UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549







FORM
20-F




 ̈
            
            REGISTRATION
      STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE
      ACT OF 1934




OR




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




For
the Fiscal year ended _________________




OR




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




For
the transition period from December 1, 2009 to
September 30,
2010




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




Date
of event requiring this shell company report




Commission
file number: 005-85665










Kingtone
Wirelessinfo Solution Holding Ltd


(Exact
name of Registrant as specified in its charter)




Not
applicable


(Translation
of Registrant’s name into English)




British
      Virgin Islands
            
            3rd
      Floor, Borough A, Block A. No.181, South Taibai Road, Xi’an,Shaanxi
      Province,
              People’s
      Republic of China 710065(Jurisdiction
      of incorporation or organization)
            
            (Address
      of principal executive offices)




Ms.
Ying Yang


3rd
Floor, Borough A, Block A. No.181, South Taibai Road, Xi’an, Shaanxi
Province,


People’s
Republic of China 710065


Tel:
(86) 29-88266368


(Name,
telephone, facsimile number and address of company contact
person)







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




Title of each class
                
                Name of each exchange on which
      registeredOrdinary
      shares, par value $.001 per share
                
                NoneAmerican
      Depositary Shares, each representing
                
                Nasdaq
      Capital Marketone
      Ordinary Share




Securities
registered or to be registered pursuant to Section 12(g) of the
Act:




none


(Title
of Class)




Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act:




none


(Title
of Class)




Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual report. —
14,000,000 Ordinary Shares, including 4,000,000 Ordinary Shares represented by
4,000,000 American Depositary Shares outstanding as of September 30,
2010.




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




If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.     ̈  Yes    x  No




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




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




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




Large
accelerated filer   ̈                
Accelerated filer   ̈                
Non-accelerated filer  x




Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing.




U.S. GAAP  x
                
                International Financial Reporting Standards as issued
                  by the International Accounting Standards Board   ̈
                
                Other   ̈




If
“Other” has been checked in response to the previous question, indicate by check
mark which financial statement item the registrant has elected to
follow.    Item 17   ̈    Item 18   ̈




If this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange
Act).     ̈  Yes    x  No





In
this annual report:





·
            References to the “Company”,
      “we”, “our” and “us” are to Kingtone Wirelessinfo Solution Holding Ltd and
      its consolidated subsidiaries and variable interest entity, except as the
      context otherwise requires;





·
            References to an “ADS” are to
      an American Depositary Share, each of which represents one of our Ordinary
      Shares with a par value of $.001 per share;
  and





·
            References to a particular
      “fiscal” year, such as “fiscal 2010”, are to our fiscal year ended on
      September 30, of that year.




Special
Note Regarding Forward-looking Statements





This
annual report contains forward-looking statements that involve risks and
uncertainties. These statements involve known and unknown risks, uncertainties
and other factors that may cause our actual results, performance or achievements
to be materially different from those expressed or implied by the
forward-looking statements.





You can
identify these forward-looking statements by words or phrases such as “may,”
“will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,”
“likely to” or other similar expressions. We have based these forward-looking
statements largely on our current expectations and projections about future
events and financial trends that we believe may affect our financial condition,
results of operations, business strategy and financial needs. You should not
place undue reliance on these forward-looking statements, which apply only as of
the date of this annual report. These forward-looking statements
include:




·
            our
      expansion plans;




·
            our
      anticipated growth strategy;




·
            our
      plans to recruit more employees;




·
            our
      plans to invest in research and development to enhance our product or
      service lines;




·
            our
      future business development, results of operations and financial
      condition;




·
            expected
      changes in our net revenues and certain cost or expense
    items;




·
            our
      ability to attract and retain customers;
and




·
            trends
      and competition in the enterprise mobile software application
      market.





You
should read this annual report thoroughly with the understanding that our actual
future results may be materially different from, and/or worse, than what we
expect. We qualify all of our forward-looking statements by these cautionary
statements. Other sections of this annual report include additional factors
which could adversely impact our business and financial performance. Moreover,
we operate in an evolving environment. New risk factors and uncertainties emerge
from time to time and it is not possible for our management to predict all risk
factors and uncertainties, nor can we assess the impact of all factors on our
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking
statements.





This
annual report also contains estimates, projections and statistical data related
to the enterprise mobile software and IT services market in China. This market
data, including data from IDC, a leading provider of market data and
intelligence, speaks as of the date it was published and includes projections
that are based on a number of assumptions and are not representations of fact.
The enterprise mobile software and IT services market may not grow at the rates
projected by the market data, or at all. The failure of the market to grow at
the projected rates may materially and adversely affect our business and the
market price of our ADSs. In addition, the rapidly changing nature of the
software and IT services market subjects any projections or estimates relating
to the growth prospects or future condition of our market to significant
uncertainties. If any one or more of the assumptions underlying the market data
proves to be incorrect, actual results may differ from the projections based on
these assumptions.




You
should not rely upon forward-looking statements as predictions of future events.
We undertake no obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.









TABLE
OF CONTENTS




Part I
                        
                        
                        5Item 1.
                        
                        
                        
                        Identity
      of Directors, Senior Management and Advisers.
                        
                        5Item 2.
                        
                        
                        
                        Offer
      Statistics and Expected Timetable.
                        
                        5Item 3.
                        
                        
                        
                        Key
      Information.
                        
                        5A.
                        
                        Selected
      Financial Data.
                        
                        5B.
                        
                        Capitalization
      and Indebtedness.
                        
                        7C.
                        
                        Reasons
      for the Offer and Use of Proceeds.
                        
                        7D.
                        
                        Risk
      Factors.
                        
                        7Item 4.
                        
                        
                        
                        Information
      on the Company.
                        
                        25A.
                        
                        History
      and Development of the Company.
                        
                        25B.
                        
                        Business
      Overview.
                        
                        26C.
                        
                        Organizational
      Structure.
                        
                        37D.
                        
                        Property,
      Plants and Equipment.
                        
                        39Item 4A.
                        
                        
                        
                        Unresolved
      Staff Comments.Item 5.
                        
                        
                        
                        Operating
      and Financial Review and Prospects.
                        
                        40A.
                        
                        Operating
      Results.
                        
                        40B.
                        
                        Liquidity
      and Capital Resources.
                        
                        53C.
                        
                        Research
      and Development, Patents and Licenses, etc.
                        
                        53D.
                        
                        Trend
      Information.
                        
                        53E.
                        
                        Off-balance
      Sheet Arrangements.
                        
                        54F.
                        
                        Tabular
      Disclosure of Contractual Obligations.
                        
                        55
  2
  Item 6.
                  
                  
                  
                  Directors,
      Senior Management and Employees.
                  
                  55A.
                  
                  Directors
      and Senior Management.
                  
                  55B.
                  
                  Compensation.
                  
                  57C.
                  
                  Board
      Practices.
                  
                  60D.
                  
                  Employees.
                  
                  63E.
                  
                  Share
      Ownership.
                  
                  63Item 7.
                  
                  
                  
                  Major
      Shareholders and Related Party Transactions.
                  
                  65A.
                  
                  Major
      Shareholders.
                  
                  65B.
                  
                  Related
      Party Transactions. Business Relationships.
                  
                  65C.
                  
                  Interests
      of Experts and Counsel.
                  
                  67Item 8.
                  
                  
                  
                  Financial
      Information.
                  
                  67A.
                  
                  Consolidated
      Statements and Other Financial Information. Financial
      Statements.
                  
                  67B.
                  
                  Significant
      Changes.
                  
                  68Item 9.
                  
                  
                  
                  The
      Offer and Listing.
                  
                  68A.
                  
                  Offer
      and Listing Details.
                  
                  68B.
                  
                  Plan
      of Distribution.
                  
                  68C.
                  
                  Markets.
                  
                  68D.
                  
                  Selling
      shareholders.
                  
                  69E.
                  
                  Dilution.
                  
                  69F.
                  
                  Expenses
      of the issue.
                  
                  69Item 10.
                  
                  
                  
                  Additional
      Information.
                  
                  69A.
                  
                  Share
      Capital.
                  
                  69B.
                  
                  Memorandum
      and Articles of Association
                  
                  69C.
                  
                  Material
      Contracts.
                  
                  69D.
                  
                  Exchange
      Controls.
                  
                  69
  3
  E.
                      
                      Taxation.
                      
                      73F.
                      
                      Dividends
      and Paying Agents.
                      
                      79G.
                      
                      Statement
      by Experts.
                      
                      79H.
                      
                      Documents
      on Display.
                      
                      79I.
                      
                      Subsidiary
      Information.
                      
                      79Item 11.
                      
                      
                      
                      Quantitative
      and Qualitative Disclosures about Market Risk.
                      
                      79Item 12.
                      
                      
                      
                      Description
      of Securities Other than Equity Securities.
                      
                      80Part II
                      
                      
                      
                      
                      
                      82Item 13.
                      
                      
                      
                      Defaults,
      Dividend Arrearages and Delinquencies.
                      
                      82Item 14.
                      
                      
                      
                      Material
      Modifications to the Rights of Security Holders and Use of
      Proceeds.
                      
                      82Item 15.
                      
                      
                      
                      Controls
      and Procedures.
                      
                      83Item 16A.
                      
                      
                      
                      Audit
      Committee Financial Expert.
                      
                      83Item 16B.
                      
                      
                      
                      Code
      of Ethics.
                      
                      83Item 16C.
                      
                      
                      
                      Principal
      Accountant Fees and Services.
                      
                      84Item 16D.
                      
                      
                      
                      Exemptions
      from the Listing Standards for Audit Committees.
                      
                      84Item 16E.
                      
                      
                      
                      Purchases
      of Equity Securities by the Issuer and Affiliated
    Purchasers.
                      
                      84Item 16F.
                      
                      
                      
                      Change
      in Registrant’s Certifying Accountant.
                      
                      84Item 16G.
                      
                      
                      
                      Corporate
      Governance.
                      
                      84Part IIIItem 17.
                      
                      
                      
                      Financial
      Statements.
                      
                      84Item 18.
                      
                      
                      
                      Financial
      Statements.
                      
                      84Item 19.
                      
                      
                      
                      Exhibits.
                      
                      86Index
      to Consolidated Financial Statements
                      
                      F-1




4


PART I





ITEM 1.  IDENTITY OF
DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.





Not
applicable.





ITEM 2.  OFFER
STATISTICS AND EXPECTED TIMETABLE.





Not applicable.





ITEM 3.  KEY
INFORMATION.





A.   SELECTED
FINANCIAL DATA.




Kingtone Wirelessinfo Solution Holding Ltd and its consolidated
subsidiaries (“Kingtone Wireless”) and Xi’an Kingtone Information Technology
Co., Ltd., a PRC limited liability company (“Kingtone Information”), which was
incorporated in Xi’an, Shaanxi province, China on December 28, 2001, are under
common control from the earliest date presented. On October 27, 2009, we were
incorporated with a fiscal year end of November 30, and on December 15, 2009, we
consummated a number of related transactions to acquire contractual control of
Kingtone Information (the “Reorganization”).The selected financial
data are solely those of Kingtone Information for the fiscal years ended
November 30, 2006, 2007 and 2008 and for the subsequent period ended October 26,
2009, and then they are combined with Kingtone Wireless through December 15,
2009, the date of the Reorganization, and they are consolidated with Kingtone
Wireless following the date of the Reorganization.




In March
2010, we changed our fiscal year end from November 30 to September 30 to have
the same fiscal year end as Kingtone Information. The consolidated and combined
balance sheets as of September 30, 2010 are presented as transition financial
statements with the beginning balance as of November 30, 2009 in our
consolidated and combined financial statements. As we and our wholly-owned
subsidiaries had no operations from October 1, 2009 to November 30, 2009, except
for our initial capitalization and our preparation for our initial public
offering, the statements of income and comprehensive income for the years ended
September 30, 2009, 2008, 2007 and 2006 are the same as those for the fiscal
years ended November 30, 2009, 2008, 2007 and 2006, respectively.





The
selected financial data for fiscal years 2010, 2009 and 2008, have been derived
from our audited combined and consolidated financial statements. The selected
financial data for our fiscal year ended September 30, 2007 and  2006
have been derived from our books and records and is unaudited. The selected
consolidated and combined financial data should be read in conjunction with our
audited financial statements and the accompanying notes and “Item 5 – Operating
and Financial Review and Prospects.” Our consolidated and combined financial
statements are prepared and presented in accordance with United States generally
accepted accounting principles, or U.S. GAAP. Our historical results do not
necessarily indicate our results expected for any future periods. You should not
view our historical results as an indicator of our future
performance.




5


Kingtone
Wirelessinfo Solution Holding Ltd and Subsidiaries


Selected
Consolidated and Combined Statements of Income and Comprehensive Income
Data




For
      the Years Ended September 30,2010
                                                                          
                                                                          
                                                                          2009
                                                                          
                                                                          
                                                                          2008
                                                                          
                                                                          
                                                                          2007
                                                                          
                                                                          
                                                                          2006Audited
                                                                          
                                                                          
                                                                          Audited
                                                                          
                                                                          
                                                                          Audited
                                                                          
                                                                          
                                                                          Unaudited
                                                                          
                                                                          
                                                                          UnauditedConsolidated
      and
                                                                            Combined
                                                                          
                                                                          
                                                                          Consolidated
      and
                                                                            Combined($
      in Thousands, Except per Share Data)Total
      revenues
                                                                          
                                                                          $
                                                                          14,506
                                                                          
                                                                          
                                                                          $
                                                                          11,240
                                                                          
                                                                          
                                                                          $
                                                                          4,286
                                                                          
                                                                          
                                                                          $
                                                                          4,012
                                                                          
                                                                          
                                                                          $
                                                                          1,472Cost
      of revenues
                                                                          
                                                                          
                                                                          2,352
                                                                          
                                                                          
                                                                          
                                                                          3,894
                                                                          
                                                                          
                                                                          
                                                                          1,621
                                                                          
                                                                          
                                                                          
                                                                          2,972
                                                                          
                                                                          
                                                                          
                                                                          775Gross
      profit
                                                                          
                                                                          
                                                                          12,154
                                                                          
                                                                          
                                                                          
                                                                          7,346
                                                                          
                                                                          
                                                                          
                                                                          2,665
                                                                          
                                                                          
                                                                          
                                                                          1,040
                                                                          
                                                                          
                                                                          
                                                                          697Operating
      expenses:Selling
      and marketing
                                                                          
                                                                          
                                                                          341
                                                                          
                                                                          
                                                                          
                                                                          350
                                                                          
                                                                          
                                                                          
                                                                          301
                                                                          
                                                                          
                                                                          
                                                                          239
                                                                          
                                                                          
                                                                          
                                                                          237General
      and administrative
                                                                          
                                                                          
                                                                          1,635
                                                                          
                                                                          
                                                                          
                                                                          537
                                                                          
                                                                          
                                                                          
                                                                          355
                                                                          
                                                                          
                                                                          
                                                                          644
                                                                          
                                                                          
                                                                          
                                                                          504Research
      and development
                                                                          
                                                                          
                                                                          179
                                                                          
                                                                          
                                                                          
                                                                          139
                                                                          
                                                                          
                                                                          
                                                                          79
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          0Total
      operating expenses
                                                                          
                                                                          
                                                                          2,155
                                                                          
                                                                          
                                                                          
                                                                          1,026
                                                                          
                                                                          
                                                                          
                                                                          735
                                                                          
                                                                          
                                                                          
                                                                          883
                                                                          
                                                                          
                                                                          
                                                                          740Operating
      income (loss)
                                                                          
                                                                          
                                                                          9,999
                                                                          
                                                                          
                                                                          
                                                                          6,320
                                                                          
                                                                          
                                                                          
                                                                          1,930
                                                                          
                                                                          
                                                                          
                                                                          157
                                                                          
                                                                          
                                                                          
                                                                          (44
                                                                          )Subsidy
      income
                                                                          
                                                                          
                                                                          44
                                                                          
                                                                          
                                                                          
                                                                          307
                                                                          
                                                                          
                                                                          
                                                                          163
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —Interest
      expense
                                                                          
                                                                          
                                                                          (218
                                                                          )
                                                                          
                                                                          
                                                                          (340
                                                                          )
                                                                          
                                                                          
                                                                          (531
                                                                          )
                                                                          
                                                                          
                                                                          (608
                                                                          )
                                                                          
                                                                          
                                                                          (506
                                                                          )Other
      income (expense)
                                                                          
                                                                          
                                                                          20
                                                                          
                                                                          
                                                                          
                                                                          (55
                                                                          )
                                                                          
                                                                          
                                                                          (356
                                                                          )
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          2Income
      before income tax expense
                                                                          
                                                                          
                                                                          9,845
                                                                          
                                                                          
                                                                          
                                                                          6,232
                                                                          
                                                                          
                                                                          
                                                                          1,206
                                                                          
                                                                          
                                                                          
                                                                          (451
                                                                          )
                                                                          
                                                                          
                                                                          (547
                                                                          )Income
      tax expenses
                                                                          
                                                                          
                                                                          1,608
                                                                          
                                                                          
                                                                          
                                                                          935
                                                                          
                                                                          
                                                                          
                                                                          191
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —Net
      income(loss)
                                                                          
                                                                          $
                                                                          8,237
                                                                          
                                                                          
                                                                          $
                                                                          5,297
                                                                          
                                                                          
                                                                          $
                                                                          1,015
                                                                          
                                                                          
                                                                          $
                                                                          (451
                                                                          )
                                                                          
                                                                          $
                                                                          (547
                                                                          )Other
      comprehensive incomeForeign
      currency translation gain
                                                                          
                                                                          
                                                                          598
                                                                          
                                                                          
                                                                          
                                                                          22
                                                                          
                                                                          
                                                                          
                                                                          544
                                                                          
                                                                          
                                                                          
                                                                          267
                                                                          
                                                                          
                                                                          
                                                                          -Comprehensive
      income
                                                                          
                                                                          $
                                                                          8,835
                                                                          
                                                                          
                                                                          $
                                                                          5,319
                                                                          
                                                                          
                                                                          $
                                                                          1,559
                                                                          
                                                                          
                                                                          $
                                                                          (184
                                                                          )
                                                                          
                                                                          $
                                                                          (547
                                                                          )Earnings
      (loss) per share:Basic
                                                                          
                                                                          $
                                                                          0.71
                                                                          
                                                                          
                                                                          $
                                                                          0.53
                                                                          
                                                                          
                                                                          $
                                                                          0.10
                                                                          
                                                                          
                                                                          $
                                                                          (0.05
                                                                          )
                                                                          
                                                                          $
                                                                          (0.05
                                                                          )Diluted
                                                                          
                                                                          $
                                                                          0.71
                                                                          
                                                                          
                                                                          $
                                                                          0.53
                                                                          
                                                                          
                                                                          $
                                                                          0.10
                                                                          
                                                                          
                                                                          $
                                                                          (0.05
                                                                          )
                                                                          
                                                                          $
                                                                          (0.05
                                                                          )Weighted
      average ordinary shares:Basic
                                                                          
                                                                          
                                                                          11,527,473
                                                                          
                                                                          
                                                                          
                                                                          10,000,000
                                                                          
                                                                          
                                                                          
                                                                          10,000,000
                                                                          
                                                                          
                                                                          
                                                                          10,000,000
                                                                          
                                                                          
                                                                          
                                                                          10,000,000Diluted
                                                                          
                                                                          
                                                                          11,527,473
                                                                          
                                                                          
                                                                          
                                                                          10,000,000
                                                                          
                                                                          
                                                                          
                                                                          10,000,000
                                                                          
                                                                          
                                                                          
                                                                          10,000,000
                                                                          
                                                                          
                                                                          
                                                                          10,000,000




6


Kingtone
Wirelessinfo Solution Holding Ltd and Subsidiaries


Selected
Consolidated and Combined Balance Sheets Data




As
      of September 30,
                          
                          
                          As of November 302010
                          
                          
                          2009
                          
                          
                          2008
                          
                          
                          2007
                          
                          
                          2006Audited
                          
                          
                          Audited
                          
                          
                          Audited
                          
                          
                          Unaudited
                          
                          
                          UnauditedConsolidated and
                            Combined
                          
                          
                          Consolidated
                            and Combined($
      in Thousands)Cash
      and bank deposits
                          
                          
                          14,909
                          
                          
                          
                          344
                          
                          
                          
                          9
                          
                          
                          
                          7
                          
                          
                          
                          98Total
      current assets
                          
                          
                          23,806
                          
                          
                          
                          4,014
                          
                          
                          
                          12,884
                          
                          
                          
                          17,360
                          
                          
                          
                          11,745Total
      assets
                          
                          
                          38,073
                          
                          
                          
                          17,907
                          
                          
                          
                          14,677
                          
                          
                          
                          18,687
                          
                          
                          
                          13,833Advances
      from customers
                          
                          
                          371
                          
                          
                          
                          1,398
                          
                          
                          
                          2,817
                          
                          
                          
                          3,168
                          
                          
                          
                          315Dividend
      payable
                          
                          
                          772
                          
                          
                          
                          1,117
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Total
      current liabilities
                          
                          
                          5,306
                          
                          
                          
                          8,781
                          
                          
                          
                          6,953
                          
                          
                          
                          13,601
                          
                          
                          
                          8,794Total
      shareholders’ equity
                          
                          
                          32,767
                          
                          
                          
                          9,126
                          
                          
                          
                          7,724
                          
                          
                          
                          5,086
                          
                          
                          
                          5,039Total
      liabilities and shareholders’ equity
                          
                          
                          38,073
                          
                          
                          
                          17,907
                          
                          
                          
                          14,677
                          
                          
                          
                          18,687
                          
                          
                          
                          13,833




B.  CAPITALIZATION
AND INDEBTEDNESS.




Not
applicable.




C.  REASONS FOR THE OFFER AND USE OF
PROCEEDS.




Not
applicable.




D.  RISK FACTORS.





An
investment in our ADSs involves a high degree of risk. You should carefully
consider the risks and uncertainties described below together with all other
information contained in this annual report, including the matters discussed
under “Special Note Regarding Forward-Looking Statements,” before you decide to
invest in our ADSs. You should pay particular attention to the fact that we are
a holding company with substantial operations in China and are subject to legal
and regulatory environments that in many respects differ from those of the
United States. If any of the following risks, or any other risks and
uncertainties that are not presently foreseeable to us, actually occur, our
business, financial condition, results of operations, liquidity and our future
growth prospects would be materially and adversely affected. You should also
consider all other information contained in this annual report before deciding
to invest in our ADSs.





Risks
Related to Our Company and Our Industry





If
demand for enterprise remote and mobile connectivity does not continue to expand
in China, we may experience a shortfall in revenues or earnings or otherwise
fail to meet public market expectations.





The
growth of our business is dependent, in part, upon the increased migration by
enterprises to wireless connectivity services in China and our ability to
capture a higher proportion of this market. If the demand in China for
enterprise connectivity services does not continue to grow, or grows in ways
that do not use our services, then we may not be able to grow our business,
maintain our profitability or meet public market expectations. Increased usage
of enterprise connectivity services depends on numerous factors,
including:




·
            the
      willingness of enterprises to make additional information technology
      expenditures;





·
            the
      availability of security products necessary to ensure data privacy over
      the public networks;





·
            the
      quality, cost and functionality of these services and competing
      services;





·
            the
      increased adoption of wired and wireless broadband access
      methods;





·
            the
      proliferation of electronic devices such as handhelds and smart-phones and
      related applications; and





·
            the
      willingness of enterprises to invest in our services during the current
      world-wide economic crisis.




7


We
face intense competition from other software development and IT service
companies and, if we are unable to compete effectively, we may lose customers
and our revenues may decline.





The
market for software products and IT services, including wireless IT application
products and solutions, is highly competitive and subject to rapid changes in
technology. In the future, we expect significant competition from both
established and emerging software companies. In addition, our growth
opportunities in new product markets could be limited to the extent established
and emerging software companies enter or have entered those markets. We believe
the principal competitive factors in our markets are industry experience,
quality of the products and services offered, reputation, marketing and selling
skills, as well as price. We face significant competition from various
competitors, including:




·
            other
      Chinese wireless data communication and exchange software application and
      service providers, such as Beijing Silu Innovation Technology Co., Ltd.
      and Cyber Technologies (Suzhou) Co.,
Ltd.;





·
            other
      Chinese software developers and IT service providers, that may decide to
      add wireless data communication and exchange programming
      capability;





·
            telecommunication
      equipment producers and suppliers;
and





·
            multi-national
      service providers.





Many of
our current and prospective competitors have significantly greater financial,
marketing, service, support, technical and other resources than we do. As a
result, they may be able to adapt more quickly than us to new or emerging
technologies and changes in customer requirements or to devote greater resources
to the promotion and sale of their products. Announcements of competing products
by large competitors or other vendors could result in the cancellation of orders
by customers in anticipation of the introduction of such new products. In
addition, some of our competitors currently make complementary products that are
sold separately. Such competitors could decide to enhance their competitive
position by bundling their products to attract customers seeking integrated,
cost-effective software applications. We also expect competition to increase as
a result of software industry consolidations, which may lead to the creation of
additional large and well-financed competitors. Increased competition is likely
to result in price reductions, fewer customer orders, reduced margins and loss
of market share.





We
may be unable to effectively manage our rapid growth, which could place
significant strain on our management personnel, systems and resources. We may
not be able to achieve anticipated growth, which could materially and adversely
affect our business and prospects.





We have
experienced rapid growth in our application implementations and revenues
recently. Our sales grew to $14.51 million in fiscal 2010 from $11.24 million in
fiscal 2009. With the forecasted increased market demand for wireless
information management applications created by the recent deployment of 3G
networks, we are actively developing our business and expanding our workforce to
pursue existing and potential market opportunities.





Our rapid
growth places a significant strain on our management personnel, system and
resources. To accommodate our growth, we will need to implement a variety of new
and upgraded operational and financial systems, procedures and controls,
including the improvement of our accounting and other internal management
systems, all of which require substantial management efforts. We also will need
to continue to expand, train, manage and motivate our workforce and manage our
customer relationships. Moreover, as we introduce new solutions or services or
enter into new markets, we may face new market, technological and operational
risks and challenges with which we are unfamiliar or cannot foresee. All of
these endeavors will involve risks and require substantial management efforts
and skills. As a result of any of these problems associated with growth, our
business, results of operations and financial condition could be materially and
adversely affected. Furthermore, we may not be able to achieve anticipated
growth, which could materially and adversely affect our business and
prospects.





We
may undertake acquisitions, investments, joint ventures or other strategic
alliances, which could have a material adverse effect on our ability to manage
our business. In addition, such undertakings may not be successful.





Our
strategy includes plans to grow both organically and through acquisitions,
participation in joint ventures or other strategic alliances. Joint ventures and
strategic alliances may expose us to new operational, regulatory and market
risks, as well as risks associated with additional capital requirements. We may
not be able, however, to identify suitable future acquisition candidates or
alliance partners. Even if we identify suitable candidates or partners, we may
be unable to complete an acquisition or alliance on terms commercially
acceptable to us. If we fail to identify appropriate candidates or partners, or
complete desired acquisitions, we may not be able to implement our strategies
effectively or efficiently.




8


In addition, our ability to
successfully integrate acquired companies and their operations may be adversely
affected by a number of factors. These factors include:




·
            diversion
      of management’s attention;





·
            difficulties
      in retaining customers of the acquired
  companies;





·
            difficulties
      in retaining personnel of the acquired
  companies;





·
            entry
      into unfamiliar markets;





·
            unanticipated
      problems or legal liabilities; and





·
            tax
      and accounting issues.





If we fail to integrate acquired
companies efficiently, our earnings, revenues growth and business could be
negatively affected.





Due
to intense competition for highly-skilled personnel, we may fail to attract and
retain enough sufficiently trained employees to support our operations; our
ability to bid for and obtain new projects may be negatively affected and our
revenues could decline as a result.





The IT
industry relies on skilled employees, and our success depends to a significant
extent on our ability to attract, hire, train and retain qualified employees.
Wireless information management application development is a relatively new area
in the IT industry. There is a small pool of experienced developers. As the
market demand picks up and more IT companies enter this market, there is
significant competition in China for professionals with the skills necessary to
develop the products and perform the services we offer to our customers.
Increased competition for these professionals, in the wireless information
management application development areas or otherwise, could have an adverse
effect on us if we experience significant increase in the attrition rate among
employees with specialized skills, which could decrease our operating efficiency
and productivity and could lead to a decline in demand for our
services.





In
addition, our ability to serve existing customers and business partners and
obtain new business will depend, in large part, on our ability to attract, train
and retain skilled personnel that enable us to keep pace with growing demands
for wireless information management application, evolving industry standards and
changing customer preferences. Our failure to attract, train and retain
personnel with the qualifications necessary to fulfill the needs of our existing
and future customers or to assimilate new employees successfully could have a
material adverse effect on our business, financial condition and results of
operations. Our failure to retain our key personnel on business development or
find suitable replacements of the key personnel upon their departure may lead to
shrinking new implementation projects, which could materially adversely affect
our business.





Our
business depends substantially on the continuing efforts of our senior
executives and other key personnel, and our business may be severely disrupted
if we lose their services.





Our
future success heavily depends upon the continued services of our senior
executives and other key employees. In particular, we rely on the expertise and
experience of Mr. Tao Li, our chairman. In addition, we rely on Mr. Peng Zhang,
our chief executive officer, Ms. Ying Yang, our chief financial officer, and Mr.
Pengguo Xi, our chief technology officer, to run our business operations. If one
or more of our senior executives or key employees is unable or unwilling to
continue in his or her present position, we may not be able to replace such
employee easily, or at all, we may incur additional expenses to recruit, train
and retain replacement personnel, our business may be severely disrupted, and
our financial condition and results of operations may be materially adversely
affected.




9


If
Mr. Li’s other professional duties interfere or conflict with his duties for our
company, our business, results of operations and financial condition could be
materially and adversely affected.





Mr. Li,
our chairman, currently serves as the chairman and chief executive officer of
China Green Agriculture, Inc. (“CGA”), a producer of humic acid based compound
fertilizer in the PRC whose common stock is listed on the New York Stock
Exchange. Mr. Li’s duties as chairman and chief executive officer of CGA require
the devotion of a substantial amount of his professional time and attention. Li
currently devotes approximately 70% of his professional time to his duties for
CGA. Similarly, our success and the execution of our growth strategy will
require his significant efforts and the devotion of a substantial amount of his
professional time and attention. If the performance of his duties on behalf of
CGA interfere or conflict with his duties as chairman of our company, we may not
be able to achieve our anticipated growth and our business, results of
operations and financial condition could be materially adversely
affected.




Our
business could suffer if our executives and directors compete against us and our
non-competition agreements with them cannot be enforced.





If any of
our senior executives or key employees joins a competitor or forms a competing
company, we may lose customers, know-how and key professionals and staff members
to them. Also, if any of our business development managers who keep a close
relationship with our customers and business partners joins a competitor or
forms a competing company, we may lose customers, and our revenues may be
materially adversely affected. Most of our executives have entered into
employment agreements with us that contain non-competition provisions. However,
if any dispute arises between our executive officers and us, such
non-competition provisions may not be enforceable, especially in China, where
all of these executive officers and key employees reside, in light of the
uncertainties with China’s legal system. See “Risk Factors — Risks Related
to Doing Business in China — Uncertainties with respect to the PRC
legal system could adversely affect us.”





A
significant portion of the software development, ongoing system support and
enhancement service revenues we generate are fixed amounts according to our
sales contracts. If we fail to accurately estimate costs and determine resource
requirements in relation to our projects, our margins and profitability could be
materially and adversely affected.





A
significant portion of the software development, ongoing system support and
enhancement service revenues we generate are fixed amounts according to our
sales contracts or bids we submit. Our projects often involve complex
technologies and must often be completed within compressed timeframes and meet
increasingly sophisticated customer requirements. We may be unable to accurately
assess the time and resources required for completing projects and price our
projects accordingly. If we underestimate the time or resources required, we may
experience cost overruns and mismatches in project staffing. Conversely, if we
over-estimate requirements, our bids may become uncompetitive and we may lose
business as a result. Furthermore, any failure to complete a project within the
stipulated timeframe could expose us to contractual and other liabilities and
damage our reputation.





Our
computer networks may be vulnerable to security risks that could disrupt our
services and adversely affect our results of operations.





Our
computer networks may be vulnerable to unauthorized access, computer hackers,
computer viruses and other security problems caused by unauthorized access to,
or improper use of, systems by third parties or employees. A hacker who
circumvents security measures could misappropriate proprietary information or
cause interruptions or malfunctions in operations. Computer attacks or
disruptions may jeopardize the security of information stored in and transmitted
through computer systems of our customers. Actual or perceived concerns that our
systems may be vulnerable to such attacks or disruptions may deter telecom
operators and consumers from using our solutions or services. As a result, we
may be required to expend significant resources to protect against the threat of
these security breaches or to alleviate problems caused by these breaches, which
could adversely affect our results of operations.





If
we do not continually enhance our solution and service offerings, we may have
difficulty in retaining existing customers and attracting new
customers.





We
believe that our future success will depend, to a significant extent, upon our
ability to enhance our existing solutions and to introduce new solutions and
features to meet the requirements of our customers in a rapidly developing and
evolving market. We currently devote significant resources to refining and
expanding our base software modules and to developing solutions that operate in
accordance with our customers’ networks and systems. Unexpected technical,
operational, distribution or other problems could delay or prevent the
introduction of one or more of these products or services, or any products or
services that we may plan to introduce in the future. Our present or future
products may not satisfy the evolving needs of the telecom industry, and these
solutions and services may not achieve anticipated market acceptance or generate
incremental revenue. If we are unable to anticipate or respond adequately to the
need for solutions and service enhancements due to resource, technological or
other constraints, our business, financial condition and results of operations
could be materially and adversely affected.




10


If
we are unable to develop competitive new products and service offerings our
future results of operations could be adversely affected.





Our
future revenue stream depends to a large degree on our ability to utilize our
technology in a way that will allow us to offer new types of software
applications and services to a broader client base. We will be required to make
investments in research and development in order to continue to develop new
software applications and related service offerings, enhance our existing
software applications and related service offerings and achieve market
acceptance of our software applications and service offerings. We may incur
problems in the future in innovating and introducing new software applications
and service offerings. Our development-stage software applications may not be
successfully completed or, if developed, may not achieve significant customer
acceptance. If we are unable to successfully define, develop and introduce
competitive new software applications, and enhance existing software
applications, our future results of operations would be adversely affected.
Development schedules for software applications are difficult to predict. The
timely availability of new applications and their acceptance by customers are
important to our future success. A delay in new the development of new
applications could have a significant impact on its results of
operations.





Changes
in technology could adversely affect our business by increasing our costs,
reducing our profit margins and causing a decline in our
competitiveness.





China’s
wireless telecom industry, in which we operate, is characterized by rapidly
changing technology, evolving industry standards, frequent new services and
solutions introductions and enhancements as well as changing customer demands.
New solutions and new technologies often render existing solutions and services
obsolete, excessively costly or otherwise unmarketable. As a result, our success
depends on our ability to adapt to the latest technological progress, such as
the 3G standard and technologies, and to develop or acquire and integrate new
technologies into our software solutions and IT-related services. Advances in
technology also require us to commit substantial resources to developing or
acquiring and then deploying new technologies for use in our operations. We must
continuously train personnel in new technologies and in how to integrate
existing hardware and software systems with these new technologies. We may not
be able to adapt quickly to new technologies or commit sufficient resources to
compete successfully against existing or new competitors in bringing to market
solutions and services that incorporate these new technologies. We may incur
problems in the future in innovating and introducing new software applications
and service offerings. Our development-stage software applications may not be
successfully completed or, if developed, may not achieve significant customer
acceptance. If we fail to adapt to changes in technologies and compete
successfully against established or new competitors, our business, financial
condition and results of operations could be adversely affected.





Returns
on our investment in new technologies, such as 3G technology, and new solutions
may not materialize as expected.





We have
invested and will invest in the future a substantial amount of capital, manpower
and other resources to develop new solutions and acquire technologies in
preparation for the adoption by the wireless telecom industry in China of new
standards and technologies, such as the 3G standard and technologies. However,
our abilities to successfully develop and commercialize these new solutions and
technologies are subject to a number of risks and uncertainties, including
uncertainty surrounding the timing of the adoption of these new standards and
technologies by China’s telecom industry and the receptiveness to these new
technologies by their customer base, as well as our abilities to develop and
market these new solutions cost-effectively and to deliver these solutions ahead
of our competitors. Any of the above risks and uncertainties could jeopardize
our ability to successfully realize a significant return on our investment in
the 3G and other new technologies and solutions, if at all.




11


Problems
with the quality or performance of our solutions may cause delays in the
introduction of new solutions or result in the loss of customers and revenues,
which could have a material and adverse effect on our business, financial
condition and results of operations.





Our
software solutions are complex and may contain defects, errors or bugs when
first introduced to the market or to a particular customer, or as new versions
are released. Because we cannot test for all possible scenarios, our solutions
may contain errors which are not discovered until after they have been
installed, and we may not be able to timely correct these problems. These
defects, errors or bugs could interrupt or delay completion of projects or sales
to our customers. In addition, our reputation may be damaged and we may fail to
acquire new projects from existing customers or new customers. Errors may occur
when we provide systems integration and maintenance services. Some of the
contracts with our customers do not have provisions setting forth limitations on
liability for consequential damages. Even in cases where we have agreements with
our customers that contain provisions designed to limit our exposure to
potential claims and liabilities arising from customer problems, these
provisions may not effectively protect us against such claims in all cases and
in all jurisdictions. In addition, as a result of business and other
considerations, we may undertake to compensate our customers for damages arising
from the use of our solutions, even if our liability is limited by these
provisions. Moreover, claims and liabilities arising from customer problems
could also result in adverse publicity and materially and adversely affect our
business, results of operations and financial condition. We currently do not
carry any product or service liability insurance and any imposition of liability
on us may materially and adversely affect our business and increase our costs,
resulting in reduced revenues and profitability.




Our
products may contain undetected software defects, which could negatively affect
our revenues.





Our
software products are complex and may contain undetected defects. In the past,
we have discovered software defects in certain of our products and have
experienced delayed or lost revenues during the period it took to correct these
problems. Although we test our products, it is possible that errors may be found
or occur in our new or existing products after we have commenced commercial
shipment of those products. Defects, whether actual or perceived, could result
in adverse publicity, loss of revenues, product returns, a delay in market
acceptance of our products, loss of competitive position or claims against us by
customers. Any such problems could be costly to remedy and could cause
interruptions, delays, or cessation of our product sales, which could cause us
to lose existing or prospective customers and could negatively affect our
results of operations.





We
may be subject to infringement, misappropriation and indemnity claims in the
future, which may cause us to incur significant expenses, pay substantial
damages and be prevented from providing our services or
technologies.





Our
success depends, in part, on our ability to carry out our business without
infringing the intellectual property rights of third parties. Patent and
copyright law covering software-related technologies and IT marketing is
evolving rapidly and is subject to a great deal of uncertainty. Our
self-developed or licensed technologies, processes or methods may be covered by
third-party patents or copyrights, either now existing or to be issued in the
future. Any potential litigation may cause us to incur significant expenses.
Third-party claims, if successfully asserted against us may cause us to pay
substantial damages, seek licenses from third parties, pay ongoing royalties,
redesign our services or technologies, or prevent us from providing services or
technologies subject to these claims. Even if we were to prevail, any litigation
would likely be costly and time-consuming and divert the attention of our
management and key personnel from our business operations.





Additionally,
most of our software development contracts signed with our customers contain
indemnity clauses whereby we will indemnify our customers for any loss or
damages suffered as a result of any third-party claims against them for any
infringement of intellectual property rights in connection with the installation
and use of the customized software solutions we develop for them. We may still
be exposed to significant liabilities under these indemnity clauses to which
we’ve agreed with our customers.





Our
failure to protect our intellectual property rights may undermine our
competitive position, and subject us to costly litigation to protect our
intellectual property rights.





Any
misappropriation of our technology or the development of competitive technology
could seriously harm our business. We regard a substantial portion of our
software solutions and systems as proprietary and rely on statutory copyright,
trademark, patent, trade secret laws, customer license agreements, employee and
third-party non-disclosure agreements and other methods to protect our
proprietary rights. Nevertheless, these resources afford only limited protection
and the actions we take to protect our intellectual property rights may not be
adequate. In particular, third parties may infringe or misappropriate our
proprietary technologies or other intellectual property rights, which could have
a material adverse effect on our business, financial condition and results of
operations. In addition, intellectual property rights and confidentiality
protection in China may not be as effective as in the United States, and
policing unauthorized use of proprietary technology can be difficult and
expensive. In addition, litigation may be necessary to enforce our intellectual
property rights, protect our trade secrets or determine the validity and scope
of the proprietary rights of others. The outcome of any such litigation may not
be in our favor. Furthermore, any such litigation may be costly and may divert
management attention, as well as our other resources, away from our business. An
adverse determination in any such litigation will impair our intellectual
property rights and may harm our business, prospects and reputation. In
addition, we have no insurance coverage against litigation costs and would have
to bear all litigation costs in excess of the amount recoverable from other
parties. The occurrence of any of the foregoing could have a material adverse
effect on our business, financial condition and results of
operations.




12


Our
solutions incorporate a portion of, and work in conjunction with, third-party
hardware and software solutions. If these third-party hardware or software
solutions are not available to us at reasonable costs, or at all, our results of
operations could be adversely impacted.





Although
our solutions primarily rely on our own core technologies, some of our solutions
incorporate a small portion of third-party hardware and software solutions. In
addition, our solutions are designed to work in conjunction with the third-party
hardware and software in our customers’ existing systems. If any third party
were to discontinue making their solutions available to us or our customers on a
timely basis, or increase materially the cost of their solutions, or if our
solutions failed to properly function or interoperate with replacement hardware
or software solutions, we may need to incur costs in finding replacement
third-party solutions and/or redesigning our solutions to replace or function
with or on replacement third-party solutions. Replacement solutions may not be
available on terms acceptable to us or at all, and we may be unable to develop
alternative solutions or redesign our solutions on a timely basis or at a
reasonable cost. If any of these were to occur, our results of operations could
be adversely impacted.





Our
ability to sell our products is highly dependent on the quality of our service
and support offerings, and our failure to offer high quality service could have
a material adverse effect on our ability to market and sell our
products.





Our
customers depend upon our customer service and support staff to resolve issues
relating to our products. High-quality support services are critical for the
successful marketing and sale of our products. If we fail to provide
high-quality support on an ongoing basis, our customers may react negatively and
we may be materially and adversely affected in our ability to sell additional
products to these customers. This could also damage our reputation and prospects
with potential customers. Our failure to maintain high-quality support services
could have a material and adverse effect on our business, results of operations
and financial condition.





If we fail to
establish or maintain an effective system of internal controls, we may be unable
to accurately report our financial results or prevent fraud, and investor
confidence and the market price of our ADSs may, therefore, be adversely
impacted.




We are
subject to reporting obligations under the U.S. securities laws. Our reporting
obligations as a public company will place a significant strain on our
management, operational and financial resources and systems for the foreseeable
future. Beginning with our annual report on Form 20-F for the year ending
September 30, 2011 , we are required to prepare a management report on our
internal controls over financial reporting containing our management’s
assessment of the effectiveness of our internal controls over financial
reporting. Our management may conclude that our internal controls over our
financial reporting are not effective. In addition, our independent registered
public accounting firm will be required to attest to our management’s assessment
of our internal controls over financial reporting in our annual report on Form
20-F for the year ending September 30, 2011.





Prior to
our public offering in May 2010, we were a private company with a limited number
of accounting personnel and we have accounted for our business using PRC
accounting standards similar for small growing PRC companies. Our accounting
staff has limited experience with U.S. GAAP standards and reporting requirements
and the rules and regulations as promulgated by the U.S. Public Company
Accounting Oversight Board, or PCAOB. Our current staff is not experienced in
U.S. GAAP requirements and we may experience difficulties or problems in
developing strong internal controls and internal documentation, accounting,
auditing and reporting systems. It is possible that our weaknesses in these
areas could lead to errors and mistakes that are damaging to our company. We
have begun the process to improve our U.S. GAAP reporting capabilities and we
plan to hire additional accounting personnel with U.S. GAAP experience to
improve our ability to apply U.S. GAAP. We prepared and are in the process of
implementing formal accounting policies and procedures to address key accounting
areas for routine and non-routine transactions. We are working to implement
these measures in fiscal 2011, although we cannot assure you that we will
complete such implementation by then. The process of designing and implementing
an effective financial reporting system is a continuous effort that requires us
to anticipate and react to changes in our business and the economic and
regulatory environments.




13


We will
continue to implement measures to identify and, if necessary, to remedy any
material weaknesses and significant deficiencies to meet the deadline imposed by
Section 404 of the Sarbanes-Oxley Act. If we fail to timely achieve and maintain
the adequacy of our internal controls, we may not be able to conclude that we
have effective internal controls over financial reporting. Moreover, effective
internal controls over financial reporting are necessary for us to produce
reliable financial reports and are important to help prevent fraud. As a result,
our failure to achieve and maintain effective internal controls over financial
reporting could result in the loss of investor confidence in the reliability of
our financial statements, which in turn could harm our business and negatively
impact the market price of our ADSs. Furthermore, we anticipate that we will
incur considerable costs and use significant management time and other resources
in an effort to comply with Section 404 of the Sarbanes-Oxley Act. We estimate
that the cost of improving our U.S. GAAP reporting capabilities and establishing
effective internal controls will be $250,000 to $350,000 per year, which
includes the cost of hiring additional qualified accounting
personnel.





We
have very limited insurance coverage which could expose us to significant costs
and business disruption.





We do not
maintain any insurance coverage for our leased properties. Should any natural
catastrophes such as earthquakes, floods, typhoons or any acts of terrorism
occur in Shaanxi Province, where our head office is located and most of our
employees are based, or elsewhere in China, we might suffer not only significant
property damages, but also loss of revenues due to interruptions in our business
operations, which could have a material adverse effect on our business,
operating results or financial condition.





The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products, and do not, to our
knowledge, offer business liability insurance. As a result, we do not have any
business liability insurance coverage for our operations. Moreover, while
business disruption insurance is available, we have determined that the risks of
disruption and cost of the insurance are such that we do not require it at this
time. Any business disruption, litigation or natural disaster might result in
substantial costs and diversion of resources, particularly if it affects our
technology platforms which we depend on for delivery of our software and
services, and could have a material adverse effect on our financial condition
and results of operations.





We
may be liable to our customers for damages caused by unauthorized disclosure of
sensitive and confidential information, whether through our employees or
otherwise.





We are
typically required to manage, utilize and store sensitive or confidential
customer data in connection with the products and services we provide. Under the
terms of our customer contracts, we are required to keep such information
strictly confidential. We seek to implement specific measures to protect
sensitive and confidential customer data. We require our employees to enter into
non-disclosure agreements to limit such employees’ access to, and distribution
of, our customers’ sensitive and confidential information and our own trade
secrets. We can give no assurance that the steps taken by us in this regard will
be adequate to protect our customers’ confidential information. If our
customers’ proprietary rights are misappropriated by our employees, in violation
of any applicable confidentiality agreements or otherwise, our customers may
consider us liable for that act and seek damages and compensation from us.
However, we currently do not have any insurance coverage for mismanagement or
misappropriation of such information by our employees. Any litigation with
respect to unauthorized disclosure of sensitive and confidential information
might result in substantial costs and diversion of resources and management
attention.




We
may face intellectual property infringement claims that could be time-consuming
and costly to defend. If we fail to defend ourselves against such claims, we may
lose significant intellectual property rights and may be unable to continue
providing our existing products and services.





It is
critical that we use and develop our technology and products without infringing
upon the intellectual property rights of third parties, including patents,
copyrights, trade secrets and trademarks. Intellectual property litigation is
expensive and time-consuming and could divert management’s attention from our
business. A successful infringement claim against us, whether with or without
merit, could, among others things, require us to pay substantial damages,
develop non-infringing technology, or re-brand our name or enter into royalty or
license agreements that may not be available on acceptable terms, if at all, and
cease making, licensing or using products that have infringed a third party’s
intellectual property rights. Protracted litigation could also result in
existing or potential customers deferring or limiting their purchase or use of
our products until resolution of such litigation, or could require us to
indemnify our customers against infringement claims in certain instances. Also,
we may be unaware of intellectual property registrations or applications
relating to our services that may give rise to potential infringement claims
against us. Parties making infringement claims may be able to obtain an
injunction to prevent us from delivering our services or using technology
containing the allegedly infringing intellectual property. Any intellectual
property litigation could have a material adverse effect on our business,
results of operations or financial condition.




14


We
have transferred intellectual property rights to a number of our customized
software solutions to our customers in the past and may not own all these
intellectual property rights. We may be subject to intellectual property
infringement claims from these customers and others, which may force us to incur
substantial legal expenses and, if determined adversely against us, may disrupt
our business and materially and adversely affect our revenues and net
income.





Our
business involves the development and customization of software solutions for
customers. While we retain ownership in the intellectual property rights
underlying the core technologies required to develop our customized finished
software solutions, in most cases, our contracts for custom-designed projects
provided that our customers own, or share with us, intellectual property rights
to the finished software solutions developed under such contracts. Under these
circumstances, we may not have the right to reuse the related finished software
in projects involving other customers nor can we unilaterally apply for
copyright registrations, patents or other intellectual property rights for these
software solutions. To the extent that we are unable to reuse the software and
to the extent that the use of such software is important to the growth of our
business with other customers, the inability to reuse such software could hinder
the growth of our business. Furthermore, a portion of these contracts provide
that our customers have ownership rights to any substantial improvements we
subsequently make to the software solutions developed under these contracts. As
a result, we may be subject to intellectual property infringement or profit
sharing claims in the future from these customers. Any such claims could subject
us to costly litigation and may require us to pay damages and develop
non-infringing intellectual property, or acquire licenses to the intellectual
property that is the subject of the alleged infringement. These could harm our
reputation and materially and adversely affect our business and net
income.




Seasonality
and fluctuations in our customers’ annual IT budget and spending cycle and other
factors can cause our revenues and operating results to vary significantly from
quarter to quarter and from year to year.





Our
revenues and operating results will vary significantly from quarter to quarter
and from year to year due to a number of factors, many of which are outside of
our control. A large number of our engineers take leave around the Chinese New
Year holiday, which typically falls between late January and February of each
year. The lack of man-hours during this holiday period usually leads to
relatively lower revenues during the first calendar quarter. Due to the annual
budget cycles of most of our customers, we may be unable to accurately estimate
the demand for our solutions and services beyond the immediate calendar year,
which could adversely affect our business planning. Moreover, our results will
vary depending on our customers’ business needs from year to year. Due to these
and other factors, our operating results have fluctuated significantly from
quarter to quarter and from year to year. These fluctuations are likely to
continue in the future, and operating results for any period may not be
indicative of our future performance in any future period.




Our
corporate actions are substantially controlled by our principal shareholders,
who can cause us to take actions in ways you may not agree with.





Mr. Tao
Li, our chairman, beneficially owns and has voting control over approximately
48.5% of our ordinary shares, and our officers and directors as a group
beneficially own and have voting control over an aggregate of approximately
49.8% of our ordinary shares. These shareholders, acting individually or as a
group, could exert control and substantial influence over matters such as
electing directors, amending our constitutional documents, and approving
acquisitions, mergers or other business combination transactions. This
concentration of ownership and voting power may also discourage, delay or
prevent a change in control of our company, which could deprive our shareholders
of an opportunity to receive a premium for their shares as part of a sale of our
company and might reduce the price of our shares. Alternatively, our controlling
shareholders may cause a merger, consolidation or change of control transaction
even if it is opposed by our other shareholders, including those who purchase
shares in this offering.





Risk
Related to Doing Business in China





Adverse
changes in political and economic policies of the PRC government could have a
material adverse effect on the overall economic growth of China, which could
reduce the demand for our services and materially and adversely affect our
competitive position.





Substantially
all of our business operations are conducted in China. Accordingly, our
business, results of operations, financial condition and prospects are subject
to a significant degree to economic, political and legal developments in China.
Although the Chinese economy is no longer a planned economy, the PRC government
continues to exercise significant control over China’s economic growth through
direct allocation of resources, monetary and tax policies, and a host of other
government policies such as those that encourage or restrict investment in
certain industries by foreign investors, control the exchange between RMB and
foreign currencies, and regulate the growth of the general or specific market.
These government involvements have been instrumental in China’s significant
growth in the past 30 years. The reorganization of the telecommunications
industry encouraged by the PRC government has directly affected our industry and
our growth prospect. In response to the recent global and Chinese economic
downturn, the PRC government has adopted policy measures aimed at stimulating
the economic growth in China. If the PRC government’s current or future policies
fail to help the Chinese economy achieve further growth or if any aspect of the
PRC government’s policies limits the growth of the telecommunications industry
in China or our industry or otherwise negatively affects our business, our
growth rate or strategy, our results of operations could be adversely affected
as a result.




15


Our
business benefits from certain government tax incentives. Expiration, reduction
or discontinuation of, or changes to, these incentives will increase our tax
burden and reduce our net income.





Under the PRC Enterprise Income Tax Law
passed in 2007 and the implementing rules, both of which became effective on
January 1, 2008, or the New EIT Law, a unified enterprise income tax rate of 25%
and unified tax deduction standard is applied equally to both domestic-invested
enterprises and foreign-invested enterprises, or FIEs. Enterprises established
prior to March 16, 2007 eligible for preferential tax treatment in accordance
with the then tax laws and administrative regulations shall gradually become
subject to the New EIT Law rate over a five-year transition period starting from
the date of effectiveness of the New EIT Law. However, certain qualifying
high-technology enterprises may still benefit from a preferential tax rate of
15% if they own their core intellectual properties and they are enterprises in
certain State-supported high-tech industries to be later specified by the
government. As a result, if our PRC subsidiaries qualify as “high-technology
enterprises,” they will continue to benefit from the preferential tax rate of
15%, subject to transitional rules implemented from January 1, 2008. Kingtone
Information has been qualified as a “high-technology enterprise” for a three
year period from November 21, 2008 and therefore it has benefited from the
preferential tax rate of 15%, subject to transitional rules implemented on
January 1, 2008. Otherwise, the applicable tax rate of our PRC subsidiaries may
gradually increase to the unified tax rate of 25% by January 1, 2013 under the
New EIT Law and the Implementing Rules. Currently, the value-added taxes we pay
on our software products are refunded to us by the tax authorities as part of
the PRC state policies to encourage the development of the PRC software
industry. If Kingtone Information ceases to qualify as a “high-technology
enterprise”, or if the refund of the value-added taxes ceases to apply, or the
tax authorities change their position on our preferential tax treatments in the
future, our future tax liabilities may materially increase, which could
materially and adversely affect our financial condition and results of
operations .





If
we and/or Topsky were deemed a “resident enterprise” by PRC tax authorities, we
and/or Topsky could be subject to tax on our global income at the rate of 25%
under the New EIT Law and our non-PRC shareholders could be subject to certain
PRC taxes.





Under the
New EIT Law and the implementing rules, both of which became effective January
1, 2008, an enterprise established outside of the PRC with “de facto management
bodies” within the PRC may be considered a PRC “resident enterprise” and will be
subject to the enterprise income tax at the rate of 25% on its global income as
well as PRC enterprise income tax reporting obligations. The implementing rules
of the New EIT Law define “de facto management” as “substantial and overall
management and control over the production and operations, personnel,
accounting, and properties” of the enterprise. However, as of the date of this
annual report, no final interpretations on the implementation of the “resident
enterprise” designation are available. Moreover, any such designation, when made
by PRC tax authorities, will be determined based on the facts and circumstances
of individual cases. Therefore, if we and/or Topsky were to be considered a
“resident enterprise” by the PRC tax authorities, our and/or Topsky’s global
income would be taxable under the New EIT Law at the rate of 25% and, to the
extent we and/or Topsky were to generate a substantial amount of income outside
of PRC in the future, we and/or Topsky would be subject to additional taxes. In
addition, the dividends we pay to our non-PRC enterprise shareholders and gains
derived by such shareholders or ADS holders from the transfer of our shares or
ADSs may also be subject to PRC withholding tax at the rate up to 10%, if such
income were regarded as China-sourced income.





Our
holding company structure may limit the payment of dividends.





We have
no direct business operations, other than our ownership of our subsidiaries and
our contractual control of Kingtone Information. While we have no current
intention of paying dividends, should we decide in the future to do so, as a
holding company, our ability to pay dividends and meet other obligations depends
upon the receipt of dividends or other payments from our operating subsidiaries
and other holdings and investments. Current PRC regulations permit our PRC
subsidiaries to pay dividends to us only out of their accumulated profits, if
any, determined in accordance with Chinese accounting standards and regulations.
In addition, each of our subsidiaries in China is required to set aside at least
10% of its after-tax profits each year, if any, to fund a statutory reserve
until such reserve reaches 50% of its registered capital. These reserves are not
distributable as cash dividends. Furthermore, if our subsidiaries in China incur
debt on their own behalf in the future, the instruments governing the debt may
restrict their ability to pay dividends or make other payments to us. As a
result, there may be limitations on the ability of our PRC subsidiaries to pay
dividends or make other investments or acquisitions that could be beneficial to
our business, or otherwise fund and conduct our business.




16


In
addition, under the New EIT Law and the implementing rules that became effective
on January 1, 2008, dividends generated from the business of our PRC
subsidiaries after January 1, 2008 and payable to us and/or Topsky may be
subject to a withholding tax rate of 10% if the PRC tax authorities subsequently
determine that we and/or Topsky is a non-resident enterprise, unless there is a
tax treaty with China that provides for a different withholding arrangement.
Topsky, the direct holder of 100% of the equity interests of Softech, is
organized in Singapore. Under the Notice of the State Administration of Taxation
on Delivering the Table of Negotiated Dividends and Interest Rates to Lower
Levels of People’s Republic of China, such dividend withholding tax rate is
reduced to 5% if a Singapore resident enterprise owns over 25% of the PRC
company distributing the dividends. As Topsky is a Singapore company and owns
100% of Softech, under the aforesaid notice, any dividends that Softech pays to
Topsky will be subject to a withholding tax at the rate of 5%, provided that
Topsky is not considered to be PRC tax resident enterprises. If, however, Topsky
is regarded as a resident enterprise, the dividends payable to Topsky from
Softech may be exempt from the PRC income tax, and the dividends payable from
Topsky to us will be subject to a 10% PRC withholding tax (unless we are
considered to be a PRC tax resident enterprise). Any such taxes could thus
materially reduce the amount of funds available to us to meet our cash
requirements, including the payment of dividends to our
shareholders.




Uncertainties
with respect to the PRC legal system could adversely affect us.





We
conduct all of our business through our subsidiaries in China. Our operations in
China are governed by PRC laws and regulations. Our PRC subsidiaries are
generally subject to laws and regulations applicable to foreign investments in
China and, in particular, laws and regulations applicable to wholly
foreign-owned enterprises. The PRC legal system is based on statutes. Prior
court decisions may be cited for reference but have limited precedential
value.





Since
1979, PRC legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. However,
China has not developed a fully integrated legal system and recently enacted
laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and
their nonbinding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, the PRC legal system is based in
part on government policies and internal rules (some of which are not published
on a timely basis or at all) that may have a retroactive effect. As a result, we
may not be aware of our violation of these policies and rules until some time
after the violation. In addition, any litigation in China may be protracted and
result in substantial costs and diversion of resources and management
attention.





PRC
regulation of loans and direct investment by offshore holding companies to PRC
entities may delay or prevent us from using the proceeds of our May 2010 public
offering to make loans or additional capital contributions to our PRC operating
subsidiaries, which could materially and adversely affect our liquidity and our
ability to fund and expand our business.





In
utilizing the proceeds of our May 2010 public offering as an offshore holding
company of our PRC operating subsidiaries, we may make loans to our PRC
subsidiaries, or we may make additional capital contributions to our PRC
subsidiaries. Any loans to our PRC subsidiaries are subject to PRC regulations.
For example, loans by us to our subsidiaries in China, which are FIEs, to
finance their activities cannot exceed statutory limits and must be registered
with the State Administration of Foreign Exchange, or SAFE. On August 29, 2008,
SAFE promulgated Circular 142, a notice regulating the conversion by a
foreign-invested company of foreign currency into RMB by restricting how the
converted RMB may be used. The notice requires that RMB converted from the
foreign currency-denominated capital of a foreign-invested company may only be
used for purposes within the business scope approved by the applicable
governmental authority and may not be used for equity investments within the PRC
unless specifically provided for otherwise. The foreign currency-denominated
capital shall be verified by an accounting firm before converting into RMB. In
addition, SAFE strengthened its oversight over the flow and use of RMB funds
converted from the foreign currency-denominated capital of a foreign-invested
company. To convert such capital into RMB, the foreign-invested company must
report the use of such RMB to the bank, and the RMB must be used to the reported
purposes. According to Circular 142, change of the use of such RMB without
approval is prohibited. In addition, such RMB may not be used to repay RMB loans
if the proceeds of such loans have not yet been used. Violations of Circular 142
may result in severe penalties, including substantial fines as set forth in the
Foreign Exchange Administration Rules.




17


We may
also decide to finance our subsidiaries by means of capital contributions. These
capital contributions must be approved by the PRC Ministry of Commerce, or
MOFCOM, or its local counterpart. We may not be able to obtain these government
approvals on a timely basis, if at all, with respect to future capital
contributions by us to our PRC subsidiaries. If we fail to receive such
approvals, our ability to use the proceeds of our May 2010 public offering and
to capitalize our PRC operations may be negatively affected, which could
adversely affect our liquidity and our ability to fund and expand our
business.




Governmental
control of currency conversion may affect the value of your
investment.





The PRC
government imposes controls on the convertibility of the RMB into foreign
currencies and, in certain cases, the remittance of currency out of China. We
receive substantially all of our revenues in RMB. Under our current corporate
structure, our income is primarily derived from dividend payments from our PRC
subsidiaries. Shortages in the availability of foreign currency may restrict the
ability of our PRC subsidiaries to remit sufficient foreign currency to pay
dividends or other payments to us, or otherwise satisfy their foreign currency
denominated obligations. Under existing PRC foreign exchange regulations,
payments of current account items, including profit distributions, interest
payments and expenditures from trade-related transactions, can be made in
foreign currencies without prior approval from SAFE by complying with certain
procedural requirements. However, approval from appropriate government
authorities is required where RMB is to be converted into foreign currency and
remitted out of China to pay capital expenses such as the repayment of loans
denominated in foreign currencies. The PRC 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 dividends in foreign currencies to our shareholders, including holders of
our ADSs or ordinary shares.





Fluctuation
in the value of the RMB may have a material adverse effect on the value of your
investment.





The value
of the RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions.
On July 21, 2005, the PRC government changed its decade-old policy of pegging
the value of the RMB to the U.S. dollar. Under the new policy, the RMB is
permitted to fluctuate within a narrow and managed band against a basket of
certain foreign currencies. This change in policy has resulted in an approximate
23.7% appreciation of the RMB against the U.S. dollar between July 21, 2005 and
September 30, 2010. Provisions on Administration of Foreign Exchange, as amended
in August 2008, further changed China’s exchange regime to a managed floating
exchange rate regime based on market supply and demand. Since reaching a high
against the U.S. dollar in July 2008, however, the RMB has traded within a
narrow band against the U.S. dollar, remaining within 1% of its July 2008 high
but never exceeding it. As a consequence, the RMB has fluctuated sharply since
July 2008 against other freely-traded currencies, in tandem with the U.S.
dollar. It is difficult to predict how long the current situation may continue
and when and how it may change again as the People’s Bank of China may regularly
intervene in the foreign exchange market to achieve economic policy goals.
Substantially all of our revenues and costs are denominated in the RMB, and a
significant portion of our financial assets are also denominated in RMB. We
principally rely on dividends and other distributions paid to us by our
subsidiaries in China. Any significant revaluation of the RMB may materially and
adversely affect our cash flows, revenues, earnings and financial position, and
the value of, and any dividends payable on, our ADSs or ordinary shares in U.S.
dollars. Any fluctuations of the exchange rate between the RMB and the U.S.
dollar could also result in foreign currency translation losses for financial
reporting purposes.





Softech’s
contractual arrangements with Kingtone Information may result in adverse tax
consequences to us.





We could
face material and adverse tax consequences if the PRC tax authorities determine
that Softech’s contractual arrangements with Kingtone Information were not made
on an arm’s length basis and adjust our income and expenses for PRC tax purposes
in the form of a transfer pricing adjustment. A transfer pricing adjustment
could result in a reduction, for PRC tax purposes, of adjustments recorded by
Kingtone Information, which could adversely affect us by increasing Kingtone
Information’s tax liability without reducing Softech’s tax liability, which
could further result in late payment fees and other penalties to Kingtone
Information for underpaid taxes.




18


We
control Kingtone Information through contractual arrangements which may not be
as effective in providing control over Kingtone Information as direct ownership,
and if Kingtone Information or its shareholders breach the contractual
arrangements, we would have to rely on legal remedies under PRC law, which may
not be available or effective, to enforce or protect our rights.





We
conduct substantially all of our operations, and generate substantially all of
our revenues, through contractual arrangements with Kingtone Information that
provide us, through our ownership of Topsky and its ownership of Softech, with
effective control over Kingtone Information. We have no direct ownership
interest in Kingtone Information. We depend on Kingtone Information to hold and
maintain contracts with our customers. Kingtone Information also owns
substantially all of our intellectual property, facilities and other assets
relating to the operation of our business, and employs the personnel for
substantially all of our business. Neither our company nor Softech has any
ownership interest in Kingtone Information. Although we believe that that each
contract under Softech’s contractual arrangements with Kingtone Information is
valid, binding and enforceable under current PRC laws and regulations in effect,
these contractual arrangements may not be as effective in providing us with
control over Kingtone Information as direct ownership of Kingtone Information
would be. In addition, Kingtone Information may breach the contractual
arrangements. For example, Kingtone Information may decide not to make
contractual payments to Softech, and consequently to our company, in accordance
with the existing contractual arrangements. In the event of any such breach, we
would have to rely on legal remedies under PRC law. These remedies may not
always be available or effective, particularly in light of uncertainties in the
PRC legal system.




PRC
laws and regulations governing our businesses and the validity of certain of our
contractual arrangements are uncertain. If we are found to be in violation of
such PRC laws and regulations, we could be subject to sanctions. In addition,
changes in such PRC laws and regulations may materially and adversely affect our
business.





There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including, but not limited to, the laws and regulations
governing our business, or the enforcement and performance of Softech’s
contractual arrangements with Kingtone Information. Softech is considered a
foreign invested enterprise under PRC law. As a result, Softech is subject to
PRC law limitations on its businesses and foreign ownership of Chinese
companies. These laws and regulations are relatively new and may be subject to
change, and their official interpretation and enforcement may involve
substantial uncertainty. The effectiveness of newly enacted laws, regulations or
amendments may be delayed, resulting in detrimental reliance by foreign
investors. New laws and regulations that affect existing and proposed future
businesses may also be applied retroactively.





The PRC
government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new PRC laws or regulations on our businesses. We
cannot assure you that our current ownership and operating structure would not
be found in violation of any current or future PRC laws or regulations. As a
result, we may be subject to sanctions, including fines, and could be required
to restructure our operations or cease to provide certain services. In addition,
any litigation in China may be protracted and result in substantial costs and
diversion of resources and management attention. Any of these or similar actions
could significantly disrupt our business operations or restrict us from
conducting a substantial portion of our business operations, which could
materially and adversely affect our business, financial condition and results of
operations.





If
we were required to obtain the prior approval of the China Securities Regulatory
Commission, or CSRC, of the listing and trading of our ADSs on the Nasdaq
Capital Market, we may face regulatory actions or other sanctions from the CSRC
or other PRC regulatory agencies.





On August
8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the
State Assets Supervision and Administration Commission, the State Administration
for Taxation, the State Administration for Industry and Commerce, the CSRC and
the SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors, which became effective on September 8, 2006
(the “New M&A Rules”). This regulation, among other things, includes
provisions that purport to require that an offshore special purpose vehicle
formed for the purposes of overseas listing of equity interests in PRC companies
and controlled directly or indirectly by PRC companies or individuals obtain the
approval of the CSRC prior to the listing and trading of such special purpose
vehicle’s securities on an overseas stock exchange. On September 21, 2006, the
CSRC published on its official website procedures regarding its approval of
overseas listings by special purpose vehicles. The CSRC approval procedures
require the filing of a number of documents with the CSRC and it would take
several months to complete the approval process, if practicable at all. The
application of this new PRC regulation remains unclear with no consensus
currently existing among leading PRC law firms regarding the scope of the
applicability of the CSRC approval requirement.




19


Prior to
our May 2010 initial public offering, our PRC counsel has advised us that, based
on its understanding of the current PRC laws and regulations as well as the
procedures announced on September 21, 2006: (i) Softech was directly
incorporated by Topsky as a foreign investment enterprise under PRC law;
therefore, there was no acquisition of the equity of a “PRC domestic company” as
defined under the New M&A Rules; and (ii) the contractual arrangements
between Kingtone Information and Softech are not clearly defined and considered
as the transaction which shall be applied to the New M&A Rules. Therefore,
we did not seek prior CSRC approval for our initial public
offering.





However,
if the CSRC required that we obtain its approval prior to the completion of our
initial public offering and the listing of our ADSs on the Nasdaq Capital
Market, we may face regulatory actions or other sanctions from the CSRC or other
PRC regulatory agencies. These regulatory agencies may impose fines and
penalties on our operations in the PRC, limit our operating privileges in the
PRC, delay or restrict the repatriation of the proceeds from our initial public
offering into the PRC, or take other actions that could have a material adverse
effect on our business, financial condition, results of operations, reputation
and prospects, as well as the trading price of our shares.





Also, if
the CSRC requires that we obtain its approval, we may be unable to obtain a
waiver of the CSRC approval requirements if and when procedures are established
to obtain such a waiver. Any uncertainties and/or negative publicity regarding
this CSRC approval requirement could have a material adverse effect on the
trading price of our shares.





PRC
regulations relating to the establishment of offshore special purpose companies
by PRC residents may subject our PRC resident shareholders to penalties and
limit our ability to inject capital into our PRC subsidiary, limit our PRC
subsidiary’s ability to distribute profits to us, or otherwise adversely affect
us.





On
October 21, 2005, the SAFE issued the Notice on Issues Relating to the
Administration of Foreign Exchange in Fund-raising and Reverse Investment
Activities of Domestic Residents Conducted via Offshore Special Purpose
Companies, or Notice 75, which became effective as of November 1, 2005.
According to Notice 75, prior registration with the local SAFE branch is
required for PRC residents to establish or to control an offshore company for
the purposes of financing such offshore company with assets or equity interests
in an onshore enterprise located in the PRC, or an offshore special purpose
company. An amendment to registration or filing with the local SAFE branch by
such PRC resident is also required for the injection of equity interests or
assets of an onshore enterprise in the offshore special purpose company or
overseas funds raised by such offshore company, or any other material change
involving a change in the capital of the offshore special purpose company.
Moreover, Notice 75 applies retroactively. As a result, PRC residents who have
established or acquired control of offshore special purpose companies that have
made onshore investments in the PRC in the past are required to have completed
the relevant registration procedures with the local SAFE branch by March 31,
2006. To further clarify the implementation of Notice 75, the SAFE issued
Circular 106 on May 29, 2007. Under Circular 106, PRC subsidiaries of an
offshore special purpose company are required to coordinate and supervise the
filing of SAFE registrations by the offshore holding company’s shareholders or
beneficial owners who are PRC residents in a timely manner.





Some of
our current shareholders and/or beneficial owners may fall within the ambit of
the SAFE notice and be required to register with the local SAFE branch as
required under the SAFE notice. If so required, and if such shareholders and/or
beneficial owners fail to timely register their SAFE registrations pursuant to
the SAFE notice, or if future shareholders and/or beneficial owners of our
company who are PRC residents fail to comply with the registration procedures
set forth in the SAFE notice, this may subject such shareholders, beneficial
owners and/or our PRC subsidiaries to fines and legal sanctions and may also
limit our ability to contribute additional capital into our PRC subsidiaries,
limit our PRC subsidiaries’ ability to distribute dividends to our company, or
otherwise adversely affect our business.





Risks
Associated with our ADSs





The
market price of our ADSs may be highly volatile, and you may not be able to
resell at or above your initial purchase price.





There is
a limited public market for our shares and ADSs. We cannot assure you that there
will be an active trading market for our ADSs. You may not be able to sell your
ADSs quickly or at the market price if trading in our ADSs is not
active.




20


The
trading price of our ADSs may be volatile. The price of our ADSs could be
subject to wide fluctuations in response to a variety of factors, including the
following:




·
            Introduction
      of new products, services or technologies offered by us or our
      competitors;





·
            Failure
      to meet or exceed revenue and financial projections we provide to the
      public;





·
            Actual
      or anticipated variations in quarterly operating
  results;





·
            Failure
      to meet or exceed the estimates and projections of the investment
      community;





·
            General
      market conditions and overall fluctuations in United States equity
      markets;





·
            Announcements
      of significant acquisitions, strategic partnerships, joint ventures or
      capital commitments by us or our
competitors;





·
            Disputes
      or other developments relating to proprietary rights, including patents,
      litigation matters and our ability to obtain patent protection for our
      technologies;





·
            Additions
      or departures of key management
personnel;





·
            Issuances
      of debt or equity securities;





·
            Significant
      lawsuits, including patent or shareholder
  litigation;





·
            Changes
      in the market valuations of similar
companies;





·
            Sales
      of our ADSs by us or our shareholders in the
  future;





·
            Trading
      volume of our ADSs; and





·
            Other
      events or factors, many of which are beyond our
  control.





In
addition, the stock market in general, and the Nasdaq Capital Market and
software products and services companies in particular, have experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of these companies. Broad market and industry
factors may negatively affect the market price of our ADS, regardless of our
actual operating performance.





If
our ADSs become subject to the SEC’s penny stock rules, broker-dealers may
experience difficulty in completing customer transactions and trading activity
in our securities may be adversely affected.




If at any
time we have net tangible assets of $5,000,000 or less and our ADSs have a
market price per ADS of less than $5.00, transactions in our ADSs may be subject
to the “penny stock” rules promulgated under the Securities Exchange Act of
1934. Under these rules, broker-dealers who recommend such securities to persons
other than institutional accredited investors must:




·
            make
      a special written suitability determination for the
    purchaser;





·
            receive
      the purchaser’s written agreement to the transaction prior to
      sale;





·
            provide
      the purchaser with risk disclosure documents which identify certain risks
      associated with investing in “penny stocks” and which describe the market
      for these “penny stocks” as well as a purchaser’s legal remedies;
      and





·
            obtain
      a signed and dated acknowledgment from the purchaser demonstrating that
      the purchaser has actually received the required risk disclosure document
      before a transaction in a “penny stock” can be
  completed.




21


If our
ADSs become subject to these rules, broker-dealers may find it difficult to
effectuate customer transactions and trading activity in our securities may be
adversely affected. As a result, the market price of our securities may be
depressed, and you may find it more difficult to sell our
securities.





Sales
of a substantial number of ordinary shares or ADSs in the public market by our
existing shareholders could cause the price of our ADSs to fall.





Sales of
a substantial number of our ordinary shares or ADSs in the public market or the
perception that these sales might occur, could depress the market price of our
ADSs and could impair our ability to raise capital through the sale of
additional equity securities. We are unable to predict the effect that sales may
have on the prevailing market price of our ADSs.





All of
our existing shareholders prior to our May 2010 offering were subject to lock-up
agreements with the underwriters of the offering that restricted the
shareholders’ ability to transfer ordinary shares or ADSs until expiration of
the lock-up period in November 2010. The lock-up agreements limited the number
of ordinary shares or ADSs that may be sold immediately following the public
offering. Subject to certain limitations, approximately 10,000,000 of our total
outstanding shares are now eligible for sale. Sales of ordinary shares by these
shareholders could have a material adverse effect on the trading price of our
ADSs.





Future
sales and issuances of our ordinary shares or ADSs, or rights to purchase our
ordinary shares or ADSs, including pursuant to our 2010 Omnibus Incentive Plan,
could result in additional dilution of the percentage ownership of our
shareholders and could cause the price of our ADSs to fall.





We expect
that significant additional capital will be needed in the future to continue our
planned operations. To the extent we raise additional capital by issuing equity
securities, our shareholders may experience substantial dilution. We may sell
ordinary shares, ADSs, convertible securities or other equity securities in one
or more transactions at prices and in a manner we determine from time to time.
If we sell ordinary shares, ADSs, convertible securities or other equity
securities in more than one transaction, investors may be materially diluted by
subsequent sales. Such sales may also result in material dilution to our
existing shareholders, and new investors could gain rights superior to our
existing shareholders.





We
have broad discretion in the use of the net proceeds from our May 2010 public
offering and may not use them effectively.





Our
management has broad discretion in the application of the net proceeds of
approximately $15.2 million from our May 2010 public offering, including for any
of the purposes described in the prospectus relating to the offering, and you
will not have the opportunity as part of your investment decision to assess
whether the net proceeds are being used appropriately. Because of the number and
variability of factors that will determine our use of the net proceeds from this
offering, their ultimate use may vary substantially from their currently
intended use. The failure by our management to apply these funds effectively
could harm our business. Pending their use, we may invest the net proceeds from
this offering in short-term, investment-grade, interest-bearing securities.
These investments may not yield a favorable return to our
shareholders.





We
do not intend to pay dividends on our ordinary shares, so any returns will be
limited to the value of our ADSs.





We have
never declared or paid any cash dividend on our ordinary shares. We currently
anticipate that we will retain future earnings for the development, operation
and expansion of our business and do not anticipate declaring or paying any cash
dividends for the foreseeable future. Any return shareholders will therefore be
limited to the value of their ADSs.





As
the rights of shareholders under British Virgin Islands law differ from those
under U.S. law, you may have fewer protections as a shareholder.





Our
corporate affairs will be governed by our memorandum of association and articles
of association, the BVI Business Companies Act, 2004, or the BVI Act, of the
British Virgin Islands and the common law of the British Virgin Islands. The
rights of shareholders to take legal action against our directors, actions by
minority shareholders and the fiduciary responsibilities of our directors under
British Virgin Islands law are to a large extent governed by the BVI Act and the
common law of the British Virgin Islands. The common law of the British Virgin
Islands is derived in part from comparatively limited judicial precedent in the
British Virgin Islands as well as from English common law, which has persuasive,
but not binding, authority on a court in the British Virgin Islands. The rights
of our shareholders and the fiduciary responsibilities of our directors under
British Virgin Islands law are not as clearly established as they would be under
statutes or judicial precedents in some jurisdictions in the United States. In
particular, the British Virgin Islands has a less developed body of securities
laws as compared to the United States, and some states (such as Delaware) have
more fully developed and judicially interpreted bodies of corporate
law.




22


As a
result of all of the above, holders of our ADSs may have more difficulty in
protecting their interests through actions against our management, directors or
major shareholders than they would as shareholders of a U.S.
company.





British
Virgin Islands companies may not be able to initiate shareholder derivative
actions, thereby depriving shareholders of the ability to protect their
interests.





British
Virgin Islands companies may not have standing to initiate a shareholder
derivative action in a federal court of the United States. The circumstances in
which any such action may be brought, and the procedures and defenses that may
be available in respect to any such action, may result in the rights of
shareholders of a British Virgin Islands company being more limited than those
of shareholders of a company organized in the United States. Accordingly,
shareholders may have fewer alternatives available to them if they believe that
corporate wrongdoing has occurred. The British Virgin Islands courts are also
unlikely to recognize or enforce against us judgments of courts in the United
States based on certain liability provisions of U.S. securities law; and to
impose liabilities against us, in original actions brought in the British Virgin
Islands, based on certain liability provisions of U.S. securities laws that are
penal in nature. There is no statutory recognition in the British Virgin Islands
of judgments obtained in the United States, although the courts of the British
Virgin Islands will generally recognize and enforce the non-penal judgment of a
foreign court of competent jurisdiction without retrial on the
merits.




The
laws of the British Virgin Islands provide little protection for minority
shareholders, so minority shareholders will have little or no recourse if the
shareholders are dissatisfied with the conduct of our affairs.





Under the
law of the British Virgin Islands, there is little statutory law for the
protection of minority shareholders other than the provisions of the BVI Act
dealing with shareholder remedies. The principal protection under statutory law
is that shareholders may bring an action to enforce the constituent documents of
the corporation, our memorandum of association and articles of association.
Shareholders are entitled to have the affairs of the company conducted in
accordance with the general law and the memorandum of association and articles
of association.





There are
common law rights for the protection of shareholders that may be invoked,
largely dependent on English company law, since the common law of the British
Virgin Islands is limited. Under the general rule pursuant to English company
law known as the rule in Foss v. Harbottle, a court will generally refuse to
interfere with the management of a company at the insistence of a minority of
its shareholders who express dissatisfaction with the conduct of the company’s
affairs by the majority or the board of directors. However, every shareholder is
entitled to have the affairs of the company conducted properly according to law
and the company’s constituent documents. As such, if those who control the
company have persistently disregarded the requirements of company law or the
provisions of the company’s memorandum of association and articles of
association, then the courts will grant relief. Generally, the areas in which
the courts will intervene are the following: (1) an act complained of which is
outside the scope of the authorized business or is illegal or not capable of
ratification by the majority; (2) acts that constitute fraud on the minority
where the wrongdoers control the company; (3) acts that infringe on the personal
rights of the shareholders, such as the right to vote; and (4) where the company
has not complied with provisions requiring approval of a majority of
shareholders, which are more limited than the rights afforded minority
shareholders under the laws of many states in the United States.





Anti-takeover
provisions in our memorandum of association and articles of association and our
right to issue preference shares could make a third-party acquisition of us
difficult.





Some
provisions of our memorandum of association and articles of association may
discourage, delay or prevent a change in control of our company or management
that shareholders may consider favorable, including provisions that authorize
our board of directors to issue preference shares in one or more series and to
designate the price, rights, preferences, privileges and restrictions of such
preference shares.




23


You
may not have the same voting rights as the holders of our ordinary shares and
must act through the depositary to exercise your rights.





Holders
of our ADSs will not be able to exercise voting rights attaching to the shares
evidenced by our ADSs on an individual basis. Holders of our ADSs will appoint
the depositary or its nominee as their representative to exercise the voting
rights attaching to the shares represented by the ADSs. You may not receive
voting materials in time to instruct the depositary to vote, and it is possible
that you, or persons who hold their ADSs through brokers, dealers or other third
parties, will not have the opportunity to exercise a right to vote. Upon our
written request, the depositary will mail to you a shareholder meeting notice
which contains, among other things, a statement as to the manner in which your
voting instructions may be given, including an express indication that such
instructions may be given or deemed given to the depositary to give a
discretionary proxy to a person designated by us if no instructions are received
by the depositary from you on or before the response date established by the
depositary. However, no voting instruction shall be deemed given and no such
discretionary proxy shall be given with respect to any matter as to which we
inform the depositary that (i) we do not wish such proxy given, (ii) substantial
opposition exists, or (iii) such matter materially and adversely affects the
rights of shareholders. We will make all reasonable efforts to cause the
depositary to extend voting rights to you in a timely manner, but you may not
receive the voting materials in time to ensure that you can instruct the
depositary to vote your ADSs. Furthermore, the depositary and its agents will
not be responsible for any failure to carry out any instructions to vote, for
the manner in which any vote is cast or for the effect of any such vote. As a
result, you may not be able to exercise your right to vote and you may lack
recourse if your ADSs are not voted as you requested. In addition, in your
capacity as an ADS holder, you will not be able to call a shareholders’
meeting.




You
may not be able to participate in rights offerings and may experience dilution
of your holdings as a result.





We may
from time to time distribute rights to our shareholders, including rights to
acquire our securities. However, we may not, and under the deposit agreement for
the ADSs, the depositary will not, offer those rights to ADS holders unless both
the rights and the underlying securities to be distributed to ADS holders are
registered under the Securities Act, or the distribution of them to ADS holders
is exempted from registration under the Securities Act with respect to all
holders of ADSs. We are under no obligation to file a registration statement
with respect to any such rights or underlying securities or to endeavor to cause
such a registration statement to be declared effective. In addition, we may not
be able to rely on an exemption from registration under the Securities Act to
distribute such rights and securities. Accordingly, holders of our ADSs may be
unable to participate in our rights offerings and may experience dilution in
their holdings as a result.





You
may be subject to limitations on transfer of your ADSs.





Your ADSs
are transferable on the books of the depositary. However, the depositary may
close its transfer books at any time or from time to time when it deems
expedient in connection with the performance of its duties. In addition, the
depositary may refuse to deliver, transfer or register transfers of ADSs
generally when our books or the books of the depositary are closed, or at any
time if we or the depositary deem it advisable to do so because of any
requirement of law or of any government or governmental body, or under any
provision of the deposit agreement, or for any other reason.





We
may be a passive foreign investment company, of PFIC, which could lead to
additional taxes for U.S. holders of our ADSs or ordinary shares.





We do not
expect to be, for U.S. federal income tax purposes, a passive foreign investment
company, or a PFIC, which is a foreign company for which, in any given taxable
year, either at least 75% of its gross income is passive income, or investment
income in general, or at least 50% of its assets produce or are held to produce
passive income, for the current taxable year, and we expect to operate in such a
manner so as not to become a PFIC for any future taxable year. However, because
the determination of PFIC status for any taxable year cannot be made until after
the close of such year and requires extensive factual investigation, including
ascertaining the fair market value of our assets on a quarterly basis and
determining whether each item of gross income that we earn is passive income, we
cannot assure you that we will not become a PFIC for the current taxable year or
any future taxable year. If we are or become a PFIC, a U.S. holder of our ADSs
or ordinary shares could be subject to additional U.S. federal income taxes on
gain recognized with respect to the ADSs or ordinary shares and on certain
distributions, plus an interest charge on certain taxes treated as having been
deferred under the PFIC rules. Non-corporate U.S. holders will not be eligible
for reduced rates of taxation on any dividends received from us if we are a PFIC
in the taxable year in which such dividends are paid or in the preceding taxable
year.


24


ITEM 4.  INFORMATION
ON THE COMPANY.





A.HISTORY AND
DEVELOPMENT OF THE COMPANY.





Overview





We are a
holding company and conduct our operations through a contractually-controlled
entity in the PRC named Xi’an Kingtone Information Technology Co., Ltd., a PRC
limited liability company (“Kingtone Information”) that develops and provides
mobile enterprise solutions in the PRC. In May 2010, we consummated an initial
public offering of our American Depository Shares, or ADSs, for gross proceeds
of $16 million, and our ADSs were listed on the Nasdaq Capital Market under the
ticker symbol “KONE”.





Kingtone
Information was incorporated in Xi’an in Shaanxi Province as a company limited
by stocks on December 28, 2001. When it was incorporated, it had a registered
capital of RMB 50 million and its name was Xi’an TechTeam Intelligent Technology
Stock Co., Ltd. Kingtone Information increased its registered capital to RMB
56,000,000 on June 16, 2008 and changed its name to the current name on November
5, 2003. Kingtone Information is majority-owned by Mr. Tao Li, our
chairman.





In
December 2009, we consummated a number of related transactions through which we
acquired control of Kingtone Information. Xi’an Softech Co., Ltd. (“Softech”), a
company incorporated on November 27, 2009 under the laws of the PRC as a wholly
foreign-owned enterprise (“WFOE”), entered into a series of agreements (the
“Control Agreements”) with Kingtone Information and the shareholders of Kingtone
Information pursuant to which Softech was granted full managerial and economic
control over Kingtone Information, effectively rendering Kingtone Information a
contractual subsidiary of Softech. We entered into this contractual-control
relationship in order to comply with certain PRC regulations relating to the
nature and sensitivity of certain aspects of Kingtone Information’s business;
namely, its work on PRC government projects. See “Item 4. – Information on the
Company – C.  Organizational Structure – Contractual Arrangements with
Kingtone Information and Its Respective Shareholders” for further information on
these contractual arrangements.





Softech
is a wholly-owned subsidiary of Topsky Info-tech Holdings Pte Ltd. (“Topsky”), a
company incorporated under the laws of Singapore on November 3, 2009. Topky, in
turn, is our wholly-owned subsidiary. We were incorporated under the name ReiZii
Capital Management Ltd. in the British Virgin Islands on October 27, 2009 and
changed our name to Kingtone Wirelessinfo Solution Holding Ltd (“Kingtone
Wireless”) on December 17, 2009.





Xtra
Heights Management Ltd. (“Xtra”), which was incorporated in the British Virgin
Islands on September 29, 2009, owned 6,806,250 shares of Kingtone Wireless,
representing approximately 68.1% of the total issued and outstanding shares of
Kingtone Wireless prior to our May 2010 public offering; SCGC Capital Holding
Company Limited (“SCGC Capital”), which was incorporated in the British Virgin
Islands on November 16, 2006, owned 1,060,714 shares of Kingtone Wireless,
representing approximately 10.6% of the total issued and outstanding shares of
Kingtone Wireless prior to our May 2010 public offering; Big Leap Enterprises
Limited (“Big Leap”), which was incorporated in the British Virgin Islands on
October 28, 2009, owns 1,060,714 shares of Kingtone Wireless, representing
approximately 10.6% of the total issued and outstanding shares of Kingtone
Wireless prior to our May 2010 public offering; Silver Avenue Overseas Inc.
(“Silver Avenue”), which was incorporated in the British Virgin Islands on
October 28, 2009, owned 972,322 shares of Kingtone Wireless representing,
approximately 9.7% of the total issued and outstanding shares of Kingtone
Wireless prior to our May 2010 public offering; Millennium Group Inc.
(“Millennium”), a California corporation incorporated on June 29, 1994, owned
100,000 shares of Kingtone Wireless representing approximately 1% of the total
issued and outstanding shares of Kingtone Wireless prior to our May 2010 public
offering. Millennium received such shares in consideration for consulting
services provided to Kingtone Information.




In
exchange for causing Kingtone Information to enter into the Control Agreements,
the shareholders of Kingtone Information received the right to acquire ordinary
shares of Kingtone Wireless, through their nominee entities (Xtra, SCGC, Big
Leap and Silver Avenue), in the same relative ownership percentage as they held
in Kingtone Information prior to our May 2010 public offering and before giving
effect to the 100,000 ordinary shares issued to Millennium. As part of the
restructuring, certain of the shareholders of Kingtone Information entered into
a Call Option Agreement dated as of December 15, 2009 with Xtra and Sha Li,
Xtra’s sole shareholder, pursuant to which the shareholders of Kingtone
Information are entitled to purchase up to an aggregate of 6,806,250 shares of
Kingtone Wireless over time if certain conditions are satisfied. See “Item 4 –
Information About the Company – C. Organizational Structure – Call Option
Agreements” between Xtra Heights Management Ltd. and Shareholders of Kingtone
Information” for further information on the Call Option Agreements. The
remaining Kingtone Information shareholders have unwritten understandings with
SCGC, Big Leap and Silver Avenue, as applicable, and their respective nominee
shareholders, pursuant to which the Kingtone Information shareholders are
entitled to purchase up to an aggregate of 3,093,750 of our ordinary shares upon
the satisfaction of conditions similar to those set forth in the Call Option
Agreements with Xtra.




25


Xtra is
owned by Sha Li, a Singapore resident. However, pursuant to the call options
agreements, the beneficial owners of our ordinary shares held by Xtra are as set
forth in the table below, which share amounts are equal to each beneficial
owner’s respective pro rata equity interest in Kingtone
Information:




Name
              
              Relationship to Kingtone
      Wireless
              
              SharesTao
      Li
              
              Chairman
              
              6,099,107Peng
      Zhang
              
              Chief
      Executive Officer
              
              35,357Li
      Wu
              
              Director
              
              107,839Pengguo
      Xi
              
              Vice
      President of Research and Development
              
              35,357Xianying
      Chen
              
              Vice
      President of Application Development
              
              35,357Wei
      Pu
              
              Softech
      employee
              
              102,536Yu
      Fan Zhang
              
              Softech
      employee
              
              88,393Wei
      Zhang
              
              Softech
      employee
              
              88,393Xiao
      Bin Zhang
              
              Softech
      employee
              
              53,036Wei
      Wang
              
              Softech
      employee
              
              37,125June
      Ma
              
              Former
      Chief Technology Officer
              
              35,357Jian
      Ping Li
              
              Former
      Softech employee
              
              88,393




SCGC
Capital is owned by Shenzhen Capital (Hong Kong) Company Limited, a Hong Kong
company. Big Leap is owned by Xuetao Chen, a PRC resident. Silver Avenue is
owned by Hu Gao, a PRC resident. Millennium is owned by Jonathon Mork, a U.S.
resident. None of our officers or directors is the beneficial owner of the
ordinary shares held of record by SCGC Capital, Big Leap or Silver
Avenue.




Corporate
Information





Our
principal executive offices are loated at 3/F, Area A, Block A, No. 181 South
Taibai Road in Xi’an,Shaanxi
Province, People’s
Republic of China 710065.  Our website is
www.kingtoneinfo.com.  We routinely post important information on our
website.  The information contained on our website is not a part of
this annual report





Our agent
for service of process in the United States is Vcorp Services LLC with an
address at 20 Robert Pitt Drive, Suite 214, Monsey, NY 10952.




B.BUSINESS
OVERVIEW.





We are a
China-based developer and provider of mobile enterprise solutions. Mobile
enterprise solutions allow company personnel whose work function requires
mobility (as opposed to operating from a single work station) to be connected
with enterprise information technology, or IT systems, including Enterprise
Asset Management (EAM), Enterprise Resource Planning (ERP), Supply Chain
Management (SCM), and Customer Relationship Management (CRM). Our software
enables such systems to get extended to personnel in the field using wireless
devices such as smart phones, PDAs, cameras, barcode scanners, portable
printers, GPS devices, and tablet computers. Mobile enterprise solutions also
include custom software applications for specific industries and
businesses.




26


Our
mobile enterprise solutions are built on our proprietary core middleware
platform consisting of standardized modules. This core middleware platform
allows our solutions to seamlessly integrate with our customers’ existing
information management systems. The core middleware platform can host an array
of standardized and scalable applications developed by us or by others. This
structured design allows us to timely and cost-effectively meet our customers’
specific requirements, and to respond to their changing needs.





Mobile
enterprise solutions are generally aimed at reducing processing times and
facilitating the flow of information among people and systems. Mobile computing
allows field workers to communicate and interact more efficiently with their
central operations, and vice versa. Enterprises are able to capture more
accurate and timely information, and to achieve major reductions in paperwork
and administration. Mobile enterprise solutions can be used to put important
data in the hands of field workers, thus improving decision-making and
productivity in the field. Mobile enterprise solutions improve efficiency in
everyday functions including work dispatch, sales, inspections, repairs,
deliveries, tracking and scheduling. Mobile enterprise solutions can also be
used within factory settings, where wireless data connections are used to
improve central control and monitoring of production and automations systems.
For example, we designed and implemented a solution for a PRC-based petroleum
company that allows plant managers to wirelessly monitor its production lines
from off-site or remote locations.





The
rollout of 3G wireless networks in China is increasing customer interest in
mobile enterprise solutions. The increased bandwidth of 3G enables greater
functionality and performance. In addition, touchscreen smart phones and other
standard consumer devices that utilize 3G are able to be used for many
applications that formerly required costly custom devices. These technology
trends are positively affecting our business. We are also working with the three
PRC telecom carriers, China Telecom, China Mobile, and China Unicom, on joint
marketing and sales efforts to enterprises and government agencies. In addition,
we are working with China Telecom to jointly develop and promote a custom,
next-generation mobile solution for public safety agencies, including police and
fire forces in certain provinces in China.





We
typically act as a total solution provider, packaging our software with various
third-party hardware and related equipment. We are headquartered in Xian, China
and sell our products widely throughout China.





Our
Industry — Mobile Enterprise Software Industry





We
operate in the mobile enterprise software industry in China. We believe the
mobile enterprise market in China benefits from compelling industry fundamentals
such as increasing investment in IT, the country’s 3G rollout, and increasing
demand for wireless applications within working environments.





Information
Technology Development in China





Information
technology has become an integral part of Chinese society and an important
engine of growth for the economy. According to an IDC article dated October 22,
2009, IT spending by the PRC government in 2009 was expected to total RMB 53.65
billion, and is predicted to reach RMB 73.36 billion in 2013. Furthermore,
according to an article published by the China Computer Newspaper dated March 3,
2010, government departments and sectors such as transportation, energy,
healthcare, and environmental protection are among those with high growth rates
in IT investment. IDC states that as the IT hardware market has become more
fully developed, the focus of IT investment has gradually shifted from hardware
infrastructure to software applications. From 2008 to 2013, the annual compound
growth rate of IT hardware is projected to be 5.6%, compared to the annual
compound growth rates of software and IT services of 13.2% and 14%,
respectively, during the same period, according to IDC.




According
to a report dated on November 24, 2010 by MIIT, China’s software industry
revenue in the first ten months of 2010 surged to 1.09 trillion, or $160.3
billion, an increase of 29.9% compared to the same period in
2009.  This also represented an increase of over ten times the amount
of software industry revenue compared to the same period in 2001, equivalent to
an annual growth rate of 38% over the period.





This
supports our belief that market acceptance of enterprise mobility applications,
solutions and systems usually accelerates when potential customers’ back-end
information technology systems are fairly developed and they start to invest in
applications. By indentifying sectors with high growth rates of IT investment,
we can exploit opportunities to expand our business by capturing the growth in
targeted vertical industry markets.




27


3G
Rollout in China





On
December 31, 2008, the State Council of the PRC, or the State Council, announced
the approval of 3G license issuances to the three telecom operators, namely
China Telecom, China Mobile and China Unicom, and the Ministry of Industry and
Information Technology (MIIT) officially issued 3G licenses to those entities on
January 7, 2009. Third generation wireless standard, or 3G, is a family of
standards for mobile telecommunication. 3G communications allow simultaneous use
of speech and data services at higher data rates than services developed under
prior generation standards.





According
to a January 2009 report by CITIC Jiantou Securities, it is estimated that
investment in 3G between 2009 and 2011 by the three Chinese telecom carriers
will total $44.0 billion. According to the MIIT, the 3G industry is expected to
generate RMB 1 trillion, or $146.5 billion, in demand in the next three years.
As mobile carriers further invest in applications and content, we believe the
demand for enterprise mobile software/middleware will experience significant
growth.





According
to an article on November 26, 2010 published by China Daily, the MIIT reports
that the number of 3G mobile telecommunication users in China reached 38.64
million by the end of October, 2010.  Of those users, approximately
25.38 million were new subscribers in the past year. The MIIT emphasized that
China aimed to have 150 million 3G mobile users, while investment in 3G
development would hit RMB 400 billion, or $59.7 billion, by 2011.





We
believe the issuance of 3G licenses is expected to drive the growth of an
enterprise wireless chain comprised of telecommunications service
providers/carriers, converged mobile device providers, IT vendors, and
software/middleware providers. Mobile software/middleware provides key platforms
across which managed enterprise mobility services are deployed. We believe the
3G rollout and the upcoming commercial deployment will both inspire and
facilitate new and diversified customer applications for mobile enterprise
software.





Mobile
Enterprise Solutions in China





We
believe that China's enterprise mobility market is experiencing rapid
development, driven primarily by the development of the mobile industry. In its
January 2008 report, IDC forecasted the enterprise mobility market in China to
reach $15.56 billion in 2011 with a forecasted compound annual growth rate of
6.0% from 2007 to 2011.





The
growth of mobile enterprise solutions is driven by the demand for increased
business efficiencies and new functionalities. In many modern businesses,
operations are distributed over a large area, with individual operating
elements. Mobile enterprise solutions allow organizations to enable
mission-specific field and long-distance information management on a real-time
basis. Mobile enterprise solutions consist of packaged, mission-specific and
industry-specific applications and software designed especially for enterprise
using wireless connectivity.





Enterprise
wireless applications can be tailored to meet the specific needs of many
industry sectors, such as manufacturing, energy, transportation, logistics,
utilities, healthcare, and government agencies (such as police and emergency
services). These custom software solutions include production control
automation, sales force automation, field force automation, customer
relationship management, enterprise resource planning, supply chain management,
operations management, inventory management, time and expense, logistics, and
other collaborative items.





Wireless
enablement for an enterprise and its many activities is now a prominent trend
according to the IDC report. With the rapid growth of the domestic economy,
improvements in bandwidth, and increased mobility in working environments,
enterprises and government agencies are increasing spending on the construction
of mobile platforms and applications to extend their functionality outside of
stationary locations. Mobile enterprise solutions including mobile middleware
software, mobile security software, mobile device management software, and
mobile enterprise applications have fueled the growth of both business data and
video/voice usage, which are also major driving factors in communication
spending.




Our
Strengths





We
believe the following strengths differentiate us from our
competitors:


28


Proprietary
suite of mobile enterprise solutions offerings





We are
among the first of Chinese companies to focus predominantly on developing mobile
enterprise solutions. Since we began our operations in 2001, we have completed
many successful client installations (approximately 140) and have accumulated
special knowledge and expertise that has directly resulted in the creation and
development of our proprietary adaptable middleware platform, and an array of
software applications. A client installation is considered “successful” when we
have developed the solutions/systems according to the customer’s contractual
specifications and have otherwise fulfilled all other material terms set forth
in the sales contract, including installing, configuring and making the
solutions/systems operational within the specified time periods. Additionally,
to be considered “successful”, a customer must have test run the
solutions/systems and indicated its satisfaction by signing the acceptance
letter.





We
believe our mobile enterprise software is superior in breadth of application.
Our middleware platform and software applications can be selectively packaged to
create tailored solutions that can be installed on both new systems and existing
frameworks.





Strong
development capability





We have
taken advantage of the significant talent pool within the universities and
research institutes in Xi’an China, where our operations are located, to
establish a dedicated research and development team. As of September 30, 2010,
we had 97 engineers dedicated to technology development and customer
implementations. Our development engineers have diverse technical backgrounds
and are led by experienced development practitioners. We have been able to track
and incorporate the latest technologies into our software to continuously
improve our core middleware platform and applications, and to develop new
functionalities.





Industry
knowledge





We work
closely with our customers to build upon our understanding of our customers’
operational processes and requirements. Our sales teams coordinate closely with
our development teams to reflect those requirements in our solutions. As a
result, our mobile enterprise solutions fit smoothly into our customers’
operations. In addition, our presence in the mobile enterprise solution market
since its inception provides us with domain knowledge which we use to help
position us for future growth. We are continually receiving feedback from this
evolving market to anticipate emerging sectors and future product
requirements.





Growing
track record





In its
January 2008 report, IDC forecasts the enterprise mobility market in China will
reach $15.6 billion in 2011. Virtually all businesses and public service
operations have the potential to experience efficiencies and new functionalities
with mobile enterprise solutions. We have successfully completed projects for
clients, such as the Central Government Security Bureau and Beijing Emergency
Response Center, from many verticals. These serve as high-profile case studies
and enhance our reputation in the marketplace and, thus, provide a key
endorsement for the quality and stability of our product offerings. Moreover, by
having our main corporate office in Xi’an, China, we have benefited from the
continued surge in IT investment by the Western provinces.





Joint
efforts with Chinese wireless telecom carriers





We
benefit from joint business development efforts with China Telecom, China Mobile
and China Unicom. These wireless telecom carriers have a strategic interest in
the advancement of the mobile enterprise in China. Our sales professionals work
closely with those companies to access their large pools of corporate customers.
Together we make joint presentations to candidate customers, where the carrier
will provide the wireless network and we will provide the mobile enterprise
solution. We have unwritten cooperative relationships with all three telecom
carriers to co-promote next-generation mobile solutions for various other
applications in China. In addition we have a formal co-marketing agreement with
China Telecom to co-promote next-generation mobile solutions for law enforcement
applications in Shaanxi province. For the year ended September 30, 2010, we
completed a total of 19 customer projects with the three telecom carriers.
Typically under these arrangements, we jointly market our products and services
for customer applications. Customers contract with the telecom carrier and we
provide our solutions to the customer and receive our remuneration from the
telecom carrier.


29


Our
Strategy





Seize
the opportunity presented by 3G adoption in China





China’s
legacy wireless networks (2G, 2.5G and 2.75G) have limited bandwidth and,
consequently, limit the functional potential of mobile enterprise applications.
Since the issuance of 3G licenses in January 2009, we have been working with
wireless telecom carriers on joint marketing initiatives aimed at increasing the
enterprise utilization of 3G. Our telecom partners are seeking new revenue
streams to offset the diminishing opportunity for voice services, and we are
offering solutions to enable wider forms of mobile computing that take advantage
of the 3G bandwidth.





Recruit,
train and retain engineering professionals





To
sustain our high rate of growth, we must continue to add to our technical and
business development teams through selective recruiting of university graduates
and qualified lateral hires. Once employed, we provide our technical employees
with a comprehensive training program to understand our technologies, market and
product offerings.





Expand
Operations





We
purchased a six-story building in Xi’an to house anticipated expansion of our
headcount and business activities. This building, which we named “Kingtone
Center”, will house our headquarters and development teams, and provide
dedicated facilities for customer demonstrations of our products and abilities.
We believe Chinese customers have more confidence in the financial strength of
businesses that have their own building. We expect the Kingtone Center to have a
positive effect on our marketing and expansion activities.





Invest
more in research and development to create more successful software
products





To keep
our competitive edge, we are launching a new research and development program to
keep abreast of the latest developments in wireless standards and information
management technologies, and to anticipate future customer needs. We also plan
to invest in developing new applications for anticipated high-growth, vertical
industry markets. Spending will be focused on testing equipment, including
laboratories and 3G simulation systems, as well as expendable materials used
during experiments. We plan to allocate a large portion of space in our new
Kingtone Center facility to house our enlarged development team and increased
research and development activities.





Pursue
strategic acquisition opportunities





We will
from time to time consider acquisitions or alliances that enable us to acquire
talented and experienced software development personnel, enhance our
technological capabilities and competitive advantages or provide licensing or
recurring revenue opportunities, and propel our expansion.





Our
Products and Solutions





We use
various combinations of our existing middleware software modules, together with
custom application software that we develop, to create a complete mobile
enterprise software solution. For some customers, we provide the mobile
enterprise software solution only. For other customers, we provide a complete
wireless system solution, including mobile enterprise software and all hardware
(our own plus third party hardware such as servers and wireless
devices).





An
example of our mobile enterprise software products is an insurance industry
application that we developed with China Mobile. Our mobile enterprise software
for this application enables an insurance company’s field personnel to receive
their dispatch information and do accident reporting and claim processing while
in the field. Form data is inputted electronically and high-resolution photos
can be collected and filed over wireless, from the accident site. For this
application, we provide the software only, while China Mobile provides hardware
and the network services.




An
example of our complete wireless systems (software and hardware) is a mobile
video surveillance system that we developed for the Beijing Emergency Response
Center. Using servers and cameras combined with our mobile enterprise software,
we provided a complete wireless system that enables the Beijing Emergency
Response Center to collect and monitor video from its patrol cars. This system
can improve the speed and quality of the emergency response by enabling
supervisors to more quickly and completely understand an emergency
situation.


30


Our
mobile enterprise software consists of core middleware and a broad array of
software applications. Our middleware serves as an intelligent platform that
operates on top of our customers’ operating systems and management information
systems. Our software applications can be integrated onto our middleware
platform as well as attached mobile devices (mobile phones, PDAs, laptops, etc.)
to perform essential tasks or extend our customers’ existing applications over
wireless communications to fixed or mobile nodes. We have combined elements of
both browser/server and client/server frameworks in our software design to allow
for both reliable and flexible access by authorized personnel, virtually at
anytime and from anywhere.





Core
Middleware Platform





Our core
middleware platform resides on the customers’ servers. It is comprised of two
layers of modules. The General
Purpose Layer consists of mandatory software modules required to support
the application software plugged into the middleware platform. The Basic Layer modules are also
mandatory components that perform basic functions, such as communicating with a
variety of hardware and software platforms, computer operating systems,
networking and database products, coordinating and synchronizing the tasks
performed by our solutions, and adding information security to data
transmission.





Software
Applications





We have
developed two types of software applications that can be selectively overlaid
with the middleware to complete a packaged solution, namely, Information and
Communication-Technology Converged, or ICT-converged, and Vertical Industry
Applications.





ICT-converged
applications perform generic functionalities that may be applied across multiple
industries. Vertical Industry Applications, on the other hand, are non-generic
and perform a specific task required by a particular industry. Both types of
applications can reside on converged mobile devices (“Terminal-end
Applications”), or on computer servers (“Server-end Applications”). Our
Terminal-end Applications work on a variety of mobile devices and mobile
operating systems.




In the
terminal-end, we have information security, RFID, location-based service, steam
media, information exchange, and management and configuration applications. The
information security application encrypts or decrypts the information to ensure
sensitive or classified information of our vertical industry customers can be
transmitted over the public wireless telecommunication network safely. Installed
with our RFID application and appropriate chips, a mobile phone can be turned
into a RFID reader and writer for faster information input in certain vertical
industry customers, such as the police and administration of industry and
commerce. Our location-based service application enables a mobile phone to
receive information relevant to its location. This application can greatly
improve the operating efficiency of the mobile workforce of some of our vertical
industry customers’ by pushing timely information to them. Our steam media
application turns a mobile phone into a moveable video monitor and collector to
facilitate decision-making by delivering live pictures anywhere anytime to the
decision-maker. The information exchange application automatically synchronizes
information in the mobile phone and in the back-end database.





Our
Hardware Products





Portable Video Server.Our portable video
server for vehicles or individuals can be integrated into the overall solution
or purchased separately to add live mobile video surveillance or transmission
functions to our customers’ existing systems.





We design
the server, including the breadboard, the layout of internal structures, the
specifications of the electronic components, and the I/O specifications. We
currently outsource the production of our hardware to third-party manufacturers.
We program the embedded software and write the software into the portable video
servers. We also program the software loaded on our customers’ central servers
to work with our portable video servers. By using our portable video server
solution, our customers enjoy higher quality video and experience better
transmission compared to the generic webcam solutions available in the
marketplace. Many industries and applications require this superior
quality.


31


Tailoring
Our Solutions





Our engineers in our internal solution
implementation department develop the tailored mobile enterprise solution
according to our customer’s requirements. The tailored solution includes our
core middleware platform and a selected combination of our software
applications, and sometimes hardware we develop ourselves or outsource to
third-party vendors. The tailored solution is delivered as a turn-key
package.





Research
and Development





At
September 30, 2010, we had 97 engineers devoted to developing our software
products. They are currently all located in our main corporate office in Xi’an,
China.





Our
success depends on continued enhancement of our current products and our ability
to develop new technologically advanced products that meet the increasingly
sophisticated requirements of our customers.  Our research and
development center is responsible for conducting all of our basic research and
development activities. The focus of our research and development personnel is
on developing and improving our core middleware platform, our CIT-converged
applications and our hardware products. Currently, there are 31 professionals in
our research and development center, including two with doctorate degrees and
two with other post-graduate degrees, with diverse backgrounds in computer
science and technology, telecommunication engineering, software engineering and
physical electronics.





We
believe our professionals are adept at utilizing the latest technical
developments in our industry to create new products and functionality. They also
receive customer feedback from the sales and marketing team to develop
applications demanded by our customers in certain sectors.





At
September 30, 2010, we had 48 engineers in our Vertical Industry Application
Development Department, which is responsible for developing vertical industry
applications. At September 30, 2010, we had 18 engineers in our Automation
Telematics Application Development Department that are responsible for
developing automation telematics applications, which is a sub-group of vertical
industry applications required by customers in manufacturing sectors with high
degree of automation in their operations. Engineers in these two departments are
also responsible for implementing the solutions for our customers.





Sales
and Marketing





We sell
our products and services mainly through our sales and marketing team, which is
primarily based at our headquarters in Xi’an, China and our branch office in
Beijing, China. We had 38 professionals in sales and marketing as of September
30, 2010.





To date,
we have sold our mobile enterprise solutions to customers in 27 provinces,
municipalities and autonomous regions in the PRC. In addition to those in Xi’an
and Beijing, we have local sales teams that maintain close contact with our
business partners and customers. We ensure that most of our sales and marketing
professionals also have a technical background to make them competent for
specialized IT sales, such as mobile enterprise solutions. Our sales and
marketing professionals are organized into two teams: (i) Vertical Industry
Application and (ii) Automation Telematics.





The
Vertical Industry Application sales force targets general business and
government customers. They work closely with sales professionals at China’s
wireless telecommunication carriers (China Telecom, China Mobile and China
Unicom), under general cooperation framework agreements to develop new
customers. We believe the carriers are motivated to improve their average
revenue per user, or APRU, by selling integrated services to enterprise
customers. However, they generally lack the ability to develop applications to
overlay on their basic data communication network. In most cases, the carriers
directly contract with us to provide the wireless application solution. In other
cases, we sell directly to our enterprise customers or are engaged as a
sub-contract or by other IT companies with the customer
relationship.





Our
Automation Telematics Application sales team focuses on industrial automation
projects. These are mainly factory-specific wireless solutions that enable
automated or semi-automated factory production lines, using our proprietary
middleware and wireless capability. Automation Telematics utilizes wireless over
short distances in a wide variety of usages that enable great automation control
and production line monitoring and management. For such projects, typically we
are contracted directly by the project owners or sub-contracted by the general
contractors to provide automation telematics solutions. In most cases, building
our software into large and complex physical systems (such as automated
production lines) enables us to make a greater profit than if we sold our
software independently.


32


Sales
Process





Our sales
process begins by explaining to our potential customers the benefit of our
wireless application products to the customer’s particular business. Some
companies seek mobile functionality for their sales force, others seek
cross-company, real-time networking across all fixed and mobile nodes, while
others seek a particular functionality specific to their own trade or business.
Our team first seeks to understand each company’s particular needs and then
develops a product design proposal. For each project or mandate, we will
typically compete against several other companies in an open bid invitation
process.





Major
Customers





In the
years ended September 30, 2010 and 2009, we derived a material portion of our
revenues from a small number of customers. In particular, a single customer,
Shaanxi Yanchang Petroleum Group, provided approximately $2.2 million and $5.0
million, respectively, of our revenue, representing 15.2% and 44.7%,
respectively, of our total annual revenue. The material terms of our two largest
contracts with such customers are summarized below.





On
October 15, 2008, Kingtone Information entered into an Installation and
Construction Subcontract, to act as a subcontractor with The Refine Chemical
Company of Shaanxi Yanchang Petroleum Group, as construction party and Shaanxi
Chemical Construction Co., Ltd., as general contract party. Pursuant to the
agreement, Kingtone Information was subcontracted to contribute to the project
named “HuiJiaHe Petroleum Product Adjusting Supply Renovation Instrument and
Control System and Control System Full Installation and System Adjusting of
Yangzhuanghe Refine Chemical Project System.” The term of the project, as set
forth in the agreement, is from October 15, 2008 through January 31, 2009 for a
fixed amount payable to Kingtone Information of RMB 21,600,000 (approximately
$3.2 million) before the deduction of administrative fees, tax and utility fees
(2.5% of the fixed amount). The project was completed and all sums were
paid.





On April
30, 2009, Kingtone Information, as the supplier, entered into a Material
Purchase Contract with Xi’an Product Petroleum Pipe Transportation Project
Management Department of Shaanxi Huajian Yelian, as the purchaser. Pursuant to
the agreement, Kingtone Information supplied a series of software and facilities
to the purchaser for a total price of RMB12,200,000 (approximately $1.8
million). According to the agreement, Kingtone Information was required to
deliver the subject items by June 25, 2009. The agreement has a one-year
warranty period. The project was completed and all sums were paid.





In the
year ended September 30, 2009, we derived revenue of $1.1 million, or 10.2% of
our total revenue, from sales to Shaanxi TechTeam Jinong Humic Acid Product Co.,
Ltd., which is a related party. We did not have any related party revenue in the
year ended September 30, 2010.





Competition





The
wireless applications software market is currently a highly-fragmented industry
with many players offering industry-specific solutions. We compete with a
variety of different companies, some of which do not have a proprietary wireless
platform and must therefore outsource and/or do more development and testing.
Other companies have developed a wireless system for a single application that
is not widely adaptable to usages across many industries. We believe one of our
competitive advantages is the versatility of our platform, which allows for its
application across numerous industries without significant ground-up
redevelopment for each customer.





Our main
competitors in the wireless application market in China are:




·
            International
      IT consulting and service providers that have a strong foothold in
      customized enterprise software and information system design and
      implementation, such as Syclo and
Accenture;





·
            International
      mobile enterprise software and solution providers that have a significant
      presence in China, such as Sybase and CDC Software;
  and





·
            Domestic
      mobile enterprise solution developers, such as Beijing Silu Innovation
      Technology Co., Ltd., a mobile application provider that focuses solely on
      environmental protection areas, and Cyber Technologies (Suzhou) Co., Ltd.,
      a wireless application software and IT service provider that focuses
      solely on the public securities
areas.


33


We
believe we have a superior understanding of our vertical industry markets
compared to our international competitors and that our software products have
much wider application areas than those of our domestic competitors. We also
bring mobile applications to industrial automation management and control, an
area in which we believe we have a higher level of sophistication than our
competitors.





Intellectual
Property





We have
registered the following software copyrights, patents and trademarks for our
business operations. We believe this intellectual property forms an integral
part of our competitive strength.





Patents:





Through
Kingtone Information, we have been granted one invention patent by the State
Intellectual Property Office (“SIPO”) of PRC on September 23, 2009. This patent
is “wireless video transmission system based on BREW platform”. The patent code
is ZL 200710018138.4. We enjoy a 20-year protection period starting from the
issuance date of the patent.





We have
also applied for a number of invention patents with SIPO. We have received
letters of substantive examination of patent for invention application from
SIPO, which is the last step before patents can be issued. The following table
summarizes these pending patents as of September 30, 2010:




Name of Invention
                                              
                                              Application
                                                Number
                                              
                                              Publication
                                                Number
                                              
                                              Publication
                                                DateBREW platform based
      audio-video collection and wireless transmission system
                                              
                                              200710018505.0
                                              
                                              101159864
                                              
                                              April
      9, 2008WINCE
      platform based audio-video collection and wireless transmission
      system
                                              
                                              200710018506.5
                                              
                                              101159865
                                              
                                              April
      25,
                                                2008Wireless
      video transmission system based on Arena platform
                                              
                                              200810150745.0
                                              
                                              101420597
                                              
                                              April
      29,
                                                2009Multilink
      wireless mobile industrial management and control integrated data
      transmission system
                                              
                                              200810150072.9
                                              
                                              101345764
                                              
                                              January
      14,
                                                2009Video
      monitoring information interaction system based on Symbian
      platform
                                              
                                              200810150746.5
                                              
                                              101420598
                                              
                                              April
      29,
                                                2009




We also
have applied for a utility model patent with SIPO (application number:
200820228566.X) and have received the notice from SIPO to grant us this patent
on September 4, 2009. The name of this utility model invention is
“Multi-business Data Collection Equipment”.





Software
Copyrights:





Through
Kingtone Information, we have received the following software copyrights from
the National Copyright Administration (“NCA”) of PRC:




Name of Software
                                
                                Registration
                                  Number
                                
                                Date of IssuanceWireless video
      monitoring system V1.0
                                
                                2007SR12909
                                
                                August
      28, 2007RFID
      based wireless transportation administration monitoring system
      V1.0
                                
                                2007SR17240
                                
                                November 1, 2007Wireless
      emergency command and management system V1.0
                                
                                2008SR04120
                                
                                February
      26, 2008Mobile
      industry management and control integrated system V1.0
                                
                                2008SR18892
                                
                                September
      10, 2008Wireless
      mobile news dispatches system V1.0
                                
                                2008SR18893
                                
                                September
      10, 2008Wireless
      police affairs system V1.0
                                
                                2009SR04756
                                
                                November
      10, 2009Wireless
      OA system V1.0
                                
                                2009SR07729
                                
                                February
      25,
2009




34


Trademarks:





We have
registered the following trademarks with the Trademark Office, State
Administration for Industry and Commerce in the PRC:




Registered Trademark
              
              Registration
                Number
              
              Classification
                Number
              
              Valid Period联合寻呼
              
              1639871
              
              38*
              
              September
      21, 2001 to September 20, 2011KingTone
              
              3559772
              
              9*
              
              November
      28, 2004 to November 27, 2014KingTone
              
              4392291
              
              42*
              
              July
      28, 2008 to July 27, 2018联合信息
              
              6484024
              
              38*
              
              April
      7, 2010 to April 6, 2020联合
              
              6484025
              
              38*
              
              March
      28, 2010 to March 27, 2020


*
                See
      the footnotes to the table below for an explanation of each classification
      number used in the table
above.




We have
submitted applications for the following trademarks to the Trademark Office of
State Administration for Industry and Commerce in the PRC:




Pending Trademark
                    
                    Application Number
                    
                    Classification
                      Number
                    
                    Application Date
                    
                    Date of Acceptance
                      for Application7402901
                    
                    9*
                    
                    May
      18, 2009
                    
                    June
      4, 2009联合信息
                    
                    7402911
                    
                    35*
                    
                    May
      18, 2009
                    
                    June
      4, 2009联合信息
                    
                    7402912
                    
                    37*
                    
                    May
      18, 2009
                    
                    June
      4, 2009联合信息
                    
                    7402913
                    
                    42*
                    
                    May
      18, 2009
                    
                    June
      4, 2009联合信息
                    
                    7402914
                    
                    9*
                    
                    May
      18, 2009
                    
                    June
      4, 20097402915
                    
                    41*
                    
                    May
      18, 2009
                    
                    June
      4, 20097402916
                    
                    45*
                    
                    May
      18, 2009
                    
                    June
      4, 2009




35





Pending Trademark
                
                Application Number
                
                Classification
                  Number
                
                Application Date
                
                Date of Acceptance
                  for Application7402917
                
                35*
                
                May
      18, 2009
                
                June
      4, 20097402918
                
                37*
                
                May
      18, 2009
                
                June
      4, 20097402919
                
                42*
                
                May
      18, 2009
                
                June
      4, 20097402920
                
                38*
                
                May
      18, 2009
                
                June
      4, 2009“KINGTONE
                  INFORMATION”
                
                7402925
                
                41*
                
                May
      18, 2009
                
                June
      4, 2009“KINGTONE
                  INFORMATION”
                
                7402926
                
                45*
                
                May
      18, 2009
                
                June
      4, 2009“KINGTONE
                  INFORMATION”
                
                7402927
                
                37*
                
                May
      18, 2009
                
                June
      4, 2009“KINGTONE
                  INFORMATION”
                
                7402928
                
                9*
                
                May
      18, 2009
                
                June
      4, 2009联合信息
                
                7402929
                
                41*
                
                May
      18, 2009
                
                June
      4, 2009联合信息
                
                7402930
                
                45*
                
                May
      18, 2009
                
                June
      4, 2009








* See
below for an explanation of each classification number used in the table
above.




Classification
No. 9:  data processing apparatus, couplers (data processing
equipment), computer software (recorded), monitors (computer programs), smart
cards (integrated circuit cards), electro-dynamic apparatus for the remote
control of signals, alarms, and electric installations for the remote control of
industrial operations.





Classification
No. 35:  auctioneering, sales promotion for others, marketing
analysis, marketing research, import-export agencies, advisory services for
business management, business management for franchise, personnel management
consultancy, relocation services for businesses, and systemization of
information into computer databases.





Classification
No. 37:  building construction supervision, electric appliance
installation and repair, installation, maintenance and repair of computer
hardware, interference suppression in electrical apparatus, machinery
installation, maintenance and repair, burglar alarm installation and repair, and
telephone installation and repair.





Classification
No. 38:  message sending, telephone communication, cellular telephone
communication, communications by computer terminals, computer aided transmission
of messages and images, electronic mail, information about telecommunication,
and providing telecommunications connections to a global computer
network.





Classification
No. 41:  instruction services, teaching, education information,
tuition, arranging and conducting of colloquiums, publication of electronic
books and journals on-line, amusements, and vocational
guidance.


Classification
No. 42:  technical research, studies (technical project), computer
software design, updating of computer software, recovery of computer data,
computer systems analysis, installation of computer software, computer
anti-virus protection, and research and development for others.




Classification
No. 45:  security consultancy, monitoring of burglar and security
alarms, computer software permit (legal service), factory security inspection,
household service security consultancy, copyright management, and baggage
examination for safety.


36


Business
Certificates and Qualifications





We have
obtained all necessary regulatory certifications to conduct our business,
including without limitation, the following: Software Enterprise Recognition
Certificate, Computer Information System Integration Qualification Certificate,
Construction Enterprise Qualification Certificate, and Security Technology &
Protection Enterprise Certificate. We have also been properly certified as a
high-tech enterprise and met the ISO 9001:2000 qualification management
system.





Legal
Proceedings





Although
we may, from time to time, be involved in litigation and claims arising out of
our operations in the normal course of business, we do not believe that we are a
party to any litigation that will have a material adverse impact on our
financial condition or results of operations. We are not aware of any
significant legal or governmental proceedings against us, or contemplated to be
brought against us.




C.ORGANIZATIONAL
STRUCTURE





The
following diagram illustrates our corporate structure and the place of formation
and affiliation of each of our subsidiaries and affiliates.











Contractual
Arrangements with Kingtone Information and Its Respective
Shareholders





Our
relationship with Kingtone Information and each of its respective shareholders
is governed by a series of contractual arrangements. Some of the businesses in
which Kingtone Information is engaged deal with classified government
information in China. Current PRC laws and regulations do not allow companies
with foreign equity holders to carry out such business activities. If we had a
direct or indirect ownership in Kingtone Information, it could materially and
adversely affect Kingtone Information’s ability to perform existing contracts
and to win future contracts. Therefore, Softech and Kingtone Information entered
into the following contractual arrangements to allow us to effectively control
Kingtone Information but without violating relevant PRC laws and regulations.
Under PRC laws, each of Softech and Kingtone Information is an independent legal
person and neither of them is exposed to liabilities incurred by the other
party. Pursuant to the contractual arrangements between Softech and Kingtone
Information, as applicable, Kingtone Information transfers any and all net
profits generated from its operations to Softech. Effective December 15, 2009,
Softech entered into several control agreements with Kingtone Information, which
agreements are summarized below.


37


Entrusted
Management Agreement





Pursuant
to the terms of a certain Entrusted Management Agreement dated December 15, 2009
among Kingtone Information, Softech and the shareholders of Kingtone Information
(the `Entrusted Management Agreement`), Kingtone Information and its
shareholders agreed to entrust the operations and management of  its
business to Softech. According to the Entrusted Management Agreement, Softech
possesses the full and exclusive right to manage Kingtone Information’s
operations, assets and personnel, has the right to control all of Kingtone
Information's cash flows through an entrusted bank account, is entitled to
Kingtone Information's net profits as a management fee, is obligated to pay all
of Kingtone Information’s payables and loan payments, and bears all losses of
Kingtone Information. The Entrusted Management Agreement will remain in effect
until (i) the parties mutually agree to terminate the agreement, (ii) the
dissolution of Kingtone Information or (iii) Softech acquires all of the assets
or equity of Kingtone Information (as more fully described below under
“Exclusive Option Agreement”). Prior to that acquisition, Kingtone Information
will continue to own all of its assets. We anticipate that Kingtone Information
will continue to be the contracting party under its customer contracts, banks
loans and certain other assets until such time as those may be transferred to
Softech.




Exclusive
Technology Service Agreement





Pursuant
to the terms of a certain Exclusive Technology Service Agreement dated December
15, 2009 between Kingtone Information and Softech (“the Exclusive Technology
Services Agreement”), Softech is the exclusive technology services provider to
Kingtone Information. Kingtone Information agreed to pay Softech all fees
payable for technologies services prior to making any payments under the
Entrusted Management Agreement. Any payment from Kingtone Information to Softech
must comply with applicable Chinese laws. Further, the parties agreed that
Softech shall retain sole ownership of all intellectual property developed in
connection with providing technology services to Kingtone Information. The
Exclusive Technology Services Agreement shall remain in effect until (i) the
parties mutually agree to terminate the agreement, (ii) the dissolution of
Kingtone Information or (iii) Softech acquires Kingtone Information (as more
fully described below under “Exclusive Option Agreement”).





Shareholders’
Voting Proxy Agreement





Pursuant
to the terms of a certain Shareholders’ Voting Proxy Agreement dated December
15, 2009 among Softech and the shareholders of Kingtone Information (the
“Shareholders’ Voting Proxy Agreement”), each of the shareholders of Kingtone
Information irrevocably appointed Softech as their proxy to exercise on each of
such shareholder’s behalf all of their voting rights as shareholders pursuant to
PRC law and the Articles of Association of Kingtone Information, including the
appointment and election of directors of Kingtone Information. Softech agreed
that it shall maintain a board of directors the composition of which will be the
members of the board of directors of Kingtone Wireless, except those directors
that are employed solely for the purpose of satisfying listing or financing
requirements of Kingtone Wireless. The Shareholders’ Voting Proxy Agreement will
remain in effect until Softech acquires all of the assets or equity of Kingtone
Information.





Exclusive
Option Agreement





Pursuant
to the terms of a certain Exclusive Option Agreement dated December 15, 2009
among Softech, Kingtone Information and the shareholders of Kingtone Information
(the “Exclusive Option Agreement”), the shareholders of Kingtone Information
granted Softech an irrevocable and exclusive purchase option (the “Option”) to
acquire Kingtone Information’s equity interests and/or remaining assets, but
only to the extent that the acquisition does not violate limitations imposed by
PRC law on such transactions. As discussed above, current PRC law does not allow
foreigners to hold equity interests in a PRC entity that engages in business
dealings with classified government information. Accordingly, the Option is
exercisable at any time at Softech’s discretion so long as such exercise and
subsequent acquisition of Kingtone Information does not violate PRC law. The
consideration for the exercise of the Option is to be determined by the parties
and memorialized in the future by definitive agreements setting forth the kind
and value of such consideration. To the extent Kingtone Information shareholders
receive any of such consideration, the Option requires them to transfer (and not
retain) the same to Kingtone Information or Softech. The Exclusive Option
Agreement may be terminated by mutual agreement or by 30 days written notice by
Softech.


38


Equity
Pledge Agreement





Pursuant
to the terms of a certain Equity Pledge Agreement dated December 15, 2009 among
Softech and the shareholders of Kingtone Information (the “Pledge Agreement”),
the shareholders of Kingtone Information pledged all of their equity interests
in Kingtone Information, including the proceeds thereof, to guarantee all of
Softech's rights and benefits under the Entrusted Management Agreement, the
Exclusive Technology Service Agreement, the Shareholders’ Voting Proxy Agreement
and the Exclusive Option Agreement. Prior to termination of the Pledge
Agreement, the pledged equity interests cannot be transferred without Softech's
prior written consent. The Pledge Agreement may be terminated only upon the
written agreement of the parties.





Call
Option Agreements between Xtra Heights Management Ltd. and Certain Shareholders
of Kingtone Information





In
connection with our December 2009 reorganization, twelve individual shareholders
(listed below) of Kingtone Information (individually a “Purchaser” and
collectively the “Purchasers”) each entered into a Call Option Agreement
(collectively the “Call Option Agreements”) with Xtra and its sole shareholder
Sha Li (collectively the “Seller”) dated as of December 15, 2009. Pursuant to
the terms and conditions of the Call Option Agreements, the Purchasers are
entitled to purchase up to an aggregate of 6,806,250 ordinary shares of our
company from the Seller at a price of $0.001 per share. Specifically, (i) if the
Purchasers enter into an employment agreement to serve for Softech for a term of
not less than five years, the Purchasers are entitled to purchase up to
3,403,125 ordinary shares from the Seller; (ii) if Softech achieves not less
than $500,000 in consolidated after-tax net income as determined under US GAAP
for the fiscal year ending September 30, 2010, the Purchasers are entitled to
purchase up to 1,361,250 ordinary shares from the Seller; (iii) if Softech
achieves not less than $1,000,000 in consolidated after-tax net income as
determined under US GAAP for the fiscal year ending September 30, 2011, the
Purchasers are entitled to purchase up to 1,361,250 ordinary shares from the
Seller; and (iv) if Softech achieves not less than $2,000,000 in consolidated
after-tax net income as determined under US GAAP for the fiscal year ending
September 30, 2012, the Purchasers are entitled to purchase up to 680,625
ordinary shares from the Seller. Under the Call Option Agreements, the Seller
also irrevocably appoints each corresponding Purchaser with the exclusive right
to exercise, on its behalf, all of the voting rights of the Seller’s shares.
Additionally, the Call Option Agreements grant the Purchasers the right to all
distributions made by us, including without limitation, dividends, in respect of
the Seller’s shares.





The
Purchasers entered into the Call Option Agreements upon terms substantially
similar to the terms set forth in that certain Term Sheet, dated October 27,
2009, between the Purchasers and Ms. Sha Li.





The
twelve Purchasers are (i) Tao Li, our chairman, (ii) Peng Zhang, our chief
executive officer, (iii) Li Wu, a member of our board of directors and our
former chief financial officer, (iv) Jun Ma, our former chief technology
officer, (v) Pengguo Xi, our vice president of research and development, (vi)
Xianying Chen, our vice president of application development, and (vii) Jian
Ping Li, Wei Pu, Wei Wang, Wei Zhang, Xiao Bin Zhang, and Yu Fan Zhang, all of
whom are employees of Softech.




D.  PROPERTY,
PLANTS AND EQUIPMENT





We
operate out of the office located at 3/F, Area A, Block A, No. 181 South Taibai
Road in Xi’an. We own our office space, which covers a floor space of 3,022.94
square meters.





Our
Beijing branch office is located at Room 2208 and 2209 at Building 16, An Hui
Dong Li, Chaoyang District, Beijing. It covers a floor space of 184.81 square
meters. Our chairman Mr. Tao Li owns this space. We pay no consideration for the
use of this space.





In April
2008, we purchased an approximately 20,000 square meter six-story warehouse and
industrial facility in Xi’an, which we named the “Kingtone Center”. We have paid
the entire purchase price and obtained both the property ownership certificate
and land ownership certificate from the provincial government. We are now in the
interior design phase of refurbishing the Kingtone Center. The building will
house over 500 employees in three years as business expands with an upgraded
research & development center and a centralized customer support center. It
will also assist sales and marketing with showrooms for demo
applications.


39


ITEM 5.  OPERATING
AND FINANCIAL REVIEW AND PROSPECTS




A.OPERATING
RESULTS.





The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the notes to those financial statements appearing elsewhere in
this report. This discussion and analysis contains forward-looking statements
that involve significant risks and uncertainties. As a result of many factors,
such our anticipated growth strategy, our plans to recruit more employees, our
plans to invest in research and development to enhance our product or service
lines, our future business development, results of operations and financial
condition, expected changes in our net revenues and certain cost or expense
items, our ability to attract and retain customers, trends and competition in
the enterprise mobile software application market, and the factors set forth
elsewhere in this report, our actual results may differ materially from those
anticipated in these forward-looking statements. In light of those risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this report will in fact occur. You should not place undue reliance
on the forward-looking statements contained in this report.





The
forward-looking statements speak only as of the date on which they are made,
and, except to the extent required by U.S. federal securities laws, we undertake
no obligation to update any forward-looking statement to reflect events or
circumstances after the date on which the statement is made or to reflect the
occurrence of unanticipated events.  Further, the information about
our intentions contained in this report is a statement of our intention as of
the date of this report and is based upon, among other things, the existing
regulatory environment, industry conditions, market conditions and prices and
our assumptions as of such date.  We may change our intentions, at any
time and without notice, based upon any changes in such factors, in our
assumptions or otherwise.





Unless
the context otherwise requires, all references to (i) “PRC” and “China” are to
the People’s Republic of China; (ii) “U.S. dollar,” “$” and “US$” are to United
States dollars; and (iii) “RMB”, “Yuan” and Renminbi are to the currency of the
PRC or China.





Overview





Kingtone
Wireless was incorporated on October 27, 2009 under the laws of the British
Virgin Islands and acts as a holding company. We conduct substantially all of
our operations through our contractually-controlled PRC entity, Kingtone
Information, which focuses on developing mobile enterprise solutions in China.
We provide a suite of applications that enable mission-specific field and
long-distance information management in wireless environments.





Kingtone
Information commenced its current line of business in 2001 as an industrial
automation management and control software system developer. We subsequently
developed a core middleware platform consisting of standardized modules. This
core middleware platform allows our solutions to seamlessly integrate with our
customers’ existing information management systems. The core middleware platform
can host an array of standardized and scalable applications developed by us.
This structured design allows us to timely and cost-effectively meet our
customers’ specific requirements and respond to their operational changes.
Customized packages of our middleware platform and applications are marketed as
tailored solutions to business and government customers of all
kinds.





Due to
the recent deployment of 3G telecommunication networks in China, demand for
wireless enterprise application solutions has grown exponentially. We believe we
are well positioned to capitalize on this market trend to further expand our
market share and grow our revenue and profits.  Please see “Item 5 –
Operating and Financial Review and Prospects – D. Trend Information” for more
information in this regard.


40


Background





In
December 2009, through one of our subsidiaries, we entered into a series of
agreements with Kingtone Information, establishing Kingtone Information as our
contractually-controlled variable interest entity, or VIE. Kingtone Information
was formed on December 28, 2001 and its financial statements are presented on a
fiscal year-end September 30 basis. In March 2010, we changed our fiscal
year-end from November 30 to September 30, so we have the same fiscal year end
with Kingtone Information. Although we are filing this transition report on Form
20-F for the transition period from December 1, 2009 to September 30, 2010 to
reflect our change of fiscal year, Kingtone Wireless had no operations other
than those of its VIE, Kingtone Information, from October 1, 2009 to November
30, 2009. In addition, the consolidated and combined statements of income and
comprehensive income and cash flows for the years ended November 30, 2009 and
2008 included Kingtone Information for the years ended September 30, 2009 and
2008. Therefore we are presenting our consolidated and combined statements of
income and comprehensive income and cash flows for the years ended September 30,
2010, 2009 and 2008 instead of for the ten months ended September 30, 2010 and
the years ended November 30, 2009 and 2008.





Results
of Operations for the fiscal year ended September 30, 2010 compared to fiscal
year ended September 30, 2009.





The
following table sets forth key components of our results of operations for the
periods indicated, in thousands of dollars and percentage of revenue and
changes.


For the Years Ended September 302010
                                    
                                    
                                    2009
                                    
                                    
                                    Changes($ in Thousands, Except per Share Data)Revenue
                                    
                                    $
                                    14,506
                                    
                                    
                                    
                                    100.0
                                    %
                                    
                                    $
                                    11,240
                                    
                                    
                                    
                                    100.0
                                    %
                                    
                                    
                                    29.1
                                    %Cost
      of sales
                                    
                                    
                                    2,352
                                    
                                    
                                    
                                    16.2
                                    %
                                    
                                    
                                    3,894
                                    
                                    
                                    
                                    34.6
                                    %
                                    
                                    
                                    -39.6
                                    %Gross
      profit
                                    
                                    
                                    12,154
                                    
                                    
                                    
                                    83.8
                                    %
                                    
                                    
                                    7,346
                                    
                                    
                                    
                                    65.4
                                    %
                                    
                                    
                                    65.5
                                    %Operating
      expensesSelling
      and marketing expenses
                                    
                                    
                                    341
                                    
                                    
                                    
                                    2.4
                                    %
                                    
                                    
                                    350
                                    
                                    
                                    
                                    3.1
                                    %
                                    
                                    
                                    -2.6
                                    %General
      and administrative expenses
                                    
                                    
                                    1,635
                                    
                                    
                                    
                                    11.3
                                    %
                                    
                                    
                                    537
                                    
                                    
                                    
                                    4.8
                                    %
                                    
                                    
                                    204.5
                                    %Research
      and development expense
                                    
                                    
                                    179
                                    
                                    
                                    
                                    1.2
                                    %
                                    
                                    
                                    139
                                    
                                    
                                    
                                    1.2
                                    %
                                    
                                    
                                    28.8
                                    %Total
      operating expenses
                                    
                                    
                                    2,155
                                    
                                    
                                    
                                    14.9
                                    %
                                    
                                    
                                    1,026
                                    
                                    
                                    
                                    9.1
                                    %
                                    
                                    
                                    110.0
                                    %Income
      from operations
                                    
                                    
                                    9,999
                                    
                                    
                                    
                                    68.9
                                    %
                                    
                                    
                                    6,320
                                    
                                    
                                    
                                    56.2
                                    %
                                    
                                    
                                    58.2
                                    %Other
      income (expense)Subsidy
      income
                                    
                                    
                                    44
                                    
                                    
                                    
                                    0.3
                                    %
                                    
                                    
                                    307
                                    
                                    
                                    
                                    2.7
                                    %
                                    
                                    
                                    -85.7
                                    %Interest
      expense
                                    
                                    
                                    (218
                                    )
                                    
                                    
                                    -1.5
                                    %
                                    
                                    
                                    (340
                                    )
                                    
                                    
                                    -3.0
                                    %
                                    
                                    
                                    -35.9
                                    %Other
      income (expense)
                                    
                                    
                                    20
                                    
                                    
                                    
                                    0.1
                                    %
                                    
                                    
                                    (55
                                    )
                                    
                                    
                                    0.5
                                    %
                                    
                                    
                                    -136.4
                                    %Total
      other income (expense)
                                    
                                    
                                    (154
                                    )
                                    
                                    
                                    -1.1
                                    %
                                    
                                    
                                    (88
                                    )
                                    
                                    
                                    -0.8
                                    %
                                    
                                    
                                    74.6
                                    %Income
      before income tax expenses
                                    
                                    
                                    9,845
                                    
                                    
                                    
                                    67.9
                                    %
                                    
                                    
                                    6,232
                                    
                                    
                                    
                                    55.4
                                    %
                                    
                                    
                                    58.0
                                    %Income
      tax expenses
                                    
                                    
                                    1,608
                                    
                                    
                                    
                                    11.1
                                    %
                                    
                                    
                                    935
                                    
                                    
                                    
                                    8.3
                                    %
                                    
                                    
                                    72.0
                                    %Net
      income
                                    
                                    $
                                    8,237
                                    
                                    
                                    
                                    56.8
                                    %
                                    
                                    $
                                    5,297
                                    
                                    
                                    
                                    47.1
                                    %
                                    
                                    
                                    55.5
                                    %Other
      comprehensive incomeForeign
      currency translation gain
                                    
                                    
                                    598
                                    
                                    
                                    
                                    4.1
                                    %
                                    
                                    
                                    22
                                    
                                    
                                    
                                    0.2
                                    %
                                    
                                    
                                    2,618.2
                                    %Comprehensive
      income
                                    
                                    $
                                    8,835
                                    
                                    
                                    
                                    60.9
                                    %
                                    
                                    $
                                    5,319
                                    
                                    
                                    
                                    47.3
                                    %
                                    
                                    
                                    66.1
                                    %Net
      earnings per ordinary share:Basic
      and Diluted
                                    
                                    $
                                    0.71
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    0.53
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    34.9
                                    %Weighted
      average number of ordinary shares outstanding
                                    
                                    
                                    11,527,473
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    10,000,000
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    15.3
                                    %





41


The
following is a breakdown of our revenue, cost of sales and gross margin for the
years indicated, in thousands of dollars, and our respective gross margin
percentages and changes.


For the Years Ended September
      302010
                  
                  
                  2009
                  
                  
                  Changes($
      in Thousands, Except per Share Data)RevenueSoftware
                  
                  $
                  11,272
                  
                  
                  
                  77.7
                  %
                  
                  $
                  5,170
                  
                  
                  
                  46.0
                  %
                  
                  
                  118.0
                  %Wireless
      system solutions
                  
                  
                  3,234
                  
                  
                  
                  22.3
                  %
                  
                  
                  6,070
                  
                  
                  
                  54.0
                  %
                  
                  
                  -46.7
                  %Total
      Revenue
                  
                  
                  14,506
                  
                  
                  
                  100.0
                  %
                  
                  
                  11,240
                  
                  
                  
                  100.0
                  %
                  
                  
                  29.1
                  %Cost
      of SalesSoftware
                  
                  
                  903
                  
                  
                  
                  38.4
                  %
                  
                  
                  476
                  
                  
                  
                  12.2
                  %
                  
                  
                  89.7
                  %Wireless
      system solutions
                  
                  
                  1,449
                  
                  
                  
                  61.6
                  %
                  
                  
                  3,418
                  
                  
                  
                  87.8
                  %
                  
                  
                  -57.6
                  %Total
      Cost of Sales
                  
                  
                  2,352
                  
                  
                  
                  100.0
                  %
                  
                  
                  3,894
                  
                  
                  
                  100.0
                  %
                  
                  
                  -39.6
                  %Goss
      ProfitSoftware
                  
                  
                  10,369
                  
                  
                  
                  85.3
                  %
                  
                  
                  4,694
                  
                  
                  
                  63.9
                  %
                  
                  
                  120.9
                  %Wireless
      system solutions
                  
                  
                  1,785
                  
                  
                  
                  14.7
                  %
                  
                  
                  2,652
                  
                  
                  
                  36.1
                  %
                  
                  
                  -32.7
                  %Total
      Gross Profit
                  
                  
                  12,154
                  
                  
                  
                  100.0
                  %
                  
                  
                  7,346
                  
                  
                  
                  100.0
                  %
                  
                  
                  65.5
                  %Gross
      MarginSoftware
                  
                  
                  
                  
                  
                  
                  92.0
                  %
                  
                  
                  
                  
                  
                  
                  90.8
                  %Wireless
      system solutions
                  
                  
                  
                  
                  
                  
                  55.2
                  %
                  
                  
                  
                  
                  
                  
                  43.7
                  %Blended
      Gross Margin
                  
                  
                  
                  
                  
                  
                  83.8
                  %
                  
                  
                  
                  
                  
                  
                  65.4
                  %





Revenue





We are a
China-based developer and provider of mobile enterprise solutions. We generate
revenue in two ways, from customized software middleware and applications for
varies public and private service agencies, which we identify as software
solution sales, and from packaged solutions that include both software and
hardware in automation telematics for clients mainly in the manufacturing
sector, which we identify as wireless system solution sales. In the past two
years, we have experienced rapid growth and significantly expanded our business.
Our revenue grew by 29.1% to approximately $14.5 million in the year ended
September 30, 2010 from approximately $11.2 million in the year ended September
30, 2009.





Our
revenue from software solution sales grew by 118.0% to approximately $11.3
million in the year ended September 30, 2010 from approximately $5.2 million in
the year ended September 30, 2009. As a percentage of total revenue, software
solution sales grew from 46.0% to 77.7%. The significant growth of our software
solution revenue was mainly driven by increased sales of mobile enterprise
applications to police and emergency agencies in new geographic
areas.


42


Our
revenue from wireless system solution sales decreased by 46.7% to approximately
$3.2 million in the year ended September 30, 2010 from approximately $6.1
million in the year ended September 30, 2009. This decrease was driven primarily
by two factors: (i) we had smaller contract value and less recognizable revenue
with one existing customer in the oil refinery industry, Shaanxi Yanchang
Petroleum (Group) CO., LTD (“Yanchang”), even though the number of contracts
with its different subsidiaries have increased, and (ii) in the prior year, we
completed two related party transactions with Shaanxi TechTeam Jinong Humic Acid
Product Co., Ltd. (“Techteam”).  See “Item 7 – Major Shareholders and
Related Party Transactions – B. Related Party Transactions.”. Without the $1.1
million revenue from these two related party transactions from the prior year,
the third-party revenue from wireless system solution sales decreased 34.3% from
a year ago even though there were more contracts with smaller amounts completed
in the year ended September 30, 2010. As a percentage of total revenue, wireless
system solution revenue decreased from 54.0% to 22.3% of our total
revenue.





In the
year ended September 30, 2010, approximately $2.2 million of our total revenue
was derived from seven contracts with Yanchang, representing 15.2% of our total
revenue, or 68.0% of our wireless system solution revenue. In the year ended
September 30, 2009, approximately $5.0 million of our revenue was derived from
four contracts with Yanchang, representing 44.7% of our total revenue, including
approximately $0.8 million in revenue from one contract in software sales,
representing 15.4% of our software revenue, and approximately $4.2 million in
revenue from three contracts in wireless system solution sales, representing
69.6% of our wireless system solution revenue.





In the
year ended September 30, 2009, we derived approximately $1.1 million of our
total revenue from two contracts with Techteam, an indirect subsidiary of China
Green Agriculture, Inc. (“CGA”), a company that is majority-owned by Mr. Tao Li,
our chairman, and whose chairman, president and chief executive officer is Mr.
Li. This revenue represented 10.2% of our total revenue and 18.9% of our revenue
from wireless system solutions sales in the year ended September 30, 2009. In
the year ended September 30, 2010, we did not have any sales to such related
parties





Cost
of Sales





Our cost
of sales decreased by 39.6% to approximately $2.4 million in the year ended
September 30, 2010 from approximately $3.9 million in the year ended September
30, 2009. The decrease in our cost of sales was largely due to the decrease in
revenue from higher-cost wireless system solutions. As a percentage of our total
revenues, our cost of sales decreased to 16.2% of revenues in the year ended
September 30, 2010 from 34.6% of our total revenues in the year ended September
30, 2009.





Cost of
sales for software increased by 89.7% to approximately $0.9 million in the year
ended September 30, 2010 from approximately $0.5 million in the year ended
September 30, 2009, representing 38.4% and 12.2% of our total cost of sales and
8.0% and 9.2% of our software revenue in the fiscal years ended September 30,
2010 and 2009, respectively. Cost of sales for wireless system solutions
decreased by 57.6% to approximately $1.4 million in the year ended September 30,
2010 from approximately $3.4 million in the year ended September 30, 2009,
representing 61.6% and 87.8% of total cost of sales and 44.8% and 56.3% of
wireless system solution revenues in the fiscal years ended September 2010 and
2009, respectively.





Gross
Margin





Our total
gross profit increased by 65.5% to approximately $12.2 million in the year ended
September 30, 2010 from approximately $7.3 million in the year ended September
30, 2009. Our total gross margin was 83.8% and 65.4% in the years ended
September 30, 2010 and 2009, respectively. The improvement in our gross margin
was mainly caused by a favorable shift in our product/service mix in fiscal 2010
as we increased the proportion of our total revenue derived from higher-margin
software solution sales.





Our gross
margin for software solution sales increased by 120.9% to approximately $10.4
million in the year ended September 30, 2010 from approximately $4.7 million in
the year ended September 30, 2009. Our gross margin for software solutions sales
increased to 92.0% in the year ended September 30, 2010 from 90.8% in the year
ended September 30, 2009. This increase of gross margin was primarily due to the
adaptability of our existing platform which we can configure and tailor without
significant additional expenditure.


43


Our gross
profit for wireless system solution sales decreased by 32.7% to approximately
$1.8 million in the year ended September 30, 2010 from approximately $2.7
million in the year ended September 30, 2009. Our gross margin for wireless
system solution sales increased to 55.2% in the year ended September 30, 2010
from 43.7% in the year ended September 30, 2009. The increase in gross margin
was mainly attributable to a shift in our business strategy to use less
purchased hardware in our wireless system solution sales in fiscal
2010.





Operating
Expenses





Selling
and Marketing Expenses





Our
selling and marketing expenses decreased by 2.6% to approximately $0.34 million
in fiscal 2010 from approximately $0.35 million in fiscal 2009, and represented
2.4% and 3.1% of our revenue for the years ended September 30, 2010 and 2009,
respectively. Selling and marketing expenses consisted primarily of compensation
and benefit expenses relating to our sales and marketing personnel, travel and
communication expenses, and selling and marketing-related office
expenses.





Although
our revenue increased significantly from fiscal year 2009 to fiscal year 2010,
our selling and marketing expenses remained flat because our sales and marketing
team improved their efficiency while remaining roughly the same size. We expect
our selling and marketing expenses to increase in the near future as we increase
our business development efforts, hire additional sales personnel, target
additional customers and initiate additional marketing programs to further build
our brand. However, we expect our selling and marketing expenses as a percentage
of revenue to decrease because we believe our revenue will grow at a faster
pace.





General
and Administrative Expenses





Our
general and administrative expenses increased by 204.5% to approximately $1.6
million in fiscal 2010 from approximately $0.54 million in fiscal 2009, and
represented 11.3% and 4.8% of our revenue for the years ended September 30, 2010
and 2009, respectively. General and administrative expenses consist primarily of
compensation and benefit expenses relating to personnel other than our engineers
and our sales and marketing team, depreciation and amortization expenses and
overhead expenses. General and administrative expenses also include legal and
other professional fees, share-based compensation and other miscellaneous
administrative costs. We expect our general and administrative expenses to
increase significantly from the year ended September 30, 2010 level as we will
incur our first full year of costs to comply with the requirements imposed on a
public company in the U.S. and we expect to incur costs to conduct financing and
investor relations activities. As a percentage of revenue, we expect our general
and administrative expenses in fiscal 2011 to remain at about the same level as
in the year ended September 30, 2010.





Research
and Development Expenses





Our
research and development expenses increased 28.8% to approximately $0.18 million
in fiscal 2010 from approximately $0.14 million in fiscal 2009, and represented
1.2% of our revenue for both of the years ended September 30, 2010 and 2009.
Research and development expenses consist primarily of compensation and benefit
expenses relating to engineers in our research and development center, materials
cost in research and development activities, and depreciation and amortization
expenses relating to our research and development center. We plan to increase
the size of our research and development team and have budgeted a significant
portion of our projected cash flow during the near future and a portion of the
proceeds from the May 2010 public offering of our American Depositary Shares, or
ADSs, for developing new software solutions, as well as to better equip our
research and development center to maintain our technological edge in our
industry. Therefore, we expect our research and development expenses will
increase in both dollar amount and as a percentage of our revenue.





Income
from Operations





Income
from operations grew 58.2% to approximately $10.0 million in the year ended
September 30, 2010 from approximately $6.3 million in the year ended September
30, 2009. The growth of income from operations was mainly attributed to the
growth in our revenue.





Net
Income





Net
income grew by 55.5% to approximately $8.2 million in the year ended September
30, 2010 from approximately $5.3 million in the year ended September 30, 2009.
The growth of net income was mainly attributed to the growth in our
revenue.


44


Results
of Operations for the fiscal years ended September 30, 2009 compared to fiscal
year ended September 30, 2008.





The following table sets forth key
components of our results of operations for the periods indicated, in thousands
of dollars and percentage of revenue and changes.





For the years ended September 30,2009
                                                                                              
                                                                                              
                                                                                              2008
                                                                                              
                                                                                              
                                                                                              Variance (%)( $ in thousands, except per share data)Revenues
                                                                                              
                                                                                              $
                                                                                              11,240
                                                                                              
                                                                                              
                                                                                              
                                                                                              100.0
                                                                                              %
                                                                                              
                                                                                              $
                                                                                              4,286
                                                                                              
                                                                                              
                                                                                              
                                                                                              100.0
                                                                                              %
                                                                                              
                                                                                              
                                                                                              162.2
                                                                                              %Cost
      of sales
                                                                                              
                                                                                              
                                                                                              3,894
                                                                                              
                                                                                              
                                                                                              
                                                                                              34.6
                                                                                              %
                                                                                              
                                                                                              
                                                                                              1,621
                                                                                              
                                                                                              
                                                                                              
                                                                                              37.8
                                                                                              %
                                                                                              
                                                                                              
                                                                                              140.2
                                                                                              %Gross
      profit
                                                                                              
                                                                                              
                                                                                              7,346
                                                                                              
                                                                                              
                                                                                              
                                                                                              65.4
                                                                                              %
                                                                                              
                                                                                              
                                                                                              2,665
                                                                                              
                                                                                              
                                                                                              
                                                                                              62.2
                                                                                              %
                                                                                              
                                                                                              
                                                                                              175.6
                                                                                              %Operating
      expensesSelling
      and marketing expenses
                                                                                              
                                                                                              
                                                                                              350
                                                                                              
                                                                                              
                                                                                              
                                                                                              3.1
                                                                                              %
                                                                                              
                                                                                              
                                                                                              301
                                                                                              
                                                                                              
                                                                                              
                                                                                              7.0
                                                                                              %
                                                                                              
                                                                                              
                                                                                              16.3
                                                                                              %General
      and administrative expenses
                                                                                              
                                                                                              
                                                                                              537
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.8
                                                                                              %
                                                                                              
                                                                                              
                                                                                              355
                                                                                              
                                                                                              
                                                                                              
                                                                                              8.3
                                                                                              %
                                                                                              
                                                                                              
                                                                                              51.3
                                                                                              %Research
      and development expenses
                                                                                              
                                                                                              
                                                                                              139
                                                                                              
                                                                                              
                                                                                              
                                                                                              1.24
                                                                                              %
                                                                                              
                                                                                              
                                                                                              79
                                                                                              
                                                                                              
                                                                                              
                                                                                              1.84
                                                                                              %
                                                                                              
                                                                                              
                                                                                              75.9
                                                                                              %Totoal
      operating expenses
                                                                                              
                                                                                              
                                                                                              1,026
                                                                                              
                                                                                              
                                                                                              
                                                                                              9.1
                                                                                              %
                                                                                              
                                                                                              
                                                                                              735
                                                                                              
                                                                                              
                                                                                              
                                                                                              17.1
                                                                                              %
                                                                                              
                                                                                              
                                                                                              39.6
                                                                                              %Income
      from operations
                                                                                              
                                                                                              
                                                                                              6,320
                                                                                              
                                                                                              
                                                                                              
                                                                                              56.2
                                                                                              %
                                                                                              
                                                                                              
                                                                                              1,930
                                                                                              
                                                                                              
                                                                                              
                                                                                              45.0
                                                                                              %
                                                                                              
                                                                                              
                                                                                              227.5
                                                                                              %Other
      income (expense)Subsidy
      income
                                                                                              
                                                                                              
                                                                                              307
                                                                                              
                                                                                              
                                                                                              
                                                                                              2.7
                                                                                              %
                                                                                              
                                                                                              
                                                                                              163
                                                                                              
                                                                                              
                                                                                              
                                                                                              3.8
                                                                                              %
                                                                                              
                                                                                              
                                                                                              88.3
                                                                                              %Interest
      expense
                                                                                              
                                                                                              
                                                                                              (340
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -3.0
                                                                                              %
                                                                                              
                                                                                              
                                                                                              (531
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -12.4
                                                                                              %
                                                                                              
                                                                                              
                                                                                              -36.0
                                                                                              %Other
      income (expense)
                                                                                              
                                                                                              
                                                                                              (55
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -0.5
                                                                                              %
                                                                                              
                                                                                              
                                                                                              (356
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -8.3
                                                                                              %
                                                                                              
                                                                                              
                                                                                              -84.6
                                                                                              %Total
      other income (expense)
                                                                                              
                                                                                              
                                                                                              (88
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -0.8
                                                                                              %
                                                                                              
                                                                                              
                                                                                              (724
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -16.9
                                                                                              %
                                                                                              
                                                                                              
                                                                                              -87.8
                                                                                              %Income
      before income tax expenses
                                                                                              
                                                                                              
                                                                                              6,232
                                                                                              
                                                                                              
                                                                                              
                                                                                              55.4
                                                                                              %
                                                                                              
                                                                                              
                                                                                              1,206
                                                                                              
                                                                                              
                                                                                              
                                                                                              28.1
                                                                                              %
                                                                                              
                                                                                              
                                                                                              416.7
                                                                                              %Income
      tax expenses
                                                                                              
                                                                                              
                                                                                              935
                                                                                              
                                                                                              
                                                                                              
                                                                                              8.3
                                                                                              %
                                                                                              
                                                                                              
                                                                                              191
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.5
                                                                                              %
                                                                                              
                                                                                              
                                                                                              389.5
                                                                                              %Net
      income
                                                                                              
                                                                                              $
                                                                                              5,297
                                                                                              
                                                                                              
                                                                                              
                                                                                              47.1
                                                                                              %
                                                                                              
                                                                                              $
                                                                                              1,015
                                                                                              
                                                                                              
                                                                                              
                                                                                              23.7
                                                                                              %
                                                                                              
                                                                                              
                                                                                              421.9
                                                                                              %Other
      comprehensive incomeForeign
      currency translation gain
                                                                                              
                                                                                              
                                                                                              22
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.2
                                                                                              %
                                                                                              
                                                                                              
                                                                                              544
                                                                                              
                                                                                              
                                                                                              
                                                                                              12.7
                                                                                              %
                                                                                              
                                                                                              
                                                                                              -96.0
                                                                                              %Comprehensive
      income
                                                                                              
                                                                                              $
                                                                                              5,319
                                                                                              
                                                                                              
                                                                                              
                                                                                              47.3
                                                                                              %
                                                                                              
                                                                                              $
                                                                                              1,559
                                                                                              
                                                                                              
                                                                                              
                                                                                              36.4
                                                                                              %
                                                                                              
                                                                                              
                                                                                              241.2
                                                                                              %Earnings
      per common share:Basic
      and Diluted
                                                                                              
                                                                                              $
                                                                                              0.53
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              0.10
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              430.0
                                                                                              %Weighted
      average number of ordinary shares outstandingBasic
      and Diluted
                                                                                              
                                                                                              
                                                                                              10,000,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              10,000,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              0
                                                                                              %




45




The following is a breakdown of our
revenue, cost of sales and gross margin for the years indicated, in thousands of
dollars, and our respective gross margin percentages and changes.




For years ended September 30,2009
                    
                    
                    2008
                    
                    
                    changes($ in thousands, except per share data)RevenueSoftware
                    
                    $
                    5,170
                    
                    
                    
                    46.0
                    %
                    
                    $
                    987
                    
                    
                    
                    23.0
                    %
                    
                    
                    423.8
                    %Wireless
      system solution
                    
                    
                    6,070
                    
                    
                    
                    54.0
                    %
                    
                    
                    3,299
                    
                    
                    
                    77.0
                    %
                    
                    
                    84.0
                    %Total
      revenue
                    
                    
                    11,240
                    
                    
                    
                    100.0
                    %
                    
                    
                    4,286
                    
                    
                    
                    100.0
                    %
                    
                    
                    162.2
                    %Cost
      of SalesSoftware
                    
                    
                    476
                    
                    
                    
                    12.2
                    %
                    
                    
                    183
                    
                    
                    
                    11.3
                    %
                    
                    
                    160.1
                    %Wireless
      system solution
                    
                    
                    3,418
                    
                    
                    
                    87.8
                    %
                    
                    
                    1,438
                    
                    
                    
                    88.7
                    %
                    
                    
                    137.7
                    %Total
      cost of sales
                    
                    
                    3,894
                    
                    
                    
                    100.0
                    %
                    
                    
                    1,621
                    
                    
                    
                    100.0
                    %
                    
                    
                    140.2
                    %Gross
      MarginSoftware
                    
                    
                    4,694
                    
                    
                    
                    63.9
                    %
                    
                    
                    804
                    
                    
                    
                    30.2
                    %
                    
                    
                    483.8
                    %Wireless
      system solution
                    
                    
                    2,652
                    
                    
                    
                    36.1
                    %
                    
                    
                    1,861
                    
                    
                    
                    69.8
                    %
                    
                    
                    42.5
                    %Total
      gross margin
                    
                    
                    7,346
                    
                    
                    
                    100.0
                    %
                    
                    
                    2,665
                    
                    
                    
                    100.0
                    %
                    
                    
                    175.6
                    %Gross
      Margin PercentageSoftware
                    
                    
                    
                    
                    
                    
                    90.8
                    %
                    
                    
                    
                    
                    
                    
                    81.5
                    %Wireless
      system solution
                    
                    
                    
                    
                    
                    
                    43.7
                    %
                    
                    
                    
                    
                    
                    
                    56.4
                    %Blended
      gross margin percentage
                    
                    
                    
                    
                    
                    
                    65.4
                    %
                    
                    
                    
                    
                    
                    
                    62.2
                    %





Revenue





Our
revenue grew by 162.2% to approximately $11.2 million in the year ended
September 30, 2009 from approximately $4.3 million in the year ended September
30, 2008. Excluding a related party transaction, our revenues grew to $10.1
million in the year ended September 30, 2009.





Our
revenue from software solution sales grew by 423.8% to approximately $5.2
million in the year ended September 30, 2009 from approximately $1.0 million in
the year ended September 30, 2008. As a percentage of total revenue, software
solution sales revenue grew from 23% to 46%. The significant growth of our
software solution revenue was mainly driven by accelerated adoption of mobile
enterprises applications by our government agency customers and general business
customers.





Our
revenue from wireless system solution sales grew by 84% to approximately $6.1
million in the year ended September 30, 2009 from approximately $3.3 million in
the year ended September 30, 2008. This growth was driven by growing mobile
application demand from our industrial automation customers and demand for our
portal mobile video server system solutions. As a percentage of total revenue,
wireless system solution revenue decreased from 77% to 54% of our total
revenue.





In the
year ended September 30, 2009, approximately $5.0 million in revenue was derived
from Yanchang, representing 44.7% of our total revenue, including approximately
$0.8 million revenue from one contract with Yanchang in software sales,
representing 15.4% of our software revenue, and approximately $4.2 million
revenue from three contracts with Yanchang in wireless system solution sales,
representing 69.6% of our wireless system solution revenue. In the year ended
September 30, 2008, approximately $2.4 million of our total revenue was derived
from one contract with Yanchang, representing 57% of our total revenue,
including 0% of our software revenue and 74% of our wireless system solution
revenue.


46


In the
year ended September 30, 2009, we derived approximately $1.1 million of our
total revenue from two contracts with Techteam. This revenue represented 10.2%
of our total revenue and 18.9% of our revenue from wireless system solutions
sales. In the year ended September 30, 2008, we did not have any sales to
related parties.





Cost
of Sales





Our cost
of sales increased by 140.2% to approximately $3.9 million in the year ended
September 30, 2009 from approximately $1.6 million in the year ended September
30, 2008. The growth in our cost of sales was driven by the growth of our
revenue. As a percentage of our revenues, our cost of sales decreased to 34.6%
of revenues in the year ended September 30, 2009 from 37.8% of revenues in the
year ended September 30, 2008.





Cost of
sales for software increased by 160.1% to approximately $0.5 million in the year
ended September 30, 2009 from approximately $0.2 million in the year ended
September 30, 2008, representing 12.2% and 11.3% of our total cost of sales and
9.2% and 18.5% of our software revenue in the fiscal years ended September 2009
and 2008, respectively. Our software is developed out of our core wireless
application software platform with limited secondary development efforts. As a
result, the growth of software cost of sales was significantly less than the
growth of software revenue.





Cost of
sales for wireless system solutions increased by 137.7% to approximately $3.4
million in the year ended September 30, 2009 from approximately $1.4 million in
the year ended September 30, 2008, representing 87.8% and 88.7% of total cost of
sales and 56.3% and 43.6% of wireless system solutions in the fiscal years ended
September 30, 2009 and 2008, respectively.





Gross
Margin





Our total
gross margin increased by 175.6% to approximately $7.3 million in the year ended
September 30, 2009 from approximately $2.7 million in the year ended September
30, 2008. Our blended gross margin percentage was 65.4% and 62.2% in the years
ended September 30, 2009 and 2008, respectively. The improvement in our blended
gross margin percentage was mainly caused by our increased gross margin
percentage in, and our proportion of revenue from, our software solution sales
in fiscal 2009, which was partially offset by the decreased gross margin
percentage in our wireless system solution sales.





Our gross
margin for software sales increased by 483.8% to approximately $4.7 million in
the year ended September 30, 2009 from approximately $0.8 million in the year
ended September 30, 2008. Our gross margin percentage for software solutions
sales increased to 90.8% in the year ended September 30, 2009 from 81.5% in the
year ended September 30, 2008. This increase of gross margin percentage was
primarily due to the adaptability of our existing platform which we can
configure and tailor without significant additional expenditure.





Our gross
margin for wireless system sales increased by 42.5% to approximately $2.7
million in the year ended September 30, 2009 from approximately $1.9 million in
the year ended September 30, 2008. Our gross margin percentage for wireless
system solution sales decreased to 43.7% in the year ended September 30, 2009
from 56.4% in the year ended September 30, 2008. The decrease in gross margin
percentage was mainly attributable to the higher portion of purchased hardware
included in our wireless system sales in fiscal 2009.





Operating
Expenses





Selling
and Marketing Expenses





Our
selling and marketing expenses increased by 16.3% to approximately $0.35 million
in fiscal 2009 from approximately $0.3 million in fiscal 2008, and represented
3.1% and 7.0% of our revenue for the years ended September 30, 2009 and 2008,
respectively.





General
and Administrative Expenses





Our
general and administrative expenses increased by 51.3% to approximately $0.54
million in fiscal 2009from approximately $0.36 million in fiscal 2008, and
represented 4.8% and 8.3% of our revenue for the years ended September 30, 2009
and 2008, respectively.


47


Research
and Development Expenses





Our
research and development expenses increased 75.9% to approximately $0.14 million
in fiscal 2009 from approximately $0.08 million in fiscal 2008, and represented
1.2% and 1.8% of our revenue for the years ended September 30, 2009 and 2008,
respectively.





Income
from Operations





Income
from operations grew 227.5% to approximately $6.3 million in the year ended
September 30, 2009 from approximately $1.9 million in the year ended September
30, 2008. The growth of income from operations was mainly attributed to the
growth in our revenue.





Net
Income





Net
income grew by 421.9% to approximately $5.3 million in the year ended September
30, 2009 from approximately $1.0 million in the year ended September 30, 2008.
The growth of net income was mainly attributed to the growth in our
revenue.





Liquidity
and Capital Resources





Cash
Flows and Working Capital





As of
September 30, 2010, we had a working capital of approximately $18.5 million,
including cash of approximately $14.9 million. The following table sets forth a
summary of our cash flow for the periods indicated:


For the Years Ended
                      September 30,2010
                    
                    
                    2009
                    
                    
                    2008($ in Thousands)Net
      cash provided by operating activities
                    
                    $
                    4,301
                    
                    
                    $
                    4,000
                    
                    
                    $
                    81Net
      cash used in investing activities
                    
                    
                    (308
                    )
                    
                    
                    (12,210
                    )
                    
                    
                    (644
                    )Net
      cash provided by financing activities
                    
                    
                    10,318
                    
                    
                    
                    8,545
                    
                    
                    
                    563Effect
      of exchange rate fluctuation on cash and cash equivalents
                    
                    
                    254
                    
                    
                    
                    —
                    
                    
                    
                    2Net
      increase in cash and cash equivalents
                    
                    
                    14,565
                    
                    
                    
                    335
                    
                    
                    
                    2Cash
      and cash equivalents, beginning of year
                    
                    
                    344
                    
                    
                    
                    9
                    
                    
                    
                    7Cash
      and cash equivalents, end of year
                    
                    
                    14,909
                    
                    
                    
                    344
                    
                    
                    
                    9





Operating
Activities





Net cash
provided by operating activities was approximately $4.3 million for the year
ended September 30, 2010 as compared to approximately $4.0 million for the year
ended September 30, 2009.  In fiscal 2010 had an increase in accounts
receivable and unbilled revenue of approximately $4.9 million, which was largely
offset by an increase in net income and tax payables.  Net cash
provided by operating activities was approximately $0.1 million for the year
ended September 30, 2008.





Investing
Activities





Net cash
used in investing activities for the year ended September 30, 2010 was
approximately $0.31 million as compared to net cash used in investing activities
of approximately $12.2 million for the year ended September 30, 2009. The cash
used in investing activities in fiscal year 2009 was mainly attributable to an
increase in property and equipment purchases.  Net cash used in
investing activities for the year ended September 30, 2008 was approximately
$0.6 million.


48


Financing
Activities





Net cash
provided by financing activities for the year ended September 30, 2010 totaled
approximately $10.3 million as compared to net cash provided by financing
activities of approximately $8.5 million for the year ended September 30, 2009.
The cash provided by financing activities for the year ended September 30, 2010
was mainly attributable to the proceeds we received from our initial public
offering in May 2010.  The cash provided by financing activities for
the year ended September 30, 2009 was mainly attributable to loan proceeds we
received from related parties. Net cash provided by financing activities for the
year ended September 30, 2008 totaled approximately $0.6 million.





As a
result of the total cash activities, our net cash increased approximately $14.6
million from September 30, 2009 to September 30, 2010. We believe that our cash
flow generated from our ongoing operating activities in addition to our public
offering should be adequate to meet our anticipated cash needs and sustain our
current operations for at least 12 months. However, if we need to raise capital
for further significant acquisitions or expansions, there can be no assurance
that we will be successful in obtaining any such debt or equity financing or
that the terms of such financing will be favorable to us.





Current
PRC regulations permit our PRC subsidiaries to pay dividends to us only out of
their accumulated profits, if any, determined in accordance with Chinese
accounting standards and regulations. In addition, each of our subsidiaries in
China is required to set aside at least 10% of its after-tax profits each year,
if any, to fund a statutory reserve until such reserve reaches 50% of its
registered capital. These reserves are not distributable as cash dividends.
Furthermore, if our subsidiaries in China incur debt on their own behalf in the
future, the instruments governing the debt may restrict their ability to pay
dividends or make other payments to us. Also, our PRC subsidiaries must file the
board resolutions authorizing the payment of dividends, the capital verification
report of our PRC subsidiaries, the audit report issued by the certified public
accountant company and other required materials to the banks entrusted by the
local foreign exchange bureau for the examination of the remittance of the
dividend. Our PRC subsidiaries can only remit dividends to us after passing the
examination. Such examination requirement may limit our PRC subsidiaries’
ability to pay dividends to us which may limit our ability to pay dividends to
our shareholders. If we are unable to pay dividends to our shareholders, our
ability to secure equity financing in the future may be adversely
affected.





Contractual
Obligations





As of
September 30, 2009, we had a one-year short-term loan due to Xi’an Commercial
Bank in the approximate principal amount of $3.4 million with an initial monthly
interest rate of 0.6638%, adjustable in line with the basic interest rate
announced by the People’s Bank of China (PBOC). This loan is guaranteed by Xi’an
Hightech Agricultural Co., Ltd. and Mr. Tao Li, our chairman, and is secured by
two land use rights owned by Xi’an Yuansheng Enterprise Co., Ltd., an unrelated
party, valued at RMB 114.71 million, or approximately $16.78 million. As of
September 30, 2010, we had no short-term loans outstanding.





Quantitative
and Qualitative Disclosure about Market Risk





Interest
Rate Risk





Our
exposure to interest rate risk primarily relates to the interest expense
incurred as a result of short-term bank loans maturing within 12 months. We have
not used any derivative financial instruments to manage our interest risk
exposure. We carry refinancing risk related to short-term interest-bearing
loans. We have not been exposed nor do we anticipate being exposed to material
risks due to changes in interest rates. However, our future interest expense may
be higher than expected due to changes in market interest rates.





Foreign
Exchange Risk





Translation
adjustments amounted to $0.6 million, $0.02 million and $0.54 million as of
September 30, 2010, 2009 and 2008,  respectively. We translated
balance sheet amounts with the exception of equity at September 30, 2010, 2009
and 2008 at RMB 6.6981, RMB 6.8376 and RMB 6.8551 to $1.00, respectively. We
stated equity accounts at their historical rate. The average translation rates
applied to income statement accounts for the year ended September 30, 2010, 2009
and 2008 were RMB 6.8214, RMB 6.8452 and RMB 7.1106 to $1.00, respectively. So
far, the PRC government has been able to manage a stable exchange rate between
RMB and the U.S. Dollar. We do not anticipate material translation adjustments
due to large fluctuations in exchange rates between RMB and the U.S. Dollar.
However, our future downward translation adjustments may occur and can be
significant due to changes in such exchange rate.


49


The PRC
government imposes strict restrictions on PRC resident companies regarding
converting RMB into foreign currencies and vice versa under capital account
transactions, such as receiving equity investments from outside of the PRC,
making equity investments outside of the PRC, borrowing money from or lending
money outside of the PRC, and repaying debt or remitting liquidated assets
and/or accumulated profits outside of the PRC. These transactions have to be
approved by the relevant PRC government authorities, including but not limited
to the commerce bureau, the tax bureau and the State Administration of Foreign
Exchange, or SAFE, and have to be conducted at banks entrusted by the local SAFE
branch. Kingtone Information has not conducted any foreign currency transactions
during prior fiscal years since its inception. Softech was recently established
and had not conducted any foreign currency transactions except for converting a
relevantly small amount of foreign currency into RMB as registered capital
pursuant to PRC regulations. In anticipation of this offering, we will invest or
lend the proceeds as equity or loans into our PRC subsidiaries. As our business
continues to grow, we may need to continuously finance our PRC subsidiaries by
raising capital from outside of the PRC. The restriction on converting RMB into
foreign currencies, and vice versa, may limit our ability to use capital
resources from outside of the PRC. Such restrictions may also limit our ability
to remit profits from our PRC subsidiaries outside of the PRC, therefore
potentially limiting our ability to pay dividends to our shareholders. In
addition, such restrictions will limit our ability to freely transfer temporary
excess cash in our or our subsidiaries’ bank accounts in and out of the PRC,
therefore limiting our ability to conduct cross-border cash management
activities to optimize the utilization of our cash.





Inflation





Although
China has experienced an increasing inflation rate, inflation has not had a
material impact on our results of operations in recent years. According to the
National Bureau of Statistics of China, the change in the consumer price index
in China was 0.46%, (0.77%), and 1.16% in 2001, 2002 and 2003, respectively.
However, in connection with a 3.9% increase in 2004, the PRC government
announced measures to restrict lending and investment in China in order to
reduce inflationary pressures in China’s economy. Following the government’s
actions, the consumer price index decreased to 1.8% in 2005 and to 1.5% in 2006.
In 2007, the consumer price index increased to 4.8%. In response, China’s
central bank, the People’s Bank of China, announced that the bank reserve ratio
would rise half a percentage point to 15.5% in an effort to reduce inflation
pressures. China’s consumer price index growth rate reached 8.7% year over year
in 2008. The results of the PRC government’s actions to combat inflation are
difficult to predict. Adverse changes in the Chinese economy, if any, will
likely impact the financial performance of a variety of industries in China that
use, or would be candidates to use, our software products and
services.





Critical
Accounting Policies





We
prepare our financial statements in conformity with the accounting principles
generally accepted in the United States of America, which requires us to make
judgments, estimates and assumptions. We continually evaluate these estimates
and assumptions based on the most recently available information, our own
historical experience and various other assumptions that we believe to be
reasonable under the circumstances. Since the use of estimates is an integral
component of the financial reporting process, actual results could differ from
those estimates. An accounting policy is considered critical if it requires an
accounting estimate to be made based on assumptions about matters that are
highly uncertain at the time such estimate is made, and if different accounting
estimates that reasonably could have been used, or changes in the accounting
estimates that are reasonably likely to occur periodically, could materially
impact the consolidated and combined financial statements. We believe the
following accounting policies involve the most significant judgments and
estimates used in the preparation of our financial statements and should be read
in conjunction with our consolidated and combined financial statements and other
disclosures included in this annual report.





Revenue
Recognition





Revenues
consist primarily of sales of wireless system solutions and software solutions
with support contracts. We recognize revenue when (1) pervasive evidence of an
arrangement exists, (2) delivery has occurred and customer acceptance is
reasonably assured, (3) the fee is fixed or determinable, and (4) collectability
is probable.


50


We
generally provide wireless system software service solutions and customized
software under short and long-term fixed-price contracts that require
significant production and customization. The contract periods range from two
months to approximately two years in length. We recognize income for these
contracts following both the percentage-of-completion method, measured by
contract milestones and on the basis of actual costs incurred versus the total
estimated contract costs, and on the completed contract method in accordance
with the ASC No. 605-35, “Construction-Type and Certain
Production-Type Contracts” and ASC No.985-605, “Software-revenue
recognition”.





Provided
unapproved change orders or claims occur in the future, in accounting for
contracts, we follow ASC No. 605-35. We will recognize as revenues costs
associated with unapproved change orders  or claims to the extent it
is probable that such claims and change orders will result in additional
contract revenue, and the amount of such additional revenue can be reliably
estimated. Contract losses are provided for in their entirety in the period that
they become known, without regard to the percentage-of-completion. However, we
have not experienced significant unapproved change orders in the
past.





The
software contracts generally provide for post-contract customer support (“PCS”)
for a period of one year from delivery of the software. The value of PCS revenue
is not separately reported and is accounted for as part of the entire fee under
the contract accounting methods described above since the PCS meets the criteria
specified in ASC No. 985-605-25-71 as follows:





·
              PCS
      is included in the total contract
price;





·
              PCS
      is for one year or less;





·
              estimated
      costs are insignificant;





·
              upgrades
      and enhancements during the PCS term have historically been and are
      expected to continue to be minimal and infrequent;
  and





·
              the
      contract does not include any service elements that are accounted for
      separately.





All other
services are provided under separate agreements and fee arrangements and the
related revenue is recognized over the period the services are
provided.





Unbilled
revenue consists of recognized recoverable costs and accrued profits on
contracts for which billings had not been presented to clients as of the balance
sheet date.





We
present all sales revenue net of a value-added tax (“VAT”) or a sales
tax.





Cost of
sales.  When the criteria for revenue recognition have been
met, costs incurred are recognized as cost of sales. Cost of sales (exclusive of
depreciation and amortization) primarily includes the cost of the hardware
purchased from the third parties, direct labor, materials and the applicable
share of overhead expense directly related to the execution of services and
delivery of projects.





Accounts
receivable





Accounts
receivable are recorded at net realizable value consisting of the carrying
amount less an allowance for uncollectible accounts as needed. The allowance for
doubtful accounts is the Company’s best estimate of the amount of probable
credit losses in the Company’s existing accounts receivable. The Company
determines the allowance based on aging data, historical collection experience,
customer specific facts and economic conditions. Account balances are charged
off against the allowance after all means of collection have been exhausted and
the potential for recovery is considered remote. The Company did not have any
off-balance-sheet credit exposure related to its customers.


51


Inventories





Inventories
consist of raw materials, finished goods, and work-in-progress, which include
the direct labor, direct materials and overhead costs related to projects.
Inventories are stated at lower of cost or market value. Cost is determined
using first in first out method.





Where
there is evidence that the market value of inventories, in their disposal in the
ordinary course of business, will be less than cost, whether due to physical
deterioration, obsolescence, changes in price levels, or other causes, a
provision is accrued for the difference with charges to cost of goods
sold.





Share-based
compensation





Share
options granted to employees and independent directors are accounted for under
ASC 718, "Share-Based Payment". In accordance with ASC 718, the Company
determines whether a share option should be classified and accounted for as a
liability award or an equity award. All grants of share options to employees
classified as equity awards are recognized in the financial statements based on
their grant date fair values. All grants of share options to employees
classified as liability awards are re-measured at the end of each reporting
period with an adjustment for fair value recorded to the current period expense
in order to properly reflect the cumulative expense based on the current fair
value of the vested options over the vesting period. The Company has elected to
recognize compensation expenses using the Black-Scholes-Merton (BSM)
option-pricing model estimated at the grant date based on the award’s fair value
and is recognized as expense on a straight-line basis for each separately
vesting portion of the award (the graded vesting attribution
method).





Restricted
stock units (RSUs) are measured based on the fair market values of the
underlying stock on the dates of grant. Shares are issued on the vesting dates
net of the statutory withholding requirements to be paid by us on behalf of our
employees. As a result, the actual number of shares issued will be fewer than
the actual number of RSUs outstanding. Also, the Company recognizes stock-based
compensation using the graded vesting attribution method.





The
Company records share-based compensation expense for awards granted to
non-employees in exchange for services at fair value in accordance with the
provisions of ASC 505-50, "Equity based" payment to non-employees. For the
awards granted to non-employees, the Company will record compensation expenses
equal to the fair value of the share at the measurement date, which is
determined to be the earlier of the performance commitment date or the service
completion date.





Impairment
of long-lived assets





The
Company applies the Accounting Standards Codification (“ASC”) No. 360-10
“Property, plant and equipment”, ASC NO. 360 requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable through the
estimated undiscounted cash flows expected to result from the use and eventual
disposition of the assets. Whenever any such impairment exists, an impairment
loss will be recognized for the amount by which the carrying value exceeds the
fair value.





The
Company tests long-lived assets, including property, plant and equipment and
intangible assets subject to periodic amortization, for recoverability at least
annually or more frequently upon the occurrence of an event or when
circumstances indicate that the net carrying amount is greater than its fair
value. Assets are grouped and evaluated at the lowest level for their
identifiable cash flows that are largely independent of the cash flows of other
groups of assets. The Company considers historical performance and future
estimated results in its evaluation of potential impairment and then compares
the carrying amount of the asset to the future estimated cash flows expected to
result from the use of the asset. If the carrying amount of the asset exceeds
estimated expected undiscounted future cash flows, the Company measures the
amount of impairment by comparing the carrying amount of the asset to its fair
value. The estimation of fair value is generally measured by discounting
expected future cash flows as the rate the Company utilizes to evaluate
potential investments. The Company estimates fair value based on the information
available in making whatever estimates, judgments and projections are considered
necessary. There were no events or changes in circumstances that necessitated a
review of impairment of long-lived assets as of September 30, 2010 and November
30, 2009.


52


Recently
Issued Accounting Standards





In July
2010, the FASB issued Accounting Standards Update 2010-20 which amended
“Receivables” (Topic 310). ASU 2010-20 is intended to provide additional
information to assist financial statement users in assessing an entity’s risk
exposures and evaluating the adequacy of its allowance for credit losses. The
disclosures as of the end of a reporting period are effective for interim and
annual reporting periods ending on or after December 15, 2010. The disclosures
about activity that occurs during a reporting period are effective for interim
and annual reporting periods beginning on or after December 15, 2010. The
amendments in ASU 2010-20 encourage, but do not require, comparative disclosures
for earlier reporting periods that ended before initial adoption. However, an
entity should provide comparative disclosures for those reporting periods ending
after initial adoption. The Company is currently assessing its implementation of
this new guidance, but does not expect a material impact on the Company’s
consolidated and combined financial statements.





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“ASC Topic 855”), which
is effective for interim or annual financial periods ending after June 15, 2009.
ASC Topic 855 establishes general standards of accounting and disclosure of
events that occur after the balance sheet but before financial statements are
issued or are available to be issued. However, since the Company is a public
entity, management is required to evaluate subsequent events through the date
that financial statements are issued and disclose the date through which
subsequent events have been evaluated, as well as the date the financial
statements were issued. ASC Topic 855 was adopted since its interim period ended
June 30, 2009.





In
February 2010, the FASB issued ASU No. 2010-09 which removes the requirement for
an SEC filer to disclose a date in both issued and revised financial statements.
This amendment shall be applied prospectively for interim or annual financial
periods ending after June 15, 2010. Management does not believe the adoption
will have a material effect on the Company’s financial statements.





During
2009 and 2010, the FASB has issued several ASU’s – ASU No. 2009-02 through ASU
No. 2010-13. Except for ASU’s No. 2010-09 and ASU’s No. 2010-20 discussed above,
the ASU’s entail technical corrections to existing guidance or affect guidance
related to specialized industries or entities and therefore have minimal, if
any, impact on the Company.




B.
LIQUIDITY AND
CAPITAL RESOURCES





The
information contained in “Item 5. Operating and Financial Review and Prospects –
A. Operating Results – Liquidity and Capital Resources” is incorporated herein
by reference.




C.  RESEARCH
AND DEVELOPMENT, PATENTS AND LICENSES, ETC.





The
discussions of our research and development activities contained in “Item
4.  Information about our Company – B. Business Overview – Research
and Development” and “Item 5.  Operating and Financial Review and
Prospects – A. Operating Results – Operating Expenses – Research and Development
Expenses” are incorporated herein by reference.   In the years
ending September 30, 2010, 2009 and 2008, we spent $179,000, $139,000 and
$79,000, respectively, on research and development activities.





D. TREND
INFORMATION.




China
Outlook




In
November 2008, China unveiled a stimulus package estimated at RMB 4 trillion, or
$570 billion, which will be spent over a two-year span to finance programs in
ten major areas, such as low-income housing, rural infrastructure, water,
electricity, transportation, the environment, technological innovation and
rebuilding from several disasters, most notably the May 12, 2008 earthquake in
Sichuan province.  We believe China’s recent stimulus package is
likely to contribute to our growth and the growth of our customers in the
future. Pursuant to this stimulus package, over $42 billion will be invested in
the expansion of 4G technology in China. According to the plans of the PRC
central government, China is to deploy 4G service by 2012.  The 4G
technology will be focused on the open-architecture convergence of multiple
wireless standards including TD-SCDMA, TD-OFDMA and other air
interfaces.




Industry
and Market Outlook




China
launched the "Sensing China" program with approximately $80 billion budgeted for
research, development and standardization of next generation wireless, mobile
and sensor technologies for the China markets. China is rolling out the 3G
networks nationwide. However, 3G is not a long-term strategy of
China.  Rather, based on the central government’s strategic order, all
mobile operators have been instructed to prepare for a smooth transition to 4G
by 2012. China’s 4G technology is fully focused on the converged solutions of
3G, LTE, WiFi and WiMax, etc.


53




Top
Line Growth Drivers




We believe that the following are the
primary drivers of our top line growth:




·
            As
      of September 30, 2010, our uncompleted project base was RMB10.4 million
      (approximately $1.5 million), including RMB 0.7 million (approximately
      $0.1 million) of software license revenue and RMB 9.6 million
      (approximately $1.4 million) of wireless system solutions to be recognized
      in future years.




·
            We
      anticipate increasing demand for value-added services such as maintenance
      and training.




·
            The
      upward trend in applications upgrades from existing
    customers.




·
            We
      anticipate solid demand from leading oil companies and large manufactures
      under attractive economic
conditions.




·
            We
      seek to deepen penetration and expand market share via our plan to further
      develop our mobile enterprise solutions by leveraging our relationships
      with three major telecom companies.




Channel
Expansion Initiatives




Currently, we derive approximately half
of our revenue from China’s three mega-cities – Beijing, Shanghai and Guangzhou
–and approximately 80% of our total revenue from eight first tier cities
(including the mega-cities) in China.  However, the continued
expansion of many local government agencies, including current Kingtone
customers, into China’s second and third tier cities presents a significant
opportunity to gain additional market share in these growing markets. As such,
one of our key initiatives going forward was to enhance penetration into second
and third tier cities, by investing approximately RMB7.5 million in order to
increase the coverage of our sales and distribution network from 10 to up to 15
provinces in China. We have recently opened up another branch office in Lhasa,
Tibet in addition to our existing offices in Beijing and Chengdu.




Underpinning our successful sales &
marketing strategy is our continued investment in R&D, which is focused on
two areas: core software solutions and development platforms. Our strategy
consists of upgrading existing systems and developing new versions. In fiscal
year 2011, we will continue to invest in new products and services to increase
revenue potential from existing clients and drive the expansion of our
addressable markets. With our mobile solutions successfully applied in police,
first response and environmental industries, we continue to expand our vertical
application solutions into transportation industry and electronic government
affairs. Furthermore, we have  extended our enterprise solutions to
more mobile phone operating systems, such as Android, iPhone and Windows Phone
7.0 in order to meet various customers’ needs. R&D investment in new
releases of core software solutions and hardware has enabled us to improve our
market position, further penetrate into second and third tier cities and broaden
the versatility of our products and solutions. We will continue to broaden our
service offerings in order to generate new revenue streams and a more even
distribution of total revenue throughout the year.




E.  OFF-BALANCE
SHEET ARRANGEMENTS





On
December 18, 2009, Kingtone Information entered a mortgage collateral agreement
with rural credit cooperation of Chang’an District, Xi’an City, pursuant to
which, Kingtone Information mortgaged its office space located at 3/F, Block A,
South Tai Bai Road, Gaoxin District, Xi’an City, to secure a RMB4,400,000, or
approximately $644,396, loan to Shaanxi Tongli Information Technology Co., Ltd.
The mortgaged period is two years ending December 17, 2011, which is the
repayment date of such loan.




Except
for the mortgage referenced above, we have not entered into any financial
guarantees or other commitments to guarantee the payment obligations of any
third parties. We have not entered into any derivative contracts that are
indexed to our shares and classified as shareholder’s equity, or that are not
reflected in our consolidated financial statements. Furthermore, except for the
mortgage referenced above, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.


54


F.  TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS





As of September 30, 2010, we did not
have any contractual obligations required to be disclosed in this Item
5.F.




ITEM 6.  DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES.





A.  DIRECTORS
AND SENIOR MANAGEMENT.





Executive
Officers and Directors





The
following table sets forth the names and ages as of the date of this annual
report of each of our executive officers and directors:




Name
              
              Age
              
              PositionTao
      Li
              
              45
              
              ChairmanPeng
      Zhang
              
              43
              
              Chief
      Executive OfficerYing
      Yang
              
              36
              
              Chief
      Financial OfficerLi
      Wu
              
              48
              
              DirectorPengguo
      Xi
              
              44
              
              Vice
      President, Research and DevelopmentXianying
      Chen
              
              36
              
              Vice
      President, Application DevelopmentLili
      Dong(1)(2)(3)
              
              50
              
              Independent
      DirectorMelody
      Shi(1)(2)(3)
              
              37
              
              Independent
      DirectorJames
      Fong(1)(2)(3)
              
              45
              
              Independent
      Director





(1)
            Member
      of the Compensation Committee


(2)
            Member
      of the Audit Committee


(3)
            Member
      of the Nominating and Corporate Governance
  Committee





Set forth
below is biographical information concerning our executive officers and
directors.





Tao Lihas
served as our chairman of the board of directors since December 2009. Since
December 26, 2007, Mr. Li has served as the chairman of the board of directors,
Chief Executive Officer and President of China Green Agriculture, Inc. (NYSE:
CGA), a producer of humic acid based fertilizer products. Currently, Mr. Li
devotes approximately 70% of his professional time to China Green Agriculture,
Inc. Mr. Li has served as the President and CEO of Shaanxi TechTeam Jinong Humic
Acid Product Co., Ltd., a wholly-owned subsidiary of China Green Agriculture,
Inc., since 2000. Mr. Li established Xi’an TechTeam Industry (Group) Co., Ltd.
in 1996 and established TechTeam in 2000. He graduated from Northwest
Polytechnic University and obtained his Master’s degree in heat and metal
treatment. Mr. Li is the current Vice Chairman of the China Green Food
Association. Previously, he has held positions at the World Bank Loan Office of
China Education Commission, National Key Laboratory for Low Temperature
Technology, and Northwest Polytechnic University. Mr. Li is active in Shaanxi
Province business and trade organizations including as a member of the CPPCC
Shaanxi Committee, the Shaanxi Provincial Decision-Making Consultation
Committee, Vice Chairman of the Shaanxi Provincial Federation of Industry and
Commerce, Vice President of the Shaanxi Overseas Friendship Association, Vice
Chairman of the Shaanxi Provincial Credit Association, Vice Chairman of the
Shaanxi Provincial Youth Entrepreneurs Association, Vice Chairman of the Xi’an
Municipal Federation of Industry and Commerce and Vice Chairman of the Xi’an
Municipal Youth Entrepreneurs Association.


55


Peng Zhang
has served as our Chief Executive Officer since December 2009. Mr. Zhang has
served as the president and chief executive officer of Kingtone Information, our
contractually-controlled PRC operating company, since March 2009. Mr. Zhang
joined Kingtone Information in August 2001 as an engineer and subsequently
worked as the manager of the automation department, deputy manager and manager
of the management and control department, and the vice president. Prior to
joining Kingtone Information, Mr. Zhang was the deputy general manager of
Lanzhou Hualong Gardening Co., Ltd. from January 2000 to July 2001. Prior to
that, Mr. Zhang worked as a technician, assistant engineer, engineer and deputy
department head at the material supply department of Yumen Petroleum
Administration Bureau of China National Petroleum Corporation (“CNPC”) from 1988
to 1999. Mr. Zhang graduated from Chongqing Petroleum Technical School with an
Associate degree in mining mechanics in 1988. He continued his education at the
Open College of the Communist Party of China (“CPC”) University, Gansu Campus
and graduated in 2000 with a Bachelor’s degree in Business
Administration.




Ying Yang
has served as our Chief Financial Officer since April 23, 2010. Prior to
becoming our Chief Financial Officer, Ms. Yang served as the Chief Financial
Officer of China Green Agriculture, Inc. (NYSE: CGA) since September 2008.
Immediately prior to joining China Green Agriculture, Inc., she worked as the
Financial Reporting and Analysis Manager of Beckman Coulter, Inc., since August
2006. From December 2004 to July 2006, Ms. Yang worked in the financial
department of Ready Pac Foods, Inc., a supplier of fresh-cut produce in
California, assisting with financial reporting and risk management. Prior to
2004, Ms. Yang held positions with U.S. and Chinese companies engaged in the
textile and chemical industries. Ms. Yang received a Master’s degree in Business
Administration from University of California, Irvine, and a Bachelor’s degree in
Economics from University of International Business & Economics in Beijing.
She is a member of AICPA with a CPA license and has also received an Associate
in Risk Management (ARM) designation.





Li Wu has
served as a director of our company since December 2009, and served as the Chief
Financial Officer of our company from December 2009 to April 2010. Since 2004,
Ms. Wu was the finance director of Kingtone Information, our
contractually-controlled PRC operating company. Prior to this position, she
worked as the Deputy Finance Director at the state-owned Xi’an Metalforming
Machine Factory from 1981 to 2003. Ms. Wu graduated from Shaanxi Finance and
Economics College and obtained her Bachelor’s degree in 1990. She is a Certified
Public Account in PRC.





Pengguo Xi
has served as our vice president of research and development of since December
2009. In this position, Mr. Xi oversees the development efforts of our core
middleware platform, CIT-converged applications and hardware products. Mr. Xi
has served as a senior programmer at Kingtone Information since 2003. Since
then, he served as the manager of platform technology department of the R&D
center, deputy manager of the R&D center, general manager of the project
implementation department, and has been serving the vice president and general
manager of the R&D center since December 2008. Prior to joining Kingtone
Information, Mr. Xi worked at Shaanxi Shengfang Science & Technology Co.,
Ltd, Xi’an Innovation Software Company, Beijing NTT DATA Integration Co., Ltd,
and Beijing Dashou Co., Ltd. Mr. Xi graduated from Xi’an Electronic Technology
University and obtained his Master’s degree in computer science in 2003 and his
Bachelor’s degree in computer information management in 2000.





Xianying
Chen has served as our vice president of application development since
December 2009. In this position, Mr. Chen oversees the development efforts of
our vertical industry applications. Mr. Chen has served as a software system
analyst for Kingtone Information since 2001. He has subsequently served as
manager of software development department, senior project manager of industrial
control department, general manager of R&D center, general manager of
product planning center. Now he serves as the general manager of project
implementation department, since 2008 Prior to joining Kingtone Information, Mr.
Chen was an assistant engineer at Shaanxi Electric Power Design Institute from
1997 to 2001. Mr. Chen graduated from Shanghai Jiaotong University and obtained
his Master’s degree in computer science in 2000 and his Bachelor’s degree in
electric system and automation in 1997.




Dr. Lili
Dong has served as an independent director of our company since March
2010. Dr. Dong has over 20 years experience in the computing distributed system,
computer network application and data mining research. She has been a professor
of Xin’an Construction Science & Technology University since December 2007.
Dr. Dong has led several important research projects, including Distributed
Object Computing Models and Multimedia Digital Watermarking Application projects
funded by Shanxi Province Fund, Peer to Peer Network Communication Technology
project funded by Xi’an Science & Technology Bureau.




Melody Shi
has served as an independent director of our company since March 2010. Ms. Shi
served  as chief financial officer at China Infrastructure
Construction Inc. from December 2009 to October 2010. Previously, she served as
chief financial officer at Shengtai Pharmaceutical Inc. from 2008 to December
2009. Prior to that, Ms. Shi served as Audit Manager at Kabani & Co. Inc.
from 2005 to 2008. Ms. Shi graduated from the University of California, Irvine
with a MBA degree in 2003 and Beijing Polytechnic University in 1997 with a
Bachelor’s degree in Computer Science and International Trade and Business. Ms.
Shi is a CPA in the United States and is fluent in English and
Chinese.


56


James Fong
has served as an independent director of our company since April 2010. From 2000
until the present, Mr. Fong has been a principal of Fong Capital, a private real
estate development and financing advisory firm based in New York City. From 2001
until 2006, Mr. Fong served as a due diligence professional and portfolio
manager of funds of hedge funds, including funds at Collins Capital and
Integrated Finance Ltd. From 1992 until 1999, Mr. Fong held various positions in
the debt capital markets groups of the Hong Kong offices of Merrill Lynch, UBS
and Citicorp. In these capacities, he advised, executed, and raised debt
financing for infrastructure projects, telecommunication, industrials, and
financial institutions. Mr. Fong holds a bachelor's degree from the University
of Pennsylvania, a master's degree in Real Estate Development from Columbia
University, and a law degree from the University of Minnesota. Mr. Fong is a
licensed attorney in the State of New York.




B.  COMPENSATION.





Compensation
of Directors and Executive Officers





For the
fiscal year ended September 30, 2010, we paid an aggregate of approximately
RMB503,000 ($76,000) in cash compensation to our executive officers. For the
fiscal year ended September 30, 2010, we paid an aggregate of approximately
$126,000 in cash compensation to our directors for serving on our board of
directors.





Other
than non-employee directors, we do not intend to compensate directors for
serving on our board of directors or any of its committees. We do, however,
intend to reimburse each member of our board of directors for out-of-pocket
expenses incurred by each director in connection with attending meetings of the
board of directors and its committees.





In the
year ending September 30, 2010, we made the following grants under our 2010
Omnibus Incentive Plan to our directors and executive officers:





Name
                        
                        Type of
                          Equity Award
                        
                        Number of
                          Ordinary Shares
                        
                        
                        Exercise Price
                        
                        Grant Date
                        
                        Expiration DateYing
      Yang
                        
                        Restricted Shares
                        
                        
                        100,000
                        (1)
                        
                        
                        n/a
                        
                        May
      14, 2010
                        
                        
                        n/aYing
      Yang
                        
                        Options
                        
                        
                        150,000
                        (2)
                        
                        $
                        4.00
                        
                        May
      14, 2010
                        
                        May
      14, 2020Lili
      Dong
                        
                        Options
                        
                        
                        10,000
                        (3)
                        
                        $
                        4.00
                        
                        May
      14, 2010
                        
                        May
      14, 2020Melody
      Shi
                        
                        Options
                        
                        
                        10,000
                        (3)
                        
                        $
                        4.00
                        
                        May
      14, 2010
                        
                        May
      14, 2020James
      Fong
                        
                        Options
                        
                        
                        10,000
                        (3)
                        
                        $
                        4.00
                        
                        May
      14, 2010
                        
                        May
      14, 2020





(1)
            The
      restricted stock vests according to the following vesting
      schedule:  (i) 50,000 shares vest on April 23, 2011 and (ii)
      50,000 shares vest on April 23,
2012.





(2)
            The
      options vest according to the following vesting schedule:  (i)
      50,000 shares vested on the grant date, (ii) 50,000 shares vest on April
      23, 2011 and (ii) 50,000 shares vest of April 23,
  2012.





(3)
            The
      options vest according to the following vesting schedule:  (i)
      3,334 shares vested on the grant date, (ii) 3,333 shares vest on May 14,
      2011 and (ii) 3,333 shares vest of May 14,
2012.





2010
Omnibus Incentive Plan





A
description of the provisions of our 2010 Omnibus Incentive Plan (the “Incentive
Plan”) is set forth below. This summary is qualified in its entirety by the
detailed provisions of the Incentive Plan, which was included as an exhibit to
our initial registration statement on Form F-1 filed on April 13,
2010.


57


In April
2010, our board of directors and our shareholders approved and adopted the
Incentive Plan, reserving 1,500,000 ordinary shares for future issuances
thereunder. The purpose of the Incentive Plan is to attract and to encourage the
continued employment and service of, and maximum efforts by, our officers, key
employees and other key individuals by offering those persons an opportunity to
acquire or increase a direct proprietary interest in our operations and future
success. At September 30, 2010, we had outstanding under the Incentive Plan the
equity awards set forth in the table above.





Administration





The
Incentive Plan is administered by our board of directors, or at the discretion
of the board, by our compensation committee. Our board of directors has
delegated authority to our compensation committee to administer the Incentive
Plan. Subject to the terms of the Incentive Plan, the compensation committee may
select participants to receive awards, determine the types of awards and terms
and conditions of awards, and interpret provisions of the Incentive
Plan.





The
ordinary shares issued or to be issued under the Incentive Plan consist of
authorized but unissued shares. If any ordinary shares covered by an award are
not purchased or are forfeited, or if an award otherwise terminates without
delivery of any ordinary shares, then the number of ordinary shares counted
against the aggregate number of ordinary shares available under the plan with
respect to the award will, to the extent of any such forfeiture or termination,
again be available for making awards under the Incentive Plan.





Eligibility





Awards
may be made under the Incentive Plan to our employees, officers, directors,
consultants or advisers or to any of our affiliates, and to any other individual
whose participation in the Incentive Plan is determined to be in our best
interests by our board of directors.





Amendment
or Termination of the Plan




Our board
of directors may terminate or amend the Incentive Plan at any time and for any
reason. No amendment, however, may adversely impair the rights of grantees with
respect to outstanding awards. The Incentive Plan has a term of ten years.
Amendments will be submitted for shareholder approval to the extent required by
applicable stock exchange listing requirements or other applicable
laws.




Options





The
Incentive Plan permits the granting of options to purchase ordinary shares
intended to qualify as incentive share options under the Internal Revenue Code
and share options that do not qualify as incentive share options, or
non-qualified share options.





The
exercise price of each share option may not be less than 100% of the fair market
value of our ADSs representing ordinary shares on the date of grant. In the case
of certain 10% shareholders who receive incentive share options, the exercise
price may not be less than 110% of the fair market value of our ADSs
representing ordinary shares on the date of grant. An exception to these
requirements is made for options that we grant in substitution for options held
by employees of companies that we acquire. In such a case the exercise price is
adjusted to preserve the economic value of the employee’s share option from his
or her former employer.





The term
of each share option is fixed by the compensation committee and may not exceed
ten years from the date of grant. The compensation committee determines at what
time or times each option may be exercised and the period of time, if any, after
retirement, death, disability or termination of employment during which options
may be exercised.





Options
may be made exercisable in installments. The award agreement provides the
vesting of the options. Exercisability of options may be accelerated by the
compensation committee.





In
general, an optionee may pay the exercise price of an option by (1) cash or
check (in U.S. dollars or Renminbi or other local currency as approved by the
compensation committee), (2) ordinary shares held for such period of time as may
be required by the compensation committee, (3) delivery of a notice of a market
order with a broker with respect to ordinary shares then issuable upon exercise
of an option, and that the broker has been directed to pay us a sufficient
portion of net proceeds of the sale in satisfaction of the exercise price,
provided that payment of such proceeds is then made to us upon settlement of
such sale, (4) other property acceptable to the compensation committee with a
fair market value equal to the exercise price, (5) cashless exercise or (6) any
combination of the foregoing.


58


Share
options granted under the Incentive Plan may not be sold, transferred, pledged,
or assigned other than by will or under applicable laws of descent and
distribution. However, we may permit limited transfers of non-qualified options
for the benefit of immediate family members of grantees to help with estate
planning concerns or pursuant to a domestic relations order in settlement of
marital property rights.





Other
Awards





The
compensation committee may also award under the Incentive Plan:




·
            ordinary
      shares subject to restrictions;




·
            deferred
      ordinary shares, credited as deferred ordinary share units, but ultimately
      payable in the form of unrestricted ordinary shares in accordance with the
      terms of the grant or with the participant’s deferral
      election;




·
            ordinary
      share units subject to
restrictions;




·
            unrestricted
      ordinary shares, which are ordinary shares issued at no cost or for a
      purchase price determined by the compensation committee which are free
      from any restrictions under the 2010 Omnibus Incentive
    Plan;




·
            dividend
      equivalent rights entitling the grantee to receive credits for dividends
      that would be paid if the grantee had held a specified number of ordinary
      shares; or




·
            a
      right to receive a number of ordinary shares or, in the discretion of the
      compensation committee, an amount in cash or a combination of ordinary
      shares and cash, based on the increase in the fair market value of the
      ADSs representing ordinary shares underlying the right during a stated
      period specified by the compensation
committee.





Effect
of Certain Corporate Transactions





Certain
change of control transactions involving us may cause awards granted under the
Incentive Plan to vest, unless the awards are continued or substituted for by
the surviving company in connection with the corporate transaction.





Unless
otherwise provided in the appropriate option agreement on the date of grant or
provided by our board of directors thereafter with the consent of the grantee,
options granted under the Incentive Plan become exercisable in full following
(1) a dissolution of our company or a merger, consolidation or reorganization of
our company with one or more other entities in which we are not the surviving
entity, (2) a sale of substantially all of our assets to another person or
entity, or (3) any transaction (including without limitation a merger or
reorganization in which we are the surviving entity) which results in any person
or entity owning 50% or more of the combined voting power of all classes of our
shares.





Adjustments
for Dividends and Similar Events




The
compensation committee will make appropriate adjustments in outstanding awards
and the number of ordinary shares available for issuance under the Incentive
Plan, including the individual limitations on awards, to reflect ordinary share
dividends, stock splits and other similar events.




59


C.  BOARD
PRACTICES.
 Board
of Directors
 
 Our board
of directors consists of five members being Mr. Tao Li, Ms. Li Wu, Dr. Lili
Dong, Ms. Melody Shi and Mr. James Fong. Our directors hold office until our
annual meeting of shareholders, where their successor will be duly elected and
qualified, or until the directors’ death, resignation or removal, whichever is
earlier. Our directors are not subject to a term of office and hold office until
their resignation, death or incapacity or until their respective successors have
been elected and qualified in accordance with our fourth amended and restated
memorandum of association and articles of association. A director will be
removed from office if, among other things, the director (1) becomes bankrupt,
(2) dies or becomes of unsound mind, or (3) is absent from meetings of our board
of directors for six consecutive months without leave and our board of directors
resolves that the office is vacated. A director is not entitled to any special
benefits upon termination of service with the company.
 
 Director
Independence
 
 Our board
of directors consists of five members, three of whom have been determined by us
to be independent directors within the meaning of the independent director
guidelines of the Nasdaq Corporate Governance Rules (the “Nasdaq
Rules”).
 
 Committees
of Our Board of Directors
 
 To
enhance our corporate governance, we established three committees under our
board of directors: an audit committee, a compensation committee, and a
nominating and corporate governance committee. We have adopted a charter for
each of these committees. The committees have the following functions and
members.
 
 Audit
Committee
  Our audit
committee reports to our board of directors regarding the appointment of our
independent public accountants, the scope and results of our annual audits,
compliance with our accounting and financial policies and management’s
procedures and policies relating to the adequacy of our internal accounting
controls. Our audit committee consists of Lili Dong, Melody Shi, and James Fong.
Ms. Shi, having accounting and financial management expertise, serves as the
chairman of the audit committee. Our board of directors has determined that each
of these persons meet the definition of  an “independent director”
under the applicable Nasdaq Rules and under Rule 10A-3 of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”).
  Our audit
committee is responsible for, among other things:
 ·
                  Our audit committee is responsible for, among other
      things:
 ·
                the
      appointment, evaluation, compensation, oversight and termination of the
      work of our independent auditor (including resolution of disagreements
      between management and the independent auditor regarding financial
      reporting);
  ·
                an
      annual performance evaluation of the audit
  committee;
  ·
                establishing
      procedures for the receipt, retention and treatment of complaints
      regarding accounting, internal accounting controls, auditing matters or
      potential violations of law, and the confidential, anonymous submission by
      our employees of concerns regarding questionable accounting or auditing
      matters or potential violations of
law;
  ·
                ensuring
      that it receives an annual report from our independent auditor describing
      our internal control procedures and any steps taken to deal with material
      control deficiencies and attesting to the auditor’s independence and
      describing all relationships between the auditor and
  us;
  ·
                reviewing
      our annual audited financial statements and quarterly financial statements
      with management and our independent
auditor;
  ·
                reviewing
      and approving all proposed related party
  transactions;
  ·
                reviewing
      our policies with respect to risk assessment and risk
      management;
  ·
                meeting
      separately and periodically with management and our independent auditor;
      and
  ·
                reporting
      regularly to our board of
directors.
  60
 
 Compensation
Committee
 
 Our
compensation committee assists the board of directors in reviewing and approving
the compensation structure of our directors and executive officers, including
all forms of compensation to be provided to our directors and executive
officers. In addition, the compensation committee reviews share compensation
arrangements for all of our other employees. Members of the compensation
committee are not prohibited from direct involvement in determining their own
compensation. Our chief executive officer is not permitted to be present at any
committee meeting during which his or her compensation is deliberated. Our
compensation committee consists of Lili Dong, Melody Shi, and James Fong, with
Dr. Dong serving as the chairman of the compensation committee. Our board of
directors has determined that each of these persons meet the definition of
“independent director” under the applicable requirements of the Nasdaq
Rules.
 
 Our
compensation committee is responsible for, among other things:
  ·
                reviewing
      and approving corporate goals and objectives relevant to the compensation
      of our chief executive officer, evaluating the performance of our chief
      executive officer in light of those goals and objectives and setting the
      compensation level of our chief executive officer based on this
      evaluation;
  ·
                reviewing
      and making recommendations to the board with respect to the compensation
      of our executives, incentive compensation and equity-based plans that are
      subject to board approval;
and
  ·
                providing
      annual performance evaluations of the compensation
    committee.
 
 Nominating
and Corporate Governance Committee
 
 Our
nominating and corporate governance committee assists the board of directors in
identifying and selecting or recommending individuals qualified to become our
directors, developing and recommending corporate governance principles and
overseeing the evaluation of our board of directors and management. Our
nominating and corporate governance committee consists of Lili Dong, Melody Shi,
and James Fong, with Mr. Fong serving as the chairman of the nominating and
corporate governance committee. Our board of directors has determined that each
of these persons meet the definition of “independent director” under the
applicable requirements of the Nasdaq Rules.
  Our
nominating and corporate governance committee is responsible for, among other
things:
 ·
                  selecting
      and recommending to our board nominees for election or re-election to our
      board, or for appointment to fill any
vacancy;
  ·
                reviewing
      annually with our board the current composition of the board of directors
      with regards to characteristics such as independence, age, skills,
      experience and availability of service to
us;
  ·
                selecting
      and recommending to our board the names of directors to serve as members
      of the audit committee and the compensation committee, as well as the
      nominating and corporate governance committee
  itself;
  ·
                advising
      our board of directors periodically with regards to significant
      developments in the law and practice of corporate governance as well as
      our compliance with applicable laws and regulations, and making
      recommendations to our board of directors on all matters of corporate
      governance and on any remedial action to be taken;
  and
  ·
                monitoring
      compliance with our code of business conduct and ethics, including
      reviewing the adequacy and effectiveness of our procedures to ensure
      proper compliance.
  Code
of Business Conduct and Ethics
 
 Our board of directors adopted a code
of business conduct and ethics applicable to our directors, officers and
employees.
 
 Duties
of Directors
 
 Under
British Virgin Islands law, our directors have a duty to act honestly, in good
faith and with a view to our best interests. Our directors also have a duty to
exercise the care, diligence and skills that a reasonably prudent person would
exercise in comparable circumstances. In fulfilling their duty of care to us,
our directors must ensure compliance with our memorandum of association and
articles of association. We have the right to seek damages if a duty owed by our
directors is breached.
  61
 
 The
functions and powers of our board of directors include, among
others:
  ·
              appointing
      officers and determining the term of office of the
    officers;
  ·
              authorizing
      the payment of donations to religious, charitable, public or other bodies,
      clubs, funds or associations as deemed
  advisable;
  ·
              exercising
      the borrowing powers of the company and mortgaging the property of the
      company;
  ·
              executing
      cheques, promissory notes and other negotiable instruments on behalf of
      the company; and
  ·
              maintaining
      or registering a register of mortgages, charges or other encumbrances of
      the company.
  Remuneration
and Borrowing
 
 The
directors may receive such remuneration as our board of directors may determine
from time to time. Each director is entitled to be repaid or prepaid all
traveling, hotel and incidental expenses reasonably incurred or expected to be
incurred in attending meetings of our board of directors or committees of our
board of directors or shareholder meetings or otherwise in connection with the
discharge of his or her duties as a director. The compensation committee will
assist the directors in reviewing and approving the compensation structure for
the directors.
 
 Our board
of directors may exercise all the powers of the company to borrow money and to
mortgage or charge our undertakings and property or any part thereof, to issue
debentures, debenture stock and other securities whenever money is borrowed or
as security for any debt, liability or obligation of the company or of any third
party.
 
 Qualification
 
 A
director is not required to hold shares as a qualification to
office.
 
 Limitation
on Liability and Other Indemnification Matters
 
 British
Virgin Islands law does not limit the extent to which a company’s memorandum of
association and articles of association may provide for indemnification of
officers and directors, except to the extent any such provision may be held by
the British Virgin Islands courts to be contrary to public policy, such as to
provide indemnification against civil fraud or the consequences of committing a
crime.
 
 Under our
memorandum of association and articles of association, we may indemnify our
directors, officers and liquidators against all expenses, including legal fees,
and against all judgments, fines and amounts paid in settlement and reasonably
incurred in connection with civil, criminal, administrative or investigative
proceedings to which they are party or are threatened to be made a party by
reason of their acting as our director, officer or liquidator. To be entitled to
indemnification, these persons must have acted honestly and in good faith with a
view to the best interest of the company and, in the case of criminal
proceedings, they must have had no reasonable cause to believe their conduct was
unlawful.
 
 Compensation
Committee Interlocks and Insider Participation
 
 None of
the members of our compensation committee is an officer or employee of our
company. None of our executive officers currently serves, or in the past year
has served, as a member of the board of directors or compensation committee of
any entity that has one or more executive officers serving on our board of
directors or compensation committee.
 
 Employment
Agreements
 
 Each of
our executive officers (except Ms. Yang, as discussed below) has entered into an
employment agreement with Softech, our wholly-owned PRC subsidiary. Softech may
terminate a senior executive officer’s employment for cause, at any time,
without prior notice or remuneration, for certain acts of the officer,
including, but not limited to, material violation of our regulations, failure to
perform agreed duties or embezzlement that caused material damage to us and
conviction of a crime. A senior executive officer may terminate his or her
employment at any time by 60-days prior written notice. Each senior executive
officer is entitled to certain benefits upon termination, including a severance
payment equal to a certain specified number of months of his or her then salary,
if he or she resigns for certain good reasons specified by the agreement or the
relevant rules or if Softech terminated his or her employment without any of the
above causes.
  62
 
 We have
an employment agreement with Ms. Ying Yang, pursuant to which she serves as our
chief financial officer. The employment agreement has a term of one year and
entitles Ms. Yang to an annual base salary of $160,000. The agreement will be
automatically extended for an additional year upon the same terms and conditions
unless either party provides notice to the other that the agreement shall not be
extended within 60 days prior to the end of the prior term. We may terminate the
agreement at any time for cause without prior written notice. Pursuant to the
terms of her employment agreement, upon the consummation of our May 2010 public
offering, Ms. Yang was granted under our 2010 Omnibus Incentive Plan (i) 100,000
restricted ordinary shares which vest in equal installments on April 23, 2011
and April 23, 2012, and (ii) options to purchase 150,000 ordinary shares at an
exercise price of $4.00 per share,  1/3 of which shall vest on the grant
date,  1/3 of which vested on April 23, 2011, and  1/3 of which shall
vest on April 23, 2012.
  D.  EMPLOYEES.
 
 As of
September 30, 2010, we had a total of 190 full-time employees, of which three
were in executive management, five were in accounting, 97 were in research and
development including 31 responsible for developing our core middleware, 48 were
responsible for developing vertical industry applications, 18 were responsible
for developing automation telematics applications, 29 were in vertical industry
application sales and 9 were in automation telematics application sales, one
were in procedure and quality control, four were in human resources and nine
were in administration. None of our employees is currently represented by a
union and/or collective bargaining agreements. We believe that we have good
relations with our employees and since our inception we have had no history of
work stoppages or union organizing campaigns.
  E.  SHARE OWNERSHIP.
 
 The
following table provides information as to the beneficial ownership of our
ordinary shares as of January 18, 2011 by the persons listed.Beneficial
ownership of shares is determined under the rules of the Securities and Exchange
Commission and generally includes any shares over which a person exercises sole
or shared voting or investment power. For purposes of the following table, a
person is deemed to have beneficial ownership of any ordinary shares of that
such person has the right to acquire within 60 days after the date of this
annual report. For purposes of computing the percentage of outstanding shares
held by each person, any shares that such person has the right to acquire within
60 days after the date of this annual report are deemed to be outstanding, but
are not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person. Except as otherwise noted, the persons named in
the table have sole voting and investment power with respect to all of the
ordinary shares beneficially owned by them. Unless otherwise indicated, the
address of each person listed is c/o Xi’an Kingtone Information Co., Ltd., 3rd
Floor, Borough A, Block A. No. 181, South Taibai Road, Xi’an, Shaanxi Province,
People’s Republic of China 710065.
 
 Percentage
ownership in the following table is based on 14,000,000 ordinary shares
outstanding on January 18, 2011.
 
 Name
                              
                              Position
                              
                              Number of Shares
                                Beneficially Owned
                              
                              
                              Percent of Shares
                                OutstandingOfficers
      and DirectorsTao
      Li
                              
                              Chairman
                              
                              
                              6,787,755
                              (1)
                              
                              
                              48.5
                              %Ying
      Yang
                              
                              Chief
      Financial Officer
                              
                              
                              150,000
                              (2)
                              
                              
                              1.1
                              %Li
      Wu
                              
                              Director
                              
                              
                              107,839
                              (3)
                              
                              
                              
                              *Peng
      Zhang
                              
                              Chief
      Executive Officer
                              
                              
                              35,357
                              (4)
                              
                              
                              
                              *Pengguo
      Xi
                              
                              Vice
      President, Research and Development
                              
                              
                              35,357
                              (5)
                              
                              
                              
                              *Xianying
      Chen
                              
                              Vice
      President, Application Development
                              
                              
                              35,357
                              (6)
                              
                              
                              
                              *Lili
      Dong
                              
                              Independent
      Director
                              
                              
                              3,333
                              (7)
                              
                              
                              
                              *Melody
      Shi
                              
                              Independent
      Director
                              
                              
                              3,333
                              (8)
                              
                              
                              
                              *James
      Fong
                              
                              Independent
      Director
                              
                              
                              3,333
                              (9)
                              
                              
                              
                              *All
      directors and executive officers as a group (9 persons)
                              
                              
                              
                              
                              7,053,825
                              
                              
                              
                              49.8
                              %5%
      ShareholdersSCGC
      Capital Holding Company Limited
                              
                              n/a
                              
                              
                              1,060,714
                              (10)
                              
                              
                              7.6
                              %Xuetao
      Chen
                              
                              n/a
                              
                              
                              883,982
                              (11)
                              
                              
                              6.3
                              %Hu
      Gao
                              
                              n/a
                              
                              
                              530,357
                              (12)
                              
                              
                              3.8
                              %
  63
 
 *
              Less
      than 1%.
  (1)
              Represents
      (i) 688,648 ADSs owned by Mr. Li and (ii) 6,099,107 ordinary shares held
      of record by Xtra Heights Management Ltd., a British Virgin Islands
      company (“Xtra”), which are beneficially owned by Mr. Li pursuant to a
      certain Call Option Agreement, dated December 15, 2009, between Mr. Li,
      Xtra and Ms. Sha Li, a Singapore resident (“Sha Li”). Additionally,
      pursuant to such agreement, Mr. Li has vested options to purchase
      3,049,554 ordinary shares from Xtra and unvested options to purchase
      3,049,554 ordinary shares from Xtra. There is no relationship between Mr.
      Li and Ms. Sha Li other than pursuant to the transactions disclosed
      herein. Xtra is the record holder of an aggregate of 6,806,250 shares, of
      which the remaining shares are beneficially owned by Kingtone Information
      shareholders other than Mr. Li, some of whom are officers of our company.
      See notes (2) through (6).
  (2)
              Represents
      (i) 100,000 restricted ordinary shares and (ii) options to purchase 50,000
      ordinary shares exercisable within 60 days, granted to Ms. Yang. Excludes
      options to purchase 100,000 ordinary shares not be exercisable within 60
      days granted to Ms. Yang.
  (3)
              Represents
      ordinary shares held of record by Xtra, which are beneficially owned by
      Ms. Wu pursuant to a certain Call Option Agreement, dated December 15,
      2009, between Ms. Wu, Xtra and Sha Li. Additionally, pursuant to such
      agreement, Ms. Wu has vested options to purchase 53,920 ordinary shares
      from Xtra and unvested options to purchase 53,919 ordinary shares from
      Xtra.
  (4)
              Represents
      ordinary shares held of record by Xtra, which are beneficially owned by
      Mr. Zhang pursuant to a certain Call Option Agreement, dated December 15,
      2009, between Mr. Zhang, Xtra and Sha Li. Additionally, pursuant to such
      agreement, Mr. Zhang has vested options to purchase 17,679 ordinary shares
      from Xtra and unvested options to purchase 17,678 ordinary shares from
      Xtra.
  (5)
              Represents
      ordinary shares held of record by Xtra, which are beneficially owned by
      Mr. Xi pursuant to a certain Call Option Agreement, dated December 15,
      2009, between Mr. Xi, Xtra and Sha Li. Additionally, pursuant to such
      agreement, Mr. Xi has vested options to purchase 17,679 ordinary shares
      from Xtra and unvested options to purchase 17,678 ordinary shares from
      Xtra.
  (6)
              Represents
      ordinary shares held of record by Xtra, which are beneficially owned by
      Mr. Chen pursuant to a certain Call Option Agreement, dated December 15,
      2009, between Mr. Chen, Xtra and Sha Li, an individual, pursuant to which
      Mr. Chen has the right to receive ordinary shares from Xtra upon the
      occurrence of certain events.
  (7)
              Represents
      options to purchase 3,333 ordinary shares exercisable within 60 days
      granted to Dr. Dong. Excludes options to purchase 6,667 ordinary shares
      not exercisable within 60 days granted to Dr.
  Dong.
  64
  (8)
              Represents
      options to purchase 3,333 ordinary shares exercisable within 60 days
      granted to Ms. Shi upon the consummation of this offering. Excludes
      options to purchase 6,667 ordinary shares not exercisable within 60 days
      granted to Ms. Shi.
  (9)
              Represents
      options to purchase 3,333 ordinary shares exercisable within 60 days
      granted to Mr. Fong upon the consummation of this offering. Excludes
      options to purchase 6,667 ordinary shares not exercisable within 60 days
      granted to Mr. Fong.
  (10)
              SCGC
      Capital Holding Company Limited, a British Virgin Islands company
      (“SCGC”), is owned by Shenzhen Capital (Hong Kong) Company Limited. The
      registered address of SCGC is P.O. Box 957, Offshore Incorporations
      Centre, Road Town, Tortola, British Virgin Islands. The beneficial owners
      of the shares held by SCGC are Shenzhen Capital Group Co., Ltd and Xi’an
      Hongtu Capital Co., Ltd., both of which are shareholders of Kingtone
      Information and are owned and controlled (as to voting and disposition) by
      the Shenzhen Municipal Government in the
PRC.
  (11)
              Represents
      ordinary shares held of record by Big Leap Enterprises Limited, a British
      Virgin Islands company (“Big Leap”), which are beneficially owned by Mr.
      Chen. Big Leap is the record holder of an aggregate of 1,060,714 shares,
      of which the remaining shares are beneficially owned by Kingtone
      Information shareholders other than Mr.
Chen.
  (12)
              Represents
      ordinary shares held of record by Silver Avenue Overseas Inc., a British
      Virgin Islands company (“Silver Avenue”), which are beneficially owned by
      Mr. Gao. Big Leap is the record holder of an aggregate of 972,322 shares,
      of which the remaining shares are beneficially owned by Kingtone
      Information shareholders other than Mr.
Gao.
  ITEM 7.  MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
 
 A.  MAJOR
SHAREHOLDERS
 
 To our knowledge, (A) we are not
directly or indirectly owned or controlled by (i) another corporation or
(ii) any foreign government and (B) there are no arrangements
(including any announced or expected takeover bid), the operation of which may
at a subsequent date result in a change in our control.
 
 The
voting rights of our major shareholders do not differ from the voting rights of
other holders of the same class of shares.
 
 As of January 18, 2011, 100,000 of our
ordinary shares are held of record by a single record holder in the United
States.  Additionally, 100,000 restricted ordinary shares have been
granted to Ying Yang, our chief financial officer, but have not yet been issued
on the books of our registrar.  The Bank of New York Mellon, as the
depositary for our ADSs, is the record holder of 4,000,000 ordinary shares;
however, we are unaware of the names and domiciles of the beneficial owners of
the ADSs representing such shares.
  B.  RELATED PARTY
TRANSACTIONS.
 
 Members
of our management team and our principal shareholders currently hold majority
equity interests in Kingtone Information, our contractually-controlled entity in
the PRC from which we derive substantially all of our revenues. We are party to
a series of control agreements with Kingtone Information. See “Item 4 –
Information About the Company – C. Organizational Structure - Contractual
Arrangements with Kingtone Information and Its Respective
Shareholders”.  In addition, certain of our officers, directors and
principal shareholders serve as officers and directors of Kingtone Information
and/or are shareholders of Kingtone Information. The following table sets forth
the relationship of such officers, directors and principal shareholders with
Kingtone Information and their respective ownership interest in Kingtone
Information:
  65
 
 Name
                                  
                                  Relationship with
                                    Kingtone Wireless
                                  
                                  Relationship with
                                    Kingtone Information
                                  
                                  Percentage
                                    Ownership
                                    Interest in
                                    Kingtone
                                    InformationTao
      Li
                                  
                                  Chairman
                                  
                                  Chairman
                                  
                                  
                                  61.61
                                  %(1)Peng
      Zhang
                                  
                                  Chief
      Executive Officer
                                  
                                  Vice
      President
                                  
                                  
                                  0.36
                                  %Li
      Wu
                                  
                                  Director
                                  
                                  Chief
      Financial Officer
                                  
                                  
                                  1.09
                                  %Pengguo
      Xi
                                  
                                  Vice
      President of
                                    Research
      andDevelopment
                                  
                                  Vice
      President of
                                    Research
      andDevelopment
                                  
                                  
                                  0.36
                                  %Xianying
      Chen
                                  
                                  Vice
      President of
                                    Application
      Development
                                  
                                  Shareholder
                                  
                                  
                                  0.36
                                  %Lili
      Dong
                                  
                                  Independent
      Director
                                  
                                  Independent
      Director
                                  
                                  
                                  —Shenzhen
      Capital Group Co., Ltd.(2)
                                  
                                  Indirect
      Shareholder
                                  
                                  Shareholder
                                  
                                  
                                  10.72
                                  %Xuetao
      Chen
                                  
                                  Indirect
      Shareholder
                                  
                                  Shareholder
                                  
                                  
                                  8.93
                                  %
  (1)
                Consists
      of (i) 36.61% of the shares of Kingtone Information owned of record by Mr.
      Li, and (ii) 25% of the shares of Kingtone Information owned of record by
      Xi’an TechTeam Investment Holding Group Company (“TechTeam Investment”).
      Mr. Li, as the majority shareholder of TechTeam Investment, has
      dispositive power over the shares of Kingtone Information owned by
      TechTeam Investment.
 (2)
              Shenzhen
      Capital Group Co., Ltd. has dispositive power with respect to the
      1,060,714 ordinary shares of our company held of record by SCGC Capital
      Holding Company Limited.
  On June
19, 2008, Kingtone Information signed an agreement to produce the fertilizer
processing equipment for Shaanxi TechTeam Humic Acid Products Co., Ltd.
(“Techteam”), an indirect subsidiary of China Green Agriculture, Inc. (CGA:
NYSE), a company that is majority owned by Mr. Tao Li, our chairman (“CGA”). Mr.
Li also serves as the chairman, president and chief executive officer of CGA,
and CGA’s chief financial officer was, until April 23, 2010, Ms. Ying Yang, our
chief financial officer. The total contracted value, including value-added taxes
(VAT) and other taxes, was RMB 4 million, or approximately $586,000. The project
was performed from May 2009 to June 2009. Pursuant to the agreement, Kingtone
Information provided certain services including designing, manufacturing,
installing and adjusting the production facilities for Techteam’s compound
fertilizer for drip irrigation (the “Project”). Kingtone Information was also
responsible for debugging the system and training Techteam employees to operate
the production line. The agreement required Kingtone Information to complete the
Project within 25 days unless there were causes for delay beyond its control.
The agreement sets forth an eighteen month warranty period during which Techteam
is entitled to receive certain spare parts for the facilities and to receive
maintenance and repair services for free.
  On
October 20, 2008, Kingtone Information signed an agreement to construct the
phase II expansion of an integrated pipeline control project for TechTeam. The
total contracted value, including VAT and other taxes, was RMB 5.2 million, or
approximately $760,000. The project was performed from December 2008 to June
2009. The term of the agreement is from the date of its signing until one year
after the operation of the subject project. Pursuant to the agreement, Kingtone
Information provided services in order to develop and install the automation
system solution for Techteam’s phase II production line and to upgrade the
automation system solution for its phase I production line. Work related to the
phase II production line included the development of automation system software,
setup of integrated automation management and control computer network to
realize relevant data collection, and automatic management and control of the
production process. Work related to the phase I production line included
upgrading the existing automation system so that phase I and phase II automation
systems become integrated into the same management and control system. In
addition to the wired automation system, Kingtone Information also developed and
installed a wireless system solution for Techteam. This wireless system solution
integrates into Techteam’s production automation system and the plant video
surveillance system.
 
 On August
10, 2010, Kingtone Information entered into an agreement with Techteam, pursuant
to which Kingtone Information is responsible for developing certain electronic
control systems for Xi’an Hu County Yuxing Agriculture Technology Development
Co., Ltd. (“Yuxing”), a wholly-owned subsidiary of Techteam in the
PRC.  The total contracted value of this agreement, including
value-added taxes and other taxes, is RMB 3.03 million, or approximately
$452,000. Pursuant to the agreement, Kingtone Information will design, plan,
construct and purchase materials for the electronic control systems to be used
in 28 greenhouses of Yuxing. The agreement sets forth a warranty period, which
is the earlier of (a) 18 months after the construction raw materials are
delivered, inspected and accepted, and (b) 12 months after the inspection and
acceptance of the work completed. During the warranty period Yuxing is entitled
to receive maintenance and repair services at no cost.
  66
 
 Our
Beijing branch office is located in office space leased to us by Mr. Tao Li, our
chairman, who owns this space. We lease it from him for no
consideration.
 
 On
September 30, 2010, Kingtone Information entered into a lease agreement with
Techteam, pursuant to which Techteam rents 360 square meters of office space
from Kingtone Information.  The lease provides for a two-year term
effective as of July 1, 2010 with monthly rent of RMB 10,800, or approximately
$1,600.
 
 During
our fiscal year ended September 30, 2010 and during prior fiscal years, Kingtone
Information provided a series of loans to Xi’an Xingrong Tech Enterprise Co.,
Ltd. (“Xi’an Xingrong”), a company that is majority-owned by Mr. Tao Li. During
our prior three fiscal years, the largest outstanding balance of the loans to
Xi’an Xingrong was RMB 117.3 million, or approximately $17.2 million, on
December 5, 2006. At September 30, 2010, all outstanding loan amounts had been
repaid in full. The loan proceeds were used for Xi’an Xingrong’s working capital
and general corporate purposes. The loans did not bear interest, were payable on
demand and were not documented pursuant to a written agreement.
 
 During
our fiscal year ended September 30, 2010 and during prior fiscal years, Kingtone
Information provided a series of loans to Xi’an TechTeam Investment Holding
Group Ltd. (“TechTeam Investment”), a company that is majority-owned by Mr. Tao
Li and which owns a 25% interest in Kingtone Information. During our prior three
fiscal years, the largest outstanding balance of the loans to TechTeam
Investment was RMB 35.2 million, or approximately $5.2 million, on May 19, 2009.
At September 30, 2009, all outstanding loan amounts had been repaid in full. The
loan proceeds were used for TechTeam Investment’s working capital and general
corporate purposes. The loans did not bear interest, were payable on demand and
were not documented pursuant to a written agreement.
 
 In
February 2003, Kingtone Information made a one-time loan to Shaanxi WeiDong
Plant Biochemical Stock Co., Ltd. (“Shaanxi WeiDong”). The principal
shareholders of Shaanxi WeiDong are Xi’an Xingrong and TechTeam Investment. The
principal amount of the loan was repaid in December 2003, however, interest
payable of $48,000 remained outstanding until such amount was repaid by Shaanxi
WeiDong in September 2009.
  On
November 16, 2009 and December 12, 2009, Mr. Tao Li, our chairman, loaned
$200,000 and $800,000, respectively, to Topsky to register Softech in the PRC.
There were no formal agreements between Mr. Li and Topsky regarding the terms of
these loans.  The loans were repaid to Mr. Li in September
2010.
 
 As of
September 30,  2010, we had an outstanding loan of approximately
$116,000 to Jinong High-Tech Agriculture Model Park, Inc., a company that is
controlled by Tao Li, our chairman.  The loan is interest free and
payable on demand.
  C.  INTERESTS
OF EXPERTS AND COUNSEL.
 
 None.
 ITEM 8.  FINANCIAL INFORMATION.
 
 A.  CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL INFORMATION.
 
 Consolidated
Statements
  See “Item
18.  Financial Statements.”
  Legal
Proceedings
  We are
not currently a party to any material legal proceeding and, to our knowledge,
there are no material legal proceedings threatened against us. From time to
time, we may be subject to various claims and legal actions arising in the
ordinary course of business.
  67
 
 Dividend
Policy
  We
currently intend to retain all of our available funds and future earnings for
use in the operation and expansion of our business and do not anticipate paying
cash dividends in the foreseeable future. Under the terms of our Amended and
Restated Memorandum and Articles of Association the declaration and payment of
any dividends in the future will be determined by our board of directors, in its
discretion, and will depend on a number of factors, including our earnings,
capital requirements and overall financial condition and our ability to receive
dividends from our subsidiaries. If we pay any dividends, we will pay our ADS
holders dividends with respect to their underlying shares to the same extent as
holders of our ordinary shares, subject to the terms of the deposit agreement,
including the fees and expenses payable thereunder. Cash dividends on our
ordinary shares, if any, will be paid in U.S. dollars.
 
 Our
ability to receive dividends from our subsidiaries may limit our ability to pay
dividends on our ordinary shares.  See Risk Factors – Risks
Related to Doing Business in China – Our holding company structure may
limit the payment of dividends” and “Item 10.  Additional Information
– D. Exchange Controls – Dividend Distribution.”.
 
 B.  SIGNIFICANT
CHANGES.
  Except as otherwise set forth in annual report, there have been
no significant changes since September 30, 2010, the date of the financial
statements in this annual report.
  ITEM 9.  THE
OFFER AND LISTING
   A. OFFER AND LISTING DETAILS.
 
 Markets
and Share Price History
 
 The primary trading market for our
ordinary shares is the Nasdaq Capital Market, where our shares have been listed
and traded under the symbol KONE since May 14, 2010.
  The table below sets forth the high and
low reported sales prices in dollars of our ordinary shares, as reported by
Nasdaq:
 
 PERIOD
                          
                          HIGH
                          
                          
                          LOWDecember
      2010
                          
                          
                          5.47
                          
                          
                          
                          2.93November
      2010
                          
                          
                          4.68
                          
                          
                          
                          3.23October
      2010
                          
                          
                          3.97
                          
                          
                          
                          2.35September
      2010
                          
                          
                          2.49
                          
                          
                          
                          2.15August
      2010
                          
                          
                          2.80
                          
                          
                          
                          2.15July
      2010
                          
                          
                          2.80
                          
                          
                          
                          2.23June
      2010
                          
                          
                          3.51
                          
                          
                          
                          2.42May
      2010
                          
                          
                          3.97
                          
                          
                          
                          2.90
  B.  PLAN OF
DISTRIBUTION.
 
 Not Applicable.
 
 C. MARKETS.
 
 Our ADSs are listed on the Nasdaq
Capital Market under the symbol “KONE”.
  68
 
 D.
SELLING SHAREHOLDERS.
  Not applicable.
  E.
DILUTION.
  Not applicable.
  F.
EXPENSES OF THE ISSUE.
  Not applicable.
  ITEM 10.  ADDITIONAL
INFORMATION.
  A.  SHARE
CAPITAL
  Not
applicable.
  B.  MEMORANDUM
AND ARTICLES OF ASSOCIATION
 
 The
description of our Memorandum of Association and Articles of Association set
forth in the section entitled “Description of Share Capital” contained in
Amendment No. 3 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission on May 11, 2010 is incorporated by reference
herein.
  C. MATERIAL CONTRACTS.
 
 In the
years ended September 30, 2009 and 2008, we derived a material portion of our
revenues from a small number of customers. In particular, a single customer,
Shaanxi Yanchang Petroleum Group, provided approximately $5.0 million of our
revenue, representing 44.7% of our total revenue in the year ended September 30,
2009. The material terms of our two largest contracts with such customer are
summarized below.
 
 On
October 15, 2008, Kingtone Information entered into an Installation and
Construction Subcontract, to act as a subcontractor with The Refine Chemical
Company of Shaanxi Yanchang Petroleum Group, as the construction party and
Shaanxi Chemical Construction Co., Ltd., as the general contract party. Pursuant
to the agreement, Kingtone Information was subcontracted to contribute safety,
security, and quality control measures to the project named “HuiJiaHe Petroleum
Product Adjusting Supply Renovation Instrument and Control System and Control
System Full Installation and System Adjusting of Yangzhuanghe Refine Chemical
Project System.” The term of the project, as set forth in the agreement, is from
October 15, 2008 through January 31, 2009 for a fixed amount payable to Kingtone
Information of RMB 21,600,000 (approximately $3.2 million) before the deduction
of administrative fees, taxes and utility fees (2.5% of the fixed amount). The
project was completed and all sums were paid.
 
 On April
30, 2009, Kingtone Information, as the supplier, entered into a Material
Purchase Contract with Xi’an Product Petroleum Pipe Transportation Project
Management Department of Shanxi Huajian Yelian, as the purchaser. Pursuant to
the agreement, Kingtone Information supplied a series of software and facilities
to the purchaser for a total price of RMB12,200,000 (approximately $1.8
million). According to the agreement, Kingtone Information was required to
deliver the subject items by June 25, 2009. The agreement has a one-year
warranty period. The project was completed and all sums were paid.
 
 D.  EXCHANGE
CONTROLS.
 
 This
section sets forth a summary of the most significant regulations or requirements
that affect our business activities in China or our shareholders’ right to
receive dividends and other distributions from us.
  69
 
 Regulations
of the Software Industry
 
 The
software industry in the PRC is regulated pursuant to two primary
policies — the Measures Concerning Software Products Administration
(the “Software Products Measures”) and the Recognition Standard and Management
measures of Software Enterprises (the “Standards and Measures”). As further
discussed below, Kingtone Information as a registered software enterprise with
registered software products can take advantage of certain favorable tax,
investment, government and other programs and policies that are designed to
encourage development of the software industry in the PRC.
 
 Software
Products Registration and Administration
 
 On March
1, 2009, the Ministry of Industry and Information Technology of the People’s
Republic of China (the “MIIT”) promulgated the Software Products Measures which
became effective on April 10, 2009. Under the Software Products Measures,
software products developed in China (including those developed in China on the
basis of imported software) can enjoy certain favorable policies when the
products have been registered and recorded pursuant to the “Certain Policies to
Encourage the Development of Software and Integrated Circuit Industries” issued
by the State Council on June 24, 2000 (the “2000 Software Encouragement
Policies”). Kingtone Information has registered its software products, including
its “Wireless emergency command and management system V1.0,” with the Shaanxi
Provincial Department of Information Technology through Kingtone Information.
Please refer to the specific favorable policies under the sub-section below
entitled “Policies to Encourage the Development of Software and Integrated
Circuit Industries.”
 
 Software
Enterprise Registration and Administration
 
 On
October 16, 2000, the Ministry of Information Industry, the Ministry of
Education, the Ministry of Science and Technology and the State Tax Bureau
issued the “Standard and Measures” to encourage the development of the software
industry in China and to enhance the competitiveness of the PRC information
technology industry in the international market. The Standard and Measures
provide strict conditions and standards, including but not limited to, the
requirement of ownership of the software products, technical employees
proportion, independent software technology and product research to recognize a
company as a “software enterprise”. Such recognized software enterprises can
enjoy the favorable policies pursuant to the 2000 Software Encouragement
Policies. Kingtone Information has been recognized as a software enterprise
since January 6, 2009. A software enterprise is subject to annual inspection,
failure of which in a given year shall cause the enterprise to be disqualified
for the relevant benefits.
 
 Policies
to Encourage the Development of Software and Integrated Circuit
Industries
 
 The 2000
Software Encouragement Policies encourage the development of the software and
integrated circuit industries in China and to enhance the competitiveness of the
PRC information technology industry in the international market. The 2000
Software Encouragement Policies encourage such development through various
methods, including:
 
 ·
              Encouraging
      venture capital investment in the software industry and providing or
      assisting software enterprises to raise capital
  overseas;
 
 ·
              Providing
      tax incentives, including an immediate tax rebate for taxpayers who sell
      self-developed software products, before 2010, of the amount of the
      statutory value-added tax that exceeds 3% and a number of exemptions and
      reduced enterprise income tax
rates;
 
 ·
              Providing
      government support, such as government funding in the development of
      software technology;
 
 ·
              Providing
      preferential treatment, such as credit facilities with low interest rates
      to enterprises that export software
products;
 
 ·
              Taking
      various strategies to ensure that the software industry has sufficient
      expertise; and
 
 ·
              Implementing
      measures to enhance intellectual property protection in
    China.
 
 As
discussed above, to qualify for favorable treatment, an enterprise must be
recognized as a software enterprise by governmental authorities and must have
registered software products. Because Kingtone Information is recognized as a
software enterprise, it can enjoy the above favorable policies. For example,
Kingtone Information currently receives an immediate tax rebate on the sale of
software products that it creates equal to the amount of the statutory
value-added tax that exceeds 3%.
  70
 
 Relevant
Laws and Regulations of the Computer Information System
 
 Management
Measures on the Computer Information System Integration
 
 On
February 13, 2001, the MIIT promulgated the Management Measures on the Computer
Information System Integration Qualification (trial) or the Management Measures,
which commenced to be enforced on February 13, 2001. The Management Measures
provides that enterprises involved in providing the computer information system
integration services shall apply for the qualification recognition to the MIIT
or its provincial branch pursuant to the conditions required in the Management
Measures and obtain the qualification certificate to provide information system
integration service. The computer information system integration means the
engagement in the overall plan, design, development, execution, protection of
the computer application system projects and network system projects. Kingtone
Information has obtained the computer information system integration certificate
and we are qualified to provide the computer information system integration
services.
 
 Regulations
for Safety Protection of Computer Information System
 
 The State
Security Bureau of PRC issued the “Administration of the Maintenance of Secrets
in the International Networking of Computer Information Systems Provisions of
the People’s Republic of China” to protect the safety of national secrets on
January 25, 2000. Under the Administration, computer systems that contain
information that is considered to be national secrets are forbidden to directly
or indirectly connect to international or other public information networks. The
State Security Bureau of PRC and its branch handle the secret maintenance work
of the international networking of computer information systems. The company has
the obligation to safeguard the national secrets of governmental authorities
that it learns through the company’s services to such governmental
authorities.
 
 Relevant
Regulations of the High-tech Enterprise
 
 The
Ministry of Information Industry, the Ministry of Science and Technology and the
State Tax Bureau collectively promulgated and issued the “Certifying Standard
and Managing Measures for High-tech Enterprises” and “the High-tech Areas of
Main National Support ” on April 14, 2008 to certify the High-tech enterprise
and encourage and support the development of the Chinese High-tech enterprises.
Under the High-tech Enterprises Measures, the enterprise can enjoy the favorable
tax policy when it is certified as a High-tech enterprise by the Ministry of
Information Industry, the Ministry of Science and Technology and the State Tax
Bureau or with its provincial branch according to the stipulated standard. The
software and computer and network technology are recognized as the main national
supported High-tech field. Kingtone Information is a High-tech enterprise and
enjoys a favorable income tax rate of 15%.
 
 Laws
and Regulations of Intellectual Property Rights
 
 China has
adopted legislation governing intellectual property rights, including patents,
copyrights and trademarks. China is a signatory to the main international
conventions on intellectual property rights and became a member of the Agreement
on Trade Related Aspects of Intellectual Property Rights upon its accession to
the WTO in December 2001.
 
 Patents
 
 The
“Patent Law of the People’s Republic of China” promulgated by the Standing
Committee of the National People's Congress, adopted in 1985 and revised in
1992, 2001 and 2008, protects registered patents. The State Intellectual
Property Office of PRC handles granting patent rights, provding for a
twenty-year patent term for inventions and a ten-year patent term for utility
models and designs. As we disclosed in Item 4, of this Annual Report on Form
20-F, through Kingtone Information, we have been granted one invention patent
“wireless video transmission system based on BREW platform” by the State
Intellectual Property Office (“SIPO”) of PRC on September 23, 2009 and therefore
such invention is entitled to all the protections provided under the Patent Law
for twenty years.
  71
 
 Computer
Software Copyright and Administration
 
 On
December 20, 2001, the State Council of PRC issued the “Regulation for Computer
Software Protection of the People’s Republic of China” (the “Regulation for
Computer Software Protection”) which became effective on January 1, 2002 to
protect the interests of copyright owners, to promote the research and
application and to encourage the development of the Chinese software industry.
Under the Regulation for Computer Software Protection, natural persons, legal
persons or any other organizations shall have a copyright on the software
developed by such persons no matter whether such software has been published.
The protection period of software copyrights owned by the legal person or other
organization is fifty years and expires on December 31 of the fiftieth year from
the initial publication date of such computer software. Currently, Kingtone
Information has seven registration certificates for software
copyrights.
 
 Trademarks
 
 The
“Trademark Law of the People’s Republic of China” promulgated by the State
Council of PRC, adopted in 1982 and revised in 1993 and 2001, protects
registered trademarks. The Trademark Office under the Chinese State
Administration for Industry and Commerce handles trademark registrations and
grants a term of ten years to registered trademarks which are renewable for
another ten years after the application to the Trademark Office by the owners of
the trademarks. Trademark license agreements must be filed with the Trademark
Office for record. China has a “first-to-register” system that requires no
evidence of prior use or ownership. Kingtone Information has its registered
trademarks as described in Item 4 of this Annual Report on Form 20-F.
Accordingly, such trademarks are entitled to the protection under the Trademark
Law.
 
 Foreign
Currency Exchange
 
 On August
29, 2008, the SAFE issued the Notice of the General Affairs Department of the
State Administration of Foreign Exchange on the Relevant Operating Issues
concerning the Improvement of the Administration of Payment and Settlement of
Foreign Currency Capital of Foreign-funded Enterprises, or Circular 142.
Pursuant to Circular 142, RMB converted from the foreign currency-denominated
capital of a foreign-invested company may only be used for purposes within the
business scope approved by the applicable governmental authority and may not be
used for equity investments within the PRC unless specifically provided for
otherwise. The use of such Renminbi capital may not be changed without SAFE’s
approval and may not in any case be used to repay Renminbi loans if the proceeds
of such loans have not been used.
 
 See “Risk
Factors — Risks Related to Doing Business in China — PRC
regulation of loans and direct investment by offshore holding companies to PRC
entities may delay or prevent us from using the proceeds of our initial public
offering to make loans or additional capital contributions to our PRC operating
subsidiaries, which could materially and adversely affect our liquidity and our
ability to fund and expand our business”.
 
 Dividend
Distribution
 
 We are a
British Virgin Islands holding company and substantially all of our operations
are conducted through Kingtone Information. We rely on dividends and other
distributions from our PRC subsidiary and Kingtone Information to provide us
with our cash flow and allow us to pay dividends on the shares underlying our
ADSs and meet our other obligations. The principal regulations governing
distribution of dividends paid by wholly foreign-owned enterprises
include:
  ·
              Wholly
      Foreign-Owned Enterprise Law (1986), as amended;
  and
  ·
              Implementation
      Rules on Wholly Foreign-Owned Enterprise Law (1990), as
      amended.
 
 Under
these regulations, wholly foreign-owned enterprises in China may pay dividends
only out of their accumulated profits, if any, determined in accordance with PRC
accounting standards and regulations. In addition, wholly foreign-owned
enterprises in China are required to set aside at least 10% of their after-tax
profit based on PRC accounting standards each year to its general reserves until
the accumulative amount of such reserves reach 50% of its registered capital.
These reserves are not distributable as cash dividends. The board of directors
of a FIE has the discretion to allocate a portion of its after-tax profits to
staff welfare and bonus funds, which may not be distributed to equity owners
except in the event of liquidation.
  72
 
 Regulation
of Foreign Exchange in Certain Onshore and Offshore Transactions
 
 In
October 2005, the SAFE issued the Notice on Issues Relating to the
Administration of Foreign Exchange in Fund-raising and Return Investment
Activities of Domestic Residents Conducted via Offshore Special Purpose
Companies, or SAFE Notice 75, which became effective as of November 1, 2005, and
was further supplemented by two implementation notices issued by the SAFE on
November 24, 2005 and May 29, 2007, respectively. Under Circular 75, prior
registration with the local SAFE branch is required for PRC residents to
establish or to control an offshore company for the purposes of financing that
offshore company with assets or equity interests in an onshore enterprise
located in the PRC. An amendment to the registration or filing with the local
SAFE branch by such PRC resident is also required for the injection of equity
interests or assets of an onshore enterprise in the offshore company or overseas
funds raised by such offshore company, or any other material change with respect
to the offshore company in connection with any increase or decrease of capital,
transfer of shares, merger, division, equity investment, debt investment, or
creation of any security interest over any assets located in the
PRC.
 
 Under
SAFE Notice 75, PRC residents are further required to repatriate into the PRC
all of their dividends, profits or capital gains obtained from their
shareholdings in the offshore entity within 180 days of their receipt of such
dividends, profits or capital gains. The registration and filing procedures
under SAFE Notice 75 are prerequisites for other approval and registration
procedures necessary for capital inflow from the offshore entity, such as
inbound investments or shareholders loans, or capital outflow to the offshore
entity, such as the payment of profits or dividends, liquidating distributions,
equity sale proceeds, or the return of funds upon a capital reduction.
Therefore, failure to comply with such registration may subject us to certain
restrictions on, including but not limited to, the increase of the registered
capital of our PRC subsidiary, making loans to our PRC subsidiary, and making
distributions to us from our on-shore companies.
 
 Regulations
of Overseas Investments and Listings
 
 On August
8, 2006, six PRC regulatory agencies, including the MOFCOM, the State Assets
Supervision and Administration Commission, the State Administration for
Taxation, the State Administration for Industry and Commerce, the CSRC and the
SAFE, jointly adopted the New M&A Rule, which became effective on September
8, 2006. This regulation, among other things, includes provisions that purport
to require that an offshore SPV formed for purposes of overseas listing of
equity interests in PRC companies and controlled directly or indirectly by PRC
companies or individuals obtain the approval of the CSRC prior to the listing
and trading of such SPV’s securities on an overseas stock exchange.
 
 On
September 21, 2006, the CSRC published on its official website procedures
regarding its approval of overseas listings by SPVs. The CSRC approval
procedures require the filing of a number of documents with the CSRC and it
would take several months to complete the approval process.
 
 The
application of the New M&A Rule with respect to overseas listings of SPVs
remains unclear with no consensus currently existing among the leading PRC law
firms regarding the scope of the applicability of the CSRC approval
requirement.
 
 We
believe that, based on our understanding of the current PRC laws, regulations
and rules and the procedures announced on September 21, 2006, there is no
requirement in this regulation that would require an application to be submitted
to the MOFCOM or the CSRC for the approval of the listing and trading of our
ADSs on the Nasdaq Capital Market.
  See “Risk
Factors — Risks Related to Doing Business in China — If we
were required to obtain the prior approval of the China Securities Regulatory
Commission, or CSRC, of the listing and trading of our ADSs on the Nasdaq
Capital Market, we may face regulatory actions or other sanctions from the CSRC
or other PRC regulatory agencies..”
  E.  TAXATION
 
 The following discussion sets forth
the material British Virgin Islands, PRC and U.S. federal income tax
consequences of an investment in our ADSs and the ordinary shares represented by
our ADSs, sometimes referred to collectively as the “securities”. It is based
upon laws and relevant interpretations thereof in effect as of the date of this
report, all of which are subject to change. This discussion does not deal with
all possible tax consequences relating to an investment in the securities, such
as the tax consequences under state, local and other tax laws. As used in this
discussion, “we,” “our” and “us” refers only to Kingtone Wirelessinfo Solution
Holding Ltd.
  73
 
 British
Virgin Islands Taxation
 
 Under the
law of the British Virgin Islands as currently in effect, a holder of the
securities who is not a resident of the British Virgin Islands is not liable for
British Virgin Islands tax on dividends paid with respect to the securities and
all holders of the securities are not liable to the British Virgin Islands for
tax on gains realized during that year on the sale or disposal of such ordinary
shares. The British Virgin Islands does not impose a withholding tax on
dividends paid by a company incorporated or re-registered under the BVI
Act.
 
 There are
no capital gains, gift or inheritance taxes levied by the British Virgin Islands
on companies incorporated under the BVI Act. In addition, shares of companies
incorporated under the BVI Act are not subject to transfer taxes, stamp duties
or similar charges.
 
 There is
no income tax treaty or convention currently in effect between the United States
and the British Virgin Islands or between China and the British Virgin
Islands.
 
 People’s
Republic of China Taxation
 
 In 2007,
the PRC National People’s Congress enacted the new Enterprise Income Tax Law
(the “EIT Law”), which became effective on January 1, 2008. The new EIT Law
imposes a single uniform income tax rate of 25% on all Chinese enterprises,
including foreign-invested enterprises, and levies a withholding tax rate of 10%
on dividends payable by Chinese subsidiaries to their foreign shareholders
unless any such foreign shareholders’ jurisdiction of incorporation has a tax
treaty with China that provides for a different withholding agreement. Under the
new EIT Law, enterprises established outside China but deemed to have a “de
facto management body” within the country may be considered “resident
enterprises” for Chinese tax purposes and, therefore, may be subject to an
enterprise income tax rate of 25% on their worldwide income. Pursuant to the
implementation rules of the new EIT Law, a “de facto management body” is defined
as a body that has material and overall management control over the business,
personnel, accounts and properties of the enterprise. Although substantially all
members of our management are located in China, it is unclear whether Chinese
tax authorities would require (or permit) us to be treated as PRC resident
enterprises. If we and/or Topsky are deemed a Chinese tax resident enterprise,
we and/or Topsky may be subject to an enterprise income tax rate of 25% on our
worldwide income, excluding dividends received directly from another Chinese tax
resident enterprise, as well as PRC enterprise income tax reporting obligations.
If we and/or Topsky are not deemed to be a Chinese tax resident enterprise, we
and/or Topsky may be subject to certain PRC withholding taxes. See “Risk
Factors — Risks Related to Doing Business in China — Our
holding company structure may limit the payment of dividends.” As a result of
such changes, our and Topky’s historical tax rates may not be indicative of our
and Topky’s tax rates for future periods and the value of our ADSs may be
adversely affected. If we are deemed a PRC resident enterprise and investors’
gain from the sales of the securities and dividends payable by us are deemed
sourced from China, such gains and dividends payable by us may be subject to PRC
tax. See “Risk Factors — Risks Related to Doing Business in
China — If we and/or Topsky were deemed a “resident enterprise” by PRC
tax authorities, we and/or Topsky could be subject to tax on our global income
at the rate of 25% under the New EIT Law and our non-PRC shareholders could be
subject to certain PRC taxes.”
 
 United
States Federal Income Taxation
 
 General
 
 The
following is a discussion of the material U.S. federal income tax consequences
to an investor of purchasing, owning and disposing of our securities. This
discussion does not address any aspects of U.S. federal gift or estate tax or
the state, local or non-U.S. tax consequences of an investment in the
securities.
 
 YOU
SHOULD CONSULT YOUR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL
AND NON-U.S. TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF THE
SECURITIES IN YOUR PARTICULAR SITUATION.
 
 This
discussion applies only to those investors that purchase the securities in this
offering and that hold the securities as capital assets within the meaning of
section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”). This
section does not apply to holders that may be subject to special tax rules,
including but not limited to:
  74
  ·
              dealers
      in securities or currencies;
  ·
              traders
      in securities that elect to use a mark-to-market method of
      accounting;
  ·
              banks,
      insurance companies or certain financial
  institutions;
  ·
              tax-exempt
      organizations;
  ·
              governments
      or agencies or instrumentalities
thereof;
  ·
              partnerships
      or other entities treated as partnerships or other pass-through entities
      for U.S. federal income tax purposes or persons holding the securities
      through such entities;
  ·
              regulated
      investment companies or real estate investment
  trusts;
  ·
              holders
      subject to the alternative minimum
tax;
  ·
              holders
      that actually or constructively own 10% or more of the total combined
      voting power of all classes of our shares entitled to
  vote;
  ·
              holders
      that acquired the securities pursuant to the exercise of employee stock
      options, in connection with employee stock incentive plans or otherwise as
      compensation;
  ·
              holders
      that hold the securities as part of a straddle, hedging or conversion
      transaction; or
  ·
              holders
      whose functional currency is not the U.S.
  dollar.
  This
section is based on the Code, its legislative history, existing and proposed
U.S. Treasury regulations, published rulings and other administrative guidance
of the U.S. Internal Revenue Service (the “IRS”) and court decisions, all as in
effect on the date hereof. These laws are subject to change or different
interpretation by the IRS or a court, possibly on a retroactive
basis.
 
 We have
not sought, and will not seek, a ruling from the IRS as to any U.S. federal
income tax consequence described herein. The IRS may disagree with the
discussion herein, and its determination may be upheld by a court. Moreover,
there can be no assurance that future legislation, regulation, administrative
rulings or court decisions will not adversely affect the accuracy of the
statements in this discussion.
 
 The
discussion below of the U.S. federal income tax consequences to “U.S. Holders”
will apply to a beneficial owner of the securities that is for U.S. federal
income tax purposes:
  ·
              a
      citizen or resident of the United
States;
  ·
              a
      corporation (or other entity treated as a corporation) that is created or
      organized (or treated as created or organized) under the laws of the
      United States, any state thereof or the District of
    Columbia;
  ·
              an
      estate whose income is subject to U.S. federal income tax regardless of
      its source; or
  ·
              a
      trust if (a) a U.S. court can exercise primary supervision over the
      trust’s administration and one or more U.S. persons are authorized to
      control all substantial decisions of the trust, or (b) if the trust has a
      valid election in effect under applicable U.S. Treasury regulations to be
      treated as a U.S. person.
 
 If a
beneficial owner of the securities is not described as a U.S. Holder and is not
an entity treated as a partnership or other pass-through entity for U.S. federal
income tax purposes, such owner will be considered a “Non-U.S. Holder.” The
material U.S. federal income tax consequences applicable specifically to
Non-U.S. Holders are described below under the heading “Tax Consequences to
Non-U.S. Holders.”
 
 If a
partnership (including for this purpose any entity treated as a partnership for
U.S. tax purposes) is a beneficial owner of the securities, the U.S. tax
treatment of a partner in the partnership generally will depend on the status of
the partner and the activities of the partnership. A holder of the securities
that is a partnership or partners in such a partnership should consult their own
tax advisors about the U.S. federal income tax consequences of holding and
disposing of the securities.
  75
 
 This
discussion assumes that any distributions made (or deemed made) on the
securities and any consideration received by a holder in consideration for the
sale or other disposition of the securities will be in U.S. dollars. This
discussion also assumes that the representations contained in the Deposit
Agreement are true and that the obligations in the Deposit Agreement and any
related agreement will be complied with in accordance with their terms. Finally,
this discussion assumes that each ADS will only represent ordinary shares in us,
and will not represent any other type of security, such as a bond, cash or other
property.
 
 For U.S.
federal income tax purposes, a holder of an ADS will be treated as the
beneficial owner of the shares represented by such ADS and an exchange of an ADS
for ordinary shares will not be subject to U.S. federal income tax. The U.S.
Treasury has expressed concerns that parties to whom ADSs are pre-released, or
intermediaries in the chain of ownership between holders of ADSs and the issuer
of the securities underlying the ADSs may be taking actions that are
inconsistent with the claiming of foreign tax credits by U.S. Holders of ADSs.
Such actions would also be inconsistent with the claiming of the reduced rate of
tax applicable to dividends received by certain non-corporate U.S. Holders,
including individual U.S. Holders, as described below under “Tax Consequences to
U.S. Holders — Taxation of Distributions.” Accordingly, the
availability of foreign tax credits or the reduced tax rate for dividends
received by certain non-corporate U.S. Holders, including individual U.S.
Holders, could be affected by actions taken by parties to whom the ADSs are
released, or by future actions by the U.S. Treasury.
 
 Tax
Consequences to U.S. Holders
 
 Taxation
of Distributions
 
 Subject
to the passive foreign investment company, or PFIC, rules discussed below, the
gross amount of any cash distributions we make with respect to a U.S. Holder in
respect of such U.S. Holder’s ADSs or shares will generally be treated as
dividend income if the distributions are made from our current or accumulated
earnings and profits, calculated according to U.S. federal income tax
principles. Cash dividends will generally be subject to U.S. federal income tax
as ordinary income on the day the U.S. Holder actually or constructively
receives such income. With respect to non-corporate U.S. Holders for taxable
years beginning before January 1, 2011, dividends may be taxed at the lower
applicable long-term capital gains rate provided that (a) our ADSs or shares are
readily tradable on an established securities market in the United States, or,
in the event we are deemed to be a Chinese “resident enterprise” under the EIT
Law (as described above under “People’s Republic of China Taxation”), we are
eligible for the benefits of the income tax treaty between the United States and
the PRC (the “U.S.-PRC Tax Treaty”), (b) we are not a PFIC, as discussed below,
for either the taxable year in which the dividend was paid or the preceding
taxable year, and (c) certain holding period requirements are met. Under
published IRS authority, ADSs are considered for purposes of clause (a) above to
be readily tradable on an established securities market in the United States
only if they are listed on certain exchanges, which presently includes the
Nasdaq Capital Market. U.S. Holders should consult their own tax advisors
regarding the availability of the lower rate for any dividends paid with respect
to our ADSs or shares.
 
 Dividends
will not be eligible for the dividends-received deduction allowed to U.S.
corporations in respect of dividends received from other U.S. corporations.
Generally, if we distribute non-cash property as a dividend (other than pro rata
distributions of our shares) out of our current or accumulated earnings and
profits (as determined for U.S. federal income tax purposes), a U.S. Holder
generally will include in income an amount equal to the fair market value of the
property, on the date that it is distributed.
 
 Distributions
in excess of current and accumulated earnings and profits, as determined for
U.S. federal income tax purposes, will be treated as a non-taxable return of
capital to the extent of the U.S. Holder’s basis in its shares or ADSs and
thereafter as capital gain. However, we do not plan on calculating our earnings
and profits in accordance with U.S. federal income tax principles. U.S. holders
therefore should generally assume that any distributions paid by us will be
treated as dividends for U.S. federal income tax purposes.
 
 If PRC
taxes apply to dividends paid by us to a U.S. Holder (see “People’s Republic of
China Taxation,” above), such taxes may be treated as foreign taxes eligible for
credit against such holder’s U.S. federal income tax liability (subject to
certain limitations), and a U.S. Holder may be entitled to certain benefits
under the U.S.-PRC Tax Treaty. The rules relating to the U.S. foreign tax credit
are complex. U.S. Holders should consult their own tax advisors regarding the
creditability of any such PRC tax and their eligibility for the benefits of the
U.S.-PRC Tax Treaty.
  76
 
 Taxation
of Dispositions of ADSs or Shares
 
 Subject
to the PFIC rules discussed below, a U.S. holder that sells or otherwise
disposes of its shares or ADSs will recognize capital gain or loss for U.S.
federal income tax purposes equal to the difference between the amount realized
and such U.S. Holder’s tax basis in its shares or ADSs. Prior to January 1,
2011, capital gains of a non-corporate U.S. holder are generally taxed at a
maximum rate of 15% where the property is held for more than one year (and 20%
thereafter). The ability to deduct capital losses is subject to
limitations.
 
 If PRC
taxes apply to any gain from the disposition of our ADSs or shares by a U.S.
Holder, such taxes may be treated as foreign taxes eligible for credit against
such holder’s U.S. federal income tax liability (subject to certain
limitations), and a U.S. Holder may be entitled to certain benefits under the
U.S.-PRC Tax Treaty. U.S. Holders should consult their own tax advisors
regarding the creditability of any such PRC tax and their eligibility for the
benefits of the U.S.-PRC Tax Treaty.
 
 Passive
Foreign Investment Company
 
 We do not
expect to be a PFIC for U.S. federal income tax purposes for our current tax
year or in the foreseeable future. The determination of whether or not we are a
PFIC in respect of any of our taxable years is a factual determination that
cannot be made until the close of the applicable tax year and that is based on
the types of income we earn and the value and composition of our assets
(including goodwill), all of which are subject to change. Therefore, we can make
no assurances that we will not be a PFIC in respect of our current taxable year
or in the future.
 
 In
general, we will be a PFIC in any taxable year if either:
  ·
                at
      least 75% of our gross income for the taxable year is passive income;
      or
  ·
                at
      least 50% of the value, determined on the basis of a quarterly average, of
      our assets is attributable to assets that produce or are held for the
      production of passive income.
  Passive
income includes dividends, interest, royalties, rents (other than certain rents
and royalties derived in the active conduct of a trade or business), the excess
of gains over losses from certain types of transactions in commodities,
annuities and gains from assets that produce passive income. We will be treated
as owning our proportionate share of the assets and earning our proportionate
share of the income of any corporation in which we own, directly or indirectly,
at least 25% (by value) of the stock.
 
 If we are
treated as a PFIC in any year during which a U.S. Holder owns the securities,
and such U.S. Holder did not make a mark-to-market election, as described below,
the U.S. Holder will be subject to special rules with respect to:
  ·
                any
      gain recognized by the U.S. Holder on the sale or other disposition of its
      shares or ADSs; and
  ·
                any
      excess distribution that we make to the U.S. Holder (generally, the excess
      of the amount of any distributions to such U.S. Holder during a single
      taxable year of such U.S. Holder over 125% of the average annual
      distributions received by such U.S. Holder in respect of the shares or
      ADSs during the three preceding taxable years of such U.S. Holder or, if
      shorter, such U.S. Holder holding period for the shares or
      ADSs).
  Under
these rules:
  ·
                the
      gain or excess distribution will be allocated ratably over the U.S.
      Holder’s holding period for the shares and
ADSs;
  ·
                the
      amount allocated to the U.S. Holder’s taxable year in which it realized
      the gain or excess distribution or to the period in the U.S. Holder’s
      holding period before the first day of our first taxable year in which we
      are a PFIC will be taxed as ordinary
income;
  ·
                the
      amount allocated to other taxable years (or portions thereof) of the U.S.
      Holder and included in its holding period will be taxed at the highest tax
      rate in effect for that year;
and
  ·
                the
      interest charge generally applicable to underpayments of tax will be
      imposed in respect of the tax attributable to each such other taxable year
      of the U.S. Holder.
  ·
                Special
      rules apply for calculating the amount of the foreign tax credit with
      respect to excess distributions by a
PFIC.
  77
  Alternatively,
if a U.S. Holder, at the close of its taxable year, owns ordinary shares or ADSs
in a PFIC that are treated as marketable stock, the U.S. Holder may make a
mark-to-market election with respect to such shares for such taxable year. Our
ADSs or shares will be “marketable” to the extent that they remain regularly
traded on a national securities exchange, such as the Nasdaq Capital Market. If
a U.S. Holder makes this election in a timely fashion, it will not be subject to
the PFIC rules described above. Instead, in general, the U.S. Holder will
include as ordinary income each year the excess, if any, of the fair market
value of its shares or ADSs at the end of the taxable year over its adjusted
basis in its shares or ADSs. Any ordinary income resulting from this election
would generally be taxed at ordinary income tax rates and would not be eligible
for the reduced rate of tax applicable to qualified dividend income. The U.S.
Holder will also be allowed to take an ordinary loss in respect of the excess,
if any, of the adjusted basis of its shares or ADSs over the fair market value
at the end of the taxable year (but only to the extent of the net amount of
previously included income as a result of the mark-to-market election). The U.S.
Holder’s basis in the shares or ADSs will be adjusted to reflect any such income
or loss amounts. U.S. Holders should consult their own tax advisor regarding
potential advantages and disadvantages of making a mark-to-market election with
respect to their ADSs or shares.
 
 Alternatively,
a U.S. Holder of stock in a PFIC may avoid the PFIC tax consequences described
above in respect to our ADSs or shares by making a timely “qualified electing
fund” election to include in income its pro rata share of our net capital gains
(as long-term capital gain) and other earnings and profits (as ordinary income),
on a current basis, in each case whether or not distributed, in the taxable year
of the U.S. Holder in which or with which our taxable year ends. However, the
qualified electing fund election is available only if the PFIC provides such
U.S. Holder with certain information regarding its earnings and profits as
required under applicable U.S. Treasury regulations. We do not intend to furnish
the information that a U.S. Holder would need in order to make a qualified
electing fund election. Therefore, U.S. Holders will not be able to make or
maintain such election with respect to their ADSs or shares.
 
 If a U.S.
Holder owns our shares or ADSs during any year that we are a PFIC, such holder
must file U.S. Internal Revenue Service Form 8621 regarding such holder’s shares
or ADSs and the gain realized on the disposition of the shares or ADSs. The
reduced tax rate for dividend income, discussed in “Taxation of Distributions,”
is not applicable to dividends paid by a PFIC. U.S. Holders should consult with
their own tax advisors regarding reporting requirements with respect to their
shares or ADSs.
  Tax
Consequences to Non-U.S. Holders
 
 Dividends
paid to a Non-U.S. Holder in respect of our ADSs or shares generally will not be
subject to U.S. federal income tax, unless the dividends are effectively
connected with the Non-U.S. Holder’s conduct of a trade or business within the
United States (and, if required by an applicable income tax treaty, are
attributable to a permanent establishment or fixed base that such holder
maintains in the United States).
 
 In
addition, a Non-U.S. Holder generally will not be subject to U.S. federal income
tax on any gain attributable to a sale or other disposition of our ADSs or
shares unless such gain is effectively connected with its conduct of a trade or
business in the United States (and, if required by an applicable income tax
treaty, is attributable to a permanent establishment or fixed base that such
holder maintains in the United States) or the Non-U.S. Holder is an individual
who is present in the United States for 183 days or more in the taxable year of
sale or other disposition and certain other conditions are met (in which case,
such gain from United States sources generally is subject to tax at a 30% rate
or a lower applicable tax treaty rate).
 
 Dividends
and gains that are effectively connected with the Non-U.S. Holder’s conduct of a
trade or business in the United States (and, if required by an applicable income
tax treaty, are attributable to a permanent establishment or fixed base in the
United States) generally will be subject to tax in the same manner as for a U.S.
Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S.
federal income tax purposes, may also be subject to an additional branch profits
tax at a 30% rate or a lower applicable tax treaty rate.
 
 Information
Reporting and Backup Withholding
 
 In
general, information reporting for U.S. federal income tax purposes generally
should apply to distributions made on the securities within the United States to
a non-corporate U.S. Holder and to the proceeds from sales and other
dispositions of the securities by a non-corporate U.S. Holder to or through a
U.S. office of a broker. Payments made (and sales and other dispositions
effected at an office) outside the United States generally should be subject to
information reporting in limited circumstances.
  78
 
 Dividend
payments made to U.S. Holders and proceeds paid from the sale or other
disposition the securities may be subject to information reporting to the IRS
and possible U.S. federal backup withholding at a current rate of 28%. Certain
exempt recipients, such as corporations, are not subject to these information
reporting requirements. Backup withholding will not apply to a U.S. Holder who
furnishes a correct taxpayer identification number and makes any other required
certification, or who is otherwise exempt from backup withholding. U.S. Holders
who are required to establish their exempt status must provide a duly executed
IRS Form W-9.
 
 A
Non-U.S. Holder generally may eliminate the requirement for information
reporting and backup withholding by providing certification of its foreign
status, under penalties of perjury, on a duly executed applicable IRS Form W-8
or by otherwise establishing an exemption.
 
 Backup
withholding is not an additional tax. Rather, the amount of any backup
withholding will be allowed as a credit against a U.S. Holder’s or a non-U.S.
Holder’s U.S. federal income tax liability and may entitle such holder to a
refund, provided that certain required information is timely furnished to the
IRS.
  PROSPECTIVE
PURCHASERS OF OUR SECURITIES SHOULD CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR
PARTICULAR SITUATIONS AS WELL AS ANY ADDITIONAL TAX CONSEQUENCES RESULTING FROM
PURCHASING, HOLDING OR DISPOSING OF OUR SECURITIES, INCLUDING THE APPLICABILITY
AND EFFECT OF THE TAX LAWS OF ANY STATE, LOCAL OR NON-U.S. JURISDICTION,
INCLUDING ESTATE, GIFT, AND INHERITANCE LAWS AND APPLICABLE TAX
TREATIES.
  F.  DIVIDENDS AND PAYING AGENTS.
  Not
applicable.
  G.  STATEMENT BY EXPERTS.
  Not
applicable.
  H.  DOCUMENTS ON DISPLAY.
  We
previously filed a registration statement on Form F-1 (File No. 333-166056) with
the SEC relating to our  initial public offering in May 2010. This
annual report does not contain all of the information in the registration
statement and the exhibits and financial statements included with the
registration statement. References in this annual report to any of our
contracts, agreements or other documents are not necessarily complete, and you
should refer to the exhibits attached to the registration statement for copies
of the actual contracts, agreements or documents. You may read and copy the
registration statement, the related exhibits and other materials we file with
the SEC at the SEC's public reference room in Washington, D.C. at 100 F Street,
Room 1580, N.E., Washington, D.C. 20549. You can also request copies of those
documents, upon payment of a duplicating fee, by writing to the SEC. Please call
the SEC at 1-800-SEC-0330 for further information on the operation of the public
reference rooms. The SEC also maintains an Internet site that contains reports,
proxy and information statements and other information regarding issuers that
file with the SEC. The website address is http://www.sec.gov. You may
also request a copy of these filings, at no cost, by writing us at 3rd Floor,
Borough A, Block A. No. 181, South Taibai Road, Xi’an, Shaanxi Province,
People’s Republic of China 710065 or telephoning us at
+86-29-88266368
  I.  SUBSIDIARY INFORMATION
  For a
listing of our subsidiaries, see “Item 4. Information on the Company – C.
Organizational Structure.”
 
 ITEM 11.  QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
 Interest
Rate Risk
 
 As of
September 30, 2010, we had no short-term or long-term borrowings. If we borrow
money in future periods, we may be exposed to interest rate risk. Our exposure
to market risk for changes in interest rates relates primarily to the interest
income generated by our cash deposits with our banks and held-to-maturity
investments. We have not used any derivative financial instruments in our
investment portfolio. Interest earnings instruments carry a degree of interest
rate risk. We have not been exposed, nor do we anticipate being exposed to
material risks due to changes in interest rates. However, our future interest
income may fall short of expectations due to changes in interest
rates.
  79
 
 Foreign
Exchange Risk
 
 Translation
adjustments amounted to $0.6 million and $0.02 million as of September 30, 2010
and 2009, respectively. The Company translated balance sheet amounts with the
exception of equity at September 30, 2010 at RMB 6.6981 to $1.00 as compared to
RMB 6.8376 to US$1.00 at September 30, 2009. The Company stated equity accounts
at their historical rate. The average translation rates applied to income
statement accounts for the year ended September 30, 2010 and September 30, 2009
were RMB 6.8214 and RMB 6.8452 to US$1.00, respectively. So far, the PRC
government has been able to manage a stable exchange rate between RMB and the
U.S. Dollar. We do not anticipate material translation adjustments due to large
fluctuations in exchange rates between RMB and the U.S. Dollar. However, our
future downward translation adjustments may occur and can be significant due to
changes in such exchange rate.
 
 To the
extent that we need to convert U.S. dollars received in our May 2010 public
offering into the Renminbi for our operations, appreciation of the Renminbi
against the U.S. dollar would have an adverse effect on the Renminbi amount that
we receive from the conversion. Conversely, if we decide to convert our Renminbi
into U.S. dollars for the purpose of making payments for dividends on our
ordinary shares or ADSs or for other business purposes, appreciation of the U.S.
dollar against the Renminbi would have a negative effect on the U.S. dollar
amount available to us.
 
 The PRC
government imposes strict restrictions on PRC resident companies regarding
converting RMB into foreign currencies and vice versa under capital account
transactions, such as receiving equity investments from outside of the PRC,
making equity investments outside of the PRC, borrowing money from or lending
money outside of the PRC, and repaying debt or remitting liquidated assets
and/or accumulated profits outside of the PRC. These transactions have to be
approved by the relevant PRC government authorities, including but not limited
to the commerce bureau, the tax bureau and the State Administration of Foreign
Exchange, or SAFE, and have to be conducted at banks entrusted by the local SAFE
branch. Kingtone Information has not conducted any foreign currency transactions
during prior fiscal years since its inception. Softech was recently established
and had not conducted any foreign currency transactions except for converting a
relevantly small amount of foreign currency into RMB as registered capital
pursuant to PRC regulations. In anticipation of this offering, we will invest or
lend the proceeds as equity or loans into our PRC subsidiaries. As our business
continues to grow, we may need to continuously finance our PRC subsidiaries by
raising capital from outside of the PRC. The restriction on converting RMB into
foreign currencies, and vice versa, may limit our ability to use capital
resources from outside of the PRC. Such restrictions may also limit our ability
to remit profits from our PRC subsidiaries outside of the PRC, therefore
potentially limiting our ability to pay dividends to our shareholders. In
addition, such restrictions will limit our ability to freely transfer temporary
excess cash in our or our subsidiaries’ bank accounts in and out of the PRC,
therefore limiting our ability to conduct cross-border cash management
activities to optimize the utilization of our cash.
 
 Inflation
 
 Although
China has experienced an increasing inflation rate, inflation has not had a
material impact on our results of operations in recent years. According to the
National Bureau of Statistics of China, the change in the consumer price index
in China was 0.46%, (0.77%), and 1.16% in 2001, 2002 and 2003, respectively.
However, in connection with a 3.9% increase in 2004, the PRC government
announced measures to restrict lending and investment in China in order to
reduce inflationary pressures in China’s economy. Following the government’s
actions, the consumer price index decreased to 1.8% in 2005 and to 1.5% in 2006.
In 2007, the consumer price index increased to 4.8%. In response, China’s
central bank, the People’s Bank of China, announced that the bank reserve ratio
would rise half a percentage point to 15.5% in an effort to reduce inflation
pressures. China’s consumer price index growth rate reached 8.7% year over year
in 2008. The results of the PRC government’s actions to combat inflation are
difficult to predict. Adverse changes in the Chinese economy, if any, will
likely impact the financial performance of a variety of industries in China that
use, or would be candidates to use, our software products and
services.
 
 ITEM 12.   DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES.
  A.
DEBT SECURITIES.
  Not
applicable.
  80
  B.
WARRANTS AND RIGHTS.
  Not
applicable.
 
 C.
OTHER SECURITIES.
  Not
applicable.
  D.
AMERICAN DEPOSITARY SHARES.
 
 The Bank
of New York Mellon, as depositary, will register and deliver ADSs. Each ADS will
represent one (1) ordinary share (or a right to receive one (1) ordinary share)
deposited with principal Hong Kong office of The Hong Kong and Shanghai Banking
Corporation Limited, as custodian for the depositary. Each ADS will also
represent any other securities, cash or other property that may be held by the
depositary. The depositary’s corporate trust office at which the ADSs will be
administered is located at 101 Barclay Street, New York, New York 10286. The
Bank of New York Mellon’s principal executive office is located at One Wall
Street, New York, New York 10286.
 
 You may
hold ADSs either (A) directly (i) by having ADSs registered in your name in the
Direct Registration System, or (ii) by having an American depositary receipt,
also referred to as an ADR, which is a certificate evidencing a specific number
of ADSs, registered in your name, or (B) indirectly by holding a security
entitlement in ADSs through your broker or other financial institution. If you
hold ADSs directly, you are a registered ADS holder, also referred to as an ADS
holder. This description assumes you are an ADS holder. If you hold the ADSs
indirectly, you must rely on the procedures of your broker or other financial
institution to assert the rights of ADS holders described in this section. You
should consult with your broker or financial institution to find out what those
procedures are.
 
 The
Direct Registration System, or DRS, is a system administered by The Depository
Trust Company, also referred to as DTC, pursuant to which the depositary may
register the ownership of uncertificated ADSs, which ownership will be confirmed
by periodic statements sent by the depositary to the registered holders of
uncertificated ADSs.
 
 As an ADS
holder, you will not be treated as one of our registered shareholders and you
will not have direct shareholder rights. British Virgin Island’s law governs our
direct shareholders’ rights. The depositary will be the holder of the shares
underlying your ADSs. As a registered holder of ADSs, you will have ADS holder
rights. A Deposit Agreement among us, the depositary and you, as an ADS holder,
and all other persons indirectly holding ADSs, sets out ADS holder rights as
well as the rights and obligations of the depositary. New York law governs the
Deposit Agreement and the ADSs.
  The
following is a summary of the material provisions of the Deposit Agreement. For
more complete information, you should read the entire Deposit Agreement and the
form of ADS, which contains the terms of the ADSs. The Deposit Agreement is
filed as an exhibit to our registration statement filed on Form F-1. You may
obtain the registration statement and the attached Deposit Agreement from the
SEC’s website at http://www.sec.gov. You may
also obtain a copy of the Deposit Agreement at the SEC’s Public Reference Room,
which is located at 100 F Street, NE, Washington, DC 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-732-0330.
  81
  Fees
and Expenses
  Persons
      depositing or withdrawing shares or ADS holders must pay:
                    
                    For:$5.00
      (or less) per 100 ADSs (or portion of 100 ADSs)
                    
                    Issuance
      of ADSs, including issuances resulting from a distribution of shares or
      rights or other propertyCancellation
      of ADSs for the purpose of withdrawal, including if the Deposit Agreement
      terminates$.05
      (or less) per ADS
                    
                    Any
      cash distribution to ADS holdersA
      fee equivalent to the fee that would be payable if securities distributed
      to you had been shares and the shares had been deposited for issuance of
      ADSs
                    
                    Distribution
      of securities distributed to holders of deposited securities which are
      distributed by the depositary to ADS holders$.05
      (or less) per ADSs per calendar year
                    
                    Depositary
      servicesRegistration
      or transfer fees
                    
                    Transfer
      and registration of shares on our share register to or from the name of
      the depositary or its agent when you deposit or withdraw
      sharesExpenses
      of the depositary
                    
                    Cable,
      telex and facsimile transmissions (when expressly provided in the Deposit
      Agreement) converting foreign currency to U.S. dollarsTaxes
      and other governmental charges the depositary or the custodian have to pay
      on any ADS or share underlying an ADS, for example, share transfer taxes,
      stamp duty or withholding taxes
                    
                    As
      necessaryAny
      charges incurred by the depositary or its agents for servicing the
      deposited securities
                    
                    As
      necessary
 
 Payment
of Taxes
  Holders
of our ADSs are responsible for any taxes or other governmental charges payable
on their ADSs or on the deposited securities represented by any of their ADSs.
The depositary may refuse to register any transfer of a holder’s ADSs or allow
withdrawal of the deposited securities represented by the ADSs until such taxes
or other charges are paid. It may apply payments owed to the holder or sell
deposited securities represented by the ADSs to pay any taxes owed and the
holder will remain liable for any deficiency. If the depositary sells deposited
securities, it will, if appropriate, reduce the number of ADSs to reflect the
sale and pay to ADS holders any proceeds, or send to ADS holders any property,
remaining after it has paid the taxes.
  PART II
  ITEM 13.  DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES.
 
 None.
 
 ITEM 14.  MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
  On
May 14, 2010, we completed our initial public offering of our ADSs at a price of
$4.00 per ADS and listed our ADS on the Nasdaq Capital Market under the symbol
“KONE.” We sold an aggregate of 4,000,000 ADSs, representing 4,0000,000 ordinary
shares and generated net proceeds of approximately $14.6 million, after
deducting underwriting discounts and other offering expenses. ROTH Capital
Partners LLC acted as sole book-running manager of the offering and as
representative for the underwriters.
  82
  The
registration statement on Form F-1 (File No. 333-166056) filed by us in
connection with our initial public offering was declared effective on May 14,
2010. The amount of expenses incurred by us in connection with the issuance and
distribution of the registered securities totaled approximately $1.4 million,
consisting of $0.8 million for underwriting discounts and commissions, and
approximately $0.6 million for other expenses. None of the payments were direct
or indirect payments to our directors, officers, general partners of our
associates, persons owning 10% or more of any class of our shares, or any of our
affiliates. As of the date of this annual report, we have invested the net
proceeds in interest bearing accounts and have not specifically applied any of
the net proceeds.
 
 ITEM 15.  CONTROLS
AND PROCEDURES.
 
 Disclosure
Controls and Procedures
  Our Chief Executive Officer and Chief
Financial Officer have reviewed and evaluated the effectiveness of our
disclosure controls and procedures, which included inquiries made to certain
other of our employees. Based on their evaluation, the our Chief Executive
Officer and Chief Financial Officer have each concluded that, as of September
30, 2010, the Company's disclosure controls and procedures were effective and
sufficient to ensure that we record, process, summarize and report information
required to be disclosed by the Company in its periodic reports filed under the
Securities and Exchange Commission's rules and forms.
  Management’s
Annual Report on Internal Control Over Financial Reporting
  This annual report does not include a
report of management’s assessment regarding internal control over financial
reporting or an attestation report of the company’s registered public accounting
firm due to a transition period established by rules of the Securities and
Exchange Commission for newly public companies.
  Attestation
report of the registered public accounting firm.
  This annual report does not include a
report of management’s assessment regarding internal control over financial
reporting or an attestation report of the company’s registered public accounting
firm due to a transition period established by rules of the Securities and
Exchange Commission for newly public companies.
  Changes
in Internal Control over Financial Reporting
  There were no changes in the Company’s
internal control over financial reporting that occurred during our fiscal year
ended September 30, 2010 that has materially affected or is reasonably likely to
materially affect our internal control over financial reporting.
  ITEM 16A.  AUDIT
COMMITTEE FINANCIAL EXPERT.
 
 Our board
of directors has determined that Ms. Melody Shi qualifies as an audit committee
financial expert. Our board of directors has determined that Ms. Shi meets the
definition of an “independent director” under the applicable Nasdaq Rules and
under Rule 10A-3 of the Securities Exchange Act of 1934, as
amended.
 
 ITEM 16B.  CODE
OF ETHICS.
 
 Our board
of directors has adopted a code of business conduct and ethics applicable to our
directors, officers and employees. We have filed our code of business conduct
and ethics as an exhibit to our registration statement on Form F-1 (No.
333-166056) and posted the code on our website athttp://www.kingtoneinfo.com/en/overview/ethics.aspx.
  83
  ITEM 16C.  PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
  Audit
Fees
 
 The aggregate fees billed by B&P
for professional services rendered for the audit of our annual financial
information included in our Annual Report on Form 20-F were $125,000 and
$120,000 for the fiscal years ended September 30, 2010 and 2009,
respectively.
 
 Audit-Related
Fees
 
 The aggregate fees billed by our
principal accountants for audit-related services were $132,500 and $128,961 for
the fiscal years ended September  30, 2010 and 2009,
respectively.
 
 Tax
Fees
 
 We did not engage our principal
accountants to provide tax or related services during the last two fiscal
years.
 
 All
Other Fees
 
 We did not engage our principal
accountants to render services to us during the last two fiscal years, other
than as reported above.
 
 ITEM 16D.  EXEMPTIONS
FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
 
 Not applicable.
 
 ITEM 16E.  PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
 
 Not applicable.
 
 ITEM 16F.  CHANGE
IN REGISTRANT’S CERTIFYING ACCOUNTANT.
  Not applicable.
 
 ITEM 16G.   CORPORATE
GOVERNANCE.
 
 We
believe that there are no significant differences between our corporate
governance practices and those of U.S. domestic companies under the listing
standards of the Nasdaq Capital Market.
  PART
III
  ITEM 17.  FINANCIAL
STATEMENTS.
 
 We have elected to provide financial
statements and related information specified in Item 18.
 
 ITEM 18.  FINANCIAL
STATEMENTS.
 
 See “Index to Consolidated Financial Statements” for a list of
all financial statements filed as part of this annual
report.
  84
 
 SIGNATURES
  The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to
sign this annual report on its behalf.
  KINGTONE
      WIRELESSINFO SOLUTION HOLDING LTD.By:
                      /s/
      Peng ZhangPeng
      ZhangChief
      Executive
Officer
  January
20, 2011
  85
 
 ITEM 19.  EXHIBITS.
  EXHIBIT
INDEX
 
 The
following documents are filed as part of this Annual Report on Form
20-F.
  Exhibit
                      Number
                  
                  Description1.1*
                  
                  Amended
      and Restated Memorandum of Association and Articles of Association of
      Kingtone Wirelessinfo Solution Holding Ltd., dated March 25, 2010 and as
      currently in effect.2.1*
                  
                  Deposit
      Agreement among the Company, depositary and holders of the American
      Depositary Receipts.2.2*
                  
                  Form
      of American Depositary Receipt.2.3*
                  
                  English
      translation of Entrusted Management Agreement dated December 15, 2009
      between Xi’an Softech Co., Ltd., Xi’an Kingtone Information Technology
      Co., Ltd. and the shareholders of Xi’an Kingtone Information Technology
      Co., Ltd.3.1*
                  
                  English
      translation of Shareholder’s Voting Proxy Agreement dated December 15,
      2009 between Xi’an Softech Co., Ltd., Xi’an Kingtone Information
      Technology Co., Ltd. and the shareholders of Xi’an Kingtone Information
      Technology Co., Ltd.4.1*
                  
                  English
      translation of Exclusive Technology Service Agreement dated December 15,
      2009 between Xi’an Softech Co., Ltd. and Xi’an Kingtone Information
      Technology Co., Ltd.4.2*
                  
                  English
      translation of Exclusive Option Agreement dated December 15, 2009 between
      Xi’an Softech Co., Ltd., Xi’an Kingtone Information Technology Co., Ltd.
      and the shareholders of Xi’an Kingtone Information Technology Co.,
      Ltd.4.3*
                  
                  English
      translation of Equity Pledge Agreement dated December 15, 2009 between
      Xi’an Softech Co., Ltd., Xi’an Kingtone Information Technology Co., Ltd.
      and the shareholders of Xi’an Kingtone Information Technology Co.,
      Ltd.4.4*
                  
                  English
      translation of Loan Agreement dated September 14, 2009 between Xi’an
      Kingtone Information Technology Co., Ltd. and Xian City Commercial
      Bank.4.5*
                  
                  English
      translation of Mortgage Agreement dated September 14, 2009 between Xi’an
      Kingtone Information Technology Co., Ltd. and Xian City Commercial
      Bank.4.6*
                  
                  English
      translation of Form of Call Option Agreement dated December 15, 2009 by
      and among Xtra Heights Management Ltd., Sha Li and twelve shareholders of
      Kingtone Information Technology Co., Ltd.4.7*
                  
                  English
      translation of Form of Employment Agreement entered into between the
      Company and the Company’s executive officers.4.8*
                  
                  Term
      Sheet dated October 27, 2009 between Sha Li and certain shareholders of
      Kingtone Information Technology Co., Ltd.4.9*
                  
                  English
      translation of Material Purchase Contract dated April 30, 2009 between
      Xi’an Kingtone Information Technology Co., Ltd. and Xi’an Product
      Petroleum Pipe Transportation Project Management Department of Shanxi
      Chemical Construction YanLian.4.10*
                  
                  Employment
      Agreement dated April 23, 2010 between the Company and Ying
      Yang.4.11*
                  
                  2010
      Omnibus Incentive Plan of the Company4.12
                  
                  English
      translation of Project Construction Contract dated August 10, 2010 between
      Xi’an Hu County Yuxing Agriculture Science & Technology Co., Ltd. and
      Xi’an Kingtone Information Technology Co., Ltd.4.13
                  
                  English
      translation of Lease Agreement dated September 30, 2010 between Shaanxi
      TechTeam Jinong Humid Acid Product Co., Ltd. and Xi’an Kingtone
      Information Technology Co.,
Ltd.
  86
  8.1
                  
                  List
      of Subsidiaries
                    
                    Topsky
      Info-tech Holdings Pte Ltd, a Singapore company.
                    Xi’an
      Softech Co., Ltd., a PRC company
                    Xi’an
      Kingtone Information Technology Co., Ltd., a PRC company (a variable
      interest entity)11.1*
                  
                  Code
      of Ethics12.1
                  
                  Certification
      of Chief Executive Officer  required by Rule
      13a-14(a)..12.2
                  
                  Certification
      of Chief Financial Officer required by Rule 13a-14(a).13.1
                  
                  Certification
      of Chief Executive Officer required by Rule 13a-14(a).13.2
                  
                  Certification
      of Chief Financial Officer required by Rule
  13a-14(a).
 
 *
              Previously filed as an exhibit to
      the Company’s Registration Statement on Form F-1 (Reg. No. 333-166056)
      filed with the Commission and incorporated herein by
      reference.
  87





Kingtone
Wirelessinfo Solution Holding Ltd and Subsidiaries





CONSOLIDATED
AND COMBINED FINANCIAL STATEMENTS





TABLE OF
CONTENTS





PAGESReport
      of Independent Registered Public Accounting Firm
                          F-1Consolidated
      and Combined Balance Sheetsas
      of September 30, 2010 and November 30, 2009
                          F-2Consolidated
      and Combined Statements of Income and Comprehensive Income
                          F-3for
      the Years Ended September 30, 2010, 2009 and 2008Consolidated
      and Combined Statements of Cash Flows
                          F-4for
      the Years Ended September 30, 2010, 2009 and 2008Consolidated
      and Combined Statements of Stockholders’ Equity
                          F-5for
      the Ten Months Ended September 30, 2010 and the Years Ended November 30,
      2009 and 2008Notes
      to the Consolidated and Combined Financial Statements
                          F-6
      – F-25














REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of


Kingtone
Wirelessinfo Solution Holding Ltd and Subsidiaries





We have
audited the accompanying consolidated and combined balance sheets of Kingtone
Wirelessinfo Solution Holding Ltd and Subsidiaries and Variable Interest Entity
(“VIE”) (the “Company”) as of September 30, 2010 and November 30, 2009, the
related consolidated and combined statements of income and comprehensive income,
and cash flows for the years ended September 30, 2010, 2009 and 2008 and the
related consolidated and combined statements of stockholders’ equity for the ten
months ended September 30, 2010 and the years ended November 30, 2009 and 2008.
The Company’s management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audits.





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





As more
fully described in Note 2a, in March 2010, the Company changed its fiscal
year-end from November 30th to
September 30th, so
that it would have the same fiscal year end as its VIE, Xi’an Kingtone
Information Technology Co., Ltd. (“Kingtone Information”). There were no
operations in the Company other than in its VIE, Kingtone Information from
October 1, 2009 to November 30, 2009. In addition, the consolidated and combined
statements of income and comprehensive income and cash flows for the years ended
November 30, 2009 and 2008 included Kingtone Information for the years ended
September 30, 2009 and 2008. Therefore the Company is presenting its
consolidated and combined statements of income and comprehensive income and cash
flows for the years ended September 30, 2010, 2009 and 2008 instead of for the
ten months ended September 30, 2010 and the years ended November 30, 2009 and
2008.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of September 30,
2010 and November 30, 2009, and the results of its operations and its cash flows
for the years ended September 30, 2010, 2009 and 2008, in conformity with
accounting principles generally accepted in the United States of
America.





/s/
Bernstein &Pinchuk LLP





New York,
New York


January
20, 2011








F-1





KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES


CONSOLIDATED
AND COMBINED BALANCE SHEETS


(Express
in thousands of U.S. Dollars, except shares and per share data)





As
      of September 30,
                
                
                As
      of November 30,2010
                
                
                2009(see
      note below)ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                14,909
                
                
                $
                344Accounts
      receivable, net of allowance
                
                
                6,650
                
                
                
                2,353Unbilled
      revenue
                
                
                973
                
                
                
                178Due
      from related companies
                
                
                120
                
                
                
                -Inventories,
      net
                
                
                383
                
                
                
                127Other
      receivables and prepayments
                
                
                771
                
                
                
                1,012Total
      Current Assets
                
                
                23,806
                
                
                
                4,014Non-current
      assetsProperty
      and Equipment, net
                
                
                13,637
                
                
                
                1,693Deposit
      to purchase building
                
                
                -
                
                
                
                12,200Intangible
      assets
                
                
                630
                
                
                
                -Total
      Assets
                
                $
                38,073
                
                
                $
                17,907LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable
                
                $
                575
                
                
                $
                1,409Advances
      from customers
                
                
                371
                
                
                
                1,398Other
      payables and accruals
                
                
                167
                
                
                
                559Taxes
      payable
                
                
                3,421
                
                
                
                601Short-term
      loan
                
                
                -
                
                
                
                3,437Amounts
      due to shareholder
                
                
                -
                
                
                
                200Dividend
      payable
                
                
                772
                
                
                
                1,177Total
      Current Liabilities
                
                
                5,306
                
                
                
                8,781Commitments
      and contingenciesStockholders'
      equityOrdinary
      share ($.001 par value, 100,000,000 shares authorized, and 10,000,000
      shares and 14,000,000 shares issued and outstanding)
                
                $
                14
                
                
                $
                10Paid
      in capital
                
                
                -
                
                
                
                6,897Additional
      paid in capital
                
                
                21,915
                
                
                
                216Appropriated
      retained earnings
                
                
                844
                
                
                
                231Unappropriated
      retained earnings
                
                
                8,281
                
                
                
                657Accumulated
      other comprehensive income
                
                
                1,713
                
                
                
                1,115Total
      Stockholders' Equity
                
                
                32,767
                
                
                
                9,126Total
      Liabilities and Stockholders' Equity
                
                $
                38,073
                
                
                $
                17,907





Note: In
March 2010, the Company changed its fiscal year-end from November 30th to
September 30th, so
that it would have the same fiscal year end as its variable interest entity
(“VIE”), Xi’an Kingtone Information Technology Co., Ltd. (“Kingtone
Information”).





See notes
to the consolidated and combined financial statements


F-2





KINGTONG
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES


CONSOLIDATED
AND COMBINED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


(Express
in thousands of U.S. Dollars, except shares and per share data)





For
      the years ended September 30,2010
                  
                  
                  2009
                  
                  
                  2008(see note below)
                  
                  
                  (see note below)RevenuesSoftware
                  
                  $
                  11,272
                  
                  
                  $
                  5,170
                  
                  
                  $
                  987Wireless
      system solution
                  
                  
                  3,234
                  
                  
                  
                  6,070
                  
                  
                  
                  3,299-
      Related party
                  
                  
                  -
                  
                  
                  
                  1,148-Third
      Party
                  
                  
                  3,234
                  
                  
                  
                  4,922
                  
                  
                  
                  3,299Total
      revenues
                  
                  
                  14,506
                  
                  
                  
                  11,240
                  
                  
                  
                  4,286Cost
      of salesSoftware
                  
                  
                  903
                  
                  
                  
                  476
                  
                  
                  
                  183Wireless
      system solution
                  
                  
                  1,449
                  
                  
                  
                  3,418
                  
                  
                  
                  1,438-
      Related party
                  
                  
                  -
                  
                  
                  
                  765
                  
                  
                  
                  --Third
      Party
                  
                  
                  1,449
                  
                  
                  
                  2,653
                  
                  
                  
                  1,438Total
      cost of sales
                  
                  
                  2,352
                  
                  
                  
                  3,894
                  
                  
                  
                  1,621Gross
      profit
                  
                  
                  12,154
                  
                  
                  
                  7,346
                  
                  
                  
                  2,665Operating
      expensesSelling
      and marketing expenses
                  
                  
                  341
                  
                  
                  
                  350
                  
                  
                  
                  301General
      and administrative expenses
                  
                  
                  1,635
                  
                  
                  
                  537
                  
                  
                  
                  355Research
      and development expenses
                  
                  
                  179
                  
                  
                  
                  139
                  
                  
                  
                  79Total
      Operating expenses
                  
                  
                  2,155
                  
                  
                  
                  1,026
                  
                  
                  
                  735Income
      from operations
                  
                  
                  9,999
                  
                  
                  
                  6,320
                  
                  
                  
                  1,930Other
      income(expense)Subsidy
      income
                  
                  
                  44
                  
                  
                  
                  307
                  
                  
                  
                  163Interest
      expense
                  
                  
                  (218
                  )
                  
                  
                  (340
                  )
                  
                  
                  (531
                  )Other
      income (expense)
                  
                  
                  20
                  
                  
                  
                  (55
                  )
                  
                  
                  (356
                  )Total
      other income (expense)
                  
                  
                  (154
                  )
                  
                  
                  (88
                  )
                  
                  
                  (724
                  )Income
      before income tax expenses
                  
                  
                  9,845
                  
                  
                  
                  6,232
                  
                  
                  
                  1,206Income
      tax expenses
                  
                  
                  1,608
                  
                  
                  
                  935
                  
                  
                  
                  191Net
      income
                  
                  $
                  8,237
                  
                  
                  $
                  5,297
                  
                  
                  $
                  1,015Other
      comprehensive incomeForeign
      currency translation gain
                  
                  
                  598
                  
                  
                  
                  22
                  
                  
                  
                  544Comprehensive
      income
                  
                  $
                  8,835
                  
                  
                  $
                  5,319
                  
                  
                  $
                  1,559Earnings
      per ordinary share:Basic
      and Diluted
                  
                  $
                  0.71
                  
                  
                  $
                  0.53
                  
                  
                  $
                  0.10Weighted
      average number of ordinary shares outstandingBasic
      and Diluted
                  
                  
                  11,527,473
                  
                  
                  
                  10,000,000
                  
                  
                  
                  10,000,000





Note: In
March 2010, the Company changed its fiscal year-end from November 30th to
September 30th, so
that it would have the same fiscal year end as its VIE, Xi’an Kingtone
Information Technology Co., Ltd. (“Kingtone Information”). There were no
operations in the Company other than in its VIE, Kingtone Information from
October 1, 2009 to November 30, 2009. In addition, the consolidated and combined
statements of income and comprehensive income for the years ended November 30,
2009 and 2008 included Kingtone Information for the years ended September 30,
2009 and 2008. Therefore the Company is presenting its consolidated and combined
statements of income and comprehensive income for the years ended September 30,
2010, 2009 and 2008 instead of for the ten months ended September 30, 2010 and
the years ended November 30, 2009 and 2008.





See notes
to the consolidated and combined financial statements


F-3





KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES


CONSOLIDATED
AND COMBINED STATEMENTS OF CASH FLOWS


(Express
in thousands of U.S. Dollars, except shares and per share data)





For the years ended September 30,2010
                  
                  
                  2009
                  
                  
                  2008(see note below)
                  
                  
                  (see note below)Cash
      flows from operating activitiesNet
      income
                  
                  $
                  8,237
                  
                  
                  $
                  5,297
                  
                  
                  $
                  1,015Depreciation
      and amortization
                  
                  
                  225
                  
                  
                  
                  129
                  
                  
                  
                  121Disposal
      of fixed assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  197Subsidiary
      income recognized from deferred government grant
                  
                  
                  -
                  
                  
                  
                  (50
                  )
                  
                  
                  -Share-based
      compensation expense
                  
                  
                  302
                  
                  
                  
                  -
                  
                  
                  
                  -Changes
      in operating assets and liabilitiesAccounts
      receivable
                  
                  
                  (4,170
                  )
                  
                  
                  (1,851
                  )
                  
                  
                  (391
                  )Unbilled
      revenue
                  
                  
                  (778
                  )
                  
                  
                  (177
                  )
                  
                  
                  -Other
      receivables and prepayments
                  
                  
                  257
                  
                  
                  
                  (234
                  )
                  
                  
                  (50
                  )Inventories
                  
                  
                  (249
                  )
                  
                  
                  150
                  
                  
                  
                  (43
                  )Tax
      payable
                  
                  
                  2,756
                  
                  
                  
                  601
                  
                  
                  
                  (159
                  )Accounts
      payable
                  
                  
                  (848
                  )
                  
                  
                  1,092
                  
                  
                  
                  30Advance
      from customers
                  
                  
                  (1,037
                  )
                  
                  
                  (1,424
                  )
                  
                  
                  (633
                  )Other
      payables and accruals
                  
                  
                  (394
                  )
                  
                  
                  467
                  
                  
                  
                  (54
                  )Deferred
      government grant
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  48Net
      cash provided by operating activities
                  
                  
                  4,301
                  
                  
                  
                  4,000
                  
                  
                  
                  81Cash
      flows from investing activitiesPurchases
      of vehicles and office equipment
                  
                  
                  (308
                  )
                  
                  
                  (24
                  )
                  
                  
                  (644
                  )Prepayment
      to purchase building
                  
                  
                  -
                  
                  
                  
                  (12,186
                  )
                  
                  
                  -Net
      cash used in investing activities
                  
                  
                  (308
                  )
                  
                  
                  (12,210
                  )
                  
                  
                  (644
                  )Cash
      flows from financing activitiesProceeds
      in short-term bank loan
                  
                  
                  -
                  
                  
                  
                  3,432
                  
                  
                  
                  3,544Repayment
      of short-term bank loan
                  
                  
                  (3,445
                  )
                  
                  
                  (3,681
                  )
                  
                  
                  (6,779
                  )(Payment)/Collection
      in amounts due from related-party companies
                  
                  
                  (118
                  )
                  
                  
                  11,335
                  
                  
                  
                  4,249Repayment
      of loan from non-related companies
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,088
                  )Collection
      from loan to non-related companies
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  582Receipt/(Repayment)
      in amounts due to shareholders
                  
                  
                  (200
                  )
                  
                  
                  200
                  
                  
                  
                  -Proceeds
      from issuance of shares
                  
                  
                  14,503
                  
                  
                  
                  10
                  
                  
                  
                  1,055Dividend
      paid to shareholders
                  
                  
                  (422
                  )
                  
                  
                  (2,751
                  )
                  
                  
                  -Net
      cash provided by financing activities
                  
                  
                  10,318
                  
                  
                  
                  8,545
                  
                  
                  
                  563Effect
      of exchange rate changes on cash and cash equivalents
                  
                  
                  254
                  
                  
                  
                  -
                  
                  
                  
                  2Net
      increase in cash and cash equivalents
                  
                  
                  14,565
                  
                  
                  
                  335
                  
                  
                  
                  2Cash
      and cash equivalents at beginning of year
                  
                  
                  344
                  
                  
                  
                  9
                  
                  
                  
                  7Cash
      and cash equivalents at end of year
                  
                  $
                  14,909
                  
                  
                  $
                  344
                  
                  
                  $
                  9Supplemental
      disclosure of cash flow informationInterest
      paid
                  
                  $
                  218
                  
                  
                  $
                  340
                  
                  
                  $
                  531Income
      taxes paid
                  
                  $
                  92
                  
                  
                  $
                  215
                  
                  
                  $
                  495





Note: in
March 2010, the Company changed its fiscal year-end from November 30th to
September 30th, so
that it would have the same fiscal year end as its VIE, Xi’an Kingtone
Information Technology Co., Ltd. (“Kingtone Information”). There were no
operations in the Company other than in its VIE, Kingtone Information from
October 1, 2009 to November 30, 2009. In addition, the consolidated and combined
statements of cash flows for the years ended November 30, 2009 and 2008 included
Kingtone Information for the years ended September 30, 2009 and 2008. Therefore
the Company is presenting its consolidated and combined statements of cash flows
for the years ended September 30, 2010, 2009 and 2008 instead of for the ten
months ended September 30, 2010 and the years ended November 30, 2009 and
2008.





See notes
to the consolidated and combined financial statements





F-4




KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES


CONSOLIDATED
AND COMBINED STATEMENTS OF STOCKHOLDERS’ EQUITY


(Express
in thousands of U.S. Dollars, except shares and per share data)





Ordinary shares
                            
                            
                            Paid-in
                            
                            
                            Additional
                              paid-in
                            
                            
                            Appropriated
                              Retained
                            
                            
                            Unappropriated
                              Retained
                            
                            
                            Comprehensive
                            
                            
                            Total
                              stockholders’No. of share
                            
                            
                            Amount
                            
                            
                            capital
                            
                            
                            capital
                            
                            
                            earnings
                            
                            
                            earnings
                            
                            
                            income
                            
                            
                            equityBalance
      at November 30, 2007
                            
                            
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            6,034
                            
                            
                            $
                            -
                            
                            
                            $
                            30
                            
                            
                            $
                            (1,527
                            )
                            
                            $
                            549
                            
                            
                            $
                            5,086Net
      income for the year
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,015
                            
                            
                            
                            -
                            
                            
                            
                            1,015Share
      contribution
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            863
                            
                            
                            
                            216
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,079Transfer
      to statutory reserves
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            32
                            
                            
                            
                            (32
                            )
                            
                            
                            -
                            
                            
                            
                            -Foreign
      currency translation gain
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            544
                            
                            
                            
                            544Balance
      as of November 30, 2008
                            
                            
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            6,897
                            
                            
                            $
                            216
                            
                            
                            $
                            62
                            
                            
                            $
                            (544
                            )
                            
                            $
                            1,093
                            
                            
                            $
                            7,724Share
      contribution
                            
                            
                            10,000,000
                            
                            
                            
                            10
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            10Net
      income for the year
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            5,297
                            
                            
                            
                            -
                            
                            
                            
                            5,297Payment
      of dividends
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (4,096
                            )
                            
                            
                            -
                            
                            
                            
                            (4,096
                            )Transfer
      to statutory reserves
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            169
                            
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            169Foreign
      currency translation gain
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            22
                            
                            
                            
                            22Balance
      as of November 30, 2009
                            
                            
                            10,000,000
                            
                            
                            
                            10
                            
                            
                            
                            6,897
                            
                            
                            
                            216
                            
                            
                            
                            231
                            
                            
                            
                            657
                            
                            
                            
                            1,115
                            
                            
                            
                            9,126Issuance
      of ordinary shares in form of American Depositary Shares
                            
                            
                            4,000,000
                            
                            
                            
                            4
                            
                            
                            
                            -
                            
                            
                            
                            14,500
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            14,504Share-based
      compensation
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            302
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            302Net
      income for the year
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            8,237
                            
                            
                            
                            -
                            
                            
                            
                            8,237Effect
      of reorganization
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (6,897
                            )
                            
                            
                            6,897
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            -Transfer
      to statutory reserves
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            613
                            
                            
                            
                            (613
                            )
                            
                            
                            -
                            
                            
                            
                            -Foreign
      currency translation gain
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            598
                            
                            
                            
                            598Balance
      as of September 30, 2010
                            
                            
                            14,000,000
                            
                            
                            $
                            14
                            
                            
                            $
                            -
                            
                            
                            $
                            21,915
                            
                            
                            $
                            844
                            
                            
                            $
                            8,281
                            
                            
                            $
                            1,713
                            
                            
                            $
                            32,767





See notes
to the consolidated and combined financial statements


F-5


KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 (Expressed
in thousands of U.S. dollars, except shares and per share amount)
 
 NOTE
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
 
 Kingtone
Wirelessinfo Solution Holding Ltd (“Kingtone Wireless”) was incorporated in the
British Virgin Islands on October 27, 2009 under the name of Reizii Capital
Management Limited.  It has wholly-owned subsidiaries and a variable
interest entity (“VIE”).  Its wholly-owned subsidiaries include: Topsky
Info-tech Holdings Pte Ltd. (“Topsky”), which was established in Singapore on
November 3, 2009, and Xi’an Softech Co., Ltd. (“Softech”), which was established
on November 27, 2009 in Xi’an, Shaanxi Province, China by Topsky.  Its VIE
is Xi’an Kingtone Information Technology Co., Ltd. (“Kingtone Information”)
which was incorporated in Xi’an, Shaanxi province, China on December 28, 2001.
Kingtone Wireless and its wholly-owned subsidiaries and VIE together are
referred to as the “Company”.
 
 Kingtone
Wireless’ controlling shareholder since its inception, October 27, 2009, also
owned more than 50% of Kingtone Information since its inception, December 28,
2001. On December 15, 2009, Kingtone Wireless through one of its subsidiaries,
Softech, entered into a series of agreements (the “Restructuring Agreements”)
with Kingtone Information for it to qualify as a VIE and to meet foreign
ownership limitations established by the People Republic of China (the
“Reorganization”).  The Restructuring Agreements are as
follows:
 
 Entrusted Management
Agreement
 
 Pursuant
to the terms of a certain Entrusted Management Agreement dated December 15, 2009
among Kingtone Information, Softech and the shareholders of Kingtone Information
(the “Entrusted Management Agreement”), Kingtone Information and its
shareholders agreed to entrust the operations and management of  its
business to Softech. According to the Entrusted Management Agreement, Softech
possesses the full and exclusive right to manage Kingtone Information’s
operations, assets and personnel, has the right to control all of Kingtone
Information's cash flows through an entrusted bank account, is entitled to
Kingtone Information's net profits as a management fee, is obligated to pay all
of Kingtone Information’s payables and loan payments, and bears all losses of
Kingtone Information. The Entrusted Management Agreement will remain in effect
until (i) the parties mutually agree to terminate the agreement; (ii) the
dissolution of Kingtone Information or (iii) Softech acquires all of the assets
or equity of Kingtone Information (as more fully described below under
“Exclusive Option Agreement”).
 
 Exclusive Technology Service
Agreement
 
 Pursuant
to the terms of a certain Exclusive Technology Service Agreement dated December
15, 2009 between Kingtone Information and Softech (“the Exclusive Technology
Services Agreement”), Softech is the exclusive technology services provider to
Kingtone Information. Kingtone Information agreed to pay Softech all fees
payable for technologies services prior to making any payments under the
Entrusted Management Agreement. Any payment from Kingtone Information to Softech
must comply with applicable Chinese laws. Further, the parties agreed that
Softech shall retain sole ownership of all intellectual property developed in
connection with providing technology services to Kingtone Information. The
Exclusive Technology Services Agreement shall remain in effect until (i) the
parties mutually agree to terminate the agreement; (ii) the dissolution of
Kingtone Information or (iii) Softech acquires Kingtone Information (as more
fully described below under “Exclusive Option Agreement”).
 
 Shareholders’ Voting Proxy
Agreement
 
 Pursuant
to the terms of a certain Shareholders’ Voting Proxy Agreement dated December
15, 2009 among Softech and the shareholders of Kingtone Information (the
“Shareholders’ Voting Proxy Agreement”), each of the shareholders of Kingtone
Information irrevocably appointed Softech as their proxy to exercise on each of
such shareholder’s behalf all of their voting rights as shareholders pursuant to
PRC law and the Articles of Association of Kingtone Information, including the
appointment and election of directors of Kingtone Information. Softech agreed
that it shall maintain a board of directors the composition of which will be the
members of the board of directors of Kingtone Wireless, except those directors
that are employed solely for the purpose of satisfying listing or financing
requirements of Kingtone Wireless. The Shareholders’ Voting Proxy Agreement will
remain in effect until Softech acquires all of the assets or equity of Kingtone
Information.
  F-6
  KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 (Expressed
in thousands of U.S. dollars, except shares and per share amount)
 
 Exclusive Option
Agreement
 
 Pursuant
to the terms of a certain Exclusive Option Agreement dated December 15, 2009
among Softech, Kingtone Information and the shareholders of Kingtone Information
(the “Exclusive Option Agreement”), the shareholders of Kingtone Information
granted Softech an irrevocable and exclusive purchase option (the “Option”) to
acquire Kingtone Information’s equity interests and/or remaining assets, but
only to the extent that the acquisition does not violate limitations imposed by
PRC law on such transactions. As discussed above, current PRC law does not allow
foreigners to hold equity interests in a PRC entity that engages in business
dealings with classified government information. Accordingly, the Option is
exercisable at any time at Softech’s discretion so long as such exercise and
subsequent acquisition of Kingtone Information does not violate PRC law. The
consideration for the exercise of the Option is to be determined by the parties
and memorialized in the future by definitive agreements setting forth the kind
and value of such consideration. To the extent Kingtone Information shareholders
receive any of such consideration, the Option requires them to transfer (and not
retain) the same to Kingtone Information or Softech. The Exclusive Option
Agreement may be terminated by mutual agreement or by 30 days written notice by
Softech.
 
 Equity Pledge
Agreement
 
 Pursuant
to the terms of a certain Equity Pledge Agreement dated December 15, 2009 among
Softech and the shareholders of Kingtone Information (the “Pledge Agreement”),
the shareholders of Kingtone Information pledged all of their equity interests
in Kingtone Information, including the proceeds thereof, to guarantee all of
Softech's rights and benefits under the Entrusted Management Agreement, the
Exclusive Technology Service Agreement, the Shareholders’ Voting Proxy Agreement
and the Exclusive Option Agreement. Prior to termination of the Pledge
Agreement, the pledged equity interests cannot be transferred without Softech's
prior written consent. The Pledge Agreement may be terminated only upon the
written agreement of the parties.
 
 Call Option Agreements
between Xtra Heights Management Ltd. and Certain Shareholders of Kingtone
Information
 
 In
connection with the Reorganization, twelve individual shareholders (listed
below) of Kingtone Information (individually a “Purchaser” and collectively the
“Purchasers”) each entered into a Call Option Agreement (collectively the “Call
Option Agreements”) with Xtra Heights Management Ltd., a corporation
incorporated under the laws of the British Virgin Islands (“Xtra”) 
 and its sole shareholder Sha Li (collectively the “Seller”) dated as of
December 15, 2009. Pursuant to the terms and conditions of the Call Option
Agreements, the Purchasers are entitled to purchase up to an aggregate of
6,806,250 ordinary shares of the Company from the Seller at a price of $0.001
per share. Specifically, (i) if the Purchasers enter into an employment
agreement to serve for Softech for a term of not less than five years, the
Purchasers are entitled to purchase up to 3,403,125 ordinary shares from the
Seller; (ii) if Softech achieves not less than $500,000 in consolidated
after-tax net income as determined under US GAAP for the fiscal year ending
September 30, 2010, the Purchasers are entitled to purchase up to 1,361,250
ordinary shares from the Seller; (iii) if Softech achieves not less than
$1,000,000 in consolidated after-tax net income as determined under US GAAP for
the fiscal year ending September 30, 2011, the Purchasers are entitled to
purchase up to 1,361,250 ordinary shares from the Seller; and (iv) if Softech
achieves not less than $2,000,000 in consolidated after-tax net income as
determined under US GAAP for the fiscal year ending September 30, 2012, the
Purchasers are entitled to purchase up to 680,625 ordinary shares from the
Seller. Under the Call Option Agreements, the Seller also irrevocably appoints
each correspondingPurchaser with
the exclusive right to exercise, on its behalf, all of the voting rights of the
Seller’s shares. Additionally, the Call Option Agreements grant the Purchasers
the right to all distributions made by us, including without limitation,
dividends, in respect of the Seller’s shares.
 
 The
Purchasers entered into the Call Option Agreements upon terms substantially
similar to the terms set forth in that certain Term Sheet, dated October 27,
2009, between the Purchasers and Ms. Sha Li.
  F-7
  KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 (Expressed
in thousands of U.S. dollars, except shares and per share amount)
 
 As a
result of these contractual arrangements, Kingtone Wireless is able to exercise
control over Kingtone information and was entitled to substantially all of the
economic benefits of Kingtone information through its subsidiary, Softech.
Therefore, Kingtone Wireless consolidates Kingtone Information in accordance
with ASC 810-10, “Consolidation of Variable Interest Entities”) since the date
of the Reorganization. The controlling shareholder also controlled Kingtone
Wireless and Kingtone Information before and after the Reorganization, therefore
the Reorganization is accounted for as a transaction between entities under
common control in a manner similar to pooling of interests.
 
 On
December 17, 2009, Reizii Capital Management Limited changed its name to
Kingtone Wirelessinfo Solution Holding Ltd.
 
 On March
23, 2010, the board of directors of Kingtone Wireless resolved to change the
fiscal year end of Kingtone Wireless and its wholly-owned subsidiaries, Topsky
and Softech, from November 30th to September 30th so they have the same fiscal
year end as Kingtone Information.
 
 On May
14, 2010, the Company completed the initial public offering of its American
Depositary Shares (“ADSs”) at a price of $4.00 per ADS and listed its ADS on the
Nasdaq Capital Market under the symbol “KONE.” The Company sold an aggregate of
4,000,000 ADSs, representing 4,000,000 ordinary shares and received net proceeds
of approximately $14.5 million, net of underwriting discounts and other offering
expenses.
 
 The
Company is principally involved in developing and implementing mobile enterprise
solutions for its customers in a broad variety of sectors and industries to
improve its operating efficiency by facilitating mission-specific field and
long-distance information management in wireless environments through its VIE,
Kingtone Information.
 
 NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 (a)
Basis of presentation
 
 The
consolidated and combined financial statements of the Company have been prepared
in accordance with the accounting principles generally accepted in the United
States of America (“U.S. GAAP”). The financial statements are solely those of
Kingtone Information for the fiscal years ended September 30, 2008 and 2009 and
for the subsequent period ended October 26, 2009, and then they are combined
with Kingtone Wireless and its subsidiaries through the date of the
Reorganization, December 15, 2009, and they are consolidated with Kingtone
Wireless and its subsidiaries following the date of the Reorganization. The
consolidated and combined financial statements as of September 30, 2010 include
the financial statements of Kingtone Wireless, its subsidiaries, and its VIE for
which Kingtone Wireless is the primary beneficiary. All inter-company
transactions and balances between Kingtone Wireless, its subsidiaries and its
VIE are eliminated upon consolidation. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included, and
such adjustments are of a normal recurring nature.
 
 In March
2010, the Company changed its fiscal year-end from November 30th to
September 30th, so
that it would have the same fiscal year end as its VIE, Kingtone Information.
The Company had no operations other than the operations of Kingtone Information
from October 1, 2009 to November 30, 2009. In addition, the consolidated and
combined statements of income and comprehensive income and cash flows for the
years ended November 30, 2009 and 2008 included Kingtone Information for the
years ended September 30, 2009 and 2008. Therefore the Company is presenting its
consolidated and combined statements of income and comprehensive income and cash
flows for the years ended September 30, 2010, 2009 and 2008 instead of for the
ten months ended September 30, 2010 and the years ended November 30, 2009 and
2008.
 
 (b)
Foreign currency transaction
 
 The
functional currency of the Company is United States dollars (“US$”), and the
functional currency of Topsky is Singapore dollars (“SG$”). The functional
currency of the Company’s PRC subsidiary, Softech and Kingtone Information, is
the Renminbi (“RMB’), and PRC is the primary economic environment in which the
Company operates.
 
 Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the dates of the
transactions. The resulting exchange differences are included in the
determination of net income for the respective periods.
  F-8
  KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 (Expressed
in thousands of U.S. dollars, except shares and per share amount)
 
 For
financial reporting purposes, the financial statements of the Company’s PRC
subsidiary which are prepared using the RMB, are translated into Company’s
reporting currency, the United States Dollar (“U.S. dollar”). Assets and
liabilities are translated using the exchange rate at each balance sheet date.
Revenue and expenses are translated using average rates prevailing during each
reporting period, and stockholders’ equity is translated at historical exchange
rates. Adjustments resulting from the translation are recorded as a separate
component of accumulated other comprehensive income in stockholders’
equity.
 
 The
exchange rates applied are as follows:
 
 2010
                  
                  
                  2009
                  
                  
                  2008RMB
      exchange rate at balance sheets dates,
                  
                  
                  6.6981
                  
                  
                  
                  6.8376
                  
                  
                  
                  6.8551Average
      RMB exchange rate for each period
                  
                  
                  6.8214
                  
                  
                  
                  6.8452
                  
                  
                  
                  7.1106
 
 No
representation is made that the RMB amounts could have been, or could be,
converted into U.S. dollars at the rates used in translation.
 
 (c)
Use of estimation
 
 The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Management makes these estimates using the
best information available at the time the estimates are made. Significant
estimates and judgments made by the management include: (i) estimates of profits
and losses on contracts in process; (ii) accrual of estimated liabilities; and
(iii) contingencies and litigation. However actual results could differ from
those estimates.
 
 (d)
Cash and cash equivalents
 
 Cash and
cash equivalents represent cash on hand and deposits held with banks. The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash
equivalents.
 
 (e)
Accounts receivable
 
 Accounts
receivable are recorded at net realizable value consisting of the carrying
amount less an allowance for uncollectible accounts as needed. The allowance for
doubtful accounts is the Company’s best estimate of the amount of probable
credit losses in the Company’s existing accounts receivable. The Company
determines the allowance based on aging data, historical collection experience,
customer specific facts and economic conditions. Account balances are charged
off against the allowance after all means of collection have been exhausted and
the potential for recovery is considered remote. The Company did not have any
off-balance-sheet credit exposure related to its customers.
 
 (f)
Inventories
 
 Inventories
consist of raw materials, finished goods, and work-in-progress, which include
the direct labor, direct materials and overhead costs related to projects.
Inventories are stated at lower of cost or market value. Cost is determined
using first in first out method.
 
 Where
there is evidence that the market value of inventories, in their disposal in the
ordinary course of business, will be less than cost, whether due to physical
deterioration, obsolescence, changes in price levels, or other causes, a
provision is accrued for the difference with charges to cost of goods
sold.
  F-9
  KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 (Expressed
in thousands of U.S. dollars, except shares and per share amount)
 
 (g)
Property and equipment
 
 The
Company states plant and equipment at cost less accumulated depreciation. The
Company computes depreciation using the straight-line method over the estimated
useful lives of the assets with 5% residual value.
 
 Estimated
useful lives of property and equipment:
 
 Useful LifeProperty
      and improvements
                      
                      20-35
      yearsTransportation
      equipment
                      
                      5
      yearsOffice
      equipment
                      
                      5
      yearsFurniture
                      
                      5
      years
 
 The
Company eliminates the cost and related accumulated depreciation of assets sold
or otherwise retired from the accounts and includes any gain or loss in the
statement of income. The Company charges maintenance, repairs and minor renewals
directly to expenses as incurred, and it capitalizes major additions and
betterment to buildings and equipment.
 
 Impairment
of long-lived assets
 
 The
Company applies the Accounting Standards Codification (“ASC”) No. 360-10
“Property, plant and equipment”, ASC NO. 360 requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable through the
estimated undiscounted cash flows expected to result from the use and eventual
disposition of the assets. Whenever any such impairment exists, an impairment
loss will be recognized for the amount by which the carrying value exceeds the
fair value.
 
 The
Company tests long-lived assets, including property, plant and equipment and
intangible assets subject to periodic amortization, for recoverability at least
annually or more frequently upon the occurrence of an event or when
circumstances indicate that the net carrying amount is greater than its fair
value. Assets are grouped and evaluated at the lowest level for their
identifiable cash flows that are largely independent of the cash flows of other
groups of assets. The Company considers historical performance and future
estimated results in its evaluation of potential impairment and then compares
the carrying amount of the asset to the future estimated cash flows expected to
result from the use of the asset. If the carrying amount of the asset exceeds
estimated expected undiscounted future cash flows, the Company measures the
amount of impairment by comparing the carrying amount of the asset to its fair
value. The estimation of fair value is generally measured by discounting
expected future cash flows as the rate the Company utilizes to evaluate
potential investments. The Company estimates fair value based on the information
available in making whatever estimates, judgments and projections are considered
necessary. There were no events or changes in circumstances that necessitated a
review of impairment of long-lived assets as of September 30, 2010 and November
30, 2009.
 
 (h)
Statutory surplus reserve
 
 The
Company is required to set aside 10% of its income after income taxes prepared
in accordance with PRC accounting regulations to the statutory surplus reserve
until the balance reaches 50% of the paid-in capital or registered capital,
after which further appropriation will be at the directors’
recommendation.
 
 (i)
Revenue recognition
 
 Revenues
consist primarily of sales of wireless system software service solutions and
other customized software with support contracts. The Company recognizes revenue
when (1) pervasive evidence of an arrangement exists, (2) delivery has occurred
and customer acceptance is reasonable assured (3) the fee is fixed or
determinable, and (4) collectability is probable.
  F-10
  KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 (Expressed
in thousands of U.S. dollars, except shares and per share amount)
 
 The
Company generally provides wireless system software service solutions and
customized software under short and long-term fixed-price contracts that require
significant production and customization. The contract periods generally range
from two months to one year in length. The Company recognizes income for these
contracts following both the percentage-of-completion method, measured by
contract milestones and on the basis of actual costs incurred versus the total
estimated contract costs, and on the completed contract method in accordance
with the ASC No. 605 -35 “Construction-Type and Production-Type Contracts” and
ASC No. 985 - 605 “Software Revenue Recognition”.
 
 Provided
unapproved change orders or claims occur in the future, in accounting for
contracts, the Company follows ASC No. 605-35. The Company will recognize as
revenues costs associated with unapproved change orders or claims to the extent
it is probable that such claims and change orders will result in additional
contract revenue, and the amount of such additional revenue can be reliably
estimated. Contract losses are provided for in their entirety in the period that
they become known, without regard to the percentage-of-completion. However, the
Company has not experienced significant unapproved change orders in the
past.
 
 The
software contracts generally provide for post-contract customer support (“PCS”)
for a period of one year from delivery of the software. The value of PCS revenue
is not separately reported and is accounted for as part of the entire fee under
the contract accounting methods described above since the PCS meets the criteria
specified in ASC No. 985-605-25-71 as follows:
 
 ·
                PCS
      is included in the total contract
price;
 
 ·
                PCS
      is for one year or less;
 
 ·
                estimated
      costs are insignificant;
 
 ·
                upgrades
      and enhancements during the PCS term have historically been and are
      expected to continue to be minimal and infrequent;
  and
 
 ·
                the
      contract does not include any service elements that are accounted for
      separately.
 
 All other
services are provided under separate agreements and fee arrangements and the
related revenue is recognized over the period the services are
provided.
 
 Unbilled
revenue consists of recognized recoverable costs and accrued profits on
contracts for which billings had not been presented to clients as of the balance
sheet date.
 
 The
Company presents all sales revenue net of a value-added tax (“VAT”) or a sales
tax.
 
 The
Company's PRC subsidiary and VIE are subject to business tax on revenues related
to certain types of services at various rates. Business tax on revenues earned
from provision of services to customers is recorded as a deduction from gross
revenue to derive net revenue in the same period in which the related revenue is
recognized.
 
 Cost
of Sales
 
 When the
criteria for revenue recognition have been met, costs incurred are recognized as
cost of sales. Cost of sales (exclusive of depreciation and amortization)
primarily includes the cost of the hardware purchased from the third parties,
the labor costs of those responsible for the software development and project
implementation and the applicable share of overhead expense directly related to
the execution of services and delivery of projects.
 
 The
Company is responsible for the cost of providing a warranty. In the past
warranty costs have been insignificant.
  F-11
  KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 (Expressed
in thousands of U.S. dollars, except shares and per share amount)
 
 (j)
Research and development costs
 
 Research
and development costs include salaries, consultant fees, supplies and materials,
as well as costs related to other overhead expenses such as depreciation,
facilities, utilities and other R&D departmental expenses. Research and
development costs are expensed as incurred in performing research and
development activities in accordance with ASC No. 730-10-5, Accounting for
Research and Development Costs.
 
 (k) Advertising
expenses
 
 Advertising
expenses, which generally represent the cost of promotions to create or
stimulate a positive image of the Company or a desire to buy the Company’s
products and services, are expensed as incurred. The Company incurred no
advertising expenses in each of the periods presented.
 
 (l) Share-based
compensation
 Share
options granted to employees and independent directors are accounted for under
ASC 718, "Share-Based Payment". In accordance with ASC 718, the Company
determines whether a share option should be classified and accounted for as a
liability award or an equity award. All grants of share options to employees
classified as equity awards are recognized in the financial statements based on
their grant date fair values. All grants of share options to employees
classified as liability awards are re-measured at the end of each reporting
period with an adjustment for fair value recorded to the current period expense
in order to properly reflect the cumulative expense based on the current fair
value of the vested options over the vesting period. The Company has elected to
recognize compensation expenses using the Black-Scholes-Merton (BSM)
option-pricing model estimated at the grant date based on the award’s fair value
and is recognized as expense on a straight-line basis for each separately
vesting portion of the award (the graded vesting attribution
method).
 
 Restricted
stock units (RSUs) are measured based on the fair market values of the
underlying stock on the dates of grant. Shares are issued on the vesting dates
net of the statutory withholding requirements to be paid by the Company on
behalf of its employees. As a result, the actual number of shares issued will be
fewer than the actual number of RSUs outstanding. Also, the Company recognizes
stock-based compensation using the graded vesting attribution
method.
 
 The
Company records share-based compensation expense for awards granted to
non-employees in exchange for services at fair value in accordance with the
provisions of ASC 505-50, "Equity based" payment to
non-employees. For the awards granted to non-employees, the Company will record
compensation expenses equal to the fair value of the share options at the
measurement date, which is determined to be the earlier of the performance
commitment date or the service completion date.
 
 (m)
Taxation
 
 a)
              Income
      tax
 
 i).
              The
      Company is incorporated in the BVI. Under the current law of the BVI, the
      Company is not subject to tax on income or capital gains. Additionally,
      upon payments of dividends by the Company to its shareholders, no BVI
      withholding tax will be imposed.
 
 ii).
              Topsky
      was incorporated in Singapore and does not conduct any substantial
      operations of its own. No provision for Singapore profits tax has been
      made in the financial statements as Topsky has no assessable profits for
      the years ended September 30, 2010, 2009 and 2008. Additionally, upon
      payments of dividends by Topsky to its shareholders, no Singapore
      withholding tax will be imposed.
  iii).
              The
      Company’s PRC subsidiary and VIE, being incorporated in the PRC, are
      governed by the income tax law of the PRC and is subject to PRC enterprise
      income tax (“EIT”). Effective from January 1, 2008, the EIT rate of PRC
      was changed from 33% of to 25%, and applies to both domestic and foreign
      invested enterprises.
 
 F-12
  KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 (Expressed
in thousands of U.S. dollars, except shares and per share amount)
 
 According
to a filing document from Xi’an State Tax authorities of the High-technology
zone, Kingtone Information was granted a reduced income tax rate of 15% from
January 1, 2008 to December 31, 2009 on the basis of being a high-tech
company.
 
 For the years ended
                      September 30,2010
                    
                    
                    2009
                    
                    
                    2008US$(’000)
                    
                    
                    US$(’000)
                    
                    
                    US$(’000)PRC
      federal statutory tax rate
                    
                    
                    25%
                    
                    
                    
                    25%
                    
                    
                    
                    25%Taxable
      income
                    
                    
                    9,861
                    
                    
                    
                    6,232
                    
                    
                    
                    1,206Computed
      expected income tax expense
                    
                    
                    2,465
                    
                    
                    
                    1,558
                    
                    
                    
                    302Non-deductible
      expenses
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    4Effect
      of tax holidays
                    
                    
                    (857
                    )
                    
                    
                    (623
                    )
                    
                    
                    (115
                    )Income
      tax expenses
                    
                    
                    1,608
                    
                    
                    
                    935
                    
                    
                    
                    191
 
 b)
              Value-added
      tax and business tax
 
 PRC
Value-added Tax
 
 The
Company’s products are only sold in the PRC and therefore are generally subject
to a Chinese VAT at a rate of 17%. The VAT may be offset by VAT the Company pays
on raw materials and other materials included in the cost of producing its
finished product. Accrued VAT payables are subject to a 10% surtax, which
includes urban maintenance and construction taxes and additional education
fees.
 
 PRC
Business Tax
 
 Revenues
from services provided by Kingtone Information are subject to a PRC business tax
of 5% for software solution and 3% for wireless system solution, with a surtax
of 0.5%. Kingtone Information pays business tax on gross revenues.
 
 c)
              Deferred
      tax
  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 and any operating loss and tax credit carry forwards.
Deferred tax assets 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. A valuation allowance is
provided to reduce the amount of deferred tax asset if it is considered more
likely than not that some portion, or all, of the deferred tax assets will not
be realized. 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.
  F-13
  KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 (Expressed
in thousands of U.S. dollars, except shares and per share amount)
 
 d)
              Uncertain
      tax positions
 
 The
Company adopted ASC No. 740-10 “Income Taxes”, on January 1, 2007. ASC No.
740-10 prescribes a more likely than not threshold for financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This Interpretation also provides guidance on recognition of income
tax assets and liabilities, classification of current and deferred income tax
assets and liabilities, accounting for interest and penalties associated with
tax positions, accounting for income taxes in interim periods, and income tax
disclosures. For the yeas ended September 30, 2010, 2009 and 2008, the Company
did not have any interest and penalties associated with tax positions and the
Company did not have any significant unrecognized uncertain tax
positions.
 
 (n)
Comprehensive income
 
 Accumulated
other comprehensive income, as presented on the accompanying consolidated and
combined balance sheets are the cumulative foreign currency translation
adjustments.
 
 (o)
Commitments and contingencies
 
 In the
normal course of business, the Company is subject to loss contingencies, such as
legal proceedings and claims arising out of its business, that cover a wide
range of matters, including, among others, government investigations, product
and environmental liability, and tax matters. In accordance with ASC No. 450-10,
“Accounting for
Contingencies”, the Company records accruals for such loss contingencies
when it is probable that a liability has been incurred and the amount of loss
can be reasonably estimated. Historically, the Company has not experienced any
material service liability claims.
 
 (p)
Fair value measurements
 
 The
carrying amounts of cash and cash equivalents, accounts receivable from third
and related parties, amounts due from and due to related parties, accounts
payable, other payables and short-term borrowings approximate their fair values
due to their short term nature.
 
 The
Company adopted ASC No. 820 Fair Value Measurements and Disclosures on
January 1, 2008 for all financial assets and liabilities and nonfinancial
assets and liabilities that are recognized or disclosed at fair value in the
combined financial statements on a recurring basis (at least annually). ASC No.
820-10 defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. The Company has not adopted
ASC No. 820-10 for non-financial assets and non-financial liabilities, as these
items are not recognized at fair value on a recurring basis.
 
 ASC No.
820-10 defines fair value as the price that would be received from selling an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. When determining the fair value
measurements for assets and liabilities required or permitted to be recorded at
fair value, the Company considers the principal or most advantageous market in
which it would transact and it considers assumptions that market participants
would use when pricing the asset or liability.
 
 ASC No.
820-10 establishes a fair value hierarchy that requires an entity to maximize
the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. A financial instrument’s categorization within the fair
value hierarchy is based upon the lowest level of input that is significant to
the fair value measurement. ASC No. 820-10 establishes three levels of inputs
that may be used to measure fair value:
  F-14
  KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 (Expressed
in thousands of U.S. dollars, except shares and per share amount)
 
 Level 1
applies to assets or liabilities for which there are quoted prices in active
markets for identical assets or liabilities.
 
 Level 2
applies to assets or liabilities for which there are inputs other than quoted
prices included within Level 1 that are observable for the asset or liability
such as quoted prices for similar assets or liabilities in active markets;
quoted prices for identical assets or liabilities in markets with insufficient
volume or infrequent transactions (less active markets); or model-derived
valuations in which significant inputs are observable or can be derived
principally from, or corroborated by, observable market data.
 
 Level 3
applies to assets or liabilities for which there are unobservable inputs to the
valuation methodology that are significant to the measurement of the fair value
of the assets or liabilities.
  (q)
Segment reporting
  The
Company follows ASC No. 280, "Segment Reporting". The
Company's chief operating decision-maker, who has been identified as the Chief
Executive Officer, reviews the consolidated results when making decisions about
allocating resources and assessing performance of the Company as a whole and
hence, the Company has only one reportable segment. As the Company's long-lived
assets are substantially all located in the PRC and substantially all the
Company's revenues are derived from within the PRC, no geographical segments are
presented.
  (r)
Significant risks
 
 Credit
risk
 
 Financial
instruments that potentially expose the Company to concentrations of credit risk
consist primarily of cash, cash equivalents, accounts receivable, other
receivables and amounts due from related parties. As of September 30, 2010 and
November 30, 2009, US$13,758,000 and US$134,000, respectively, were deposited
with major financial institutions located in the PRC and US$1,151,000 and
$210,000, respectively, were deposited with major financial institutions located
in Singapore. Historically, deposits in Chinese banks are secure due to the
state policy on protecting depositors' interests. However, China promulgated a
new Bankruptcy Law in August 2006 that came into effect on June 1, 2007,
which contains a separate article expressly stating that the State Council may
promulgate implementation measures for the bankruptcy of Chinese banks based on
the Bankruptcy Law. Under the new Bankruptcy Law, a Chinese bank may go into
bankruptcy. In addition, since China's concession to the World Trade
Organization, foreign banks have been gradually permitted to operate in China
and have been significant competitors against Chinese banks in many aspects,
especially since the opening of the Renminbi business to foreign banks in late
2006. Therefore, the risk of bankruptcy of those Chinese banks in which the
Company has deposits has increased. In the event of bankruptcy of one of the
banks which holds the Company's deposits, it is unlikely to claim its deposits
back in full since it is unlikely to be classified as a secured creditor based
on PRC laws.
 
 The
Company conducts credit evaluations of customers and generally does not require
collateral or other security from its customers. The Company establishes an
allowance for doubtful accounts primarily based upon the age of the receivables
and factors surrounding the credit risk of specific customers.
  F-15
  KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 (Expressed
in thousands of U.S. dollars, except shares and per share amount)
  Business,
political and economic risks
  The
Company participates in a relatively young and dynamic industry that is heavily
reliant and also susceptible to complementary and/or competitive technological
advancements. The Company believes that changes in any of the following areas
could have a material adverse effect on the Company's future financial position,
result of operations or cash flows:
  (i)
              Business
      Risk.
 
 Third
parties may develop technological or business model innovations that address
content delivery requirements in a manner that is, or is perceived to be,
equivalent or superior to the Company's services. If competitors introduce new
products or services that compete with, or surpass the quality, price or
performance of the Company's services, the Company may be unable to renew its
agreements with existing customers or attract new customers at the prices and
levels that allow the Company to generate reasonable rates of return on its
investment.
 
 (ii)
              Political,
      economic and social uncertainties.
 
 The
Company's operations could be adversely affected by significant political,
economic and social uncertainties in the PRC. Although the PRC government has
been pursuing economic reform policies for more than 20 years, no assurance
can be given that the PRC government will continue to pursue such policies or
that such policies may not be significantly altered, especially in the event of
a change in leadership, social or political disruption or unforeseen
circumstances affecting the PRC political, economic and social conditions. There
is also no guarantee that the PRC government's pursuit of economic reforms will
be consistent or effective.
 
 (iii)
              Regulatory
      restrictions.
 
 The
applicable PRC laws, rules and regulations currently prohibit foreign ownership
of companies that provide content and application delivery services.
Accordingly, the Company's subsidiary, Softech is currently ineligible to apply
for the required licenses for providing content and application delivery
services in China. As a result, the Company operates its business in the PRC
through its VIEs, which holds the licenses and permits that are required to
provide content and application delivery services in the PRC. The PRC Government
may also choose at any time to block access to the Company's customers' content
which could also materially impact the Company's ability to generate
revenue.
 
 Foreign
currency risk
 
 A
majority of the Company’s sales and expenses transactions and a significant
portion of the Company’s assets and liabilities are denominated in Renminbi
(“RMB”). The RMB is not freely convertible into foreign currencies. In the PRC,
certain foreign exchange transactions are required by law to be transacted only
by authorized financial institutions at exchange rates set by the People’s Bank
of China (“PBOC). Remittances in currencies other than RMB by the Company in
China must be processed through the PBOC or any other China foreign exchange
regulatory body which require certain supporting documentation in order to
affect the remittance.
  From
July 21, 2005, the RMB is permitted to fluctuate within a narrow and
managed band against a basket of certain foreign currencies. While the
international reaction to the appreciation of the RMB has generally been
positive, there remains significant international pressure on the PRC Government
to adopt an even more flexible currency policy, which could result in a further
and potentially more significant appreciation of the RMB against the
US$.
  F-16
  KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 (Expressed
in thousands of U.S. dollars, except shares and per share amount)
  (s)
Earnings per share (“EPS”)
  EPS is
calculated in according with ASC No. 260 “Earning per share”. Basic EPS excludes
dilution and is computed by dividing net income attributable to common
stockholders by the weighted average number of ordinary shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock (convertible preferred
stock, forward contract, warrants to purchase common stock, contingently
issuable shares, common stock options and warrants and their equivalents using
the treasury stock method) were exercised or converted into common stock. The
Company excludes potential ordinary shares in the diluted EPS computation in
periods of losses from continuing operations, as their effect would be
anti-dilutive.
  (t)
Recently issued accounting standards
 
 In July 2010, the FASB issued
Accounting Standards Update 2010-20 which amended “Receivables” (Topic 310). ASU
2010-20 is intended to provide additional information to assist financial
statement users in assessing an entity’s risk exposures and evaluating the
adequacy of its allowance for credit losses. The disclosures as of the end of a
reporting period are effective for interim and annual reporting periods ending
on or after December 15, 2010. The disclosures about activity that occurs during
a reporting period are effective for interim and annual reporting periods
beginning on or after December 15, 2010. The amendments in ASU 2010-20
encourage, but do not require, comparative disclosures for earlier reporting
periods that ended before initial adoption. However, an entity should provide
comparative disclosures for those reporting periods ending after initial
adoption. The Company is currently assessing its implementation of this new
guidance, but does not expect a material impact on the Company’s consolidated
and combined financial statements.
 
 In May 2009, the FASB issued SFAS No.
165, “Subsequent Events” (“ASC Topic 855”), which is effective for interim or
annual financial periods ending after June 15, 2009. ASC Topic 855 establishes
general standards of accounting and disclosure of events that occur after the
balance sheet but before financial statements are issued or are available to be
issued. However, since the Company is a public entity, management is required to
evaluate subsequent events through the date that financial statements are issued
and disclose the date through which subsequent events have been evaluated, as
well as the date the financial statements were issued. ASC Topic 855 was adopted
since its interim period ended June 30, 2009.
 
 In February 2010, the FASB issued ASU
No. 2010-09 which removes the requirement for an SEC filer to disclose a date in
both issued and revised financial statements. This amendment shall be applied
prospectively for interim or annual financial periods ending after June 15,
2010. Management does not believe the adoption will have a material effect on
the Company’s financial statements.
 
 During 2009 and 2010, the FASB has
issued several ASU’s – ASU No. 2009-02 through ASU No. 2010-13. Except for ASU’s
No. 2010-09 and ASU’s No. 2010-20 discussed above, the ASU’s entail technical
corrections to existing guidance or affect guidance related to specialized
industries or entities and therefore have minimal, if any, impact on the
Company.
 
 NOTE
3. ACCOUNTS RECEIVABLE, NET
 
 Accounts
receivable and allowance for doubtful accounts consisted of the
following:
 
 As of September 30, 2010
                          
                          
                          As of November 30, 2009US$(’000)
                          
                          
                          US$(’000)Accounts
      receivable
                          
                          
                          6,699
                          
                          
                          
                          2,401Less:
      allowance for doubtful accounts
                          
                          
                          (49
                          )
                          
                          
                          (48
                          )6,650
                          
                          
                          
                          2,353
  F-17
  KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 (Expressed
in thousands of U.S. dollars, except shares and per share amount)
 
 As of
September 30, 2010 and November 30, 2009, all accounts receivable were due from
third party customers.
  Any
additions, deductions and amounts recovered of the Company's allowance for
doubtful accounts are recorded within general and administration expenses for
the respective periods.
  NOTE
4. UNBILLED REVENUE
 
 Unbilled
revenue consisted of the following:
 
 As of September 30, 2010
                        
                        
                        As of November 30, 2009US$(’000)
                        
                        
                        US$(’000)Unbilled
      revenue
                        
                        
                        973
                        
                        
                        
                        178973
                        
                        
                        
                        178
 
 The
Company records revenue in excess of billings as “unbilled revenue”. The Company
expects all billed and unbilled amounts to be collected within one
year.
 
 NOTE
5. AMOUNTS DUE FROM RELATED PARTIES
 
 Amounts
due from related parties consisted of the following:
 
 As of September 30, 2010
                        
                        
                        As of November 30, 2009US$(’000)
                        
                        
                        US$(’000)Jinong
      High-Tech Agriculture Model Park, Inc.
                        
                        
                        116
                        
                        
                        
                        —Xi'an
      Ding Tian Investment Holding Group Ltd
                        
                        
                        4
                        
                        
                        
                        —120
                        
                        
                        
                        —
 
 These
related parties are directly or indirectly owned and controlled by Tao Li, the
Chairman of the Company. The Company provided short-term financing to these
parties. The balance due from Xi'an Ding Tian Investment Holding Group Ltd as of
September 30, 2010 was paid off by December 2010. The balance due from Jinong
High-Tech Agriculture Model Park, Inc will be paid off by January
2011.
 
 NOTE
6. INVENTORIES, NET
 
 Inventories
consisted of the following:
 
 As of September 30, 2010
                        
                        
                        As of November 30, 2009US$(’000)
                        
                        
                        US$(’000)Raw
      material
                        
                        
                        181
                        
                        
                        
                        15Finished
      goods
                        
                        
                        55
                        
                        
                        
                        25Project-in-progress
                        
                        
                        147
                        
                        
                        
                        87383
                        
                        
                        
                        127
  F-18
  KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 (Expressed
in thousands of U.S. dollars, except shares and per share amount)
 
 The
Company reviews its inventories periodically for possible obsolete or damaged
goods and to determine if any allowance is necessary for potential obsolescence.
As of September 30, 2010 and November 30, 2009, the Company determined that no
allowance for obsolescence was necessary.
 
 NOTE
7. OTHER RECEIVABLES AND PREPAYMENTS
 
 Other
receivables and prepayments consisted of the following:
 
 As of September 30, 2010
                        
                        
                        As of November 30, 2009US$(’000)
                        
                        
                        US$(’000)Advances
      to employees
                        
                        
                        361
                        
                        
                        
                        182Deposits
      on projects
                        
                        
                        101
                        
                        
                        
                        140Prepayment
      to suppliers
                        
                        
                        309
                        
                        
                        
                        690771
                        
                        
                        
                        1,012
 
 NOTE
8. DEPOSIT TO PURCHASE BUILDING
 
 Deposit
to purchase building consisted of the following:
 
 As of September 30, 2010
                        
                        
                        As of November 30, 2009US$(’000)
                        
                        
                        US$(’000)Deposit
      to purchase building
                        
                        
                        —
                        
                        
                        
                        12,200—
                        
                        
                        
                        12,200
 
 Deposit
to purchase building was an upfront payment to a property owner for purchasing a
building for the Company’s research and development center. The consideration
has been fully paid and the title to the property was transferred to the Company
as of September 30, 2010.
 
 NOTE
9. PROPERTY AND EQUIPMENT, NET
 
 Property
and equipment consisted of the following:
 
 As of September 30, 2010
                        
                        
                        As of November 30, 2009US$(’000)
                        
                        
                        US$(’000)Buildings
      and improvements
                        
                        
                        14,117
                        
                        
                        
                        2,078Vehicles
                        
                        
                        88
                        
                        
                        
                        —Other
      equipment and devices
                        
                        
                        342
                        
                        
                        
                        28514,547
                        
                        
                        
                        2,363Less:
      accumulated depreciation
                        
                        
                        (910
                        )
                        
                        
                        (670
                        )13,637
                        
                        
                        
                        1,693
  F-19
  KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 (Expressed
in thousands of U.S. dollars, except shares and per share amount)
 
 For the
years ended September 30, 2010, 2009 and 2008, depreciation expenses were
US$222,000, US$129,000 and US$121,000, respectively.
 
 NOTE
10. INTANGIBLE ASSETS, NET
 
 The
intangible assets consisted of the following:
 
 As of September 30, 2010
                        
                        
                        As of November 30, 2009US$(’000)
                        
                        
                        US$(’000)Land-use
      rights
                        
                        
                        633
                        
                        
                        
                        —Less:
      accumulated amortization
                        
                        
                        (3
                        )
                        
                        
                        —630
                        
                        
                        
                        —
 
 Amortization
expense for the year ended September 30, 2010 was $3,000. There were no
amortization expenses for the years ended September 30, 2009 and 2008,
respectively. Estimated amortization expense relating to the existing intangible
assets for the aggregated and each of the next five years are as
follows:
 
 US$ (‘000)September
      30, 2011
                    
                    
                    17September
      30, 2012
                    
                    
                    17September
      30, 2013
                    
                    
                    17September
      30, 2014
                    
                    
                    17September
      30, 2015
                    
                    
                    17Total:
                    
                    
                    85
 
 NOTE
11. ACCOUNTS PAYABLE
 
 Accounts
payable consisted of the following:
 
 As of September 30, 2010
                          
                          
                          As of November 30, 2009US$(’000)
                          
                          
                          US$(’000)Payable
      to third-party suppliers
                          
                          
                          575
                          
                          
                          
                          1,409575
                          
                          
                          
                          1,409
 
 The
accounts payable to third-party suppliers are mainly for raw materials
purchase.
 
 NOTE
12. ADVANCE FROM CUSTOMERS
 
 Advance
from customers consisted of the following:
 
 As of September 30, 2010
                        
                        
                        As of November 30, 2009US$(’000)
                        
                        
                        US$(’000)Advance
      from third-party customers
                        
                        
                        371
                        
                        
                        
                        1,398371
                        
                        
                        
                        1,398
  F-20
  KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 (Expressed
in thousands of U.S. dollars, except shares and per share amount)
 
 The
advance from customers represents the upfront payment of 10-30% of the contract
price received from the customers according payment schedules in the sales
contracts.
 
 NOTE
13. OTHER PAYABLES AND ACCRUALS
 
 Other
payables and accruals consisted of the following:
 As of September 30, 2010
                        
                        
                        As of November 30, 2009US$(’000)
                        
                        
                        US$(’000)Accrued
      employee benefits
                        
                        
                        14
                        
                        
                        
                        497Accrued
      payroll
                        
                        
                        —
                        
                        
                        
                        16Deposits
      from suppliers
                        
                        
                        51
                        
                        
                        
                        46Other
      payables
                        
                        
                        102
                        
                        
                        
                        —167
                        
                        
                        
                        559
 
 Accrued
employee benefits include the withholding individual tax on the dividends paid
to individual shareholders in fiscal year 2009 in accordance with PRC tax
regulation.
 
 NOTE
14. TAXES PAYABLE
 As of September 30, 2010
                        
                        
                        As of November 30, 2009US$(’000)
                        
                        
                        US$(’000)VAT
      payable
                        
                        
                        64
                        
                        
                        
                        26Enterprise
      Income tax payable
                        
                        
                        1,958
                        
                        
                        
                        422Other
      taxes payable
                        
                        
                        1,399
                        
                        
                        
                        1533,421
                        
                        
                        
                        601
 
 NOTE
15. AMOUNTS DUE TO SHAREHOLDER
 
 As of September 30, 2010
                        
                        
                        As of November 30, 2009US$(’000)
                        
                        
                        US$(’000)Amounts
      due to shareholder
                        
                        
                        —
                        
                        
                        
                        200—
                        
                        
                        
                        200
 
 In
November 2009, Mr. Li, the Chairman of the Company, loaned Topsky $200,000 with
no interest for its initial working capital. The loan was fully paid off on
September 13, 2010.
 
 NOTE
16. SHORT-TERM BANK LOAN
 
 As of September 30,
                              2010
                            
                            
                            As of November 30,
                              2009US$(’000)
                            
                            
                            US$(’000)Bank Name
                            
                            Interest rateXi'an
      Commercial Bank
                            
                            Monthly
      interest rate 0.6638% initially, adjustable in line with basic interest
      rate announced by PBOC.
                            
                            
                            —
                            
                            
                            
                            3,437—
                            
                            
                            
                            3,437
  F-21
  KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 (Expressed
in thousands of U.S. dollars, except shares and per share amount)
 
 The
interest rate was 8% per annum and was secured by a guarantee granted by a third
party and Tao Li, and pledged by another third party with two land use rights
valued as RMB114,709,735. The Company repaid the loan on July 6, 2010. The
interest expenses from these short-term loans were $218,000, $340,000 and
$531,000 for the years ended September 30, 2010, 2009 and 2008,
respectively.
 
 NOTE
17. DIVIDEND PAYABLE
 
 As of September 30, 2010
                        
                        
                        As of November 30, 2009US$(’000)
                        
                        
                        US$(’000)Dividend
      due to shareholders
                        
                        
                        772
                        
                        
                        
                        1,117
 
 In fiscal
year 2009 the shareholders made a resolution to appropriate US$4,096,000 to all
shareholders in proportion to their shareholding percentage. In fiscal year
2010, two shareholders received their dividend payment. The balance represents
outstanding unpaid dividends to the shareholders.
 
 NOTE
18. RELATED PARTY TRANSACTIONS
 
 For the years ended September 30,2010
                    
                    
                    2009
                    
                    
                    2008US$(’000)
                    
                    
                    US$(’000)
                    
                    
                    US$(’000)Sales
      to related parties:Xi’an
      TechTeam Humic Acid Productions Co., Ltd.
                    
                    
                    —
                    
                    
                    
                    1,148
                    
                    
                    
                    ——
                    
                    
                    
                    1,148
                    
                    
                    
                    —
 
 Xi’an
TechTeam Humic Acid Productions Co., Ltd., which is a subsidiary of China Green
Agricultural Co., Inc. (CGA), a company under common control with the Company,
received products from the Company at a consideration of US$1,148,000 in the
year ended September 30, 2009 and the payment was fully received. There were no
other sales from related parties for the year ended September 30,
2010.
  For the
year ended September 30, 2009, Kingtone Information, the VIE provided its
self-owned office space at 3/F, Area A, Block A, No. 18 South Taibai Road, Xi’an
710065,  People’s Republic of China to Xi’an Techteam Science and
Technology Industry (Group) Co., Ltd. (the “Group Company”), which is controlled
by Tao Li, the Company’s Chairman.  The Group Company later leased these
offices to CGA for no consideration for an unspecified term. On September 30,
2010, CGA cancelled the lease agreement with the Group Company without penalty
and signed a two year lease starting from July 1, 2010 directly with the VIE.
According to the new lease agreement, the monthly rent is approximately $1,600
(RMB 10,800).
 
 The
Company’s Beijing office is located in two Suites (2208 and 2209) at Building
16, An Hui Dong Li, Chaoyang District, Beijing. It covers a combined gross floor
space of 184.8 square meters. Tao Li owns this space and allows the Company to
use it for no consideration for an unspecified term. Such amount is
immaterial.
  F-22
  KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 (Expressed
in thousands of U.S. dollars, except shares and per share amount)
 
 NOTE
19. MAJOR CUSTOMERS AND VENDORS
 
 One
customer accounted for 15.5% , 44.7% and 57% of total sales for the years ended
September 30, 2010, 2009 and 2008, respectively. The outstanding accounts
receivable balance for this customer is 21.8% and 64.4% of the total accounts
receivable balance as of September 30, 2010 and November 30, 2009,
respectively.
 
 Two
vendors each accounted for over 10% of the total purchases for the year ended
September 30, 2010. No vendor accounted for over 10% of the total purchases for
the years ended September 30, 2009 and 2008.
 
 NOTE
20. COMMITMENTS AND CONTINGENCIES
  The
Company has one VIE as of September 30, 2010. In the opinion of the management,
(i) the ownership structure of the Company and the VIE are in compliance
with existing PRC laws and regulations; (ii) the contractual arrangements
with the VIE and its shareholder are valid and binding, and will not result in
any violation of PRC laws or regulations currently in effect; and (iii) the
Company's business operations are in compliance with existing PRC laws and
regulations in all material respects. However, there are substantial
uncertainties regarding the interpretation and application of current and future
PRC laws and regulations. Accordingly, the Company cannot be assured that PRC
regulatory authorities will not ultimately take a contrary view to its opinion.
If the current ownership structure of the Company and its contractual
arrangements with the VIE are found to be in violation of any existing or future
PRC laws and regulations, the Company may be required to restructure its
ownership structure and operations in the PRC to comply with the changing and
new PRC laws and regulations. In the opinion of management, the likelihood of
loss in respect of the Company's current ownership structure or the contractual
arrangements with the VIE is remote based on current facts and
circumstances.
 
 On
December 18, 2009, the VIE entered into a two-year financial guarantee with
Xi’an Taiyigong Credit Union to guarantee the payment obligations of a third
party’s short-term loan of RMB4,400,000.
 
 NOTE
21. SHARE-BASED COMPENSATION
  In order
to attract and retain the best available personnel, provide additional
incentives to employees, directors and consultants and promote the success of
the Company's business, its board of directors and its shareholders approved and
adopted an Omnibus Incentive Plan in April 2010 (the "2010 Plan"). Under the
2010 Plan, the Company may grant options or restricted award to its employees,
directors and consultants to purchase an aggregate of no more than 1,500,000
ordinary shares of the Company, subject to different vesting requirements. The
2010 Plan will be administered by the Compensation Committee (the "Plan
Administrator"). The officers of the Company have been authorized and directed
by the Plan Administrator to execute Option Agreements with those persons
selected by the Plan Administrator and issue ordinary shares of the Company upon
exercise of any options so granted pursuant to the terms of an Option
Agreement.
  All
options granted under the 2010 Plan have a term of ten years from the option
grant date and vest according to the terms and conditions set forth in each
respective grant agreement. On May 14, 2010, the Company granted 180,000
options, to a combination of employees and directors of the Company at an
exercise price of US$4.00. The Company did not grant any equity awards for the
year ended September 30, 2009. As of September 30, 2010, options to purchase
180,000 of ordinary shares were outstanding. On May 14, 2010, the Company also
granted 100,000 restricted shares to an officer with 1/2 to be vested on April
23, 2011 and 1/2 to be vested on April 23, 2012.
  The
Black-Scholes option pricing model was applied in determining the estimated fair
value of the options granted to employees and non-employees. The model requires
the input of highly subjective assumptions including the estimated expected
stock price volatility, the expected price multiple at which employees are
likely to exercise share options. For expected volatilities, the Company has
made reference to the historical price volatilities of ordinary shares of
several comparable companies in the same industry as the Company. The risk-free
rate for periods within the contractual life of the option is based on the U.S.
Treasury Bills yield in effect at the time of grant. The Company's management is
ultimately responsible for the determination of the estimated fair value of its
ordinary shares. The Company calculated the estimated fair value of the options
on the grant date (May 14, 2010) with the following
assumptions:
  F-23
  KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 (Expressed
in thousands of U.S. dollars, except shares and per share amount)
 
 May 14, 2010Risk-free
      interest rates
                      
                      
                      1.63%Expected
      term
                      
                      2
      yearsExpected
      volatility
                      
                      
                      90%Expected
      dividend yield
                      
                      
                      0%Fair
      value of underlying ordinary share (per share) (*)
                      
                      US$3.94
 (* there
is no trade on the grand date, this represented initial public offering close
price)
 
 The
Company recognized compensation cost for options granted as general and
administrative expense on a straight-line basis for each separately vesting
portion of the award (the graded vesting attribution method). The fair value of
options on the grant date of May 14, 2010 was $1.89 per share. The share-based
compensation expense for options was $179,000 for the year ended September 30,
2010. There was no share-based compensation expense for options for the years
ended September 30, 2009 and 2008.
 
 The
Company records share-based compensation expense for restricted shares granted
to non-employees in exchange for services at fair value as of the grand date
which was $3.94 based on the graded vesting
attribution method. The share-based compensation expense for restricted
shares was $123,000 for the year ended September 30, 2010. There was no
share-based compensation expense for restricted shares for the years ended
September 30, 2009 and 2008.
 
 NOTE
22. STATUTORY RESERVES
  Under PRC
law, Softech and Kingtone Information are required to provide for certain
statutory reserves, namely a general reserve, an enterprise expansion fund and a
staff welfare and bonus fund. The entities are required to allocate at least 10%
of their after tax profits on individual company basis as determined under PRC
GAAP to the general reserve and have the right to discontinue allocations to the
general reserve if such reserve has reached 50% of registered capital.
Appropriations to the enterprise expansion fund and staff welfare and bonus fund
are at the discretion of the Board of Directors of the entity. These reserves
can only be used for specific purposes and are not transferable to the Company
in the form of loans, advances, or cash dividends.
  As of
September 30, 2010 and November 30, 2009, the Company had appropriated
US$844,000 and US$231,000, respectively in its statutory reserves.
 
 NOTE
23. ORDINARY SHARES
 
 The
Company’s Memorandum and Articles of Association, as amended, authorized the
Company to issue 100,000,000 shares of US$0.001 par value per ordinary share.
Each ordinary share is entitled to one vote. The holders of ordinary shares are
also entitled to receive dividends whenever funds are legally available and when
declared by the Board of Directors. The Company had 10,000,000 ordinary shares
issued and outstanding prior to the May 2010 public offering. In May 2010, the
Company issued 4,000,000 shares of ADSs, representing 4,000,000 ordinary shares,
through its depositary, Bank of New York Mellon on the Nasdaq Capital Market, at
a consideration of US$4.00 per share for a gross consideration of US$16,000,000.
As of September 30, 2010, there were 14,000,000 ordinary shares issued and
outstanding.
  F-24
  KINGTONE
WIRELESSINFO SOLUTION HOLDING LTD AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 (Expressed
in thousands of U.S. dollars, except shares and per share amount)
 
 NOTE
24. EARNINGS PER ORDINARY SHARE
 
 For the years ended September 30,2010
                
                
                2009
                
                
                2008Numerator
      used in basic net income per share:Net
      income
                
                $
                8,237,000
                
                
                $
                5,297,000
                
                
                $
                1,015,000Shares
      (denominator):Weighted
      average ordinary shares outstanding
                
                
                11,527,473
                
                
                
                10,000,000
                
                
                
                10,000,000Weighted
      average ordinary shares outstanding used in computing diluted
      earnings per ordinary share
                
                
                11,527,473
                
                
                
                10,000,000
                
                
                
                10,000,000Earnings
      per ordinary share- basic and diluted
                
                $
                0.71
                
                
                $
                0.53
                
                
                $
                0.10
 
 As of
September 30, 2010, the Company had 100,000 restricted shares and 180,000
outstanding options that could potentially dilute basic income per share in the
future, but which were excluded in the computation of diluted income per share
in the periods presented, as their effect would have been anti-dilutive since
the grant price of these restricted shares and the exercise price of these
option were higher than the average market price during period
presented.
 
 NOTE
25. SUBSEQUENT EVENTS
 
 Management
has considered all events and transactions that occurred after September 30,
2010 and through the date of the financial statements are issued, and has
determined that the Company did not have any material subsequent events that
require adjustment to or disclosure in the consolidated and combined financial
statements during this period.
  F-25