrease in steel prices period-on-period.

Selling Expenses

Selling expenses decreased by $179,489, or 84.9%, period-on-period, to $31,809 for the period ended September 30, 2009 compared to the corresponding period in 2008 of $211,298. The decrease was mainly attributable to less selling commission costs associated with export products period-on-period.

Administrative Expenses

Administrative expenses increased by $116,598, or 25.2%, period-on-period, to $578,698 for the period ended September 30, 2009 compared to $462,100 for the period ended September 30, 2008. This was chiefly due to an increase in salaries and wages due to the increased average number of staff at the Group companies, as well as an increase in stock and listing fees during the period ended September 30, 2009. . . .