UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
20-F


(Mark
One)




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


OR





x
            ANNUAL REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for
      the fiscal year endedDecember
      31, 2009


OR





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


transition
period from ________________ to ________________


OR





o
            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: 001-33134





Yucheng
Technologies Limited


(Exact
name of Registrant as specified in its charter)





Not
Applicable


(Translation
of Registrant’s name into English)





British
Virgin Islands


(Jurisdiction
of incorporation or organization)





Beijing
Global Trade Center, Tower D , Floor 9, 36 North Third Ring Road East, Dongcheng
District, Beijing


100013,
P.R. China


(Address of principal
executive offices)





Weidong
Hong, Chief Executive Officer, Tel: +86 10 5913 7700, Fax: +86 10 5913
7800


Beijing
Global Trade Center, Tower D , Floor 9, 36 North Third Ring Road East, Dongcheng
District, Beijing


100013,
P.R. China





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
              The
      NASDAQ Stock Market LLC





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


None








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


None




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.


18,560,014
ordinary
shares





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.





o  Yes     x  No





If this
report is an annual or transaction 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.


o  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      o  No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 c) Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


o  Yes      o  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):


o  Large
Accelerated Filer     x  Accelerated
Filer      o    Non-Accelerated
Filer




Indicate
by check mark which financial statement item the registrant has elected to
follow.


o  Item
17      x  Item
18




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




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




o  Item
17      o  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).




o  Yes      x  No




(APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE
YEARS)








Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.


o  Yes      o  No








YUCHENG
TECHNOLOGIES LIMITED





TABLE
OF CONTENTS







PageITEM
      1.
                              
                              IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
                              
                              
                              4ITEM
      2.
                              
                              OFFER
      STATISTICS AND EXPECTED TIMETABLE
                              
                              
                              4ITEM
      3.
                              
                              KEY
      INFORMATION
                              
                              
                              4ITEM
      4.
                              
                              INFORMATION
      ON THE COMPANY
                              
                              
                              27ITEM
      4A.
                              
                              UNRESOLVED
      STAFF COMMENTS
                              
                              
                              49ITEM
      5.
                              
                              OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS
                              
                              
                              50ITEM
      6.
                              
                              DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES
                              
                              
                              71ITEM
      7.
                              
                              MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
                              
                              
                              79ITEM
      8.
                              
                              FINANCIAL
      INFORMATION
                              
                              
                              80ITEM
      9.
                              
                              THE
      OFFER AND LISTING
                              
                              
                              82ITEM
      10.
                              
                              ADDITIONAL
      INFORMATION
                              
                              
                              83ITEM
      11.
                              
                              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                              
                              
                              93ITEM
      12.
                              
                              DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES
                              
                              
                              93ITEM
      13.
                              
                              DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES
                              
                              
                              93ITEM
      14.
                              
                              MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERSAND
      USE OF PROCEEDS
                              
                              
                              93ITEM
      15.
                              
                              CONTROLS
      AND PROCEDURES
                              
                              
                              94ITEM
      16A.
                              
                              AUDIT
      COMMITTEE FINANCIAL EXPERT
                              
                              
                              96ITEM
      16B.
                              
                              CODE
      OF ETHICS
                              
                              
                              96ITEM
      16C.
                              
                              PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                              
                              
                              96ITEM
      16D.
                              
                              EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
                              
                              
                              97ITEM
      16E.
                              
                              PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
    PURCHASERS
                              
                              
                              97ITEM
      17.
                              
                              FINANCIAL
      STATEMENTS
                              
                              
                              97ITEM
      18.
                              
                              FINANCIAL
      STATEMENTS
                              
                              
                              97ITEM
      19.
                              
                              EXHIBITS
                              
                              
                              97


i


Introduction





Unless
otherwise indicated, references in this annual report to:





·
            “China” or “PRC” refers to the
      People’s Republic of China, excluding, for the purpose of this annual
      report only, Hong Kong SAR, Macau SAR and
  Taiwan.





·
            “NASDAQ” refers to the NASDAQ
      Global Market.





·
            “Renminbi” or “RMB” refers to the
      legal currency of China.





·
            “SEC” refers to the United States
      Securities and Exchange
Commission.





·
            “Securities Act” refers to the
      Securities Act of 1933, as
amended.





·
            “Shares” or “ordinary shares”
      refers to our ordinary shares, of no par value.  “USD”, “U.S.
      dollars”, “dollar” and “US$” refer to the legal currency of the United
      States.





In
addition, unless otherwise indicated, references in this annual report
to:





·
            “Yucheng” or “Yuxinyicheng”
      refers to the Yucheng Technologies Limited, as a whole or any portion
      thereof, unless expressly stated
  otherwise.





·
            “Beijing Sihitech” refers to
      Beijing Sihitech Technology Co., Ltd. and, unless the context otherwise
      requires, its subsidiaries.





·
            “China Unistone” refers to China
      Unistone Acquisition
Corporation.





·
            “Easycon” refers to Beijing
      Easycon Electronics Limited.





·
            “e-Channels” refers to Beijing
      e-Channels Century Technology Co.,
Ltd.





·
            “e-Channels BVI” refers to Port
      Wing Development Co., Ltd.





·
            “Fujie” refers to Shanghai Fujie
      Business Consulting Limited.





·
            “Fuyi” refers to Shanghai Fuyi
      Business Consulting Limited.





·
            “Recency” refers to Chengdu
      Recency Technologies
Limited.





·
            “Sihitech BVI” refers to Ahead
      Billion Venture Ltd.





·
            “Sunrisk”
      or “Yuxinhengsheng” refers to Beijing Yuxinhengsheng Information
      Technology Limited.


1





·
            “Yuxin
      Data” refers to Yuxin Data Technologies Co., Limited
    (Tianjin)





·
            “Yuxinyicheng
      Information” refers to Beijing Yuxinyicheng Information Co.,
      Ltd.





·
            “Elegon”
      refers to Chengdu Elegon Infotech
Ltd.





·
            “Beijing
      Huazhi” refers to Beijing Sihitech Huazhi Consulting Service
      Co.,Ltd.





·
            “Hainan
      Baodaotong” refers to Hainan Baodaotong Technology
  Limited.





·
            “we,” “us,” “our company,” “our,”
      “the Company” and “Yucheng” refer to Yucheng Technologies Limited and,
      unless the context otherwise requires, its subsidiaries and
      predecessors.





·
            “Tier I banks” or “Top Four
      banks” refers to the four largest state-controlled banks in China, namely
      the Industrial and Commercial Bank of China, the Bank of China, China
      Construction Bank and the Agricultural Bank of China; “Tier II banks” or
      “Joint-Stock banks” refers to the other 13 national commercial banks in
      China; and “Tier III banks” or “SMBs” refers to small and mid-sized banks
      in China.





This
annual report contains statistical data relating to the banking industry in
China that we obtained from various publications.  These publications
generally indicate that they have obtained their information from sources
believed to be reliable, but we do not guarantee the accuracy and completeness
of their information.  Although we believe that these publications are
reliable, we have not independently verified their statistical
data.  The statistical data may not be comparable to similar
statistics collected for the industry in the United States or other
countries.




Forward-Looking
Information




This
annual report contains forward-looking statements that are based on our current
expectations, assumptions, estimates and projections about us and our
industry.  All statements other than statements of historical fact in
this annual report are forward-looking statements.  These
forward-looking statements can be identified by words or phrases such as “may,”
“will,” “expect,” “anticipate,” “estimate,” “plan,” “believe,” “is /are likely
to” or other similar expressions.  The forward-looking statements
included in this annual report relate to, among other things:




·
            our goals and strategies,
      including how we effect our goals and
  strategies;





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





·
            expected changes in our revenue
      composition, margins and certain costs or
    expenditures;





·
            our future contracting and
      pricing strategies or
policies;





·
            our plans to expand our business
      operations and product
offerings;





·
            competition from other providers
      of IT services and products;





·
            the time to develop and market
      new services and
products;


2





·
            PRC governmental policies
      relating to the business development, banking regulation and regulation of
      the financial services sector;
and





·
            other “forward-looking”
      information.




We
believe it is important to communicate our expectations to our
stockholders.  However, there may be events in the future that we are
not able to predict accurately or over which we have no control.  The
risk factors and cautionary language discussed in this annual report provide
examples of risks, uncertainties and events that may cause actual results to
differ materially from the expectations in these forward-looking statements,
including, among other things:




·
            changing interpretations of
      generally accepted accounting
principles;





·
            outcomes of government reviews,
      inquiries, investigations and related
  litigation;





·
            continued compliance with
      government regulations;





·
            legislation or regulatory
      environments, requirements or changes adversely affecting the businesses
      in which we and our PRC operating companies are
      engaged;





·
            geopolitical events and
      regulatory changes; and





·
            the effect of world recession and
      declines in global and specific country GDP on the world financial sector
      and the Chinese economy.




These
forward-looking statements involve various risks, assumptions and
uncertainties.  Although we believe that our expectations expressed in
these forward-looking statements are reasonable, we cannot give assurance that
our expectations will turn out to be correct.  Our actual results
could be materially different from and worse than our
expectations.  Important risks and factors that could cause our actual
results to be materially different from our expectations are generally set forth
in “Item 3. Key Information — D. Risk factors” and elsewhere in this annual
report.




The
forward-looking statements made in this annual report relate only to events or
information as of the date on which the statements are made in this annual
report.  You should not place undue reliance on these forward-looking
statements, and you should read these statements in conjunction with the risk
factors disclosed in “Item 3. Key Information — D. Risk factors” in this annual
report.




All
forward-looking statements included herein attributable to us or other parties
or any person acting on our behalf are expressly qualified in their entirety by
the cautionary statements contained or referred to in this
section.  Except to the extent required by applicable laws and
regulations, we undertake no obligations to update these forward-looking
statements to reflect events or circumstances after the date of this annual
report or to reflect the occurrence of unanticipated
events.


3




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.





SELECTED
CONSOLIDATED FINANCIAL DATA





The
following summary consolidated financial data for the three years ended December
31, 2009 are derived from our audited consolidated financial statements, which
have been prepared in accordance with United States generally accepted
accounting principles, or US GAAP, and have been audited by BDO Limited, an
independent registered public accounting firm.  The report of BDO
Limited on those consolidated financial statements is included elsewhere in this
annual report.  This information is only a summary and should be read
together with the consolidated financial statements, the related notes and other
financial information included in this annual report.  Our selected
consolidated financial data for the two years ended December 31, 2005 and 2006
have been derived from our audited consolidated financial statements, which are
not included in this annual report, and
have been retrospectively adjusted for the adoption of the new accounting
standards related to the presentation and disclosure requirements for
non-controlling interests.




Yucheng
Technologies Limited, or Yucheng, was incorporated on November 17, 2005 as a
subsidiary of China Unistone.  After completion of a redomestication
merger of China Unistone with and into Yucheng and the acquisition by Yucheng of
Sihitech BVI and e-Channels BVI on November 24, 2006, Yucheng became the holding
company of our business.  Sihitech BVI was our predecessor from an
accounting perspective, and the purchase method of accounting was used in
consolidating e-Channels BVI and China Unistone into Sihitech BVI.




Revenues
represented in this section are net of business tax.





The
following table sets forth our selected consolidated statement of operations
data.


4





2005
                                              
                                              
                                              2006
                                              
                                              
                                              2007
                                              
                                              
                                              2008
                                              
                                              
                                              2009RMB
                                              
                                              
                                              RMB
                                              
                                              
                                              RMB
                                              
                                              
                                              RMB
                                              
                                              
                                              RMB
                                              
                                              
                                              USD(in
      thousands, except per share data)Revenues
                                              
                                              
                                              177,327
                                              
                                              
                                              
                                              289,650
                                              
                                              
                                              
                                              435,519
                                              
                                              
                                              
                                              676,819
                                              
                                              
                                              
                                              380,364
                                              
                                              
                                              
                                              55,705Cost
      of revenues
                                              
                                              
                                              (133,085
                                              )
                                              
                                              
                                              (215,332
                                              )
                                              
                                              
                                              (277,826
                                              )
                                              
                                              
                                              (449,277
                                              )
                                              
                                              
                                              (204,975
                                              )
                                              
                                              
                                              (30,019
                                              )Gross
      profit
                                              
                                              
                                              44,242
                                              
                                              
                                              
                                              74,318
                                              
                                              
                                              
                                              157,693
                                              
                                              
                                              
                                              227,542
                                              
                                              
                                              
                                              175,389
                                              
                                              
                                              
                                              25,686Operating
      expenses:Research
      and development
                                              
                                              
                                              (352
                                              )
                                              
                                              
                                              (902
                                              )
                                              
                                              
                                              (8,370
                                              )
                                              
                                              
                                              (10,148
                                              )
                                              
                                              
                                              (13,828
                                              )
                                              
                                              
                                              (2,025
                                              )Selling
      and marketing
                                              
                                              
                                              (11,181
                                              )
                                              
                                              
                                              (13,990
                                              )
                                              
                                              
                                              (29,053
                                              )
                                              
                                              
                                              (49,383
                                              )
                                              
                                              
                                              (53,822
                                              )
                                              
                                              
                                              (7,882
                                              )General
      and administrative
                                              
                                              
                                              (13,913
                                              )
                                              
                                              
                                              (14,170
                                              )
                                              
                                              
                                              (50,668
                                              )
                                              
                                              
                                              (95,425
                                              )
                                              
                                              
                                              (126,492
                                              )
                                              
                                              
                                              (18,525
                                              )Total
      operating expenses
                                              
                                              
                                              (25,446
                                              )
                                              
                                              
                                              (29,062
                                              )
                                              
                                              
                                              (88,091
                                              )
                                              
                                              
                                              (154,956
                                              )
                                              
                                              
                                              (194,142
                                              )
                                              
                                              
                                              (28,432
                                              )Income
      (Loss) from operations
                                              
                                              
                                              18,796
                                              
                                              
                                              
                                              45,256
                                              
                                              
                                              
                                              69,602
                                              
                                              
                                              
                                              72,586
                                              
                                              
                                              
                                              (18,753
                                              )
                                              
                                              
                                              (2,746
                                              )Other
      income (expenses):Interest
      income
                                              
                                              
                                              142
                                              
                                              
                                              
                                              117
                                              
                                              
                                              
                                              1,818
                                              
                                              
                                              
                                              1,259
                                              
                                              
                                              
                                              425
                                              
                                              
                                              
                                              62Interest
      expense
                                              
                                              
                                              (617
                                              )
                                              
                                              
                                              (1,263
                                              )
                                              
                                              
                                              (1,937
                                              )
                                              
                                              
                                              (3,783
                                              )
                                              
                                              
                                              (2,861
                                              )
                                              
                                              
                                              (419
                                              )Income
      (loss) from short-term investment
                                              
                                              
                                              0
                                              
                                              
                                              
                                              0
                                              
                                              
                                              
                                              3,494
                                              
                                              
                                              
                                              (529
                                              )
                                              
                                              
                                              1,204
                                              
                                              
                                              
                                              176Loss
      from equity method investee
                                              
                                              
                                              (759
                                              )
                                              
                                              
                                              (135
                                              )
                                              
                                              
                                              0
                                              
                                              
                                              
                                              (1,280
                                              )
                                              
                                              
                                              (3,830
                                              )
                                              
                                              
                                              (560
                                              )Other
      income, net
                                              
                                              
                                              431
                                              
                                              
                                              
                                              27
                                              
                                              
                                              
                                              1,078
                                              
                                              
                                              
                                              493
                                              
                                              
                                              
                                              8,170
                                              
                                              
                                              
                                              1,196Total
      other income (expenses)
                                              
                                              
                                              (803
                                              )
                                              
                                              
                                              (1,254
                                              )
                                              
                                              
                                              4,453
                                              
                                              
                                              
                                              (3,840
                                              )
                                              
                                              
                                              3,108
                                              
                                              
                                              
                                              455Income
      (loss) before income taxes
                                              
                                              
                                              17,993
                                              
                                              
                                              
                                              44,002
                                              
                                              
                                              
                                              74,055
                                              
                                              
                                              
                                              68,746
                                              
                                              
                                              
                                              (15,645
                                              )
                                              
                                              
                                              (2,291
                                              )Income
      tax (expenses) benefits
                                              
                                              
                                              (3,462
                                              )
                                              
                                              
                                              (3,271
                                              )
                                              
                                              
                                              (5,528
                                              )
                                              
                                              
                                              9,538
                                              
                                              
                                              
                                              7,730
                                              
                                              
                                              
                                              1,132Net
      income (loss)
                                              
                                              
                                              14,531
                                              
                                              
                                              
                                              40,731
                                              
                                              
                                              
                                              68,527
                                              
                                              
                                              
                                              78,284
                                              
                                              
                                              
                                              (7,915
                                              )
                                              
                                              
                                              (1,159
                                              )Loss
      attributable to non-controlling interests
                                              
                                              
                                              0
                                              
                                              
                                              
                                              0
                                              
                                              
                                              
                                              (1,813
                                              )
                                              
                                              
                                              2,711
                                              
                                              
                                              
                                              3,715
                                              
                                              
                                              
                                              544Net
      income (loss) attributable to shareholders of Yucheng
      Technologies
                                              
                                              
                                              14,531
                                              
                                              
                                              
                                              40,731
                                              
                                              
                                              
                                              66,714
                                              
                                              
                                              
                                              80,995
                                              
                                              
                                              
                                              (4,200
                                              )
                                              
                                              
                                              (615
                                              )Foreign
      currency translation adjustment
                                              
                                              
                                              0
                                              
                                              
                                              
                                              (139
                                              )
                                              
                                              
                                              (1,425
                                              )
                                              
                                              
                                              (1,188
                                              )
                                              
                                              
                                              522
                                              
                                              
                                              
                                              76Comprehensive
      income (loss)
                                              
                                              
                                              14,531
                                              
                                              
                                              
                                              40,592
                                              
                                              
                                              
                                              65,289
                                              
                                              
                                              
                                              79,807
                                              
                                              
                                              
                                              (3,678
                                              )
                                              
                                              
                                              (539
                                              )Earnings
      (loss) per share (basic)
                                              
                                              
                                              3.87
                                              
                                              
                                              
                                              5.02
                                              
                                              
                                              
                                              5.08
                                              
                                              
                                              
                                              4.61
                                              
                                              
                                              
                                              (0.23
                                              )
                                              
                                              
                                              (0.03
                                              )Earnings
      (loss) per share (fully diluted)
                                              
                                              
                                              3.87
                                              
                                              
                                              
                                              3.96
                                              
                                              
                                              
                                              4.34
                                              
                                              
                                              
                                              4.33
                                              
                                              
                                              N.A.
                                              
                                              
                                              N.A.Weighted
      average ordinary shares outstanding (basic)
                                              
                                              
                                              3,754,484
                                              
                                              
                                              
                                              8,118,335
                                              
                                              
                                              
                                              13,144,681
                                              
                                              
                                              
                                              17,566,898
                                              
                                              
                                              
                                              18,541,289
                                              
                                              
                                              
                                              18,541,289Weighted
      average ordinary shares outstanding (fully diluted)
                                              
                                              
                                              3,754,484
                                              
                                              
                                              
                                              10,292,308
                                              
                                              
                                              
                                              15,370,197
                                              
                                              
                                              
                                              18,691,852
                                              
                                              
                                              N.A.
                                              
                                              
                                              N.A.





The
following table sets forth our selected consolidated balance sheet
data.




As
      of December 31,2005
                        
                        
                        2006
                        
                        
                        2007
                        
                        
                        2008
                        
                        
                        2009RMB
                        
                        
                        RMB
                        
                        
                        RMB
                        
                        
                        RMB
                        
                        
                        RMB
                        
                        
                        USD(in
      thousands)Cash
                        
                        
                        42,716
                        
                        
                        
                        98,358
                        
                        
                        
                        222,494
                        
                        
                        
                        239,751
                        
                        
                        
                        246,577
                        
                        
                        
                        36,112Trade
      accounts receivable
                        
                        
                        55,209
                        
                        
                        
                        116,606
                        
                        
                        
                        203,451
                        
                        
                        
                        280,654
                        
                        
                        
                        147,979
                        
                        
                        
                        21,672Total
      current assets
                        
                        
                        144,104
                        
                        
                        
                        305,848
                        
                        
                        
                        572,304
                        
                        
                        
                        647,311
                        
                        
                        
                        561,216
                        
                        
                        
                        82,191Goodwill
                        
                        
                        0
                        
                        
                        
                        37,274
                        
                        
                        
                        169,362
                        
                        
                        
                        187,816
                        
                        
                        
                        189,010
                        
                        
                        
                        27,681Total
      assets
                        
                        
                        159,137
                        
                        
                        
                        389,141
                        
                        
                        
                        821,747
                        
                        
                        
                        943,887
                        
                        
                        
                        868,118
                        
                        
                        
                        127,137Total
      current liabilities
                        
                        
                        101,547
                        
                        
                        
                        141,218
                        
                        
                        
                        315,727
                        
                        
                        
                        367,352
                        
                        
                        
                        265,699
                        
                        
                        
                        38,912Total
      liabilities
                        
                        
                        105,539
                        
                        
                        
                        146,511
                        
                        
                        
                        323,450
                        
                        
                        
                        373,328
                        
                        
                        
                        266,931
                        
                        
                        
                        39,092Stockholders'
      equity
                        
                        
                        53,599
                        
                        
                        
                        242,629
                        
                        
                        
                        493,098
                        
                        
                        
                        558,536
                        
                        
                        
                        593,318
                        
                        
                        
                        86,892Total
      liabilities and stockholders' equity
                        
                        
                        159,137
                        
                        
                        
                        389,141
                        
                        
                        
                        821,747
                        
                        
                        
                        943,887
                        
                        
                        
                        868,118
                        
                        
                        
                        127,137





EXCHANGE
RATE INFORMATION




The
following table sets forth information concerning exchange rates between the
Renminbi and the U.S. dollar for the periods indicated.  These rates
are provided solely for investors’ reference and are not necessarily the
exchange rates that are used in this annual report or will be used in the
preparation of our other periodic reports or any other information to be
provided by the company.


5




PeriodEnd
                      
                      
                      Average(1)
                      
                      
                      High
                      
                      
                      Low(Renminbi
      per USD1.00)2004
                      
                      
                      8.2765
                      
                      
                      
                      8.2768
                      
                      
                      
                      8.2774
                      
                      
                      
                      8.27642005
                      
                      
                      8.0702
                      
                      
                      
                      8.1936
                      
                      
                      
                      8.2765
                      
                      
                      
                      8.07022006
                      
                      
                      7.8041
                      
                      
                      
                      7.9723
                      
                      
                      
                      8.0702
                      
                      
                      
                      7.80412007
                      
                      
                      7.2949
                      
                      
                      
                      7.6058
                      
                      
                      
                      7.8127
                      
                      
                      
                      7.29462008
                      
                      
                      6.8225
                      
                      
                      
                      6.9477
                      
                      
                      
                      7.2946
                      
                      
                      
                      6.78002009
                      
                      
                      6.8282
                      
                      
                      
                      6.8314
                      
                      
                      
                      6.8380
                      
                      
                      
                      6.8250November
                      
                      
                      6.8272
                      
                      
                      
                      6.8274
                      
                      
                      
                      6.8282
                      
                      
                      
                      6.8267December
                      
                      
                      6.8282
                      
                      
                      
                      6.8279
                      
                      
                      
                      6.8287
                      
                      
                      
                      6.82682010
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -January
                      
                      
                      6.8270
                      
                      
                      
                      6.8273
                      
                      
                      
                      6.8281
                      
                      
                      
                      6.8269February
                      
                      
                      6.8269
                      
                      
                      
                      6.8270
                      
                      
                      
                      6.8273
                      
                      
                      
                      6.8269March
                      
                      
                      6.8263
                      
                      
                      
                      6.8264
                      
                      
                      
                      6.8268
                      
                      
                      
                      6.8261April
                      
                      
                      6.8263
                      
                      
                      
                      6.8262
                      
                      
                      
                      6.8265
                      
                      
                      
                      6.8259May
                      
                      
                      6.8280
                      
                      
                      
                      6.8274
                      
                      
                      
                      6.8281
                      
                      
                      
                      6.8265








(1)
            Averages for a period are
      calculated by using the average of the exchange rates on the end of each
      month during the period.  Monthly averages are calculated by
      using the average of the daily rates during the relevant
      period.


Source: Federal
Reserve Bank of New York and the Bank of China





This
annual report contains translations of certain Renminbi amounts into U.S. dollar
amounts at specified rates.  Translations from Renminbi to U.S. dollars at
certain specified date refers to the noon buying rate on that particular date in
The City of New York for cable transfers of Renminbi as certified for customs
purpose by the Federal Reserve Bank of New York.  Unless otherwise
stated, the translations of Renminbi into U.S. dollars have been made based on
the noon buying rate on December 31, 2009, which was RMB6.8282 to
USD1.00.  We make no representation that the Renminbi or U.S. dollar
amounts referred to in this annual report could have been or could be converted
into U.S. dollars or Renminbi, as the case may be, at any particular rate or at
all.  See “Item 3. Key Information — Risk factors — Risks related to
doing business in China — Any fluctuations in exchange rates could result in
foreign currency exchange losses” and “— Restrictions on currency exchange may
limit our ability to receive and use our revenues or financing effectively” for
discussions on the effects of fluctuating exchange rates and currency control on
the value of our ordinary shares.  On June 29, 2010, the noon
buying rate was RMB6.7901 to USD1.00.





The
People’s Bank of China, or the PBOC, issued a public notice on July 21, 2005
increasing the exchange rate of the Renminbi against the U.S. dollar by
approximately 2.0% to RMB8.11 per USD1.00.  Further to this notice,
the PRC government has reformed its exchange rate regime by adopting a managed
floating exchange rate regime based on market supply and demand with reference
to a portfolio of currencies.  Under this new regime, the Renminbi is
no longer pegged to the U.S. dollar.  This change in policy has
resulted in an approximate 18% appreciation of the Renminbi against the U.S.
dollar between July 21, 2005 and June 29, 2010.  The PRC
government may decide to adopt an even more flexible currency policy in the
future, which could result in a further and more significant appreciation of the
Renminbi against the U.S. dollar,or adopt a more conservative currency policy
which could effectively peg the RMB to the U.S. dollar.





B.
            Capitalization
      and indebtedness.





Not
applicable.





C.
            Reasons
      for the offer and use of proceeds.





Not
applicable.




6




D.
            Risk
      factors.




RISKS
RELATING TO OUR BUSINESS




We
have a limited operating history as a combined company, which makes evaluating
our business and prospects difficult.




Our
current business was formed upon the consummation of a three-party acquisition
on November 24, 2006 among Yucheng, Sihitech BVI, parent of Beijing Sihitech, a
company established in June 1999 that focused on providing system integration
and other IT solutions and services, and e-Channels BVI, parent of e-Channels, a
company established in February 2001 that focused on providing multi-channel
software solutions and IT consulting services.   In addition, we
acquired five companies in 2007.  See “Item 4. Information on the
Company - A. History and development of the Company.”  Our combined
company has a limited operating history, which makes it difficult to evaluate
our historical financial results and business prospects.  Our future
success depends on a successful integration of all these companies and the
capturing of opportunities presented by these acquisitions.  If we
experience difficulties in the integration process or are not able to take
advantage of the perceived synergies between us and these companies, we may not
be able to expand our operations and revenues as expected.




In
addition, our management team has worked together for a relatively short period
of time and it may be difficult to evaluate their effectiveness, on an
individual or collective basis, as well as their ability to respond to future
challenges to our business, including their ability to:





·
            respond to increasing
      competitions in the
industry;





·
            adapt to changing
      technologies;





·
            retain and expand our client
      base;





·
            expand our solution and service
      offerings;





·
            manage our business expansions,
      including integration of past and future
    acquisitions;





·
            manage risks associated with
      intellectual property;





·
            maintain effective control of our
      costs and expenses; and





·
            attract, retain and motivate
      qualified personnel.




If we are
unsuccessful in addressing these challenges, our results of operations and
business prospects may be materially and adversely affected.


7




We
may not be able to sustain our rate of revenue growth.





Our
revenues fluctuated in recent years.  Our revenue increased by 50.4%
from RMB289.7 million in 2006 to RMB435.5 million in 2007, and 55.4% from the
2007 revenue amount to RMB676.8 million in 2008, and decreased by 43.8% from the
2008 revenue to RMB380.4 million(USD55.7 million) in 2009.  Our
revenue growth, in particular the growth from 2006 to 2007, was primarily
enhanced by our merger with e-Channels BVI on November 24, 2006 and our
acquisitions of five companies in 2007.  In addition to revenues
generated by these acquired companies, we were also able to achieve synergies
among our existing business and the acquired
businesses.   Without the impact of these acquisitions, our
growth rate during this period would have been much lower.  In 2008
and 2009, we did not make any acquisition and we may not be able to make
acquisitions with a similar scale, or at all, in future periods, or give
assurance that our future acquisitions, if any, will be able to provide the same
level of synergy as our past acquisitions.  In addition, our past
growth reflected our success in achieving market acceptance of our IT solutions
and software and establishing market leadership in certain segments of
China’s financial IT services industry.  As we become a larger and more
mature company, we may not be able to sustain our recent rate of revenue growth
in future periods. Additionally, the changing economic environment as a result
of the recent world recession and PRC government economic policy decisions may
have an effect on our overall growth.




We have been relying on, and are
expected to continue to rely on, a limited number of clients, in particular the
various separatedevelopment centers and provincial branchesof China Construction Bank, for a
significant proportion of our revenues.  Any loss of these clients
could significantly impact our future revenues, and materially and adversely
affect our operational results and our financial condition.




China
Construction Bank is one of the largest banks in China and our largest user of
our services, accounting in the aggregate for 59.2%, 47.8% and 31.7% of our
revenues in 2007, 2008 and 2009, respectively.  We provide solutions
and services to different provincial branch offices of China Construction Bank
and to its head office.  Although the engagements with the branches
and the head office are under separate and independent contracts, certain
individual accounts still historically account for a significant amount of
revenue.  For example, our largest account within China Construction
Bank was with its head office, which accounted for 29.1%, 36.9% and 20.0% of our
revenues in 2007, 2008 and 2009, respectively.  Notwithstanding the
separate legal treatment of the engagements, a substantial failure to provide
the contracted solutions and services under one of our agreements may result in
a disruption to our overall relationship with China Construction
Bank.  Also, if China Construction Bank’s general IT spending pattern
and budget changes or decreases, it could adversely affect our ability to offer
services and win contracts from different entities within the
bank.  We have no long-term contracts with China Construction Bank or
any of our major clients.  There are no assurances that we will be
able to continue to retain these clients, and that we will maintain or increase
our current level of business with them in the future.  If we lose any
of these significant clients, or if any of them significantly reduces their use
of our solutions and services, we may not be able to find replacement revenue
sources, thus materially and adversely impacting our operating results and
financial condition.  In addition, our current clients are primarily
large national commercial banks that possess significant negotiating and pricing
power, and if they exert pricing pressure on us, we cannot guarantee that we
will be able to resist this pressure or find other replacement
clients.  If we have to lower prices to maintain our business with
these clients, our profitability may be materially and adversely
affected.




Fluctuations
in our clients’ annual IT budgets and spending cycles and other factors can
cause our revenues and results of operations to vary significantly from quarter
to quarter and from year to year.




Our
revenues and results of operations will vary significantly from quarter to
quarter and from year to year due to numerous factors, many of which are outside
of our control.  As substantially all of our revenues are derived from
providing services on IT projects outsourced from our banking clients in China,
the amount of our revenues for any period is affected by the timing of our
clients’ IT projects, which in turn depends on their internal budgeting and
planning process, over which we have no control.  Historically, our
banking clients have been awarding more projects in the third and fourth
quarters as compared to the first and second quarters, as a result, we generally
record stronger revenues in the third and fourth quarters of each
year.  In addition, our revenues are generally the lowest in the first
quarter of each year due to the Chinese New Year
holiday.  Furthermore, the project mix of any given period also
significantly affects our gross margin and results of operations.  For
example, if we record a higher percentage of low margin hardware pass-through
revenue as compared to higher margin software development revenue in a given
quarter, our gross margin will be negatively affected.  We may not be
able to control the timing and types of projects we undertake and the revenue we
can record in a given quarter.





Due to
the annual budget cycles of most of our clients, we also may be unable to
accurately estimate the demand for our Software & Solutions, which could
adversely affect our business planning.  Moreover, our results will
vary depending on our clients’ business needs from year to year.




8




Other
factors that may cause fluctuation of our quarterly and annual results
include:




·
            our ability to successfully
      develop, introduce and sell new or enhanced solutions in a timely
      manner;





·
            the announcement or introduction
      of new or enhanced solutions by us or our
    competitors;





·
            any delays in the completion of
      our projects; and





·
            the results of our acquisitions
      of, or investments in, other businesses or
  assets.




Due to
these and other factors, including factors discussed elsewhere in this “Risk
factors” section, our results of operations may fluctuate significantly from
quarter to quarter and from year to year, and our results of operations for any
period may not be indicative of our performance in any future
period.




In
addition, we base our planned operating expenses, including research and
development expenses, general and administrative expenses, and hiring of
additional personnel in part on our expectations of future
revenue.  If our revenues for a particular quarter are lower than we
expect, we may be unable to proportionately reduce our operating expenses for
that quarter, which would harm our results of operations for that
quarter.  If our results of operations in future quarters fall below
the expectations of securities analysts or investors, the market price of our
shares will likely decline significantly.




Our
business depends on the banking industry in China, and changes within that
industry could reduce demand for our solutions and services.  The
recent growth of China’s banking industry and IT spending by China’s banks may
not continue, which would have a material adverse effect on our results of
operations and business prospects.




Substantially
all of our revenues have been derived, and are expected to continue to be
derived from, solutions and services which we provide to banks in
China.  Our revenue growth in recent years has been driven in part by
the growth in China’s banking industry, which is a result of China’s rapid
economic development and recent industry-wide reforms.  These combined
changes have greatly increased IT spending by China’s banks.  This
growth may not continue at the same rate or at all.  Unfavorable
economic conditions, such as a slow-down in the global economic development led
by the recent economic downturn, potential instability in the global banking
system and changing monetary policies in China, have and could continue to
adversely impact China’s economy and the growth of banks operating in China,
which may in turn impact their IT expenditures.  Any decreases in, or
reallocation of, capital expenditures by our current and potential clients could
have a material and adverse effect on our business, financial conditions and
results of operations.  In addition, to encourage potential growth in
the Chinese economy, the PBOC has adopted, and may continue to adopt, various
macroeconomic measures that may encourage banks to lend more and to riskier
clients than in the recent past.  This could cause an increase in the
non-performing loan rate, which would materially impact bank
profitability.  Finally, the PBOC may also impose monetary policies or
interest rates that may reduce the profitability of China’s
banks.  Any reduction in profitability of China’s banks may reduce
their spending on IT, which may materially and adversely affect our business,
financial condition and results of operations.




We
may lose our clients and our financial results may suffer if our clients change
the decision-making body for their IT procurement or investment, merge with or
are acquired by other banks, develop their own in-house capabilities or fail to
expand.




Many
factors, including those listed below, could affect our clients’ decisions
relating to their IT outsourcing and our business relationship with our
clients:


9





·
            Our clients
      may change the way they make IT spending decisions.We derive a
      substantial majority of our revenues from providing IT solutions, software
      and services to China’s banks on a project-by-project basis, and client
      relationships play an important role in our ability to win projects from
      our clients.  We strive to build long-term relationships with
      our clients to increase our competitive advantage over other IT
      vendors.  We have recently observed a shift in the
      decision-making process for IT spending in China’s banks.  More
      decisions are being made at banks’ head offices, instead of provincial
      level branches, primarily due to centralization of customer data at the
      bank head offices.  Such a shift, or any other change of the
      decision maker in our clients, may result in the loss of business
      opportunities to competitors who have closer relationships than us with
      the new decision-making body within the
  bank.





·
            Consolidation
      of our clients.  There is a
      continuing trend for financial institutions in China to
      consolidate.  Our clients may be acquired by other financial
      institutions and adopt the acquirer’s IT systems.  Also, as
      these institutions grow in size through consolidation, they may exert
      pricing pressure on vendors.  In addition, as restrictions
      against foreign ownership in the financial and insurance industries ease,
      more foreign investors may acquire stakes in or form strategic alliances
      with financial institutions in China, and may direct or influence
      management to use IT vendors recommended or favored by the investor,
      leading to the loss or reduction of our business with these existing
      clients.





·
            Our clients
      may decide to develop their IT solutions in-house.  Our clients may find
      it more cost-effective to invest in and develop their own in-house IT
      capacity rather than relying on third-party vendors, thereby reducing
      their purchases of our solutions and services.  For example, a
      banking client for which we designed the initial online banking platform
      decided to later conduct further online banking development in-house, and
      as a result, we were not able to renew our contract with such
      client.





·
            Our clients
      fail to expand.  The banking industry
      in China is becoming increasingly competitive.  Our clients may
      not successfully compete with their domestic and foreign competitors in
      the future.  If any of our key clients suffer reduced market
      share or their results of operations and financial condition are otherwise
      adversely affected, they may reduce their IT spending and change expansion
      plans for their IT systems, which in turn may materially and adversely
      affect our growth and results of
  operations.





The
occurrence of any of these events may materially and adversely affect our
business, financial condition and results of operations.




We
are facing increasing competition in the market for IT services in China’s
banking industry, and if we fail to compete successfully, we may lose clients
and our revenues and profits may decline.




There is
intense competition in the market for IT services in China’s banking industry,
and the industry is characterized by frequent technological changes, evolving
industry standards and changing client demands.  We face competition
from both China’s domestic IT service providers, such as Longtop Financial
Technologies Limited, Digital China Holdings Limited, Global InfoTech Co., Ltd ,
HiSun Technology Holdings Ltd. and Client Service International Inc., as well as
global IT vendors, such as IBM Global Services and SAP AG.  See “Item
4. Information on the Company — B. Business overview —
Competition”.  Some of our competitors have longer operating
histories, larger clientele, more diverse service offerings, more extensive
personnel and financial resources than we do.  While new IT service
providers may also enter the industry, we also compete with the IT departments
of our existing and potential clients, which may be capable of creating in-house
solutions, thereby reducing the need for outside service
providers.  We expect competition to increase and we cannot guarantee
that we will successfully compete against our competitors.  Our
current or future competitors may develop or offer solutions or services that
are comparable or superior to ours at a lower price.  In addition,
only some of our solutions and services are protected by intellectual property
rights, and therefore, our competitors may copy some of our technologies without
incurring the associated research and development expenses, and sell their
competing products with lower cost, which could result in the loss of sales of
our solutions and services.  If we fail to successfully compete
against our current and future competitors, our business, financial condition
and results of operations may be materially and adversely
affected.


10





We
undertake many of our projects on a fixed-price basis.  If we
underestimate our costs, or fail to control our costs in the implementation of
the projects, our gross margins and profitability may be materially and
adversely affected.




We
typically undertake our client projects on a fixed-price basis where we charge a
fixed price to the client based on our evaluation of the estimated resources
required to implement the project.  If we overestimate costs required
for the project, our bid may become uncompetitive and we may lose business as a
result.  Conversely, if we underestimate the project costs, complexity
or scope of work to be done for the projects that we win, due to
miscommunication with our clients or underestimation of technical difficulties,
or if we incur additional costs due to unforeseen conditions, such as
appreciation of personnel cost or the existence of software bugs, we will not be
able to change the contract value or pass such additional costs to our
clients.  As a result, we may have a reduced gross margin from such
projects or even suffer a loss, which would negatively affect our overall gross
margin and profitability.




We
may be forced to reduce the prices of our solutions and services due to
increased competition, which could lead to reduced revenues and
profitability.




We may be
forced to reduce the prices of our solutions and services in response to
price-cutting strategies of our competitors, in particular in the areas of labor
intensive contracts with low requirements for proprietary solutions or
know-how.  Many smaller financial IT service companies depend on
offering low prices to win these contracts.  We may not be able to
respond to such competition by controlling our costs, shifting to other service
areas with higher margins or providing additional solutions and services or
enhancements to enable us to charge premium prices, and we may lose clients in
these particular segments of our business if we do not reduce our
prices.  Any such reduction in prices may materially and adversely
affect our business, financial condition and results of operations.




Cancellelation
of projects by customers and the risk of recognizing the cost incurred for such
circumstance could adversely affect our revenues and profitability.




From time
to time, projects on which we start work are cancelled. This may be because of
change in client management, client budgetary constraints, client strategy
shifts, and other similar factors. We may not be able to, or for client
relations reasons, want to seek reimbursement for all of our costs incurred for
projects cancelled by customers.




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




The
markets for our Software & Solutions change rapidly due to technological
innovation, product introductions, declining prices and evolving industry
standards, among other factors.  New solutions and technology often
render existing solutions and services obsolete, excessively costly or otherwise
unmarketable.  As a result, our success depends on our ability to keep
up with the latest technological progress and anticipate technological advances
and to develop or acquire and integrate new technologies into our Software &
Solutions portfolio.  We cannot give assurances that we will be able
to keep our solutions and services competitive in the evolving
market.  In addition, rapid advances in technology also require us to
commit substantial resources to researching, developing or acquiring new
technologies and deploying them into our operations, as well as to continuously
train personnel in new technologies and in how to integrate existing hardware
and software systems with these new technologies.  Such research,
development and training place significant burden to our financial
resources.  If we are not able to devote adequate resources to keep
our technologies competitive, our ability to effectively compete in the market
may suffer as a result, which may materially and adversely affect our business,
financial condition and results of operations.




Our
failure to retain existing clients or changes in their continued use of our
solutions and services will adversely affect our results of
operations.




We strive
to establish strong, long-term client relationships, so that our clients will
come back to us project after project.  For many projects that we
undertake with our clients, there are often subsequent phases as the client’s
business develops and their IT needs evolve, and we are typically engaged for
the follow-on work.  Revenue from such follow-on projects is a source
of our repeating revenues.  Historically, such repeating revenues
accounted for a significant portion of our total revenues.  Whether
our clients will come back to us for such follow-on projects depends on a number
of factors, including the quality of our work, the ease of use, reliability and
price, clients’ IT strategy,as well as the cost of switching to another service
provider.  Our existing clients may decide not to engage us for
follow-on projects due to quality, our competitors’ aggressive pricing or the
obsolescence of our solutions or other concerns.  In addition, our
clients may decide to delay system expansions, upgrades and improvements due to
a change in their own growth, spending patterns or IT budget.  Any
material reduction in our repeat revenues may materially and adversely affect
our business, financial condition and results of operations.




11




Furthermore,
we rely in part on our ability to cross-sell new solutions and services to our
existing clients to our share of wallet with each client.  For our new
clients, we typically provide one initial service component, such as a custom
application development or the integration of a new application with legacy IT
systems.  Then we seek to use such initial client engagement as a
foothold to understand the clients’ IT needs and quickly build client
relationships that will provide us with opportunities to demonstrate our
capabilities and value so that they may engage us for additional
projects.  If we fail to satisfy our clients in one product line, it
may negatively impact our sales of other solutions and services to that client,
which may materially and adversely affect our future revenue
growth.




We
are expanding into other business areas, such as our POS merchant acquisition
services business, for which we have limited experience and for which the
regulatory environment still changes frequently with a possible negative impact
on our business. If we fail to manage and grow our new businesses, our financial
condition and results of operations may be materially and adversely
affected.




We
established a wholly-owned subsidiary, Beijing Yuxingyicheng Information
Technology Company Ltd., or Yuxinyicheng Information, to focus on the Point of
Sale merchant acquiring services business, or POS, for credit and debit cards in
a nationwide collaboration with China Merchants’ Bank, currently the largest
credit card issuer in China.   Our banking partners have expanded
to include regional cooperation relationship with China Construction Bank, the
Bank of Communications, China Citic Bank, the Bank of China and China Everbright
Bank.  For each POS terminal that we deploy, we share with the
collaborating bank a certain percentage of the processing fee for transactions
occurred on the POS terminal.  In return, we bear the cost of POS
terminals, related consumables, sales and marketing costs and other maintenance
costs.  At this point, we still suffered a loss for our POS business
in 2009.  We cannot guarantee that we will be successful in our
management of this business.  Many factors, some of them are beyond
our control, could materially and adversely affect our ability to turn this
business into a profitable business, including:





·
            our limited ability to navigate
      the changing environment due to the changing
      regulations;





·
            our limited experience in
      managing the POS merchant acquiring
  business;





·
            our ability to manage our
      relationships with our
collaborators;





·
            the low barriers to entry and
      increasing competition;





·
            the existence of larger more
      established competitors, in particular China UnionPay, the predominant
      player in the field;





·
            adoption of credit and debit
      cards and prepaid store cards as a way of payment by merchants and
      consumers in China; and





·
            our ability to deploy additional
      POS terminals.




12





In
addition, we may expand into other business areas in the future where we do not
have significant experience and will be facing additional risks and
uncertainties.  If we fail to mange and grow our POS business or other
new businesses that we undertake, our overall business, financial condition and
results of operations may be materially and adversely affected.





We
are expanding into other business areas through joint ventures, such as Elegon,
Baodaotong, and Yuxin Data. If we fail to manage the complexity of a joint
venture, the business of the joint venture may suffer and our financial
condition and results of operations may be materially and adversely
affected.




We have
established Elegon, Baodaotong, and Yuxin Data with third party partners to
expand into different new areas of business. Managing the additional complexity
of a joint venture can be very challenging. We cannot guarantee that we will be
successful in our management of these joint venture.  Many factors,
some of them are beyond our control, could materially and adversely affect our
ability to turn this business into a profitable business, We will assess
regularly any joint venture endeavors and from time to time we may choose to
exit from them when they no longer fit our business strategy. Upon exit, we may
not recover our investment.




We
are expanding into other sectors of the diversified financial services, and seek
to establish a presence in IT services for insurance and securities companies,
with which we have limited experience.





We
believe that we will be able to become an IT service provider for a broad range
of diversified financial service companies as the market characteristics and
underlying IT capabilities are similar to the banking
industry.





In the
past our clients have been predominately banks in China.  As we expand
into the insurance market, we may not be able to successfully localize the
software or understand the requirements of insurance companies. Although the
market for IT solutions for insurance companies is nascent and highly
fragmented, there are already competitors in the space.  We may not be
able to compete in a cost effective manner or gain successful reference sites
that will enhance our reputation in this field.  Our IT solutions may
also be outdated, before they are even brought to market, or we may not be able
to develop appropriate solutions.  In addition, we do not have
significant experience with insurance solutions and will be facing additional
risks and uncertainties.  If we fail to manage and grow our service
capabilities, in this or other business we undertake, our business, financial
condition and results of operations may be materially and adversely
affected.




We
introduced an Application Service Provider, or ASP, service for SMBs, and we may
not be able to successfully implement this new revenue model.





We
typically provide our IT solutions and software on a project-by-project basis,
through which we charge our clients based on the entire cost and an expected
profit on a project.   In January 2008, we entered into a
collaboration agreement with China Financial Certification Authority, or CFCA,
to provide an online banking ASP platform to serve SMBs.  CFCA will
host and maintain the online banking platform, and we will provide the necessary
hardware and online banking solutions. In exchange for ASP services,
clients pay an annual hosting and maintenance fee and variable fees based on the
number of users, transactions and other services, as stipulated in the
contracts.  Revenues generated through the ASP platform are shared by
Yucheng and the CFCA. Unlike our project-based revenue model, the initial charge
to the client is small, and we expect to recover our costs and make a profit by
generating recurring revenues tied to the use of the ASP
platform.  However, we cannot guarantee that we will be able to
generate a profit from this service.  Whether we can succeed in this
business depends on how many SMBs are willing to use this service instead of
creating their own online banking platform in-house or via customized outsourced
project, and also to the extent their end customers use the online banking
platform.  As we have borne significant costs to establish the
platform, if we fail to generate enough interest among SMBs for the use of this
service, or if their end customers do not use the online banking platform we
provide, we may not be able to recover our costs and our business, financial
condition and results of operations may be materially and adversely
affected.


13




We
are expanding our client base to include an increasing number of SMBs, which
subjects us to additional risks, such as uncertainties of future businesses and
credit risks.




As part
of our effort to diversify our business and reduce our dependence on a limited
number of banking clients, we have expanded our client base to include
SMBs.  However, we have limited experience doing business with these
banks and we cannot ensure that our sales strategies will be successful in
obtaining repeat business, such as later phase improvement or expansion of the
initial projects we undertake, from these clients as we are typically able to do
with our larger clients, such as Top Four bank and Joint-Stock bank
clients.  In addition, as compared to Top Four banks and Joint-Stock
banks, we have less understanding of SMBs’ budgeting process and their project
awarding practices due to much
larger number of banks and diversified characteristics among them, which
makes it more difficult for us to predict future projects in order to allocate
and plan our resources.  Furthermore, SMBs may not be as reliable as
Top Four banks and Joint-Stock banks in making timely payments, which would
subject us to additional credit risks.  If we cannot successfully
manage these risks, our business, financial condition and results of operations
may be materially and adversely affected.




We
may not be able to prevent others from unauthorized use of our intellectual
property, which could harm our competitive position and adversely affect our
business and prospects.




We rely
on a combination of patent, copyright and trademark laws, licensing agreements,
confidentiality agreements, internal confidentiality policies and other
contractual provisions, as well as technical measures to protect our
intellectual property rights.  We cannot give assurance that PRC laws
and our measures will be adequate to protect our intellectual
property.  PRC laws are still developing in this area and the
enforcement of such rights at the judicial level is highly uncertain and may not
be as effective as in the United States or other countries.  We may
not be able to deter competitors from copying our technology,
reverse-engineering our solutions, or otherwise infringing on our intellectual
property rights.  To protect our trade secrets and other proprietary
information, our employees, consultants, advisors and collaborators are required
to enter into confidentiality agreements.  There can be no assurance
that these agreements will provide meaningful protection in the event of any
unauthorized use, misappropriation or disclosure of such trade secrets, know-how
or other proprietary information.  We hold registered rights covering
certain aspects of our technology, in particular software solutions, but it is
uncertain how much protection such registrations provide us.  We have
2 patents and 162 copyrights in China; however the protection is limited and may
not sufficiently protect our intellectual property rights.  In
addition, because we currently do not have patents, we are unable to rely on
patent law to protect our intellectual property.  If we fail to
protect our intellectual property and technology, or if our competitors
independently develop technologies that are substantially equivalent or superior
to our technology, our competitiveness may be adversely affected, which may
materially and adversely affect our business and prospects.




Furthermore,
if we believe third parties have infringed our intellectual property and other
proprietary rights, we may have to resort to litigation to enforce our
intellectual property and proprietary rights.  Intellectual property
litigation is expensive and time-consuming.  Litigation may also cause
significant diversion of company resources and management attention, cause
disruptions in our daily operations, prove to be unsuccessful, and result in our
intellectual property rights being held invalid or unenforceable, all of which
could materially and adversely affect our business, financial conditions and
results of operations.





If
we infringe on third-parties’ intellectual property rights, we could be required
to cease offering the infringing solutions, redesign those solutions or enter
into license agreements and pay royalties, any of which could have an material
adverse impact on our business, financial condition and results of
operations.




There can
be no assurances that a third party will not assert that our solutions and
services violate their intellectual property rights.  Intellectual
property laws are not fully developed in China, and there may be significant
uncertainties in the scope and enforceability of intellectual property rights a
company holds.  As the number of solutions offered by Yucheng and our
competitors increase and the functionality of these solutions further overlaps,
intellectual property related litigation in our industry may
increase.  Our competitors may claim that our solutions and services
infringe their intellectual property rights and initiate litigation against
us.




Any such
claims, whether with or without merit, could be expensive and time consuming to
defend, cause significant diversion of our management’s time and our resources,
disrupt our daily operations and damage our reputation.  If we are
found by a competent court to have infringed third parties’ intellectual
property rights, we may be required to:





·
            pay damages to the owner of the
      technology that we are found to infringe, which could be
      substantial;




14




·
            cease making, selling or using
      solutions that incorporate the infringed intellectual
      property;





·
            redesign our solutions around the
      infringed intellectual property, which may not be feasible;
      and





·
            enter into licensing agreements
      and pay royalties in order to obtain the right to use necessary
      technologies.




Any such
litigation and the judgment of any of these remedies may materially and
adversely affect our business, financial condition and results of
operations.




We
may be subject to intellectual property infringement claims from our clients,
which may force us to incur substantial legal expenses and, if the claim is
upheld against us, may materially and adversely affect our business, financial
condition and results of operations.




The
majority of our contracts involving custom-designed software solutions provide
that our clients own the intellectual property rights to software solutions
developed under these contracts, and we are not permitted to use such
intellectual property.  We only retain our proprietary rights to the
methodologies, algorithms or patents that we use in the development of the
custom-designed software solutions.  In addition, most of these
contracts are silent as to whether we can make improvements on such
custom-designed solutions and commercialize such improvements.




As a
result of these contract provisions, we may be subject to intellectual property
infringement claims by our clients.  It may be difficult to
distinguish which part of the software that we developed for our clients
represents our proprietary rights, and it is also not clear whether we have
rights to make improvements on the software or part of the software that we
developed for our clients.  If our clients initiate intellectual
property claims against us, we may have to incur substantial legal expenses,
which may also divert significant management attention and company resources,
damage our client relationships and disrupt our normal business
operations.  In addition, we may not be successful in defending
against such litigation.  If we are found to have violated our
clients’ intellectual property rights, we could be forced to pay licensing fees
or be enjoined from using the related intellectual property and forced to
develop and utilize alternatives.  Such a finding could also result in
substantial monetary liabilities, harm our reputation, cause a decline in our
sales and negatively affect our client relationships, all of which may
materially and adversely affect our business, financial condition and results of
operations.  One successful claim may also bring a cascade of other
similar claims, which may further exacerbate the material adverse effect of such
litigation on our business, financial condition and results of
operations.




Our
intellectual property indemnification practices may materially and adversely
impact our business.




We have
agreed to defend many of our clients at our own cost for any third-party
intellectual property claims filed against them arising from the solutions and
services we furnished them, and indemnify them for any damages of intellectual
property infringement.  This practice may subject us to significant
litigation costs and indemnification claims by our clients.  We cannot
assure that third-parties will not pursue such claims, which may materially and
adversely affect our business, financial condition and results of
operations.




We
rely on selected third-party technologies and third-party suppliers for hardware
equipment and software applications for our Platform & Maintenance
Services.  If we are not able to obtain the needed items, our business
could be materially and adversely affected.




We depend
on the availability of the necessary hardware equipment and software
applications from third-parties for our Platform & Maintenance Services. We
have established business relationships with selected suppliers. We cannot
assure that these vendors/distributors will continue to offer needed hardware or
software solutions, continue their relationships with us or provide us their
products at reasonable prices. In such an event, we may not be able to secure
alternative suppliers or procure hardware equipment and software applications at
a reasonable cost. In addition, even if we are able to obtain replacement
third-party products in a timely manner, our solutions may not properly
interface or interoperate with their hardware or software solutions, which may
result in delays and client dissatisfaction, or even result in contractual
breaches with our clients. We may be unable to develop an alternative solution
on a timely basis or at a reasonable cost to circumvent the lack of products
from third parties. Our failure or inability to acquire alternative third-party
products or develop alternative solutions on a timely basis or at a reasonable
cost may subject us to contract liability and our relationship with our clients
may be negatively affected, which may materially and adversely affect our
business, financial condition and results of operations.




15




We
may be unsuccessful in identifying and acquiring suitable acquisition candidates
or fail to complete acquisitions, which could adversely affect our
growth.




We have
grown in the past partly through selective acquisitions.  Through
these acquisitions we expanded our revenue sources, added new solutions or
services, acquired new clients and obtained qualified personnel, all of which
complemented our organic growth.  We plan to continue to pursue
selective acquisitions of high-quality financial IT services companies to
further our future growth.  However, we may not be able to identify
suitable future acquisition candidates or complete such acquisitions on terms
commercially acceptable to us, which may impair our ability to effectively or
efficiently implement our growth strategies.  In addition, identifying
acquisition targets, due diligence and negotiations all require significant
management attention and diversion of our resources.  If we fail to
successfully complete acquisitions after spending significant management time
and company resources, our business, financial condition and results of
operations could be materially and adversely affected.




We
face risks in connection with the acquisition of businesses.  If we
fail to manage these risks, our financial condition and results of operations
may be adversely affected.




We face
risks in connection with the acquisition of businesses.  These risks
include:





·
            difficulties integrating acquired
      businesses and retaining necessary personnel to run such
      businesses;





·
            entry into unfamiliar
      markets;





·
            unforeseen or hidden
      liabilities;





·
            need for financial resources
      beyond our planned levels;





·
            inability to generate sufficient
      revenues and profits to offset acquisition
  costs;





·
            failures in realizing anticipated
      synergies; and





·
            potential loss of or harm to
      relationships with employees and clients resulting from our integration of
      the acquired businesses.




Any of
these risks may derail the success of our acquisitions.  As a result,
we may not realize the benefit we anticipated while incurring significant costs,
and our business, financial condition and results of operations may be
materially and adversely affected.


16




If
we are not able to retain our senior management team and critical staff members,
and recruit quality personnel as we expand, our business and prospects will be
adversely affected.




We depend
on our ability to retain and recruit qualified personnel, including senior
management and other key staff members.  The available talent
pool, especially the more senior
and experienced pool, in China is limited and competition is
intense.  We depend on our senior management team for their industry
knowledge and experience as well as their relationships with existing
clients.  If we lose the service of any member of our senior
management team, we may not be able to find a suitable replacement in a timely
manner or at all.  Even if we are able to find a replacement, it will
take time for the new person to be integrated into our business. 
Furthermore, the ability to successfully complete client engagements depends on
a trained, knowledgeable and stable staff, such as skilled engineers and project
managers.  As we continue to grow, we need additional qualified staff
to carry out our additional business projects, as well as other aspects of our
business, such as sales and marketing, research and development and
accounting. If we are not able to retain our senior management team,
recruit quality personnel as we expand, or provide appropriate training, career
opportunities and otherwise motivate and retain our qualified employees, our
business, financial condition and results of operations may be materially and
adversely affected.  In addition, although we have non-competition
provisions in our employment agreements with our management and key personnel,
we cannot be certain that these provisions will not be breached and that they
will be enforceable in a PRC court.  If our management and key
personnel join our competitors or form competing businesses, our competitive
position and business prospects may be materially and adversely
affected.




Increases
in wages for IT professionals will increase our costs and our gross margins and
profit margins may be adversely affected.




Historically,
wages for comparably skilled technical personnel in China’s IT services industry
have been lower than in developed regions, such as in the U.S. or
Europe.  However, in
recent years, due to rapid economic development, and intense competition for
qualified IT professionals and general inflation, wages in China’s IT services
industry have increased. Wages may continue to increase at even faster rates
considering the recent government initiatives to increase the incomes of
laborers to narrow the income gaps between rich and poor.  In
addition, we may be required to implement wage increases by the relevant labor
bureaus’ guidelines,such as our average 5% wage increase in early April
2009.  Our personnel cost accounted for 57.4%, 55.3% and 54.3% of our
cost of revenues in 2007, 2008 and 2009, respectively.  Although we
were able to increase productivity to counter the increase in our IT personnel
costs, we cannot assure you that we will be able to achieve these or comparable
cost savings in the future.  If we experience significant increases in
wages for IT professionals, our cost of revenues will increase significantly,
which could materially and adversely affect our gross margin and results of
operations.




We
provide warranties on third-party hardware and software that we procure for our
clients.  We may incur substantial costs, if our clients file a
significant number of warranty claims against us for such third-party hardware
and software, and if those claims either exceed the scope of the warranties that
the manufacturers or their agents have contracted to provide to us, or if such
manufacturers or their agents do not honor their contract
warranties.




Through
our Platform & Maintenance Services, we assist clients with the procurement
and installation of third-party hardware and software which best meets their
system requirements.  For the individual components, we typically
provide warranties similar in scope to the warrants covered by the
manufacturers.  However, we are generally responsible for the
maintenance and service of the entire system, and will act on behalf of our
clients to obtain manufacturer warranted services.  Most of our
contracts do not have disclaimers or limitations on liability for special,
consequential and incidental damages, nor do we limit the amount recoverable for
damages.  If our clients file a significant number of warranty claims
against us for such third-party hardware or software, we cannot be certain that
the original manufacturers’ warranties will be fulfilled and that the costs
incurred will be sufficiently cover.  The warranties obtained from
such manufacturers may not cover the entire warranty claims, or the
manufacturers may refuse to honor their contract warranties.  As a
result, we may be liable for damages, which could materially and adversely
affect our financial condition and results of operations.


17




Many
of our contracts with clients permit termination by our clients as their IT
requirements change, or if our performance is not consistent with the quality
and other standards specified in those contracts.  Any termination of
contracts may materially and adversely affect our business, results of
operations and financial condition.




Many of
our client contracts can be terminated by our clients as their IT requirements
change, and without penalty. There are a number of factors relating to our
clients that are outside of our control which might lead them to terminate a
contract or project with us, including a change in financial condition, mergers
and acquisitions or significant corporate restructurings. The ability of our
clients to terminate contracts creates an uncertain revenue stream. Furthermore,
many of our contracts provide that our client may terminate the contract if we
fail to meet a specified timetable or fail to achieve certain quality or other
standard. If our contracts are terminated due to this reason, in addition to the
lost revenue and incurrence of penalties, our industry reputation may suffer.
Any significant contract termination, especially if unanticipated, could have a
negative impact on our business, financial condition and results of
operations.




We
may be subject to significant contract liabilities, if we fail to complete
client projects on time, or if we fail to provide required level of services
under our maintenance contracts.




Many of
our client contracts require us to complete the projects in a certain timeframe
and some also impose interim milestones. We cannot make assurances that we will
always be able to complete our client projects on time or meet all the interim
milestones. A number of reasons may result in delay of our client projects, such
as unforeseen bugs, technical difficulties or lack of sufficient software
engineers. Some of these factors are beyond our control. If we fail to meet the
deadlines or milestones specified in the timetable, we may be subject to
contractual penalties, such as significant late fees, and the client may have
the right to terminate the contract and require us to compensate them for any
loss they incurred due to our delay. If this happens, our reputation, client
relationships as well as our business, financial condition and results of
operations may be materially and adversely affected.




In
addition, some of our client contracts require us to keep the client’s system in
operation and are subject to contractual liabilities if the client’s system
breaks down for more than a specified period of time.  If we fail to
properly maintain the client system, or fail to fix system disruptions in a
timely manner, we may breach such contracts and be subject to contractual
liabilities, which could also materially and adversely affect our client
relationships as well as our business, financial condition and results of
operations.




Our
solutions use internally developed technology and third-party products, any of
which may contain errors and bugs, which may require us to spend additional time
and incur additional expenses to correct.  These errors and bugs may
also cause breaches in our service agreements and require us to pay damages to
our clients.




Our
solutions may contain undetected errors, defects or bugs that may or may not be
correctable.  Our solutions also involve integration with products and
systems developed by third-parties.  Complex third-party software
programs may contain undetected errors or bugs when they are first introduced or
as new versions are released. Because we cannot test our existing or future
solutions or third-party products upon which our solutions are dependent 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 correct these
problems on a timely manner. We may be required to devote resources and incur
significant expenses to detect and correct such errors and bugs, and we cannot
guarantee that all of these errors or bugs can be corrected. These errors and
bugs may also result in delays in project completion, loss of our solutions
market share, injury to our reputation and damage our relationship with our
clients. Furthermore, these errors or bugs may significantly impair their
intended use and subject us to liabilities, which may require us to pay damages,
which may adversely affect our client relationships as well as our business,
financial condition and results of operations.




We
may experience system failures, which could hurt our business reputation, and
subject us to contract liability to our clients for the interruption in service.
Our computer networks may be vulnerable to security risks that could materially
and adversely affect our results of operations and subject us to
liability.





Our
operations depend on our ability to protect our systems from interruptions
caused by damage from fire, earthquake, power loss, telecommunications failure,
unauthorized access, computer hackers, computer viruses, software malfunction or
other events beyond our control. We currently back-up data only relating to
certain systems, such as financial, human resource and emails, and do not have
sufficient backup facilities to provide full system services, if the primary
facility is not functioning. We currently do not have an offsite disaster
recovery system. In the event of major disasters, both primary and backup
locations could be adversely impacted. We could also experience system
interruptions due to the failure of our systems to function as intended, such as
the failure of the systems relied upon to deliver online banking services or the
failure of the interaction of our systems with other systems and networks of our
clients or other third parties. Loss of all or part of the systems for a period
of time could have a material adverse effect on our business reputation,
financial condition and results of operations.




18




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. Although we intend to
continue to implement security measures, computer attacks or disruptions may
jeopardize the security of information stored in and transmitted through
computer systems of our clients. Actual or perceived concerns that our systems
may be vulnerable to such attacks or disruptions may deter banks 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.




Data
networks are also vulnerable to attacks, unauthorized access and disruptions.
For example, in a number of public networks, hackers have bypassed firewalls and
misappropriated confidential information. It is possible that, despite existing
safeguards, an employee could divert our clients’ funds, exposing us to a risk
of loss or litigation and possible liability. Losses or liabilities that are
incurred as a result of any of the foregoing may materially and adversely affect
our business, financial condition and results of operations.




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




The PRC
government has provided various incentives to domestic companies in the software
industry in China in order to encourage developmentand growth of the industry.
Many of our PRC subsidiaries have historically received technology subsidies,
business tax exemptions, value-added tax, or VAT, refunds and preferential
income tax treatments. For example, many of our PRC subsidiaries enjoyed reduced
enterprise income tax at the applicable rate of 15% on taxable profits in China,
as compared to the statutory rate (33% prior to 2008 and 25% thereafter) and/or
tax holidays due to their status as a foreign-invested enterprises, software
enterprises or high-tech enterprises located in certain locations. Our tax
savings from these preferential income tax treatments amounted to RMB18.1
million, RMB31.2 million and RMB5.6 million (USD0.8 million) in 2007, 2008 and
2009, respectively. See “Item 5. Operating and Financial Review and Prospects —
A. Operating results — Income taxes.” In addition, due to our status as Software
Enterprise in the high-tech industry, we received technology subsidies, VAT
refunds, business tax refunds and other benefits in the amount of RMB7.3
million, RMB6.2 million and RMB4.4 million (USD0.6 million) respectively, in
2007, 2008 and 2009. See “Item 5. Operating and Financial Review and Prospects —
A. Operating results — Operating expenses — General and administrative
expenses.” The PRC government may reduce or eliminate these incentives at any
time in the future. Additionally, in order to continue to qualify for some of
these incentives, we are required to meet stringent requirements on research and
development activities and on our gross revenues.




On March
16, 2007, the PRC National People’s Congress passed the PRC Enterprise Income
Tax Law, or the New EIT Law, and in December 2007 the PRC State Council issued
implementation rules under the New EIT Law, both of which became effective on
January 1, 2008. Under the New EIT Law and its implementation rules, a unified
enterprise income tax rate of 25% and unified tax deduction standards will be
applied equally to both domestic-invested enterprises and foreign-invested
enterprises, but it repealed most of the existing preferential tax treatments,
including the preferential tax rates and the tax holidays. The New EIT Law
provides a five-year transition period that allows enterprises that enjoyed
certain preferential tax treatment under the old enterprise income tax regime to
gradually transition to the 25% statutory rate in a prescribed fashion.
According to a notice issued by the PRC State Council, for enterprises that
enjoyed preferential income tax rate of 15% pursuant to certain prior tax rules
or regulations specified in the notice, the applicable enterprise income tax
rate will increase to 18% for 2008, 20% for 2009, 22% for 2010, 24% for 2011 and
25% for 2012 and thereafter. For tax holidays specified in the notice,
enterprises already enjoying such holidays prior to January 1, 2008 can
generally continue to enjoy such tax holidays until their expiration, upon which
time the 25% tax rate will apply. All other preferential tax treatments have
generally terminated on December 31, 2007. Due to the application of the New EIT
Law and its implementation rules, certain of our subsidiaries may no longer be
able to enjoy any preferential income tax treatment, and certain others may need
to pay higher transitional income tax rates starting January 1, 2008. As a
result, we expect our effective income tax rate to gradually increase from our
2009 level, which may materially and adversely affect our financial condition
and results of operations.


19




We
may incur losses due to business interruptions resulting from the occurrence of
natural catastrophes, acts of terrorism or fires, and we have limited insurance
coverage.




Insurance
companies in China offer limited business insurance products and we currently do
not have insurance against business interruptions. Should any natural
catastrophes, such as earthquakes, floods, typhoons, fire or any acts of
terrorism occur in China that affect our operations, we might suffer not only
significant property damages, but also the loss of revenue due to interruptions
to our business operations, which could have a material adverse effect on our
business, financial condition or results of operations. In addition, we do not
have any key personnel insurance to cover any losses we may suffer due to any
loss of our senior management and other key personnel. In any such event, we may
incur additional costs, which could materially and adversely affect our
financial condition and our results of operations.




Any
health epidemics and other outbreaks could severely disrupt our business
operations.




Our
business could be materially and adversely affected by the outbreak of a health
epidemic or pandemic. Any prolonged occurrence of a health crisis, such as
severe acute respiratory syndrome, influenza or other adverse public health
developments in China could require the temporary closure of our offices or
prevent our staff from traveling to our clients’ offices to provide on-site
services. Such closures could severely disrupt our business operations and
materially and adversely affect our business, financial condition and results of
operations.





We do not believe our business
exposes the company and its employees to environment risks.





Because
our business is intellectually based, we do not believe it poses any
environmental risk to its customers, employees or industry





RISKS
RELATED TO DOING BUSINESS IN CHINA





Adverse
changes in China’s political and economic policies, including its policy of
reforming its economic system, could have a material adverse effect on the
growth of private businesses in China, such as ours.




All of
our operations are conducted in China and all of our sales are made in China.
Accordingly, our business, financial condition and results of operations are
significantly affected by economic, political and legal developments in China.
Since the late 1970s, China has been reforming its economic system and changing
from a planned economy based on governmental dictates and priorities to one that
uses market forces to influence deployment of economic resources, labor and
capital and to determine business endeavors. It is impossible to predict whether
or not the government will continue to encourage economic liberalization and
further release its control over the economy and encourage private enterprise.
We also cannot predict the timing or extent of future economic reforms that may
be proposed. Any re-imposition of planned economy regulation or similar kinds of
restrictions could reduce the freedom of private businesses to operate in a
profitable manner, restrict inflows of capital or stifle investor willingness to
participate in China’s economy. Any adverse change in the economic conditions or
government policies in China could have a material adverse effect on overall
economic growth, which in turn could lead to a reduction in demand for our
solutions and services and consequently have a material adverse effect on our
business. Moreover, to the extent we need additional capital; any restrictions
on foreign ownership, foreign investment and repatriation of profits will hamper
our ability to find capital outside of China.


20




The
Chinese economy has experienced rapid growth and the accompanying inflation for
the past few years.  In 2010, the Chinese economy is expected to face
an uncertaingrowth prospect, due
in part to the uncertain direction of the post-recession globaleconomy,
which could lead to deflationary or inflation pressures and slower long-term
growth prospects.  These economic uncertainties and wide swings
between inflation and deflation may result in the decreased profitability of
China’s banks, and
hence could adversely affect our business.





The rapid growth of China’s economy has
resulted in higher levels of inflation in 2007 and 2008.  However, the
economy slowed down a little in 2009 due to the global economic recession which
also led to much lower inflation in the year. China’s consumer price index (CPI)
increased by 4.8%, 5.8%, and decreased by 0.7% in the full year of 2007, 2008,
and 2009, respectively.As part of the measures to control inflation, the
People’s Bank of China, or PBOC, China’s central bank, has increased statutory
deposit reserve ratio ten times in 2007 and five times in the first two quarters
in 2008. However, as a result of the global economic slowdown in the second half
of 2008, China’s economy has also been negatively impacted. To spur consumer
spending, the PBOC decreased the deposit reserve ratio four times since early
September 2008, and has cut benchmark interest rates three times in 2008. Due to
China’s underdeveloped financial system, these volatilities and reactionary
practices may have negative long-term consequences on bank’s
profitability.





Given the
poor economic visibility, rapid policy changes and global economic pressures on
China, banks may be more conservative when it comes to upgrading or expanding
their IT capabilities. This could potentially lead banks to defer IT purchase or
demand price concessions, resulting in downward pricing pressure on IT vendors.
If our pricing policies come under pressure, it is possible that we will not be
able to correspondingly lower our expenses and our gross margin and net margin
could be materially and adversely affected. In addition, any reduction in IT
spending by banks or decline in IT pricing may affect our sales, which could
materially and adversely affect our business, financial condition and results of
operations.





PRC
laws and other conditions may limit our ability to make dividend payments to our
shareholders.




We are a
holding company in the British Virgin Islands, or the BVI. We rely on our PRC
subsidiaries to provide us with cash flow and to meet our other obligations,
including paying dividends to our shareholders. Relevant PRC laws and
regulations permit payment of dividends by a PRC subsidiary only from
accumulated distributable profits, if any, determined in accordance with PRC
accounting standards and regulations, and only after setting aside at least 10%
of its current year profits (up to an aggregate amount equal to half of its
registered capital). See “Item 8. Financial Information — A. Consolidated
statements and other financial information — Dividend policy.” The PRC tax
authorities may initiate changes in determining income of our PRC subsidiaries
that would further limit their ability to pay dividends and make other
distributions to us. It is therefore possible that our PRC subsidiaries will not
have any distributable profit to pay us, even if they are profitable under US
GAAP.





In
addition, although PRC law currently allows enterprises owned by foreign
investors to remit their profits, dividends and bonuses earned in China to other
countries, and the remittance does not require prior approval by the State
Administration of Foreign Exchange, or SAFE, we cannot assure you such policy
will not change. SAFE regulations require extensive documentation and reporting,
some of which is burdensome and slows payments. If there is a return to payment
restrictions and reporting, it may also adversely affect the ability of our PRC
subsidiaries to distribute their profits to us. Furthermore, if any of our PRC
subsidiaries incurs debt on its own behalf in the future, the instruments
governing the debt may also restrict their ability to pay dividends or make
other payments to us. Any limitation on our subsidiaries’ ability to distribute
dividends to us may adversely affect our ability to pay dividends to our
shareholders.




Any
fluctuations in exchange rates could result in foreign currency exchange
losses.




Our
operating subsidiaries are all located in China and our functional currency is
Renminbi, and we are subject to fluctuations of the exchange rate between the
Renminbi and the U.S. dollar. PBOC sets and publishes daily a base exchange rate
between the Renminbi and the U.S. dollar. Beginning on July 21, 2005, PBOC has
set this rate with reference primarily to the supply and demand of Renminbi
against a basket of currencies in the market during the prior day, taking into
account other factors such as the general conditions existing in the
international foreign exchange markets, as compared to an exchange rate pegged
to the U.S. dollar before such date. As a result, from July 21, 2005 to June 29,
2010, the Renminbi appreciated approximately 18% against the U.S. dollar. Due to the global financial crisis
started in the second half of 2008, PBOC reversed the Renminbi appreciation
course and effectively re-pegged the RMB to the U.S. dollar to stimulate
exports. As a result, the Renminbi appreciated only 17% and 18% in 2009 and as
of June 29, 2010.There is increasing international pressure for the PRC
government to further loosen its control of the foreign exchange rate to allow a
faster appreciation of the Renminbi.




21





Because
our earnings and cash from operations are denominated in Renminbi, fluctuations
in exchange rates between the U.S. dollar and the Renminbi will affect our
balance sheet and earnings per share in U.S. dollars. In addition, appreciation
or depreciation in the value of the Renminbi relative to the U.S. dollar would
affect our financial results reported in U.S. dollar terms without giving effect
to any underlying change in our business or results of operations. Furthermore,
fluctuations in the exchange rate could affect the relative value of any
dividend we issue, which will be exchanged into U.S. dollars, as well as the
value of any U.S. dollar denominated investments we make in the future and any
earnings on such investments. The value in Renminbi in terms of our financing
activities denominated in U.S. dollars will also be adversely affected if
Renminbi continues to appreciate against the U.S. dollar.




Restrictions
on currency exchange may limit our ability to receive and use our revenues or
financing effectively.




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




Recent
PRC regulations relating to offshore investment activities by PRC residents may
increase the administrative burden we face and create regulatory uncertainties
that could restrict our overseas and cross-border investment activity, and a
failure by our shareholders, who are PRC residents to make any required
applications and filings pursuant to such regulations may prevent us from being
able to distribute profits and could expose us and our PRC resident shareholders
to liability under PRC law.




SAFE
promulgated regulations that require registration with local SAFE offices in
connection with direct or indirect offshore investment and cross-border
investment through the special purpose vehicles by PRC residents, including PRC
individual residents and PRC corporate entities. These regulations apply to our
shareholders who are PRC residents and also apply to our prior and future
offshore acquisitions. In particular, the SAFE regulations require PRC residents
to file with competent SAFE offices information about offshore companies in
which they have directly or indirectly invested or through which the
cross-border investment is conducted and to make follow-up filings in connection
with certain material transactions involving such offshore companies, such as
increases or decreases in investment amount, transfers or exchanges of shares,
mergers or divisions, long-term equity or debt investments, external guarantees
or other material events that do not involve return investment.




The SAFE
regulations retroactively require registration by March 31, 2006 of direct or
indirect investments in offshore companies or cross-border investments
previously made by PRC residents in offshore companies. If a PRC resident with a
direct or indirect stake in an offshore parent company or any cross-border
investment fails to make the required SAFE registration, the PRC subsidiaries of
such offshore parent company may be prohibited from making distributions of
profit to the offshore parent and from paying the offshore parent proceeds from
any reduction in capital, share transfer or liquidation in respect of the PRC
subsidiaries. Further, failure to comply with various SAFE registration
requirements described above could result in liability under PRC law for foreign
exchange evasion.




To date,
our major shareholders who are PRC residents, or whose shares are beneficially
owned by PRC residents, have completed the required foreign exchange
registration with the local foreign exchange bureau according to these SAFE
regulations. They are still required to file with competent SAFE offices when
there are material transactions involving us. We are committed to complying and
to ensuring that our shareholders who are subject to these regulations to
continue comply with the relevant rules. However, due to the newness of the
regulations and uncertainty concerning the reconciliation of the new regulations
with other approval requirements, it remains unclear how the regulations, and
any future legislation concerning offshore or cross-border transactions, will be
interpreted, amended and implemented by the relevant government authorities, and
we cannot make assurances that all of our shareholders who are PRC residents
will comply with our requests to make or obtain any applicable registrations or
approvals required by the regulations or other related legislation. The failure
or inability of our PRC resident shareholders to receive any required approvals
or make any required registrations may subject us to fines and legal sanctions,
restrict our overseas or cross-border investment activities, limit our PRC
subsidiaries from making distributions or paying dividends or affect our
ownership structure, as a result of which our business operations and our
ability to distribute dividends to you could be materially and adversely
affected.




22


We
may be treated as a resident enterprise for PRC tax purposes under the New EIT
Law and we may therefore be subject to PRC income tax for any dividends we
receive from our subsidiaries, which may materially and adversely affect the
amount of dividends we must pay to our shareholders.




Under the
New EIT Law and its implementation rules, enterprises established under the law
of non-PRC jurisdictions, but whose “de facto management body” is
located in China, are treated as resident enterprises for PRC tax purposes.
Although the implementation rules stipulate that the “de facto management body”
refers to the organization which substantially manages and controls the
operation, staff, finance, properties and other aspects of the enterprises, it
is currently unclear in which specific situations a non-PRC enterprise’s “de facto management body” is
located in China. All of our management is currently based in China. If we are
treated as a resident enterprise for PRC tax purposes, we will be subject to PRC
tax on our worldwide income at the 25% uniform tax rate, which will include any
dividend income we receive from our subsidiaries. In addition, the New EIT Law
provides that the qualified dividend income between resident enterprises is
exempted income, and the implementation rules stipulates that the “the qualified
dividend income between resident enterprises” refers to the direct investment
between resident enterprises, it is not clear what is considered a qualified
resident enterprise under the New EIT Law. If we are required under the New EIT
Law to pay income tax for any dividends we receive from our subsidiaries, it
will materially and adversely affect the amount of dividends we may pay to our
shareholders.




Dividends
payable by us to our non-PRC shareholders, and gains on the sales of our
ordinary shares, may be subject to withholding taxes under PRC tax laws, which
may materially reduce the value of the investment.




The New
EIT Law and its implementation rules provide that an income tax rate of 10% will
normally be applicable to dividends payable to non-PRC investors which are
derived from sources within China. This provision may apply to our non-PRC
shareholders, if we are deemed as a resident enterprise for tax purposes.
According to a notice issued by the PRC State Council, this 10% income tax
starts to apply to dividends declared from profits generated after January 1,
2008. In addition, under the New EIT Law and its implementation rules, if we are
deemed as a resident enterprise, any gains realized on the transfer of shares by
such investors are also subject to 10% tax, if such gains are regarded as income
derived from sources within China. We are a BVI holding company and
substantially all of our income may come from dividends we receive from our
subsidiaries, primarily those located in China. If we declare dividends from
such income to our shareholders, it is unclear whether such dividends, or the
gain our non-PRC shareholders may realize from the transfer of our ordinary
shares, would be treated as PRC-sourced income and be subject to PRC tax. If we
are required under the New EIT Law to withhold PRC income tax on our dividends
payable to our non-PRC shareholders, or if non-PRC shareholders are required to
pay PRC income tax on the transfer of their ordinary shares, the value of the
investment may be materially and adversely affected.


23




Uncertainties
with respect to the PRC legal system could limit the protection available to
investors and the company.




The PRC
legal system is a civil law system based on written statutes. Unlike in the
common law system, 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. We conduct all of our business through our consolidated
entities established in China. These entities are generally subject to laws and
regulations applicable to foreign investment in China and, in particular, laws
applicable to wholly foreign-owned enterprises. However, since many laws, rules
and regulations are relatively new, and the PRC legal system continues to
rapidly evolve, the interpretations of many laws, regulations and rules are not
always uniform and enforcement of these laws, regulations and rules involves
uncertainties, which may limit legal protection available to us. For example, we
may have to resort to administrative and court proceedings to enforce the legal
protection that we enjoy either by law or contract. However, since PRC
administrative and court authorities have significant discretion in interpreting
and implementing statutory and contractual terms, it may be more difficult to
predict the outcome of Chinese administrative and court proceedings as well as
assess the level of legal protection we enjoy in China versus in more developed
legal systems. These uncertainties may impede our ability to enforce the
contracts we have entered into with our business partners, clients and
suppliers. In general, these uncertainties, including the inability to enforce
our contracts, could materially and adversely affect our business and
operations. Furthermore, intellectual property rights and confidentiality
protections in China may not be as effective as in the United States or other
countries. Accordingly, we cannot predict the effect of future developments in
the PRC’s legal system, particularly with regard to China’s IT industry and
banking industry, including the promulgation of new laws, changes to existing
laws or the interpretation or enforcement thereof, or the preemption of local
regulations by national laws. These uncertainties could limit the legal
protections available to us and other foreign investors. In addition, any
litigation in China may be protracted and result in substantial costs and
diversion of our resources and management attention.




There
may be difficulties in effecting service of legal process, enforcing foreign
judgments or bringing original actions in China based on United States judgments
against us, our subsidiaries, our officers and directors and experts named in
this annual report.




We are
incorporated in the British Virgin Islands and our operating subsidiaries are
formed under PRC law. Substantially all of our assets are located in China. In
addition, our directors and executive officers reside within China, and
substantially all of the assets of these persons are located within China. It
may not be possible to effect service of process within the United States or
elsewhere outside China upon our directors, executive officers or experts named
in this annual report, including effecting service of process with respect to
matters arising under United States federal securities laws or applicable state
securities laws. China does not have treaties providing for the reciprocal
recognition and enforcement of judgments of courts with the United States and
many other countries. As a result, recognition and enforcement in China of
judgments of a court in the United States and many other jurisdictions in
relation to any matter, including securities laws, may be difficult or
impossible. Furthermore, an original action may be brought in China against our
assets and our subsidiaries, our directors and executive officers and experts
named in this annual report only if the actions are required to be arbitrated by
PRC law and only if the facts alleged in the complaint give rise to a cause of
action under PRC law. In connection with any such original action, a PRC court
may award civil liability, including monetary damages.




RISKS
RELATING TO OUR SHARES




Future
sales of shares, or the perceived sale of additional shares, may lead to a
decline in the market price of our shares.




We issued
5,328,320 ordinary shares as part of the initial purchase price for the
acquisitions of Sihitech BVI and e-Channels BVI. As of March 31, 2009, all of
such shares are tradable subject to restrictions under Rule 144 and insider
trading rules.




As a
significant portion of our shares are held by a small number of shareholders,
historically trading volume of our shares has been relatively low. We cannot
predict the effect, if any, market sales of securities held by our significant
shareholders or any other shareholders or the availability of these securities
for future sale will have on the market price of our ordinary
shares.




Furthermore,
we may need to do additional financing in the future in the form of our ordinary
shares or securities convertible into, or exchangeable for, our ordinary shares,
which will further dilute the shareholding of shareholders and may result in
decline of our share price.


24




If
certain financial or financing objectives are achieved, selling shareholders in
the three-party acquisition will be entitled to receive shares of our stock
which would result in dilution and might have an adverse effect on the market
price of our ordinary shares.




Selling
shareholders in the three-party acquisition have the right to earn up to 952,832
shares per year from 2007 to 2010 based on net profit targets. See “Item 4.
Information on the Company — A. History and development of the Company —
Corporate history”. We are required to issue 952,832 shares to these selling
shareholders in the three-party acquisition based on our fiscal results, which
were met in 2007 and 2008. The Company failed to meet the
pre-determined financial objectives in 2009 and as a result, no shares are to be
issued to selling shareholders for 2009.There is no obligation to
register these shares after issuance. However, after being held for the
appropriate periods, these shares will be eligible for resale under Rule 144 of
the Securities Act. If the additional shares are earned, they will significantly
increase the number of our shares outstanding, and result in dilution to our
existing shareholders. The issuance of these additional shares may cause a
decrease in the trading price of our shares in the public market.




A
large portion or our shares are owned by two of our directors and executive
officers. These shareholders will have a significant influence over our
corporate transactions and other matters that require shareholder
approval.




Our
executive officers and directors, including Messrs. Weidong Hong, Chairman and
Chief Executive Officer and director and Shuo Zeng, Chief Operating Officer and
director, in aggregate control the vote of about 17.1% of our issued and
outstanding ordinary shares, assuming they do not sell any of their shares and
our total number of issued and outstanding shares does not change. These two
major shareholders maintain a significant influence over the outcome of
corporate transactions or other matters submitted to our shareholders for
approval, including the election of directors and the approval of other business
transactions.




The
interest of these shareholders may not be the same as the interest of our other
shareholders. This concentration of ownership could have the effect of delaying
or preventing a change in our control or discouraging a potential acquirer from
attempting to obtain control of us, which in turn could have a material adverse
effect on the market price of our shares or prevent shareholders from realizing
a premium over the market price for their shares. In addition, if our major
shareholders chose to dispose of a material portion of the ordinary shares they
hold, the prevailing market price of our shares may decline.




Certain
provisions in our organizational documents may discourage our acquisition by a
third party, which could limit your opportunity to sell your shares at a
premium.




Our
Memorandum and Articles of Association include provisions that could limit the
ability of others to acquire control of us. Under those provisions, our board
has the power to issue preferred shares with such rights attaching to them as
they decide and that this power could be used in a manner that would delay,
defer or prevent a change of control of our company. These provisions could have
the effect of depriving shareholders of an opportunity to sell their shares at a
premium over prevailing market prices by discouraging third parties from seeking
to acquire control of us in a tender offer or similar transactions.




The
market price for our shares may be volatile.




Our share
price has been highly volatile and is expected to remain highly volatile in the
future. Many factors affect the market price for our shares, including the
following:




·
            actual
      or anticipated fluctuations in our quarterly results of
      operations;





·
            changes
      in financial estimates by securities research
  analysts;





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





·
            the
      addition or departure of key
personnel;


25





·
            the
      addition or loss of key clients;





·
            fluctuations
      of exchange rates between the Renminbi and the U.S.
  dollar;





·
            intellectual
      property litigation;





·
            the
      release from or expiration of lock-up or other transfer restrictions on
      our outstanding ordinary shares or sales of additional shares;
      and





·
            general
      economic or political conditions in China and the United
      States.




In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our shares.




Although
publicly traded, the trading market in our ordinary shares has been
substantially less liquid than the average trading market for a stock quoted on
NASDAQ and this low average trading market in our ordinary shares may adversely
affect the price of our ordinary shares.




Although
our ordinary shares are traded on NASDAQ under the symbol “YTEC”, the trading
market in our ordinary shares has been substantially less liquid than the
average trading market for companies quoted on NASDAQ. Reported average daily
trading volume in our ordinary shares for the three-month period ended March 31,
2010 was approximately 676,000 shares. Excluding the extreme high volume during
the week following our fourth quarter earning announcement in January 2010, the
average daily trading volume would have been 372,547 shares. Limited trading
volume will subject our shares to greater price volatility and may make it
difficult to sell our shares at an attractive price.




As
a foreign private issuer with ordinary shares listed on NASDAQ, we may follow
certain home country corporate governance practices instead of certain NASDAQ
requirements.




As a
foreign private issuer whose ordinary shares are listed on the NASDAQ Global
Market, we are permitted to follow certain home country corporate governance
practices instead of certain NASDAQ requirements. A foreign private issuer that
elects to follow its home country practice must submit to NASDAQ a written
statement from an independent counsel in such issuer’s home country certifying
that the issuer’s practices are not prohibited by the home country’s laws. In
addition, a foreign private issuer must disclose in its annual reports filed
with the SEC each NASDAQ requirement with which it does not comply followed by a
description of its applicable home country practice. As a company incorporated
in the British Virgin Islands and listed on the NASDAQ Global Market, we expect
to follow our home country practice with respect to, among other things, the
composition of our board, director nomination procedures, the compensation of
officers, annual meetings, the distribution of annual reports to shareholders
and quorum requirements at shareholders’ meetings. In addition, we expect to
follow BVI law instead of NASDAQ requirements that mandate that we obtain
shareholder approval for certain dilutive events, such as the establishment or
amendment of certain equity-based compensation plans, an issuance that will
result in a change of control, certain transactions other than a public offering
involving issuances of 20% or greater interests in the Company and certain
acquisitions of the stock or assets of another company.




In
addition, we are obligated to file an annual report on Form 20-F with audited
financial statements and a report on Form 6-K at such times as we release
information to the public either voluntarily or pursuant to the BVI laws.
Therefore, our frequency of filing financial and other information may be less
than that of a domestic United States registered company under the rules and
regulations of the SEC. Investors may not receive information on a timely basis,
therefore increasing their risk of investment.


26





We
are a BVI company and, because judicial precedent regarding the rights of
shareholders is more limited under BVI law, shareholders may have less
protection for their shareholder rights than they would under U.S.
law.




Our
corporate affairs are governed by our Memorandum and Articles of Association,
the BVI Business Companies Act, 2004 and the common law of the BVI. The rights
of shareholders to take action against the directors, actions by minority
shareholders and the fiduciary responsibilities of our directors to us under BVI
law are to a large extent governed by the common law of the BVI. The common law
of the BVI is derived in part from comparatively limited judicial precedent in
the BVI as well as from English common law, the decisions of whose courts are of
persuasive authority, but are not binding on a court in the BVI. The rights of
our shareholders and the fiduciary responsibilities of our directors under BVI
law are not necessarily as clearly established as they would be under statutes
or judicial precedent in some jurisdictions in the United States. In particular,
the BVI 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. In addition, BVI companies may
not have standing to initiate a shareholder derivative action in a federal court
of the United States. As a result of all of the above, public shareholders may
have more difficulty in protecting their interests in the face of actions taken
by management, members of our board or controlling shareholders than they would
as public shareholders of a company incorporated in a U.S.
jurisdiction.




ITEM
4.          INFORMATION ON THE
COMPANY




A.  
History and development of the Company.





CORPORATE
INFORMATION




Our legal
name is Yucheng Technologies Limited, which was incorporated in the BVI on
November 17, 2005. Our principal executive offices are located at Beijing Global
Trade Center, Tower D , Floor 9, 36 North Third Ring Road East, Dongcheng
District, Beijing 100013, P.R. China, and our telephone number is +86 10 5913
7998. Our registered office in the BVI is at P.O. Box 957, Offshore
Incorporations Centre, Road Town, Tortola. We maintain an Internet website at
www.yuchengtech.com. Our agent for service of process in the United States is
National Corporate Research at 10 E. 40th Street, 10th Floor, New York, New York
10016.




CORPORATE
HISTORY




Yucheng
Technologies was founded on November 24, 2006 via a three-party acquisition
among China Unistone, Sihitech BVI and e-Channels BVI. Pursuant to the
acquisition agreement and its amendment, in addition to the initial purchase
considerations, the selling shareholders of Sihitech BVI and e-Channels BVI are
entitled to additional cash and equity purchase consideration upon satisfaction
of certain conditions. With respect to additional cash consideration, they are
entitled to:




(1)
            USD4,960,000,
      if we receive an aggregate of USD34,250,000 in gross proceeds from an
      additional financing, including, but not limited to, (a) exercise of our
      warrants, (b) our successful completion of a secondary offering, or (c)
      the private investment into us by a strategic
  investor;





(2)
            USD1,000,000,
      if the average closing price of our stock in any 60 consecutive trading
      days of the year, or the Average Share Price, is above USD10.00 in
      2006;





(3)
            USD2,000,000,
      if the Average Share Price is above USD12.00 in any 60 consecutive trading
      days of 2007; and





(4)
            USD3,000,000,
      if the Average Share Price is above USD14.4 in any 60 consecutive trading
      days of 2008;




provided,
however, that in the event that all of the above events occur, the maximum
aggregate amount to be paid by us to the selling shareholders will be no more
than USD10,000,000. As of March 31, 2009, the hurdle criteria for conditions
(1), (3) and (4) have been met. We paid USD4,960,000 to the selling shareholders
in 2007, with respect to condition (1). With respect to condition (3), we have
paid USD2,000,000 to the selling shareholders. With respect to condition (4) we
have paid USD3,000,000 to the selling shareholders.


27




With
respect to additional equity consideration, the selling shareholders are
entitled to receive 952,832 shares each year for four years starting from 2008,
if we achieve a net profit of the following amounts according to the financial
statements audited in accordance with US GAAP, where net profit shall be
determined for this purpose only, as net profit (determined on the basis of US
GAAP) before the amortization expenses related to the acquisition of
e-Channels:




Year Ending December 31,
                  
                  Net Profit2007
                  
                  USD8.5
      million2008
                  
                  USD11.9
      million2009
                  
                  USD16.7
      million2010
                  
                  USD23.3
      million




As of
March 31, 2009, the net profit target for the years ended December 31, 2007 and
December 31, 2008 were met. Accordingly, we are required to issue and we have
issued 952,832 shares to the selling shareholders for each year. The Company failed to meet the
pre-determined financial objectives in 2009 and as a result, no shares are to be
issued to selling shareholders for 2009.




In 2007,
we made four acquisitions which became wholly-owned subsidiaries: Sunrisk,
Recency, Fuyi and Fujie. All acquisition related payments for Sunrisk and
Recency have been paid. For Fuyi and Fujie of the total possible RMB20.7 million
consideration, RMB17.1 million has been paid and RMB3.5 million has been
accrued, with the variance due to operating results. Subsequently, we sold a 49%
interest in Sunrisk. The minority shareholders are Gu’an Qihang, a private
Chinese company, and 3 individual investors.





In May
2007, we acquired a 75% interest of Easycon, a provider of IT solutions and
service to SMBs in China. In January 2008, we acquired the remaining 25%
interest and Easycon is now a wholly-owned subsidiary. All payments have been
made in relation to the 2007 consideration. An aggregate consideration of RMB7.2
million was negotiated with the minority shareholders of Easycon. RMB6.0 million
was paid on February 2, 2008, RMB1.2 million was paid on April 1,
2008.





In August
2008, we established a joint venture Elegon Infotech, a joint venture with 3i
Infotech of India. In 2008, we made cash advances to Elegon approximately RMB1.8
million, and collected from Elegon approximately RMB1.8 million. In June, 2009
we transferred our interests of 49% in Chengdu Elegon Infotech Limited
(“Elegon”) to 3i Infotech Limited for a cash consideration of RMB8.4
million.





In March,
2009, we established a joint-venture, Hainan Baodaotong Technologies Limited
(“Baodaotong”) in Haikou city. Total registered capital is RMB50 million. Haikou
Gas Holding Company, Yucheng and Guangzhou Tech holds 45%, 35% and 20% of
Baodaotong’s equity interests, respectively. In December, 2009, Yucheng
transferred 20% of Baodaotong’s equity interest to a third party for cash
consideration of RMB2.5 million. In May, 2010, Yucheng transferred the remaining
15% of Baodaotong’s equity interest to a third party for a total consideration
of RMB7.2 million.





In April
2009 we established a joint venture Sihitech Huazhi Consulting Service, a joint
venture with SmartSoft. Total registered capital is RMB1.0 million .We hold a
40% interest in the company.





In March,
2010, we established a joint-venture, Yuxin Data Technologies Co., Ltd (“Yuxin
Data”) in Tianjin with NTT Data Group. We hold 49% of equity interests in the
company.





B.  
Business overview.




OVERVIEW
OF OUR BUSINESS




We are a
leading provider of information technology, or IT, software, solutions and
services to China’s banking sector. Our Software & Solutions business
enables our clients to establish and maintain IT platforms to better manage
their operations and serve their customers’ needs. We develop and deliver an
extensive suite of technology via our Software & Solutions business, which
we believe are best in class in the Chinese market, and are tailored toward
specific functional needs of our clients. Software & Solutions provides
critical functionality required in China’s banking industry, including Channel
Solutions, Management Solutions and Business Solutions. For a more detailed
description, see “Item 4. INFORMATION ON THE COMPANY – B. Business overview. –
Our solutions and services – Software & Solutions.”


28




We
generally provide our Software & Solutions to our clients on a
project-by-project basis, whereby our clients agree to enter into one or several
fixed-price, all-inclusive contracts, as opposed to purchasing separate
individual service components from us on a time-and-materials or per-segment
basis.




In
addition to Software & Solutions, we also provide Platform & Maintenance
Services to our clients, which involves selecting, procuring and reselling
third-party hardware equipment and software applications to our clients. This
also involves monitoring and assisting in the installation of such equipment and
software at clients’ sites, as well as assisting in the integration of the
installed equipment with clients’ existing IT systems. We typically only provide
Platform & Maintenance Services as part of a larger client engagement that
includes Software & Solutions, or if we anticipate that the Platform &
Maintenance Services component will lead to future Software & Solutions
revenue from the same client.




Beginning
in early 2007, we launched our POS merchant acquiring business, which includes
deploying Point-of-Sale terminals, or POS terminals, to merchants and processing
credit and debit card payments through these POS terminals in collaboration with
banks. Our POS business enables banks to increase their number of installed
terminals in a more rapid and efficient manner, and creates a new, recurring
revenue stream for us under the revenue sharing arrangements in which we enter
into with our collaborating banks.




Since
becoming a public company in November 2006, we have grown both organically and
through acquisition of other IT solutions and service providers in China’s
banking industry. In total, we have acquired five companies:




·
            a
      100% interest of Sunrisk, a provider of risk management solutions and
      services to China’s banks; subsequently in April 2008, we sold a 49%
      interest in Sunrisk to
third-parties.





·
            a
      100% interest of Easycon, a provider of IT solutions and service to SMBs
      in China;





·
            a
      100% interest of Recency, a provider of business intelligence solutions
      and consulting services to China’s banks;
and





·
            a
      100% interest of both Fujie and Fuyi, two related companies focused on ERP
      management consulting and project
  implementation.


These
acquisitions have enabled us to offer a broader range of solutions and services,
provided us with access to a broader client base, and helped us to strengthen
our management team and employee base.





In
January 2007, we established Yuxinyicheng Information and Yuxinyicheng Software,
through which we conduct our POS Merchant Acquiring Services. Yucheng maintained
an 80% controlling interest in Yuxinyicheng Information and an individual
investor controlled a 20% minority interest. As of January 2009, we acquired the
minority interest and Yuxinyicheng Information is currently a wholly-owned
subsidiary.





In 2008,
we started to provide E-Banking ASP services to small banks in China to
capitalize the opportunities presented by those banks who wish to jointly
operate their E-Banking services with a third party partner.





In August
2008, we invested in Elegon Infotech, Ltd., a joint venture with 3i Infotech of
India, to localize 3i Infotech’s relevant products into the insurance sector in
China. We hold a 49% interest in the company until June 2009 when we sold all of
our equity stake in Elegon Infotech, Ltd .to 3i Infotech,Ltd..





In March
2009, we established a joint-venture, Hainan Baodaotong Technologies Limited
(“Baodaotong”) in Haikou city with a third party.  Baodaotong is
focused on card issuance business for  public transportation in Hainan
Province.  As of December 31, 2009, we hold 15% of equity interests in
the company. In May, 2010, Yucheng transferred the remaining 15% of Baodaotong’s
equity interest to a third party.




29




In April
2009 we established a joint venture Sihitech Huazhi Consulting Service, a joint
venture with SmartSoft, to provide high end IT consulting services for banks in
China. We hold a 40% interest in the company.





In March,
2010, we established a joint-venture, Yuxin Data Technologies Limited (“Yuxin
Data”) in Tianjin with NTT Data Group, to run our E-Banking ASP businesses. We
hold 49% of equity interests in the company.





We
conduct our business through various subsidiaries in the PRC. Together with our
head offices in Beijing, we have subsidiaries or branch offices in 24 other
cities. As of December 31, 2009, we had 2,208 employees.




OUR
INDUSTRY




According
to IDC, the market for banking industry IT solution spending in China is
expected to grow from RMB6.6 billion (USD1.0 billion) in 2009 to RMB13.5billion
(USD2.0 billion) in 2013, representing a CAGR of 19.4%. This rapid growth in IT
solution spending is driven primarily by the development in China’s economy and
the ongoing regulatory reform catalyzed by China’s accession into the WTO, and
the resulting increase in competition in China’s banking industry. To meet
increasingly complex customer demands and to stay competitive in the market
place, China’s banks are increasingly relying on IT systems for the management
of their operations, such as processing transactions, analyzing operational data
and managing risks, thereby creating growth opportunities for IT service
providers such as us.





The
following table sets forth China’s banking industry IT solution spending by
solution type from 2006 to 2013.










Source: IDC, July
2009





China’s
banking and financial institutions and their IT needs




China’s
banking industry continues to be the primary provider of capital to China’s
economy and bank deposits remain the primary choice for domestic savings.
According to IDC, there are currently less than 9,000 banking institutions
operating in China today. This number is expected to continue to decline as the
Chinese Banking Regulatory Commission (CBRC), continues to emphasis industry
consolidation to increase the efficiency of banks and the integrity of the
Chinese banking system. Most of banking institutions in China are either wholly
state-owned or state-controlled, directly or through state-owned enterprises. In
recent years, there have been a growing number of privately-owned as well as
foreign-owned banks, although they are still relatively small in number to date.
In addition, to promote competition the CBRC lessened regional restrictions,
thereby allowing more banks, especially joint-stock and SMBs, to expand
nationally.


30




China’s
banking industry can be classified into four groups, including:




·
            Tier 1 - State-controlled
      commercial banks. Commonly known as the “Big Four,” this group is
      comprised of the Industrial and Commercial Bank of China, Bank of China,
      China Construction Bank and the Agricultural Bank of China. These four
      banks are the largest among China’s domestic banks in terms of assets,
      deposit base, loan portfolio and nationwide branch network. According to
      CBRC 2008 Annual Report, the Big Four together account for 46.7% of bank
      assets in China. In recent years, three members of the Big Four, i.e., the
      Industrial and Commercial Bank of China, Bank of China and China
      Construction Bank, have completed an initial public offering and listing
      of their shares on the Hong Kong Stock Exchange. Agricultural Bank of
      China is also expected to list its shares on both Hong Kong Stock Exchange
      and Shanghai Stock Exchange in 2010. Although the Big Four have
      substantial in-house IT capabilities, we believe that, given their status
      as overseas listed companies on foreign exchanges and their needs to
      achieve global best practices; they will continually need to use
      third-party IT solution and service providers to various
      degrees.





·
            Tier 2 – National commercial
      banks. More commonly referred to as “Joint-Stock” banks, this group
      comprises of 13 other national commercial banks, which are owned by a
      combination of government entities, state-owned enterprises and other
      investors. Many members of this group, such as Bank of Communications,
      China Merchants Bank, China Minsheng Banking Corporation, Huaxia Bank,
      Shanghai Pudong Development Bank and Shenzhen Development Bank, are listed
      domestically and/or in Hong Kong. Joint-Stock banks generally have the
      financial resources necessary to maintain sufficient in-house IT
      capabilities to meet their needs. However, we believe that they are in
      substantial need of third-party expertise to enable them to sustain the
      growth rates that they have achieved in recent
  years.





·
            Tier 3 – Small and
      Medium-sized Banks (SMBs). According to IDC, in 2008 this group
      comprised 158 city commercial banks, 32 foreign banks, and over 5,242
      cooperatives (including rural commercial banks and rural cooperative
      banks). We believe that most of the SMBs lack both the financial resources
      and in-house IT expertise needed to either scale up operations or to meet
      increasingly stringent regulatory requirements. As such, we believe they
      are most likely to allocate a majority of their IT spending to third-party
      providers such as us. Although foreign banks possess the financial
      resources, they are not familiar with local market practices and the
      regulatory requirements and often require the assistance of China’s
      domestic IT service providers.





·
            Central bank and policy
      banks. The People’s Bank of China, or PBOC, is PRC’s central bank,
      which formulates China’s monetary policies and implements, such policies
      through a number of means, such as setting deposit reserves, interest
      rates and foreign exchange rates. In addition, there are three policy
      banks in China: the Agricultural Development Bank of China, China
      Development Bank and the Export-Import Bank of China. These policy banks
      were established in the mid-1990s as a result of banking reforms to assume
      the government driven policy lending functions from the Big Four. China
      Development Bank is in the process of transforming from a policy bank to a
      national commercial bank.




In
addition to banks, there are numerous non-banking financial institutions in
China, including insurance companies, securities brokerages, investment
companies, asset management companies, trust companies, finance companies and
investment banks. This industry segment is still in the early stages of
development in China. As this industry segment matures, we expect it to undergo
significant consolidation. The IT systems and applications used in these
non-banking financial institutions have similarities to those used in banking
institutions. We believe as these financial institutions become larger, they
will need more complex and sophisticated IT solutions to manage their business
and service their customers. Non-banking financial institutions present
potential business opportunities for IT service providers, such as Yucheng. As
we are a leader to provide IT services  for banks and our systems,
such as call centers and e-transactions software, are readily adaptable to new
applications.




Furthermore,
we believe that in order to continue to access new channels for growth, banks
may use their strong government support and access to capital to expand into new
financial services adjacent to the banking sector, such as insurance, asset
management, securities brokerage and investment banking, if such diversification
becomes allowed under PRC laws and regulations. We believe such expansion and
the need to integrate these new businesses with their existing banking
businesses will require banks to place an even greater emphasis on IT
capabilities in order to increase efficiency. As their IT needs become
increasingly complex, their use of third-party IT services will continue to
increase, in particular from those providers with experience in both the banking
industry and the non-banking financial services industry.




31




Driving
forces of IT spending at China’s banking institutions




China’s
growing economy and the ongoing regulatory reforms are two major driving forces
of change for China’s banking industry. China has experienced rapid economic
growth over the past three decades, largely as a result of the PRC government’s
extensive economic reforms. China’s gross domestic product, or GDP, as measured
by the National Bureau of Statistics of China, has grown in nominal terms at a
CAGR of 16.0%from 2005 to 2009, the latest year available. China’s economic
growth, combined with increasing fixed capital formation, high household savings
rates, and a closed capital account, have driven the growth of China’s banks in
the past decade. Such a rapidly developing economy places heavy demands on the
efficiency and integrity of the country’s banking system. In recent years,
China’s banking system has undergone significant changes and evolved to become
an increasingly market-driven system.




In
addition, China’s entry into the WTO in December 2001 and its accession
commitments have served as a catalyst for regulatory reforms in China’s banking
sector. In addition to PBOC, the most important government entity overseeing
China’s banks is the Chinese Banking Regulatory Commission (CBRC). The CBRC was
formed in April 2003 to assume the principal bank regulatory functions from PBOC
as a response to the WTO entry requirements and the need to improve banking
regulations. Since its establishment, the CBRC has pushed for improved
disclosure, management accountability, more prudent regulatory standards and
more efficient operations. It has played a key role in carving out bad debt,
recapitalizing leading banks, regulating bank operations and driving reform
throughout the banking system. The CBRC’s actions have led to significant
improvements in corporate governance, risk management, internal controls and
financial and operational transparency of China’s banks. While China’s banking
industry is still evolving from a level well below the Organization for Economic
Co-operation and Development’s (OECD) standards, supervision and regulation of
China’s banks has improved dramatically in recent years, and is expected to
continue to improve.




As
required by the WTO accession agreement, China has gradually phased out
limitations on foreign financial institutions. Foreign banks are now able to
accept Renminbi denominated deposits, which previously was a significant
advantage for domestic banks. In addition, the limitations on geographic network
expansion are being reduced, which is promoting greater competition amongst
domestic banks and greater access for foreign banks. We believe that the
liberalization of the banking and financial services industry in China will
force domestic banks and other financial institutions to improve their
operations, increase the breadth of their product offerings and enhance their
quality of services so that they can more effectively compete with increasingly
prevalent international competitors.




As such,
we expect China’s banking institutions to more aggressively seek technology and
outsourced solutions to resolve inefficiencies and lower costs, so that they can
compete more effectively in the marketplace. According to CBRC Report , as of
the end of 2009, China’s domestic banks total assets were estimated to be
RMB78.8 trillion (USD11.5 trillion), which represents a year over year increase
of 26.3%. The
tremendous growth in assets is increasing the need for efficient technology. We
believe that, as part of a broad-based effort to accelerate compliance with
requirements of the WTO and Basel II (the international standards for better
risk management for banks), China’s domestic banks will increasingly benchmark
themselves to their foreign counterparts, and seek to achieve operational
efficiencies through long-term increases in IT spending.


These
developments in China’s banking industry indicate strong demand for IT
capabilities, a significant portion of which we expect will be outsourced to
third-party IT solution and service providers. In addition, due to their limited
business scale and resources as compared to large Big Four and Joint-Stock
banks, we believe that SMBs will rely even more heavily on third-party service
providers to meet their increasingly complex IT needs. We believe that all of
these developments present significant growth opportunities for IT service
providers in China.




32




Requirements
to be a successful third-party IT service provider for China’s banking
institutions




As the
market for our services continues to evolve, the needs of our clients continue
to become increasingly sophisticated. Based on our experience, we believe the
following criteria are increasingly relevant to our existing and new clients
when selecting a third-party IT provider:




·
            extensive
      experience in providing the specific services
  required;





·
            ability
      to proactively identify and address additional issues that may be
      encountered with a given client’s IT operations for a project initially
      undertaken for different
objectives;





·
            ability
      to complete the overall project and interim project milestones on timely
      basis;





·
            ability
      to deliver solutions and services on budget for each
    project;





·
            best-in-class
      solutions which can be implemented quickly and cost effectively and which
      leverage prior solution development
experience;





·
            flexible
      project staffing and resource allocation that best meets the project’s
      scope, scale and length; and





·
            client
      access to the deepest and most valuable technical and industry-specific
      expertise, such as highly experienced senior staff
  members.





We
believe that as our clients’ needs become increasingly complex, so will the
requirements for success in our industry. Our ability to remain competitive will
depend, in part, on ongoing investments in our technological capabilities and
our human resources, which we believe differentiate us from our competitors. We
also expect our industry to continue to undergo rapid consolidation. China’s
domestic banks increasingly seek vendors with comprehensive service offerings
and the scale necessary to provide solutions and services seamlessly to numerous
client locations across China. In order to succeed, we may need to continue to
seek attractive acquisition candidates to compliment our existing core
strengths.




OUR
SOLUTIONS AND SERVICES




We
provide a broad range of solutions and services to meet China’s banking
institutions IT needs. Based on the nature of our solutions and services, we
categorize them as Software & Solutions, Platform & Maintenance Services
or POS. This is a new categorization system that we are implementing beginning
in our 2008 annual report and it will be the basis for our future reporting.
Software & Solutions includes the development and sale of our software
solutions, IT consulting and implementation and customized software development.
Platform & Maintenance Services relates to the procurement, re-sale,
installation, integration and maintenance of third-party hardware and software.
Started in 2008, we officially classified our POS merchant acquiring business as
its own category.




Software
& Solutions




We
primarily provide Software & Solutions to our banking clients via customized
software, standard software, customized solution development, and consulting
services; however, we believe that conceptually it is more relevant to discuss
the end result of our business. Therefore, we classify our Software &
Solutions into the following sub-categories:





·
            Business Solutions. Our
      Business Solutions include a wide range of transaction-related solutions,
      such as core-banking, foreign exchange and loan management. We provide our
      core banking solutions, which manage all operations relevant to deposit
      and loan accounts, principally to SMBs, as they usually lack the internal
      IT capabilities needed to develop and maintain their own systems. In 2007,
      2008 and 2009, our revenues from Business Solutions were RMB45.5 million,
      RMB72.3million and RMB78.9 million (USD 11.6 million), respectively,
      representing a CAGR of 31.7%, and accounted for 23.7%, 27.4% and 28.0% of
      our Software & Solutions revenues,
  respectively.




33




·
            Channel Solutions.
      Channel Solutions are designed to facilitate banks’ interactions with
      their customers, to improve communication and transaction efficiency and
      to enhance the overall customer banking experience. Channel Solutions
      include: customized online banking solutions, our E-Banking ASP, mobile
      banking, and call center solutions, which allow our clients to serve their
      customers in a more timely and cost effective manner. Our solutions
      automate our clients’ operations and allow them to better track
      performance of different interaction methods. According to a July 2009
      report issued by IDC, a third-party research organization, we ranked first
      among all of the banking IT solution providers in China for Channel
      Solutions as measured by 2008 revenues. In 2007, 2008 and 2009, our
      revenues from Channel Solutions were RMB49.4 million, RMB97.7 million and
      RMB131.7 million(USD19.3 million), respectively, representing a CAGR of
      63.3%, and accounted for 25.7%, 37.0% and 46.7% of our Software &
      Solutions revenues, respectively.





·
            Management Solutions.
      Management Solutions help banks to collect and analyze data, so that they
      can monitor and manage risks and performance in a timely manner, as well
      as business intelligence. These solutions support intelligent data
      analysis to enhance management reporting and sound decision making. We
      provide a suite of consulting and implementation services in risk and
      performance management, such as asset and liability management, funds
      transfer pricing and profitability analysis. In 2007, 2008 and 2009, our
      revenues from Management Solutions were RMB97.5 million, RMB93.9 million
      and RMB71.3 million (USD 10.4 million), accounted for 50.7%, 35.6% and
      25.3%of our Software & Solutions revenues,
    respectively.




We
develop customized, function-specific applications according to our clients’
needs and integrate these applications into our clients’ existing IT systems.
Increasingly, we are leveraging our customized development work, so that we can
use the same core technology in customized projects for other clients and
extract economies of scale from our own business. We believe that providing
“repeatable” solutions will become increasingly important as we target new
segments of the market, such as SMBs, which have limited budgets for
large-scale, highly customized IT work.




Platform
& Maintenance Services





We
primarily provide Platform & Maintenance Services in conjunction with our
Software & Solutions business. Platform & Maintenance Services, although
not a primary focus or growth area for us, is necessary as it assure that our
clients IT investments function correctly and smoothly in relation to their IT
infrastructure. We classify our Platform & Maintenance Services into the
following sub-categories:




·
            Platform Services.Platform Services is comprised in large part of our former System
      Integration business. As a total solutions provider, our Platform Services
      assists our clients with the selection of appropriate third-party hardware
      or software, manufacturer negotiations (proposals, bids and pricing terms)
      and, as required, installation support and testing of the third-party
      hardware and software. We can also integrate the new equipment and
      software with our clients’ existing IT architecture. In 2007, 2008 and
      2009, our revenues from platform services were RMB204.9 million, RMB339.7
      million and RMB12.5 million (USD1.8 million), accounted for 47.0%, 50.2%
      and 3.3% of our total revenues,
respectively.





·
            Maintenance & Ancillary
      Services. Comprised mainly of our former IT Services business, this
      category focuses on the maintenance and support services that we provide
      after a project is completed. In addition, we perform limited agency
      services where we procure third-party IT equipment for other system
      integrators and charge a commission. We record these revenues as
      Maintenance & Ancillary Services. In 2007, 2008 and 2009, our
      maintenance and ancillary services revenue amounted to RMB34.6 million,
      RMB58.7 million and RMB60.1 million (USD 8.8 million), respectively,
      representing a CAGR of 31.8%, and accounted for 7.9%, 8.7% and 15.8% of
      our total revenues,
respectively.


34




POS
Merchant Acquiring Services




Beginning
in early 2007, we initiated our POS business, to leverage the growing use of
credit and debit cards in China. Our POS business allows us to capitalize on new
business opportunities presented by shifting consumer payment trends in China,
while creating diverse and reoccurring revenue streams. POS also allows our bank
clients to focus on their core competencies, while outsourcing non-core
functions to third-party providers, such as Yucheng.




Our
business model for POS involves executing a multi-year contract with banks to
deploy POS terminals with new merchants. The contracts are typically renewed on
an annual basis, unless terminated by either the bank or the merchant. Under
these agreements, subscribing merchants typically do not pay a direct fee for
our services. Instead, Yucheng is entitled to a portion of the acquiring bank’s
revenues from each transaction fee generated on a POS terminal that we deployed.
The POS terminals we deploy are able to accept both domestic and foreign, credit
cards and debit cards.





We as a
third-party services provider we typically:





·
            bear
      the up-front sales and marketing
costs;





·
            supply
      and install the POS terminals;





·
            install
      software to connect the POS terminals with the bank’s payment processing
      network;





·
            provide
      the training and ongoing
maintenance;





·
            supply
      consumables; and





·
            other
      merchant support services.





We
initiated our POS business through Yuxinyicheng Information and Yuxinyicheng
Software , in collaboration with China Merchants Bank, in early 2007 to deploy
POS terminals nationwide, which according to its data, is currently the largest
credit card issuer in China. In February 2008 we won an award from China
Merchants Bank (“CMSB”) as its top provider of POS merchant acquiring services
for 2007. In 2008, we expanded our bank network to include the Guangdong branch
of China Construction Bank, the Beijing branch of Bank of Communications, the
Beijing branch of Bank of China, the Beijing branch of China Citic Bank and the
Nanning branch of China Everbright Bank. In 2009, we expanded our bank network
to include the Shenyang branch, Guanghzou branch,Wuhan branch, Shijiazhuang
branch,Chongqing branch, Heilongjiang branch and Jinan branch of China
Everbright Bank, the headoffice and Zhengzhou branch of China Citic Bank, the
Shenzhen branch of Bank of Communications, the Changsha branch of CIB, the Xi’an
branch of CMSB, the Nanjing branch of Bank of Shanghai and the Zhengzhou branch
of SPTD. As of December 31, 2009, we had deployed 23,269 POS
terminals.




Nature
of our client engagements




Our
objective is to maximize our share of IT spending with new and existing clients
by developing an initial service relationship and then cross-selling additional
services. Large, multi-year projects are usually separated into different
phases; each phase is covered by a separate contract. For our Software &
Solutions and our Platform Services, we typically enter into one contract with
our clients for each project or phase that we undertake. Our Software &
Solutions contracts typically last between two and twelve months (averaging six
to seven months) and our contracts for Platform & Maintenance Services are
generally shorter.


35





Each
project typically involves multiple service components to fulfill the project or
particular project phase’s requirements. We typically price our Software &
Solutions relating to a project or a project phase based on an all-inclusive,
fixed-price basis, rather than on an à la carte basis for individual components
or segments. To the extent we are successful in managing projects, fixed-price
contracts have historically allowed us to employ various process methodologies
designed to improve the overall project profitability, while maintaining the
highest quality and milestone-oriented service. Our Platform Service projects
are generally priced based on the cost of the third-party hardware or software,
plus an applicable margin to cover our service costs. Our clients are generally
required to pay us in installments, with a portion of payment made upon
executing the contract, upon achieving certain interim milestones, and upon
completing the client inspection.




We are
starting to implement a re-occurring revenue model, when the functionality of
our solutions is per-user or per-transaction based. Under this model, we set up
the entire IT architecture and software platform, such as an entire online
banking IT platform, and charge our clients for the use of the IT platform and
on a per-user or per-transaction basis.





In
January 2008, we entered into a collaboration agreement with China Financial
Certification Authority (CFCA) to develop our E-Banking ASP platform targeted
toward SMBs. The CFCA is China’s regulatory agency for secured online
transactions. It will host and maintain the online banking platform to ensure
the highest level of transaction security and service availability. We will
provide the necessary hardware and solution technology to operate the platform.
In exchange for using the E-Banking ASP services, clients are expected to pay a
fixed annual fee for hosting and maintenance, as well as variable fees depending
on the number of users, the transaction type and the transaction volume. These
revenues will then be shared between Yucheng and the CFCA. As part of the
agreement, we will also customize elements of the E-Banking ASP platform per our
client’s request, in return for additional fees. Compared to our traditional
project-based revenue model, the client’s initial charge using a recurring
revenue model is relatively small; however, we are confident that in the long
run it will generate increased revenues tied to the platform usage.




We
believe this revenue model appeals to the SMBs, which may not have the financial
resources and internal IT capabilities to maintain their own online banking
platform.





To better
serve the market, we established Yuxin Data, a joint-venture with NTT Data
Group, to operate the E-Banking ASP business. Navigating the operational
complexity of serving this market is where NTT DATA's core competency in hosted
IT systems will add value to the joint venture. NTT DATA will contribute to the
joint venture with its experiences from its ANSER Unit Operation Center and Core
Operating System Data Center, as well as experience operating outsourced
platforms.




OUR
COMPETITIVE STRENGTHS




We
believe the following competitive strengths enable us to compete more
effectively as an IT service provider to China’s banking
institutions.




Broad
client base and extensive domestic Chinese bank experience.




Our
client base includes all of China’s most prominent Top Four banks as well as
many of the Joint-Stock and SMBs. We have successful reference sites at the Top
Four banks, and count 16 of China’s 17 largest banks as our clients. As the Top
Four and Joint-Stock banks tend to set IT norms in China’s banking industry, our
close client relationships in these segments enable us to gather the deep
expertise required to maintain our leadership position. Through the acquisition
of Easycon and also organic growth, we have also expanded our client base to
include numerous SMB clients. We believe that our broad client base and
extensive industry expertise serve as a testament to our solution quality and as
an endorsement to new customers.


36




Deep
relationships with existing clients and effective new client development
strategy.




In the
course of serving our existing clients, we typically develop a detailed and
proprietary understanding of our clients’ internal IT operations, as well as
their existing and future IT needs. As our clients typically prefer to maintain
continuity in their third-party IT outsourcing relationships, we believe we are
well-positioned to serve our clients’ needs on future projects, especially where
we have had significant prior input into the client’s IT systems. By undertaking
of one project with a new client, we are often able to gain insights into the
client’s additional IT needs and cross-sell or up-sell solutions and services to
the client, which in turn further strengthens our relationship and increases our
competitiveness.




Extensive
suite of solution and service offerings.




To date,
we have developed a broad range of solutions, which we deliver via our suite of
proprietary applications. Our solutions are often packaged with our other
services, such as consulting, custom application development, legacy system
integration, third-party packaged software application implementation,
application testing, and system integration services, to create a comprehensive
service. Our broad range of capabilities allows us to tailor our solutions to
each of our clients’ particular business needs, providing our clients with a
“one-stop shopping” experience. Our approach has enabled us to become
increasingly important to our clients’ overall IT strategies, allowing us to
more effectively cross-sell and up-sell additional solutions and services to
help better meet their long-term needs.




Highly
leveragable product suite.




The
substantial experience, both industry-specific and technology-related, that we
have gained in providing a broad range of solutions to numerous clients
historically has allowed us to develop deep insight into how best to serve both
new and existing clients. This has also enabled us to engineer applications
during the course of a specific client engagement that allow us to more easily
facilitate upgrades and additional solutions at a subsequent client engagement.
We believe that this capability provides us with a significant competitive
advantage as we target new clients, such as SMBs.




Strong
management team and highly experienced IT employees.




We
believe that our management team and employees are our most important assets and
provide us with a substantial competitive advantage during our day-to-day
business operations. Our executive management team, on average, possesses 15 or
more years of directly relevant industry experience. These individuals have been
instrumental in growing our businesses organically, as well as in identifying,
acquiring and integrating acquisition targets to date. We believe that they have
demonstrated a superior understanding of and ability to effect consolidation in
our rapidly changing industry. With significant industry experience and strong
track record, we believe that our management team, our founders in particular,
has established a favorable reputation within our industry and in the broader
marketplace, which can help us win additional clients as well as business
partners and future acquisition targets. In addition, we believe that our
employee base, which has come together both organically and via acquisition, is
a highly experienced and capable group, allowing us to target, assess and
deliver client engagements more effectively and efficiently.




Broad
geographic presence.




In
addition to our headquarters in Beijing, we maintain subsidiaries and branch
offices in 19 other cities across China. As many of our clients, in particular
the Top Four and Joint-Stock banks, have a nationwide or multi-province
presence, our broad geographic presence allows us to be close to our clients in
multiple locations, which further helps us to maintain close relationships with
them. In addition, as we further expand our SMB client base, our broad
geographic coverage makes it easier for us to connect with them and provide our
solutions and services in a client-facing fashion, which we believe is critical
for effective cross-selling and up-selling of additional services and
solutions.


37





Strong
brand in the marketplace.




We have
an established reputation as a leading provider of IT services to China’s
premier banking institutions with our clients and among China’s banking IT
service provider community. We have enjoyed close business relationships with
many Top Four and Joint-Stock banks, including China Construction Bank, which
has been our customer on an annual basis since 1999. Our services to these
premier banking institutions has earned us credibility and prestige in the
industry. For example, we were named to the Global FinTech 100 for the second
year in a row on October 29, 2009 by American Banker, Banker Technology News,
and Financial Insights, an IDC company; and we were recognized as “Most Trusted
IT Services Brand by SMB in 2009” by Chinese Finance Network and Chinese Finance
Institute. In 2008, we were named “Outstanding Chinese Financial Technology
Products 2008” by New Financial World magazine, a Chinese IT industry magazine.
In 2007, Yucheng was recognized as “One of the ten best IT solution providers
for China’s financial industry” by Computer Partner World, a leading IT focused
magazine in China. We believe that our established reputation and credibility
provide us advantages in our competition for new businesses
opportunities.




OUR
STRATEGIES




Our
objective is to become the leading provider of IT services to China’s
diversified financial services sector.  While we believe that we have
already established an attractive market position, we intend to further grow our
business and enhance our overall market standing by implementing the following
strategies:




Continue
to drive organic growth through cross-selling and up-selling of new and existing
services to our existing bank clients.




We have
established close relationships with a larger number of banks in China, and have
successfully undertaken multiple projects for these banks.  We intend
to further leverage such relationships and cross-sell more solutions and
services to these banks.  For example, we have provided numerous
services, such as online banking, call center, risk management, business
intelligence, foreign exchange, performance management solutions, to China
Construction Bank, which has been our largest client by revenue in each of the
past three years.  In comparison, we have provided much more limited
IT solutions and services to many other banks.  We intend to leverage
our experience with China Construction Bank to actively promote our other IT
solutions and services in other banks.




Continue
to expand into new client segments, such as SMBs.




We intend
to build on top of our solid SMB client base and broaden our client
base.  As compared to large Top Four and Joint-Stock banks, SMBs do
not have the business scale, financial resources or internal IT capabilities to
develop highly sophisticated IT systems and solutions. As such, they generally
demand less customization of IT solutions, providing us opportunities to sell
our solutions in a more standardized manner with minimal incremental cost per
sale. In addition, due to their smaller size and increasing needs, oftentimes we
are in a superior position to negotiate contract terms with SMBs as compared to
large banks. By the end of 2009, SMBs and other banks accounted for 22.1%of our
revenues, compared to 17.1% of revenues in 2008, and we expect to continue
expand our SMB market share.




Compliment
our project-based revenues with a transaction-based revenue model in certain
segments.




Our
traditional business model involves negotiating a fixed-price contract with our
clients based on the complexity and duration of each project we undertake. Such
projects generate one-time revenues and generally must be renegotiated should
the client decide to expand the project or make improvements, either in the
current year or in subsequent years. We have initiated our transaction-based
revenue model by delivering certain of our offerings, such as online banking
solutions, to our clients through a combination of a fixed fee plus subsequent
variable fees. We believe that such a delivery method is more economical and of
particular interest to SMBs, which are more likely to forgo a custom online
banking project due to the upfront costs.





We
entered into this model in January 2008 via a collaboration agreement with
Chinese Financial Certification Authority (CFCA), the Chinese governmental body
regulating e-commerce security. In return for our E-Banking ASP, SMBs are
expected to pay CFCA and us a combination annual maintenance fee, plus
subsequent per-transaction or per-user fees. As of June 2010, we have 16 clients
on our E-Banking ASP. We plan to expand this model to cover other services, as
feasible.


38




Expand
our solutions and service offerings to address new growth
opportunities.




As banks
in China are more and more mature in understanding their needs for IT services,
there are increasingly appreciating the needs for high end consulting in various
areas such as risk management, core banking systems, and IT infrastructure
planning. To address these customer needs, we established Sihitech Huazhi
Consulting Service, a joint venture with SmartSoft, to provide high end IT
consulting services for banks in China. The Smartsoft team has a strong track
record in the abovementioned areas. Since the establishment of the joint
venture, we were able to secure consulting projects with one of the big four
banks, along with the implementation phase of the project.





We have
expanded our CRM capabilities by putting together an experienced Siebel CRM
implementation team in December 2008.The team has extensive experience
customizing Siebel CRM systems for customers across many industries, including
banking. As Chinese banks become more complex, having the right solutions to
improve management team capabilities will be critical. With the new team joining
us, we now have the flexibility to provide our proprietary CRM software or
consulting and implementation services of Siebel CRM software to our
customers.




Pursue
selective acquisitions, joint ventures and strategic alliances.




Historically,
we have supplemented our organic growth strategy through selective acquisitions
and strategic alliances to increase our solutions and service offerings and
overall market share. In 2007, we acquired five companies. In 2008, we had a
total of six cooperation agreements with banks for POS merchant acquiring
business; we entered into an agreement with CFCA for hosting our E-Banking ASP
platform; On March 15, 2010, Yucheng formed Yuxin Data Limited in Tianjin, a
joint-venture with NTT Data Group to further expand our E-Banking ASP
businesses. These acquisitions, strategic alliances and cooperations have
expanded our revenue sources, increased our solution and service offerings,
diversified our client base, enhanced our research and development capabilities,
augmented our management resources and employee base, and enhanced our long-term
competitive position.




PROJECT
DEVELOPMENT AND MANAGEMENT




The
following chart illustrates our typical project development and management
process.










39




Project
management




We manage
our projects principally through the following steps:




·
            Project setup. We
      conduct feasibility and margin analysis before the set-up of each project,
      which requires approval of the sales, pre-sales implementation and
      technology management teams.





·
            Project planning.
      Following project setup approval, the project manager designs the overall
      project plan, including estimates for workload and costs, so that
      necessary resources can be
allocated.





·
            Project monitoring. Our
      project manager then tracks the project’s progress and results are
      presented both internally and to the client, through various project
      progress reports. Any changes to the scope of the project need to be
      approved from our sales, pre-sales implementation and technology
      management teams.





·
            Risk management. We
      estimate potential risks upon project setup, and establish relevant
      strategies and measures to respond to any such risks to minimize their
      impact.





·
            Quality assurance. We
      conduct frequent tests and examinations to ensure the quality of our
      solutions and services.





·
            Client satisfaction
      survey. We regularly distribute a client satisfaction questionnaire
      to our clients during project implementation and adopt appropriate
      measures to address any issues
raised.





·
            Project closing. Our
      sales, pre-sales implementation and technology management teams need to
      approve the completion of each project, and we assess the overall the
      project achievements and financial
return.




Project
development




Our
project development activities include the following:




·
            Needs analysis. The
      first step of our project development is to understand our client’s
      business needs for the project. We carry out frequent communications with
      our client and conduct extensive analyses of their needs based on their
      business and current IT system.





·
            System design. Based on
      our understanding of our client’s business needs, we design the overall
      system architecture, including databases, customer interfaces and modules
      to best address such needs.




·
            Coding and module
      testing. Once we have a system design or part of the system design
      to meet our client’s requirements, we start coding individual functional
      modules. Each of our functional modules is tested and debugged
      individually to ensure quality and
  functionality.




We work
closely with our clients during the above steps, and these steps may be repeated
or conducted in parallel to ensure that we have a system that best meets our
client’s business requirements.




·
            System testing. After
      we finish coding and testing the individual modules, we start connecting
      the modules and performing testing at the system
  level.




·
            System test run and client
      examination. After the system passes system testing, we then
      install it at our client’s site and conduct a real data test run with our
      client. We work closely with our client to address and resolve any issues
      that may come up during the test run and client
    examination.




·
            System delivery and
      maintenance. After passing client examination, the system is
      delivered to our client and the project development cycle is closed.
      Generally, we provide one year of maintenance and support for most of our
      solutions. We assign an employee as the principal contact person to
      receive client feedback, evaluate the severity of any problem arising from
      the use of the IT solution, resolve the problem and maintain an issue
      log.




40




QUALITY
ASSURANCE




We have
built quality assurance measures into our project management process. We conduct
frequent tests, both in the module level and system level, to ensure our
solutions meet our high quality standards and required functionality. We
frequently interact with our clients throughout the entire project development
process, soliciting feedback and taking measures to improve our solutions and
services.




We
conduct various technical and management appraisals before, during and after
project implementation. Technical appraisals include demand appraisal, design
appraisal, code spot tests, internal check and acceptance, and client check and
acceptance; management appraisals include project set-up appraisal, plan
appraisal and settlement appraisal. These appraisals are designed to ensure the
smooth progress of our projects and quality of our implementation.




We have
established a set of quality control procedures and follow standard software
development protocols in our development processes. Beijing Sihitech received an
ISO 9001:2000 certification in March 2005 and e-Channels received an ISO
9001:2000 certification in July 2006. We obtained level 3 certification of
Capability Maturity Model Integration, or CMMI, for our software development
operations in 2009. CMMI is a framework for business process improvement that is
widely accepted in the software industry.




SALES
AND MARKETING





We employ
a direct sales model to market and sell our solutions and services. As of
December 31, 2009, we had 191 sales and marketing staff in 25 cities across
China, of which 68 are focused on our core business and 123 are dedicated to our
POS business. Our core business sales personnel are organized into geographical
regions. Within each region, we organize sales teams based on client
type.




Our sales
strategy also differs depending on the type of clients. For Top Four and
Joint-Stock banks, we establish and maintain long-term partnerships, providing
these leading banks with a comprehensive set of IT consulting and implementation
services and a focus on growing with the IT needs of each client. We also strive
to provide our solutions and services to these clients in follow-on projects by
cross-selling our other solutions and services. For SMBs, we aim to secure a
foothold with our leading IT solutions, such as online banking or through the
acquisition of companies specializing in that banking segment, such as Easycon.
Due to their limited experience with third-party IT solution and service
providers, in many cases, these clients are unaware initially of the broad range
of solutions and services that may be obtained from a third-party provider, and
are therefore unaware of the benefits in leveraging the experience and
capabilities of a provider such as ourselves. The initial client engagement
enables us to understand clients’ IT needs, quickly build relationships
internally, and provide us opportunities to demonstrate to them our capabilities
and value proposition so that we can cross-sell or up-sell our additional
solutions and services to best meet their long-term business needs.




Many
banks select their IT service providers through competitive bidding. Before
submitting a bid, we usually conduct a detailed due diligence study of the bank,
our competitors, the technical advantages we have regarding the project,
duration of the project, our estimated cost and profitability and potential for
a long-term relationship with the client. We selectively submit bids on projects
where we believe we have a competitive advantage. In addition to price, we
believe clients usually select the winning bidder based on a number of other
factors, including reputation and track record of the IT service provider, its
technical capabilities, historical relationship with the client and the
functionality of the proposed solutions.





Many of
our client projects are separated into different phases, often spanning more
than one year. For the latter phases of the projects that we initially
undertake, banks usually do not engage in any additional open bidding. Instead,
we typically conduct new negotiations to determine the scope and cost of the new
phase.




As for
our POS business, our sales are conducted largely through direct sales efforts
to the merchants made on behalf of our partner banks. We also conduct various
joint-promotion activities with collaborating banks to help increase our brand
awareness in the marketplace, such as a restaurant promotion month and a
promotional bonus point program. The sales personnel for our POS business are
separately managed by our subsidiary, Yuxingyicheng Information. As of December
31, 2009 we have sales teams located in 25cities across China.




41




Our total
selling and marketing expenses were RMB29.1 million, RMB49.4 and RMB53.8 million
(USD 7.9 million) for 2007, 2008 and 2009 respectively. In addition to salaries,
our sales staff receives a significant portion of their compensation from sales
commissions.




OUR
CLIENTS




Our
current clients consist primarily of Top Four and Joint-Stock banks that look
for customized IT solutions to meet specific business and operational
requirements. Of the 17 Top Four and Joint-Stock banks, 16 are our clients and
some have been so for more than five years. We have also been adding SMBs to
expand our client base, and diversify our dependence on any one
client.




China
Construction Bank, one of the largest banks in China, and our client since 1999,
has been our largest client through the headquarters and its branch offices in
each of 2007, 2008 and 2009, accounting for 59.2%, 47.8% and 31.7% of our total
revenues, respectively, in those three years. Our contracts with China
Construction Bank were signed separately with different departments within the
bank group, branches at the provincial level and headquarters and we consider
each of them effectively separate clients, since the decision makers and budgets
are unrelated. Treating the different decision making bodies within China
Construction Bank as separate clients, China Construction Bank head office was
our largest client in each of the past three years, accounting for 29.1%, 36.9%
and 20.0% of our total revenues in 2007, 2008 and 2009, respectively. Revenues
from each of other branches of China Construction Bank accounted for less than
seven percent of our total revenues in each of 2007, 2008 and 2009.




We
realize the risks involved with overdependence on one or a few clients, and have
taken measures to expand our client base.  As our Joint-Stock client
base has grown, its contribution as a percentage of total revenues has also
increased and accounted for11.4% in 2007,15.9% in 2008 and 26.8% in 2009, and
one of our Joint-Stock bank clients accounted for 4.9%, 6.8% and 11.6% in 2007,
2008 and 2009. Over the past three years our SMB client base grew to 80 in 2007,
69 in 2008 and 118 in 2009. Our revenues from SMBs and other banks as a
percentage of total revenues was16.3% in 2007, 17.1% in 2008 and 22.1% in 2009.
We believe over time, Joint-Stock banks and SMBs will experience the greatest
competitive pressures and are likely to significantly increase their IT
investments. We have positioned ourselves to take advantage of this opportunity
as it develops.





In
addition to China’s domestic banks, we have also begun marketing our services to
the Chinese operations of foreign banks, which have expanded significantly in
recent years due to China’s WTO commitments. For example, we entered into
contracts with the PRC subsidiary of a Korean bank in late 2007 to develop their
bank card processing system and online banking platform, and with the PRC
subsidiary of a Hong Kong based bank in early 2008 to develop their online
banking platform .We continued
our efforts in 2009 and beyond to expand our presence in foreign banks and/or
PRC Subsidiary of foreign banks. We expect to add a number of foreign banks to
our client list in 2010.




SUPPLIERS





We work
with third-party suppliers for hardware equipment and certain software
components that we incorporate into our solutions. Our hardware suppliers
include IBM, HP, DELL and Sun for servers, EMC for storage, Cisco, Huawei and F5
for network equipment. Our software suppliers include Oracle, IBM, Symantec,
Microsoft, Genesys and EDIFY. We do not depend on any single supplier for either
hardware or software. In 2009, only IBM accounted for more than 10% overall
third-party hardware and software purchases.




Our POS
terminal suppliers include Ingenico, Landi, Hypercom, Sagem, Pax, Spectra and
Xinguodo. We have not experienced any difficulty in the procurement of POS
terminals. Generally, these suppliers provide a three-year service warranty on
the POS terminals free of charge. After the expiration of this period, we assume
all costs associated with the maintenance of these POS terminals.




RESEARCH
AND DEVELOPMENT




The
market for our solutions and services is characterized by rapid technological
change. As China’s banks upgrade their technology to meet international
standards, we must ensure that we keep pace with technological developments,
client demands, emerging industry standards and an increasingly sophisticated
environment by enhancing our current service offering on a timely basis and
developing new solutions that capture underdeveloped market
segments.




42




Our
research and development at the company level focuses on developing new
fundamental platforms and applications that can be used in a variety of our IT
solutions. Currently, we conduct our company level research and development
activities primarily in our Financial Information Technology Institute, or the
Tsinghua Institute, which we formally established in April 2006 pursuant to a
research collaboration arrangement with Tsinghua University. Under the
collaboration arrangement, we provide research funding and personnel, and
Tsinghua University provides research facilities, as well as their own
personnel. Currently, the Tsinghua Institute has 15 members, 10 of which are our
employees. The Tsinghua Institute has already been successful in developing a
number of new technologies that we have deployed to some of our clients. We
jointly own the intellectual property from the collaboration with Tsinghua
University, and each party can commercialize such intellectual property without
the consent of the other party. We also established a company level research and
development center in Guangzhou, focusing on information management technology
and business intelligence.




We also
carry on research and development activities at the business division level in
our various subsidiaries. Our business divisions are more familiar with our
clients’ specific IT needs and focus on developing applications that are more
closely linked to immediate trends.





As of
December 31, 2009, we had 52 employees carrying on research and development
activities.




Including
the amount we capitalized, our internal software development costs amounted to
RMB10.7 million, RMB13.7 million and RMB 22.2 million (USD3.3 million) as of the
end of each of the years 2007, 2008 and 2009, respectively. In addition, as we
conduct a substantial amount of research and development activities in
connection with our client projects, a significant amount of research and
development related expenses are recorded as cost of revenues for the client
project rather than research and development expenses.





INTELLECTUAL
PROPERTY




We rely
on a combination of patent, copyright and trademark laws, licensing agreements,
confidentiality agreements, internal confidentiality policies and other
contractual provisions, as well as technical measures to protect our
intellectual property rights. We have one received patent for our dynamic
password method and system based on mobile communication terminals and still
have one pending patent application for our dynamic password method and system
with encryption with the PRC State Intellectual Property Office. We routinely
register our proprietary software to the National Copyright Administration of
the PRC pursuant to the Regulations for the Protection of Computer Software
(2002) to ensure protection under the PRC copyright laws. As of December 31,
2009, we had 162 software products registered with the National Copyright
Administration of the PRC, including primarily system architecture and platforms
and various software applications.





Our
employees are required to enter into agreements assigning us the intellectual
property developed within the scope of their employment. We have also
established internal confidentiality procedures to safeguard our intellectual
property. We enter into confidentiality agreements with all of our employees,
collaborators, clients and suppliers, and prohibit our employees from designing
into our solutions intellectual property that belongs to any third party. As
intellectual property laws in China are still being developed and offer limited
protection, we rely heavily on our confidentiality procedures, confidentiality
agreements as well as technical measures to protect our proprietary technology
and intellectual property.




Pursuant
to the majority of our client contracts relating to our software, solutions and
services, our clients own the intellectual property developed in connection with
the projects, while we retain our proprietary rights to the methodologies,
algorithms or patents that we used in the development of custom software
solutions. However, it is often difficult to distinguish the part of the
software that we developed for our clients, which represents our proprietary
rights. As a result, there is a risk that our client may claim that we infringed
their intellectual property rights. See “Item 3. Key information — Risk factors
— Risks relating to our businesses — We may be subject to intellectual property
infringement claims from our clients, which may force us to incur substantial
legal expenses and, if determined adversely against us, may materially and
adversely affect our business, financial condition and results of operations.”
In addition, we typically agree to defend our clients on our own costs for any
third-party intellectual property claims filed against them arising from the
solutions and services we provided them, and indemnify them for any damages of
intellectual property infringement, which may subject us to significant
intellectual property indemnity claims. See “Item 3. Key information — Risk
factors — Risks relating to our businesses – Our intellectual property
indemnification practices may materially and adversely impact our
business.”




43




We have
registered one trademark, “Yucheng,” in the Trademark Office of the State
Administration of Industry and Commerce of the PRC. We also own a number of
domain names, including the domain name of our main website,
www.yuchengtech.com.




COMPETITION




The
market for IT services in China’s banking industry is intensely competitive and
characterized by rapid technological change. Competition in our industry is
based to a great extent on industry experience, solution quality, reference
sites, breadth of services offered, reputation, price and relationship. Past
track records with a particular banking client are also of particular
importance. As a result, our success rate is usually higher with banks that we
have provided solutions and services to in the past, and we are usually engaged
by our existing clients to work on projects that are the expansion of or
improvements on the original projects that we undertook.




Our major
competitors can be categorized into two groups, global IT vendors and China’s
domestic IT solutions and service providers. Our major competitors in the global
IT vendor category include Accenture, IBM Global Services and TCS/FNS. These
competitors are strong in high-level, enterprise-wide IT strategy consulting.
Our major domestic competitors include Longtop Financial Technologies Limited,
Digital China Holdings Limited, Global InfoTech Co., Ltd , HiSun Technology
Holdings Ltd. and Client Service International Inc.. Each of these competitors
has their focus and strength in different types of IT solutions and services,
and we compete with different companies depending on the types of solutions we
intend to provide to a given client.




We also
compete with the internal IT departments of our existing and potential clients,
which may be capable of creating in-house solutions, thereby reducing the need
for outsourced service providers. For example, a banking client for which we
designed an initial online banking platform decided later to conduct further
development in-house.





In
addition to the competitors listed above, there are many other smaller providers
of IT solutions and services to China’s banks. Most of these providers are
small- to mid-sized companies focusing on narrowly specified niche markets
within the broader IT solutions and services market.




In the
POS merchant acquiring business, we primarily compete with China UnionPay, the
predominant POS provider on whose network credit and debit card transactions are
processed.





INSURANCE




We own a
property in Xiamen which we use as office space, and lease all of our other
offices, and we do not maintain any property insurance for such offices. In
addition, consistent with industry practice in China, we do not maintain
business disruption insurance or key person insurance. We do maintain Director
and Officer Liability insurance, in accordance with standard practices for U.S.
listed companies.




REGULATION




The
following summarizes major PRC laws, rules and regulations applicable to our
business.




Regulation
of the software and systems integration industries




China’s
State Council and a number of ministries and agencies have issued a series of
rules and regulations aimed at stimulating and regulating the growth of the
software and systems integration industries in China. The principal regulations
governing the software and systems integration industries include:




44




·
            The
      Interim Administration Measures for Qualification of Systems Integration
      of Computer Information (1999);





·
            The
      Certification Standards and Administration Measures of Software
      Enterprises (2000);





·
            The
      Appraisal Condition for Qualification Grade of Systems Integration of
      Computer Information (Revised Version)
(2003);





·
            Certain
      Policies for Encouraging Development of the Software Industry and
      Integrated Circuits Industry
(2000);




·
            The
      Software Products Administration Measures
  (2000);




·
            The
      Interim Administration Measures for Qualification of Systems Integration
      of Computer Information Concerning State Secrets
  (2001);




·
            The
      Administrative Measures on Verification of Key Software Enterprises within
      the State Plan (2005);




·
            The
      Administrative Regulation for Commercial Cryptogram (1999);
      and




·
            The
      Administrative Measures on Examination and Sales Licensing of Security
      Products for Computer Information Systems
  (1997).




Under
these regulations, except for software developed for self-use, software products
developed in China are subject to a registration system administered by the PRC
Ministry of Information Industry (MII) and its local branches or agencies. This
registration system requires software developers to obtain registration
certificates for their software products. A software product cannot be sold in
China without such registration. The valid term of each registration is for five
years, and it may be renewed upon expiry.





Companies
in China engaged in systems integration are required to obtain qualification
certificates from MII. Companies planning to setup computer information systems
are required to engage systems integration companies with appropriate
qualification certificates. This qualification certificate is subject to
biannual review and is renewable every four years.




The
Qualification Certificate for Integration of Computer Information Systems
Concerning State Secrets granted by the PRC State Secrecy Bureau is required for
a company to engage in computer systems integration activities involving state
secrets. The valid term of such certificate is for three years, and it may be
renewed upon expiry, subject to the satisfaction of all the requirements. The
State Secrecy Bureau will only issue this special qualification certificate to
China’s domestic companies. Foreign invested companies, including Sino-foreign
joint ventures and wholly foreign-owned enterprises, are not allowed to engage
in any computer systems integration activities that involve state
secrets.




Encryption
software is an essential component of internet banking systems. The development,
production and sale of commercial encryption products in China is regulated by
the PRC National Encryption Administrative Bureau (Encryption Bureau) and its
authorized local branches. A company engaging in the encryption-related business
is subject to certain licensing requirements, such as obtaining a production
license, sale and distribution license, and a license for research and
development from the Encryption Bureau. In addition, both importing and
exporting products and equipment containing encryption technology are subject to
the prior approval of the Encryption Bureau.




Companies
in China engaged in providing security products for computer information systems
are required to obtain a sales license after official examination from the PRC
Ministry of Public Security (MPS) or its authorized local branches. The valid
term of each license is for two years which can be renewed upon
expiry.




45




We
generally register our software and have obtained, or are in the process of
obtaining, from MII or other regulatory agencies all the certificates, permits
or licenses necessary for conducting our business.




Regulation
on foreign investment




According
to The Guidelines on Foreign Investment issued by State Council on February 11,
2002, and The Catalogue on Foreign Invested Industries (2007 Revision) issued by
National Development and Reform Commission and the Ministry of Commerce on
October 31, 2007, IT solutions and services fall into the category of industries
in which foreign investment is encouraged.




Regulations
on foreign exchange




The
principal regulations governing foreign exchange in China are the PRC Foreign
Exchange Administration Regulations (1996), as amended in 1997. Under these
regulations, current account income denominated in foreign currencies shall be
sold to designated banks or deposited into foreign exchange bank accounts. The
Renminbi is convertible for current account items including the distribution of
dividends, interest payments and trade and service-related foreign exchange
transactions. For conversion of the Renminbi for capital account items, such as
making inbound and outbound direct investments, borrowing foreign loans,
repatriating investments and investing in securities outside China, prior
approval of or registration with State Administration for Foreign Exchange
(SAFE) is required.




Pursuant
to the Administration Rules on the Settlement, Sale and Payment of Foreign
Exchange (1996), foreign-invested enterprises may only buy, sell and/or remit
foreign currencies at those banks authorized to conduct foreign exchange
business after providing valid commercial documents and, in the case of capital
account item transactions, obtaining approval from SAFE or its local branches.
Foreign investment enterprises are permitted to remit their profits or dividends
in foreign currencies out of their foreign exchange accounts or exchange
Renminbi for foreign currencies through banks authorized to conduct foreign
exchange business. Capital investments by foreign-invested enterprises outside
of China are also subject to limitations, which include approvals by SAFE, the
Ministry of Commerce of the PRC and the PRC National Development and Reform
Commission or their local counterparts.




Pursuant
to SAFE’s Notice on Relevant Issues Concerning Foreign Exchange Administration
for PRC Residents to Engage in Financing and Return Investments via Overseas
Special Purpose Vehicles, generally known in China as SAFE Circular 75, which
became effective November 1, 2005, (i) a legal person entity incorporated in
China, a PRC citizen, or an individual with habitual residence in China due to
certain economic benefits, who is referred to as an onshore resident under SAFE
Circular 75, shall register with the local branch of SAFE before it establishes
or controls an overseas special purpose vehicle (SPV) for the purpose of
overseas equity financing (including convertible debts financing); (ii) when a
PRC resident contributes the assets or equity interests it holds in a domestic
enterprise into an SPV, or engages in overseas financing after contributing
assets or equity interests into an SPV, such PRC resident shall modify its SAFE
registration in light of its interest in the SPV and any change thereof; and
(iii) where an SPV undergoes material events relating to increases or decreases
in investment amount, transfers or exchanges of shares, mergers or divisions,
long-term equity or debt investments, or external guarantees, or other material
events that do not involve return investments, such PRC resident shall, within
30 days from the occurrence of such material event, apply to the local branch of
SAFE to amend or file the registration of foreign exchange of overseas
investment. Onshore residents who have established or controlled SPVs and
completed return investments before November 1, 2005, the effective date of SAFE
Circular 75, were also required to register with the local SAFE branch before
March 31, 2006.




To
further clarify the implementation of SAFE Circular 75, SAFE issued The Notice
of the State Administration of Foreign Exchange on Operating Procedures
concerning Foreign Exchange Administration for Domestic Residents to Engage in
Financing and in Return Investment via Overseas Special Purpose Companies on May
29, 2007 (Circular 106). Under Circular 106, if the investment in the overseas
SPV fails to be registered with SAFE by the onshore residents, (1) the overseas
SPV is not qualified to conduct overseas financing or return investment; and (2)
the PRC subsidiaries of the SPV are prohibited from distributing their profits
and proceeds from any reduction in capital, share transfer or liquidation to the
overseas SPV. Moreover, failure to comply with the above SAFE registration
requirements could result in liabilities under PRC laws for evasion of foreign
exchange restrictions. All our PRC resident beneficial owners have registered
with local SAFE branch as required under the SAFE regulations in respect to
return investment.




46




Regulations
on offshore parent holding companies’ direct investment in and loans to their
PRC subsidiaries




An
offshore company may make an equity investment in a PRC company, which will
become the PRC subsidiary of the offshore holding company after the investment.
Such equity investment is subject to a series of laws and regulations generally
applicable to any foreign-invested enterprise in China, which include the Wholly
Foreign-Owned Enterprise Law, the Sino-Foreign Equity Joint Venture Enterprise
Law, the Sino-Foreign Contractual Joint Venture Enterprise Law, all as amended
from time to time, and their respective implementation rules. Under these laws
and regulations, the contribution and increase of the registered capital of a
foreign-invested enterprise is subject to prior approval by the relevant
authorities.




Shareholder
loans made by offshore parent holding companies to their PRC subsidiaries are
regarded as foreign debts in China for regulatory purposes, and are subject to a
number of PRC laws and regulations, including the PRC Foreign Exchange
Administration Regulations, the Interim Measures on Administration on Foreign
Debts, the Tentative Provisions on the Statistics Monitoring of Foreign Debts
and its implementation rules, and the Administration Rules on the Settlement,
Sale and Payment of Foreign Exchange. Under these regulations, shareholder loans
made by offshore parent holding companies to their PRC subsidiaries shall be
registered with SAFE. Furthermore, the total amount of foreign debt that can be
borrowed by such PRC subsidiaries, including any shareholder loans, shall not
exceed the difference between the total investment amount and the registered
capital amount of the PRC subsidiaries, both of which are subject to
governmental approval.





Regulations
on dividend distribution




Under the
relevant PRC laws and regulations, foreign-invested enterprises in China may
distribute dividends only out of their accumulated profits determined in
accordance with Chinese accounting standards and regulations. In addition,
wholly foreign-owned enterprises in China are required to contribute at least
10% of their after-tax profits based on PRC accounting standards each year to
their general reserves fund until the accumulative amount of the reserve fund
reaches 50% of the registered capital of such wholly foreign-owned enterprise.
Contributions to the fund may not be distributed as dividends.




C. Organizational structure.
  The
following diagram illustrates our organizational structure as of December
31,2009:









47




The
following summarizes relevant information concerning our
subsidiaries:





Beijing Yuxinyicheng Technology
Limited, or Yuxinyicheng. Yuxinyicheng was established as a wholly
foreign-owned enterprise in China on October 19, 2006. It is 68.25% owned by
Sihitech BVI and 31.75% owned by e-Channels BVI. It is a holding company in
China without its own business operations.




Beijing Sihitech Technology Co.,
Ltd., or Beijing Sihitech. Beijing Sihitech, along with its subsidiaries
Shanghai Software, Beijing Software, Shanghai Yucheng, Xiamen Yucheng,
ChengduYucheng and TianjinYucheng, engages in the provision of system
integration, software development, information technology consulting,
maintenance and support services. Beijing Sihitech and its subsidiaries
mentioned above were the principal operating entities of Sihitech BVI prior to
the three-party merger.




Beijing e-Channels Century
Technology Co., Ltd., or e-Channels. E-Channels engages in the provision
of technology development, technology transfer, consulting and training
services, in particular relating to online booking-related solutions. E-Channels
was the principal operating entity of e-Channels BVI prior to the three-party
merger.




Beijing Easycon Electronics Limited,
or Easycon. We acquired 75% interest of Easycon in June 2007 and the
remaining 25% interest in January 2008. Easycon specialized in providing IT
services to smaller and regional commercial banks in China. Its banking
integrative service management system and credit management system both hold a
significant market share and are very well received among SMBs.




48




Beijing Yuxinhengsheng Information
Technology Limited, or Yuxinhengsheng. We initially acquired 100%
interest of Sunrisk in March 2007. Sunrisk is a risk management total solutions
provider for the Chinese banking industry, focusing on consulting, product
implementation and system integration in the area of enterprise risk management
for financial institutions. In April 2008, Yuxinyicheng introduced a strategic
investor to acquire 49% of Sunrisk’s equity interest. As a result,
Yuxinyicheng’s equity interest in Sunrisk was reduced to 51% from
100%.





Beijing Yuxinyicheng Information
Technology Limited, or Yuxinyicheng Information (POS). We established
Yuxinyicheng Information (POS) in January 2007, and its focus is on providing
our POS merchant acquiring business in collaboration with banks. Initially
we held 80% of the equity and in January 2009 we acquired the minority interest
in our POS business; it is now a wholly-owned subsidiary.





Beijing Yuxinyicheng Software Co.
Ltd., or Yuxinyicheng Software (POS).We established Yuxinyicheng
Software (POS) in 2008, a wholly owned subsidiary, to further develop our POS
merchant acquiring business.




Chengdu Recency Technologies
Limited, or Recency. We acquired 100% interest of Recency in June 2007.
Recency is a business intelligence solution and consulting service provider for
the Chinese banking industry, focusing on software development, information
technology consulting, maintenance and support.




Shanghai Fujie Business Consulting
Limited, or Fujie and Shanghai Fuyi Business Consulting Limited, or Fuyi.
We acquired 100% interest of Fujie and Fuyi in October 2007. Fujie and Fuyi are
related companies focusing on Enterprise Resource Planning, or ERP, management
consulting, software development, maintenance and support.





Guangzhou Yuxinyicheng Information
Technology Limited, or Guangzhou Yuxinyicheng. We established Guangzhou
Yuxinyicheng in November 2007, and it provides system integration, software
development, information technology consulting and maintenance and support to
our customers.





Hainan Baodaotong Technologies
Limited or Baodaotong.We established Baodaotong in March 2009 in
conjunction with a third party and hold 35% interest. We transferred 20% of
Baodaotong’s equity interest to a third party in December 2009 and we sold the
remaining 15% interest in May 2010.





Beijing Sihitech Huazhi Consulting
Service Co.,Ltd. or Huazhi.We established Huazhi in April 2009 in
conjunction with SmartSoft and hold 40% interest, to provide high end IT
consulting services for banks in China.





Yuxin Data Technologies Co.,
Ltd.(Tianjin) or Yuxin Data.We established Yuxin Data in March 2010, a
joint venture with NTT Data Group and hold 49% interest, to provide E-Banking
ASP services to small banks in China.





D.
Property, plant and equipment.




Our
principal executive offices are located at Beijing Global Trade Center, 36 North
Third Ring Road East, Dongcheng District, Beijing where we lease approximately
3,461 square meters of office space. We have 24 other office locations in China,
including Shanghai, Guangzhou, Xian, Xiamen, Zhengzhou, Chengdu, Shijiazhuang,
Shenyang, Nanjing, Dalian, Harbin, Wuxi, Changzhou, Wuhan, Changsha, Dongguan,
Nanning, Liuzhou Changchun, Tianjin, Yichang, Chongqing, Jinan, and Shenzhen. We
own one property in Xiamen with a gross floor area of 1,258 square meters and
another property in Beijing with a gross floor area of 373 square meters, and we
lease properties in all other cities with an aggregate gross floor area of 4,899
square meters. We use all these properties as office space for our employees.
The aggregate rent for all our offices is RMB747,421 (USD109,461) per
month.




ITEM
4A.       UNRESOLVED STAFF
COMMENTS




Not
applicable.




49




ITEM
5.          OPERATING AND
FINANCIAL REVIEW AND PROSPECTS




The
following discussion and analysis of our financial condition and results of
operations in should be read in conjunction with the section titled “Selected
Consolidated Financial Data” and our consolidated financial statements and
related notes included elsewhere in this annual report. This discussion contains
forward-looking statements that involve risks, uncertainties and assumptions.
Our actual results and timing of selected events may differ materially from
those anticipated in these forward-looking statements. In evaluating our
business, you should carefully consider the information provided in “Item 3. Key
Information — Risk factors”.




OVERVIEW




We are a
leading provider of information technology, or IT, solutions and services to
China’s domestic banking sector. Our solutions and services enable our clients
to establish and maintain IT platforms and operational capabilities to better
manage their operations and serve their customers’ needs.




Historically,
we derived a majority of our revenues from providing system integration services
(now included under Platform Services), which included selecting, procuring and
reselling third-party hardware equipment and software applications to our
clients, monitoring and assisting in the installation of such equipment and
software at our clients’ sites and assisting in the integration of the installed
equipment and software with our clients’ existing IT systems. Due to the lower
gross margin and growth potential of Platform Services as compared to
software-related solutions and services, in 2006 we began to shift our focus
away from providing Platform Services.




Our
current business focus is to develop and deliver an extensive suite of
software-related solutions and services tailored toward specific functional
needs of our clients. Our software-related solutions and services encompass all
major categories of IT solutions used in China’s banking industry, namely
Channel Solutions, Management Solutions and Business Solutions. Our revenues
derived from providing software-related solutions and services have grown at a
much faster pace than our revenues derived from Platform Services in recent
years, in part due to our shifted business focus, and in part due to our
acquisitions. For a detailed description, please see “Item 4. Information on the
Company - A. History and development of the Company. - Corporate
History.”





We
provide our software and software-related solutions to our clients predominately
on a project-by-project basis, and charge an all inclusive fee for each project.
Previously, these contracts were recognized under the heading of IT Solutions
and Services, however, in this 20-F and going forward they will be classified
under Software & Solutions.





We charge
Platform Services based on material and service cost plus certain margin.
Previously, these contracts were recognized under the heading of Systems
Integration, however, in this 20-F and going forward they will be classified
under Platform & Maintenance Services and in the sub-category of Platform
Services.




We also
provide IT maintenance and support services to our clients as well as limited
agency services, in which we source third-party IT equipment from other system
integrators and charge clients on a commission basis. Previously, these
contracts were recognized under the heading of IT Solutions and Services,
however, in this 20-F and going forward they will be classified under Platform
& Maintenance Services and in the sub-category of Maintenance &
Ancillary Services.





Beginning
in early 2007, we launched our POS merchant acquiring business, which deploys
and serves POS terminals in collaboration with our partner banks, enabling
merchants to process debit card and credit card payments. We receive a
percentage of the transaction processing fees that occur through our POS
terminals. Revenue from our POS merchant acquiring business currently accounts
for a relatively small portion of our revenues. In the past these revenues were
included in our Channel Solutions revenues, under our IT Solutions and Services
business. In this 20-F and going forward our POS revenues will be a distinct
category.


Our
clients are primarily banking institutions in China; for a complete description,
see “Item 4. B. Business Overview — Our Clients.”
  We have
one operating segment, we track our revenues by types and did not track
expenses, operating income, or net income by revenue streams.


50




Our
revenues was RMB380.4 million (USD 55.7 million) in 2009 as compared to RMB676.8
million in 2008 and RMB435.5 million in 2007, primarily due to a decrease in
Platform & Maintenance Service of RMB325.7million (USD 47.7 million) in
2009.





·
            Our
      Software & Solutions revenue grew from RMB192.4 in 2007 to RMB263.9
      million in 2008 and to RMB281.9 million (USD 41.3 million) in 2009,
      representing a CAGR of 21.0%.





·
            Our
      Platform & Maintenance Services revenue decreased to RMB72.6 (USD10.6
      million) in 2009 from RMB398.3 million in 2008 and from RMB239.5 million
      in 2007.





·
            Our
      POS business was established in 2007 and revenues grew from RMB3.6 million
      in 2007 to RMB14.6million in 2008 and to RMB25.9 million (USD3.8 million)
      in 2009, representing a CAGR of
166.6%.





·
            As
      a result our gross margins were 36.2% in 2007, 33.6% in 2008 and 46.1% in
      2009.




Our net
loss was RMB 4.2 million (USD0.6 million) in 2009 as compared to the net income
of RMB66.7 million in 2007 and RMB81.0 million in 2008.





Our
growth has been and will continue to be driven in large part by the sales of our
solutions and services to our banking clients. We expect our sales of solutions
and services to Joint-Stock banks and SMBs to continue to increase at a faster
pace than our sales to the Top Four banks. Our past growth has been partly
attributable to the acquisitions we made in 2007 as well as our acquisition of
e-Channels in November 2006. We expect to continue to grow both organically and
through acquisitions.




BASIS
OF PRESENTATION




Yucheng
was incorporated on November 17, 2005 as a subsidiary of China Unistone. After
completion of a redomestication merger of China Unistone with and into Yucheng
and a three-party acquisition among Yucheng, Sihitech BVI and e-Channels BVI on
November 24, 2006, Yucheng became the holding company of our business. Sihitech
BVI was our predecessor from an accounting perspective, and the purchase method
of accounting was used in consolidating e-Channels BVI and China Unistone into
Sihitech BVI. Therefore, our operating results for 2006 reflected those of
Sihitech BVI and the operating results of e-Channels BVI from November 25, 2006
to the end of 2006; and our operating results for 2007 reflected those of both
Sihitech BVI and e-Channels BVI as well as our 2007 acquisitions from their
respective acquisition date to the end of 2007.




FACTORS
AFFECTING OUR RESULTS OF OPERATIONS




Our
results of operations in any period are affected by a number of factors,
including factors affecting our industry and factors related to the management
and operations of our businesses.


Factors
affecting our industry




Growth
of the banking industry in China and the need for third-party IT services
providers





Our
growth has been attributable to the rapid development of China’s banking
industry. China’s banking industry has undergone significant reforms and
modernization in recent years in order to manage the challenges associated with
a rapidly developing economy and to fulfill China’s requirements as a WTO
member. As part of such efforts, since 2005, a number of Chinese banks have
listed their shares on the international stock exchange, including ICBC, which
is the largest IPO to date, China Construction Bank, and Bank of
China.




51




To
continue to meet the demands of the changing market landscape in China, banks
have greatly increased their IT spending in order to upgrade their systems and
capabilities. As most of Chinese banks do not have strong in-house IT
development capabilities, these banks largely rely on third-party IT service
suppliers, such as us, to meet their IT needs. We expect that as competition in
China’s banking industry intensifies, and as China’s banks strive to meet Basel
II requirements, they will rely more heavily on third-party IT solution and
service providers for their IT needs. Any factors that adversely affect the
growth of China’s banking industry, such as a general slow-down in China’s
economy, a global economic downturn, or the adoption of economic growth and
inflation rate policies by the PRC central government, may reduce the
profitability of China’s banks and result in a decrease in their IT spending,
which could in turn adversely affect our business. Furthermore, our results of
operations are also affected by the extent China’s banks continue to outsource
their IT services. Any increase or decrease in the extent of outsourcing IT
solutions and services by China’s banks will positively or negatively affect
business opportunities available to us.




Changes
in decision making over IT spending among our clients




We derive
the substantial majority of our revenues by providing IT related solutions and
services to China’s banks on a project-by-project basis. We have observed a
recent shift in the way IT spending is decided in China’s banks, with more
decisions being made at banks’ head offices instead of provincial level
branches. Such centralization changes the competitive dynamics in our industry
and generally favors large IT service providers with premium brands, broad
product offerings and deep client relationships, in particular relationships
with the bank’s head offices.




Competition
in China’s banking IT service industry




Our
results of operations have been, and will continually be primarily affected by,
the competitive landscape in China’s banking IT service industry. Due to
competitive pressures between banks, we have observed that SMBs in China are
focusing more on an IT service provider’s reputation and service quality as
compared to price when awarding IT projects, which enhances our competitive
position. On the other hand, as more competitors enter the IT service market for
big banks, these banks may be able to extract increasing pricing concessions. In
addition, as China’s banking IT service industry develops, more global IT
service providers are entering the market, which may further intensify
competitive pressures.




Factors
related to the management and operation of our businesses.




Revenue
mix




We derive
our revenues primarily from two sources, Software & Solutions and Platform
& Maintenance Services. Platform & Maintenance Services has a much lower
gross margin as compared to Software & Solutions. Our consolidated gross
profit and gross margin are greatly affected by our revenue mix.





We began
to shift our business focus to Software & Solutions in 2006. We currently
typically only provide Platform & Maintenance Services as part of a larger
client engagement that includes Software & Solutions, or if we anticipate
that the Platform & Maintenance Services component will lead to future
Software & Solutions revenue from the same client. As a result of these
factors, our revenues from Platform & Maintenance Services as a percentage
of total revenues on a net basis was 16.8% in 2009, 25.0% in 2008 and 22.8% in
2007. Our gross margins on a gross basis have therefore fluctuated in line with
our revenue mix and were 46.1% in 2009 compared to 33.6% in 2008and 36.2% in
2007. We intend to continue to focus on providing Software & Solutions, and
expect the percentage of our revenues from Platform & Maintenance Services
to gradually decrease.




Timing
of Chinese banks’ outsourced IT projects




Substantially
all of our revenues are derived from outsourced IT projects for China’s Banks.
As a result, our revenues for any given period are affected by the timing of our
clients’ IT projects, which in turn depends on their internal budgeting and
planning process. This process may differ, depending on the type of client and
project. For example, the head offices of our Top Four and Joint-Stock bank
clients generally determine the major IT solutions and services projects
according to an annual budget and plan, which is usually finalized in the first
calendar quarter of each year. In contrast, regional branches of these big banks
and our SMB clients may decide smaller projects on ad hoc basis and follow a
less precise schedule. For more detailed information, please see “Item 3. Key
Information – D. Risk factors. – Risks relating to our business – Fluctuations
in our clients’ annual IT budgets and spending cycles and other factors can
cause our revenues and results of operations to vary significantly from quarter
to quarter and from year to year.”


52




Client
composition




In 2006,
our clients were primarily China’s Top Four banks. Beginning in 2007, we have
gradually expanded our client base to include more Joint-Stock banks as well as
SMBs. The percentage of our revenues derived from Joint-Stock banks accounted
for 11.4% in 2007, 15.9% in 2008 and 26.8% in 2009. At the same time, SMBs
represented the following percentages of our revenues 16.3% in 2007, 17.1% in
2008 and 22.1% in 2009.





Top Four
banks, because of their size, generally have the strongest bargaining power in
their negotiations with us, and generally require extensive customization of our
solutions. On the other hand, they have not been as price sensitive in the past
because of the complexity of their projects and their financial resources;
however, this trend may be changing due to increasing competition in the banking
IT service industry. Joint-Stock banks project requirement and budgets are in
many respects similar to the Top Four banks. In contrast, SMBs generally have
fewer customization requirements, enabling us to sell repeatable solutions with
minimal customization. In addition, we are more in an equal footing in contract
negotiations with SMBs, which have gradually realized the benefits of our
leading products. Our changing client composition and changes in their behavior
are expected to affect our future results of operations.




Success
of our new business initiatives




We
launched the POS business in early 2007 and as of the end of 2009 had deployed
23,269 terminals. For a complete description of this business, see “Item 4 –
Information on the Company – B. Business overview – POS Merchant Acquiring
Services.” As we bear the initial sales and marketing costs as well as the
capital expenditure relating to the deployed POS terminals, while revenues from
this business, which directly relate to the value transacted through each
deployed POS terminal, take time to ramp up, this business is expected to
negatively affect our results of operations until 2011.





In
addition, we have recently started to provide our online banking solutions and
services in a per-transaction or per-user based revenue model rather than our
traditional project-based revenue model, which, similar to our POS business,
requires significant initial capital expenditures while revenues will take time
to ramp up. We expect that these new business initiatives will bring us revenue
predictability and stability in the long-run.





Success
in our acquisition and integration of acquired businesses




In
addition to organic growth, we intend to grow by continuing to acquire or invest
in complementary businesses to our existing business. Our acquisition of
e-Channels in November 2006 and our acquisitions of five companies in 2007
broadened our solution and service offerings, increased our client base,
strengthened our management talent and employee base and created a wider range
of cross-selling and up-selling opportunities, which greatly contributed to our
past growth, in particular our revenue growth from Software & Solutions and
the improvement of our overall gross margin. Our future growth will continue to
be affected by our ability to identify appropriate acquisition targets, acquire
such targets at appropriate costs, integrate the acquired businesses with our
existing businesses and realize synergies from such acquisitions. In addition,
as China’s banks are becoming more sophisticated in their IT requirements, they
are increasingly favoring large solution and service providers with solid
financial background and broad product offerings. As a result, our industry will
be consolidating, which we believe will present larger players in the industry,
such as us, more opportunities to grow by acquisition.




CRITICAL
ACCOUNTING POLICIES




Our
discussion and analysis of our financial condition and results of operations are
based on our consolidated financial statements which have been prepared in
accordance with US GAAP. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of our assets and liabilities that are not
readily available from other sources. Actual results may differ from these
estimates under different assumptions or conditions.




53




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 if changes in the accounting estimates that
are reasonably likely to occur periodically, could materially impact the
consolidated financial statements. We believe that the following accounting
policies involve a higher degree of judgment and complexity in their application
and require us to make significant accounting estimates. The following
descriptions of critical accounting policies, judgments and estimates should be
read in conjunction with our consolidated financial statements and other
disclosures included in this annual report.




Revenue
recognition




The
Company generates revenues primarily from Software & Solutions, Platform
& Maintenance Services and POS services. Revenue is recognized as
follows:




(i) Software & Solutions–they
mainly consist of services including implementation, customization, training,
consulting and post-contract customer support (“PCS”). Revenue from software and
solutions services is generated primarily from customer orders in which
customers purchase bundled solutions that include the Company’s software or
software system and services, and third party hardware. Our bundled solutions
generally require significant production, modifications, or customization of
software or software system, contract accounting is therefore applied in
accordance with ASC Topic 605-35, Construction-Type and
Production-Type Contracts, and ASC Topic 985-605, Software - Revenue
Recognition. Based on our fact pattern, we apply the
percentage-of-completion method of revenue recognition to account for the
bundled solutions to the period from the start of the significant production,
modification, or customization through to the last element delivered, which is
the end of the PCS service period. Labor costs and direct project expenses are
used to determine the stage of completion. Revisions in estimated contract
profits are made in the period in which the circumstances requiring the revision
become known. Provisions, if any, are made for anticipated losses on uncompleted
contracts.




In a
typical bundled solutions contract that includes PCS, the Company generally
offers the PCS to customers for one year. In limited circumstances, the Company
would offer PCS for more than one year.  In dealing with one-year PCS,
the Company follows ASC Topic 985-605 to recognize PCS revenue upon delivery of
the software & solutions, as it considers that (i) the PCS fee is included
with the initial solution service fee; (ii) the PCS included with the initial
solution service is for one year or less; (iii) the estimated cost of providing
PCS during the arrangement is insignificant and (iv) unspecified
upgrades/enhancements offered during the PCS arrangements historically have been
and are expected to continue to be minimal and infrequent.  In dealing
with bundled solutions contract that include multi-year PCS, the Company
recognizes the revenue from the bundled solutions services using the
percentage-of-completion method as mentioned above.
  Costs and
estimated earnings in excess of billings on uncompleted contracts consist of
recognized recoverable costs and accrued profits on contracts for which billings
had not been presented to customers as of the balance sheet
date.  Billings in excess of revenue recognized for which payments
have been received are deferred until the applicable revenue recognition
criteria have been met.




The
determination of the amount of revenue requires us to make estimates about total
cost to complete the project and the stage of completion. The assumptions,
estimates, and uncertainties inherent in determining the stage of completion
affect the timing and amounts of revenues and expenses reported. If we do not
have a sufficient basis to measure the progress of completion or to estimate the
total contract revenues and costs, revenue is recognized when the project is
complete and, if applicable, the final acceptance is received from the customer.
The over or under recognized contract profits will be recognized in the income
statement when the actual costs were known or in the year in which the project
is complete.




54




(ii) Platform & Maintenance
Services–Platform
& Maintenance Services consist of system integration service, agency sales
and maintenance services. System integration services mainly consist of value
added services of planning, designing, installing, integrating and testing of
hardware sold to customers.  Revenue from system integration services
is recognized in accordance with FASB ASC Topic 605, Revenue Recognition, when the
following conditions are all met:  persuasive evidence of an
arrangement exists, system integration services have been rendered and products
have been delivered and accepted, the price is fixed or determinable and,
collectibility is reasonably assured. Customer’s acknowledgement evidences their
acceptance of the system integration work being completed at which time revenue
is recognized. The contract revenue and related costs are deferred if the
customer’s acknowledgement is not obtained.


Revenue
from sales of IT equipment and software to the end users, which are limited to
passing the IT equipment and software from vendors to end users, is treated as
agency sales. The Company records the net difference between the amount it bills
to end users and the fees charged by third party vendors as revenue. The Company
considers the criteria set out in ASC Topic 605-45, Principal Agent
Considerations, in determining whether it should recognize such revenues
at gross or net of revenue. The Company believes that based on its arrangement
with the system integrators, end users (banks) and the third party IT
manufacturers, the net approach is appropriate as the Company is not the primary
obligor to the end users, does not take general inventory risk, does not have
latitude in establishing price and does not have discretion in supplier
selection with respect to the IT equipment or software delivered to end
users.




Maintenance
service revenue is recognized ratably over the maintenance period.





(iii) POS service–POS service is a
business process outsourcing service, including merchant acquisition,
deployment, installation and maintenance of POS terminals, merchant training and
technical support. POS revenue is recognized in accordance with ASC Topic 605,
when the following conditions are all met: persuasive evidence of an arrangement
exists, service is performed, the price is fixed or determinable and,
collectibility is reasonably assured.




Allowance
for Doubtful Accounts




Our
allowance for doubtful accounts is based on management’s assessment of the
business environment, customers’ financial condition, historical collection
experience, accounts receivable aging, customer disputes and the collectability
of specific customer accounts. If there were a deterioration of a major
customer’s creditworthiness, or actual defaults were higher than our historical
experience, our estimates of the recoverability of amounts due to us could be
overstated, which could have an adverse impact on our operating results. The
allowance for doubtful accounts is also affected by the time at which
uncollectible accounts receivable balances are actually written
off.




Impairment
of long-lived assets




The
Company evaluates for impairment its long-lived assets to be held and used,
including properties and equipment, intangible assets and other non-current
assets, when events or changes in circumstances indicate, in management’s
judgment, that the carrying value of such assets may not be recoverable in
accordance with ASC Topic 360, Property, Plant and
Equipment, or ASC Topic 350-30, General Intangibles Other than
Goodwill, or ASC Topic 340, Other
Assets and Deferred Costs. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to estimate
undiscounted future cash flows expected to be generated by the
asset.  If the carrying value of an asset exceeds its estimated future
cash flows, an impairment charge is recognized by the amount that the carrying
value exceeds the estimated fair value.
  Assets to
be disposed of would be separately presented in the balance sheet and reported
at the lower of carrying amount or estimated fair value less the cost to sell,
and are no longer depreciated.
  Judgments
and assumptions are inherent in management’s estimate of undiscounted future
cash flows used to determine recoverability of an asset and the estimate of an
asset’s fair value used to calculate the amount of impairment to recognize. The
use of alternate judgments and/or assumptions could result in the recognition of
different levels of impairment charges in the consolidated financial
statements.


55




Capitalization
of internal software development costs




Internal
development of software products is accounted for in accordance with ASC Topic
985-20, Costs of Software to
be Sold, Leased, or Marketed. ASC Topic 985-20 requires that the cost of
developing software be expensed prior to establishing technological feasibility
and those costs be capitalized once technological feasibility has been
established. Capitalization ceases upon general release of the software. The
determination of whether internal software development costs are subject to
capitalization is, by its nature, highly subjective and involves significant
judgments. This decision could significantly affect earnings during the
development period. Also, judgement is required in determination of no
significant subsequent testing cost will be incurred after the capitalization of
software development costs. Further, once capitalized, the software costs are
generally amortized on a straight-line basis over the estimated economic life of
the product. The determination of the expected useful life of a product is
highly judgmental. Finally, capitalized software costs must be assessed for
realizability at the end of each reporting period.




Pre-contract
costs




Due to
the business environment in which the Company operates, it is common practice
that the Company commences the software development or IT consulting project for
its banking clients without commercial contracts being signed. If the contracts
are not obtained during the reporting period where implementation costs have
been incurred, the Company defers revenue recognition for the related contracts
until contracts are obtained. In accordance with ASC Topic 720-15, Start-Up Costs, costs that
are incurred for a specific anticipated contract and that will result in no
future benefits unless the contract is obtained, including cost of equipment,
direct labour costs, and other ancillary costs, are deferred until receipt of
the signed contract, and are then included in contract costs or
inventory.  Such deferred costs, subject to their not being related to
costs of start-up activities, are evaluated periodically for probability of
recoverability.  If deemed unrecoverable, deferred costs are expensed
to operating expenses.
 
 Costs of
start-up activities, including organization costs, are expensed as
incurred.
 
 Costs
incurred in connection with anticipated contracts are deferred outside the
contract cost or inventory classification if their recovery from future contract
revenue or from other dispositions is considered probable.
  Goodwill




Goodwill
represents the excess of the purchase price and related costs over the fair
value assigned to net tangible and identifiable intangible assets of business
acquired and accounted for under the purchase method.




In
accordance with ASC Topic 350, Goodwill, the impairment
evaluation of goodwill is conducted annually, or more frequently, if events or
changes in circumstances indicate that an asset might be impaired. The
evaluation is performed by using a two-step process. In the first step, the fair
value of each reporting unit is compared with the carrying amount of the
reporting unit, including goodwill. The estimated fair value of the reporting
unit is generally determined on the basis of discounted future cash flows. If
the estimated fair value of the reporting unit is less than the carrying amount
of the reporting unit, then a second step must be completed in order to
determine the amount of the goodwill impairment that should be recorded. In the
second step, the implied fair value of the reporting unit’s goodwill is
determined by allocating the reporting unit’s fair value to all of its assets
and liabilities other than goodwill (including any unrecognized intangible
assets) in a manner similar to a purchase price allocation. The resulting
implied fair value of the goodwill that results from the application of the
second step is then compared to the carrying amount of the goodwill and an
impairment charge is recorded for the difference.




The
assumptions used in the estimate of fair value are generally consistent with the
past performance of each reporting unit and are consistent with the projections
and assumptions that are used in current operating plans. Such assumptions are
subject to change as a result of changing economic and competitive conditions.
Although we believe the historical assumptions and estimates we have made are
reasonable and appropriate, different assumptions and estimates could materially
impact our reported financial results. We did not recognized any impairment
charges in fiscal 2009, 2008 or 2007.




56
  A
reporting unit is an operating segment, or one unit below. The component of an
operating segment is a reporting unit if the component constitutes a business
for which discrete financial information is available and segment management
regularly reviews the operating results of that component. In the fiscal 2009,
2008 and 2007 we operated in one reporting segment. We have two reporting units
which are two components below the operating segment:  1) component
including revenue streams “Software & Solutions” and “Platform &
Maintenance Services”; and 2) component comprising the revenue stream
“POS”.
  Events or
changes in facts and circumstances that we consider as impairment indicators
include but are not limited to the following:
 • significant
underperformance of our business relative to expected operating
results;
 •
significant adverse economic and industry trends;
 •
significant decline in our market capitalization for an extended period of time
relative to net book value; and
 •
expectations that a reporting unit will be sold or otherwise
disposed.





Income
taxes




Our
effective tax rate includes the impact of certain undistributed foreign earnings
for which no U.S. taxes have been provided because such earnings are planned to
be indefinitely reinvested outside the United States. Remittances of foreign
earnings to the U.S. are planned based on projected cash flow, working capital
and investment needs of our foreign and domestic operations. Based on these
assumptions, we estimate the amount that will be distributed to the U.S. and
provide U.S. federal taxes on these amounts. Material changes in our estimates
could impact our effective tax rate.





We record
a valuation allowance to reduce our deferred tax assets to the amount that is
more likely than not to be realized. In order for us to realize our deferred tax
assets, we must be able to generate sufficient taxable income in those
jurisdictions where the deferred tax assets are located. We consider future
growth, forecasted earnings, future taxable income, the mix of earnings in the
jurisdictions in which we operate and prudent and feasible tax planning
strategies in determining the need for a valuation allowance. In the event we
were to determine that we would not be able to realize all or part of our net
deferred tax assets in the future, an adjustment to the deferred tax assets
would be charged to earnings in the period in which we make such a
determination. Likewise, if we later determine that it is more likely than not
that the net deferred tax assets would be realized, we would reverse the
applicable portion of the previously provided valuation allowance.




RECENTLY
ISSUED ACCOUNTING STANDARDS




Recently
Adopted Accounting Pronouncements





In May
2009, the FASB issued ASC Topic 855-10, Subsequent Events (“ASC 855-10”). ASC
855-10 provides general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. ASC 855-10 is applicable for interim or
annual periods after June 15, 2009.  The Company adopted this amended
topic effective July 1, 2009.





In June
2009, the FASB issued SFAS No. 168, The ‘FASB Accounting Standards Codification’
and the Hierarchy of Generally Accepted Accounting Principles, which is codified
as ASC Topic 105 (“ASC 105”). ASC 105 establishes the “FASB Accounting Standards
Codification” ( “Codification”), which officially launched July 1, 2009, to
become the source of authoritative U.S. generally accepted accounting principles
(“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules
and interpretive releases of the Securities and Exchange Commission (“SEC”)
under authority of federal securities laws are also sources of authoritative
U.S. GAAP for SEC registrants. The subsequent issuances of new standards will be
in the form of Accounting Standards Updates that will be included in the
Codification. Generally, the Codification is not expected to change U.S. GAAP.
All other accounting literature excluded from the Codification will be
considered non-authoritative.  ASC 105 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. The Company has adopted ASC 105 for the year ending March 31, 2010. The
adoption of this Statement will not impact the results of operations or
financial position, as it only required disclosures. Beginning with this Annual
Report on Form 10-K for March 31, 2010, and in all filings thereafter,
references to Financial Accounting Standards that have been codified in the FASB
Accounting Standards Codification have been replaced with references to the
appropriate guidance in the Codification.


57





In
December 2009, the FASB issued ASU 2010-02, Accounting and Reporting for
Decreases in Ownership of a Subsidiary - a Scope Clarification, under ASC Topic
810, Consolidation. This update provides amendments to ASC Subtopic 810-10 and
related guidance within U.S. GAAP to clarify the scope of the decrease in
ownership provisions of the Subtopic and related guidance. The amendments in ASU
2010-02 also clarify that the decrease in ownership guidance does not apply to
certain transactions even if they involve businesses. The amendments were
effective for transactions occurred after December 15, 2009. The adoption of ASU
No. 2010-02 did not have a material impact on the Company’s consolidated
financial statements.





In
January 2010, the FASB issued ASU 2010-04, Accounting for Various
Topics—Technical Corrections to SEC Paragraphs (SEC Update). The adoption of ASU
2010-04 did not have a material impact on the Company’s consolidated financial
statements.





In
February 2010, the FASB issued ASU No. 2010-09, “Subsequent Events (Topics 855):
Amendments to certain Recognition and Disclosure Requirements.” An entity that
is an SEC filer is not required to disclose the date through which subsequent
events have been evaluated. This change alleviates potential conflicts between
the ASC and the SEC’s requirements. In addition, the scope of the “reissuance”
disclosure requirements is refined to include revised financial statements only.
This update was effective February 24, 2010. The adoption of ASU No. 2010-09 did
not have a material impact on the Company’s financial statements.





RECENT
ACCOUNTING PRONOUCEMENTS NOT YET ADOPTED





In
October 2009, the FASB amended the Accounting Standards Codification (“ASC”) as
summarized in ASU 2009-14, Software (ASC Topic 985): Certain Revenue
Arrangements That Include Software Elements, and ASU 2009-13, Revenue
Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. As
summarized in ASU 2009-14, ASC Topic 985 has been amended to remove from the
scope of industry specific revenue accounting guidance for software and software
related transactions, tangible products containing software components and
non-software components that function together to deliver the product’s
essential functionality. As summarized in ASU 2009-13, ASC Topic 605 has been
amended (1) to provide updated guidance on whether multiple deliverables exist,
how the deliverables in an arrangement should be separated, and the
consideration allocated; (2) to require an entity to allocate revenue in an
arrangement using estimated selling prices of deliverables if a vendor does not
have vendor-specific objective evidence (“VSOE”) or third-party evidence of
selling price; and (3) to eliminate the use of the residual method and require
an entity to allocate revenue using the relative selling price method. The
accounting changes summarized in ASU 2009-14 and ASU 2009-13 are both effective
for fiscal years beginning on or after June 15, 2010, with early adoption
permitted. Adoption may either be on a prospective basis or by retrospective
application. The Company is currently evaluating the impact of ASU 2009-13 and
ASU 2009-14, if any, that they may have on the Company’s consolidated financial
statements.





In
January 2010, the FASB issued ASU No. 2010-06 (ASU No. 2010-06), Improving
Disclosure about Fair Value Measurements, under ASC Topic 820, Fair value
Measurements and Disclosures, to improve and provide new disclosures for
recurring and nonrecurring fair value measurements under the three-level
hierarchy of inputs for transfers in and out of Levels 1 and 2, and activity in
Level 3.  This update also clarifies existing disclosures of the level of
disaggregation for the classes of assets and liabilities and the disclosure
about inputs and valuation techniques. ASU No. 2010-06 new disclosures and
clarification of existing disclosure is effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements.  Those disclosures are
effective for financial statements issued for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years.  The
Company is currently accessing the impact, if any, of ASU No. 2010-06
disclosures about purchases, sales, issuances, and settlements in the roll
forward of activity in Level 3 fair value measurements the Company’s
consolidated financial statements.





In
February 2010, the FASB issued ASU No. 2010-08, Technical Corrections to Various
Topics. This update’s purpose is to eliminate GAAP inconsistencies, update
outdated provisions, and provide needed clarifications. The company does not
expect the adoption of ASU No. 2010-08 will have a material impact on the
Company’s consolidated financial statements.


58





A.
Operating Results.





The
following table sets forth a summary of our consolidated statement of operations
for the periods indicated. The operation results of any period are not
necessarily indicative of the results that may be expected for any future
period.





For
      the Year Ended December 31,2007
                          
                          
                          2008
                          
                          
                          2009RMB
                          
                          
                          %
                          
                          
                          RMB
                          
                          
                          %
                          
                          
                          RMB
                          
                          
                          USD
                          
                          
                          %(in
      thousands, except percentages)Revenues
                          
                          
                          435,519
                          
                          
                          
                          100.0
                          
                          
                          
                          676,819
                          
                          
                          
                          100.0
                          
                          
                          
                          380,364
                          
                          
                          
                          55,705
                          
                          
                          
                          100.0Cost
      of revenues
                          
                          
                          (277,826
                          )
                          
                          
                          (63.8
                          )
                          
                          
                          (449,277
                          )
                          
                          
                          (66.4
                          )
                          
                          
                          (204,975
                          )
                          
                          
                          (30,019
                          )
                          
                          
                          (53.9
                          )Gross
      profit
                          
                          
                          157,693
                          
                          
                          
                          36.2
                          
                          
                          
                          227,542
                          
                          
                          
                          33.6
                          
                          
                          
                          175,389
                          
                          
                          
                          25,686
                          
                          
                          
                          46.1Operating
      expensesResearch
      and development expenses
                          
                          
                          (8,370
                          )
                          
                          
                          (1.9
                          )
                          
                          
                          (10,148
                          )
                          
                          
                          (1.5
                          )
                          
                          
                          (13,828
                          )
                          
                          
                          (2,025
                          )
                          
                          
                          (3.6
                          )Selling
      and marketing expenses
                          
                          
                          (29,053
                          )
                          
                          
                          (6.7
                          )
                          
                          
                          (49,383
                          )
                          
                          
                          (7.3
                          )
                          
                          
                          (53,822
                          )
                          
                          
                          (7,882
                          )
                          
                          
                          (14.1
                          )General
      and administrative expenses
                          
                          
                          (50,668
                          )
                          
                          
                          (11.6
                          )
                          
                          
                          (95,425
                          )
                          
                          
                          (14.1
                          )
                          
                          
                          (126,492
                          )
                          
                          
                          (18,525
                          )
                          
                          
                          (33.3
                          )Total
      operating expenses
                          
                          
                          (88,091
                          )
                          
                          
                          (20.2
                          )
                          
                          
                          (154,956
                          )
                          
                          
                          (22.9
                          )
                          
                          
                          (194,142
                          )
                          
                          
                          (28,432
                          )
                          
                          
                          (51.0
                          )Income
      (Loss) from operations
                          
                          
                          69,602
                          
                          
                          
                          16.0
                          
                          
                          
                          72,586
                          
                          
                          
                          10.7
                          
                          
                          
                          (18,753
                          )
                          
                          
                          (2,746
                          )
                          
                          
                          (4.9
                          )Other
      income (expenses)
                          
                          
                          4,453
                          
                          
                          
                          1.0
                          
                          
                          
                          (3,840
                          )
                          
                          
                          (0.6
                          )
                          
                          
                          3,108
                          
                          
                          
                          455
                          
                          
                          
                          0.8Income
      (Loss) before non-controlling interests and income taxes
                          
                          
                          74,055
                          
                          
                          
                          17.0
                          
                          
                          
                          68,746
                          
                          
                          
                          10.2
                          
                          
                          
                          (15,645
                          )
                          
                          
                          (2,291
                          )
                          
                          
                          (4.1
                          )Income
      tax (expenses) benefit
                          
                          
                          (5,528
                          )
                          
                          
                          (1.3
                          )
                          
                          
                          9,538
                          
                          
                          
                          1.4
                          
                          
                          
                          7,730
                          
                          
                          
                          1,132
                          
                          
                          
                          2.0Income
      (Loss) before non-controlling interests
                          
                          
                          68,527
                          
                          
                          
                          15.7
                          
                          
                          
                          78,284
                          
                          
                          
                          11.6
                          
                          
                          
                          (7,915
                          )
                          
                          
                          (1,159
                          )
                          
                          
                          (2.1
                          )Non-controlling
      interests
                          
                          
                          (1,813
                          )
                          
                          
                          (0.4
                          )
                          
                          
                          2,711
                          
                          
                          
                          0.4
                          
                          
                          
                          3,715
                          
                          
                          
                          544
                          
                          
                          
                          1.0Net
      income (loss)
                          
                          
                          66,714
                          
                          
                          
                          15.3
                          
                          
                          
                          80,995
                          
                          
                          
                          12.0
                          
                          
                          
                          (4,200
                          )
                          
                          
                          (615
                          )
                          
                          
                          (1.1
                          )





REVENUES




In
2007, 2008 and 2009, our overall revenues amounted to RMB435.5 million, RMB676.8
and RMB380.4 million (USD55.7 million), respectively. We categorize our revenues
by source as Software & Solutions, Platform & Maintenance Services and
POS Merchant Acquiring Services.




Software
& Solutions




Software
& Solutions includes revenues we generated from software and
software-related solutions, such as sale of software licenses, custom software
development, IT consulting services and implementation.




We
generally provide software-related solutions and services to our clients on a
project-by-project basis, and record revenues based on the percentage of
completion of our client projects. Our Software & Solutions revenues can be
further broken into Channel Solutions, Business Solutions and Management
Solutions.




Software
& Solutions is the focus of our core business. Software & Solutions
revenue as a percentage of our revenues accounted for 44.2% in 2007, 39.0% in
2008 and 74.1% in 2009. We expect that Software & Solutions revenue will be
our primary area of revenue growth in the near future, and its percentage of our
revenues will continue to increase over time.




Platform
& Maintenance Services





Platform
& Maintenance Services revenue consists of revenues we generated from the
procurement and resale of third-party hardware and software to our clients, the
related installation and integration services, IT maintenance and other
services. Similar to our Software & Solutions, we also provide Platform
& Maintenance Services on a project-by-project basis, and record revenues
based on the delivery of the service.


59


Platform
& Maintenance Services have been historically a major part of our business.
However, we increase the breadth of our IT capabilities and our service
strength; we have been focusing on our Software & Solutions business, which
have higher margins and greater long-term potential. We currently provide
Platform & Maintenance Services as a component of a larger client engagement
that includes Software & Solutions projects, or if we anticipate that the
Platform & Maintenance Services project will lead to future Software &
Solutions projects from the client. Platform & Maintenance Services revenue
as a percentage of our revenues accounted for 55.0% in 2007, 58.9% in 2008, and
19.1% in 2009. Platform & Maintenance Services revenue decreased in
2009 due to bank demand for third-party hardware remained weak with year
over year comparisons influenced by the high base from aggressive Olympic
spending in 2008. We expect to gradually reduce Platform & Maintenance
Services as a percentage of our revenues





POS
Merchant Acquiring Services




Our POS
business generate revenues as consumers make payment transactions using credit
card, debit card or prepaid store card on the POS terminals we deployed. As we
receive a percentage of the payment processing fees paid to our collaborating
banks, we record revenues as the services are provided. POS revenue as a
percentage of our revenues accounted for 0.8% in 2007, 2.1% in 2008 and 6.8% in
2009. As we increase the number of our collaborating banks and the number of POS
terminals deployed, we expect our revenues from POS acquiring business to
increase.





Revenues
by sources




The
following table sets forth our revenue sources, as recognized on a net basis,
and the corresponding percentage relative to our total revenues for the periods
indicated.




For
      the Year Ended December 31,2007&
lt;
      /font>
                                                
                                                
                                                2008
                                                
                                                
                                                2009Revenues
      by sources
                                                
                                                Amount
                                                
                                                
                                                %
      of
                                                  total
                                                
                                                
                                                Amount
                                                
                                                
                                                %
      of
                                                  total
                                                
                                                
                                                %
      change
                                                  from
                                                  2007
                                                
                                                
                                                Amount
                                                
                                                
                                                %
      of
                                                  total
                                                
                                                
                                                %
      change
                                                  from
                                                  2008RMB
                                                
                                                
                                                %
                                                
                                                
                                                RMB
                                                
                                                
                                                %
                                                
                                                
                                                %
                                                
                                                
                                                RMB
                                                
                                                
                                                USD
                                                
                                                
                                                %
                                                
                                                
                                                %(in
      thousands, except percentages)Software
      & Solutions
                                                
                                                
                                                192,383
                                                
                                                
                                                
                                                75.8
                                                
                                                
                                                
                                                263,881
                                                
                                                
                                                
                                                71.1
                                                
                                                
                                                
                                                37.2
                                                
                                                
                                                
                                                281,894
                                                
                                                
                                                
                                                41,284
                                                
                                                
                                                
                                                76.2
                                                
                                                
                                                
                                                6.8POS
                                                
                                                
                                                3,644
                                                
                                                
                                                
                                                1.4
                                                
                                                
                                                
                                                14,622
                                                
                                                
                                                
                                                3.9
                                                
                                                
                                                
                                                301.3
                                                
                                                
                                                
                                                25,895
                                                
                                                
                                                
                                                3,792
                                                
                                                
                                                
                                                7.0
                                                
                                                
                                                
                                                77.1Platform
      & Maintenance Services
                                                
                                                
                                                57,815
                                                
                                                
                                                
                                                22.8
                                                
                                                
                                                
                                                92,677
                                                
                                                
                                                
                                                25.0
                                                
                                                
                                                
                                                60.3
                                                
                                                
                                                
                                                62,061
                                                
                                                
                                                
                                                9,089
                                                
                                                
                                                
                                                16.8
                                                
                                                
                                                
                                                (33.0
                                                )Total
                                                
                                                
                                                253,842
                                                
                                                
                                                
                                                100.0
                                                
                                                
                                                
                                                371,180
                                                
                                                
                                                
                                                100.0
                                                
                                                
                                                
                                                46.2
                                                
                                                
                                                
                                                369,850
                                                
                                                
                                                
                                                54,165
                                                
                                                
                                                
                                                100.0
                                                
                                                
                                                
                                                (0.4
                                                )




When
recognizing our revenues on a net basis, we had a CAGR of 20.7% from 2007 to
2009, including a CAGR of  21.0% for Software&Solutions and a CAGR
of 166.6% for POS. We have included a net basis representation of our revenues
since the majority of the Platform & Maintenance Services revenues are
simply pass-through costs related to the price of third-party software or
hardware and have little relationship to the overall health of our business. The
change only affects our Platform & Maintenance Services presentation. 
When recognized on a gross basis, a decrease of total revenue is RMB3.0 million
(USD0.4 million) from 2008 to 2009, as shown in the table below.





For
      the Year Ended December 31,2007
                          
                          
                          2008
                          
                          
                          2009Revenues
      by sources
                          
                          Amount
                          
                          
                          %
      of
                            total
                          
                          
                          Amount
                          
                          
                          %
      of
                            total
                          
                          
                          %
      change
                            from
                            2007
                          
                          
                          Amount
                          
                          
                          %
      of
                            total
                          
                          
                          %
      change
                            from
                            2008RMB
                          
                          
                          %
                          
                          
                          RMB
                          
                          
                          %
                          
                          
                          %
                          
                          
                          RMB
                          
                          
                          USD
                          
                          
                          %
                          
                          
                          %(in
      thousands, except percentages)Software
      & Solutions
                          
                          
                          192,383
                          
                          
                          
                          44.2
                          
                          
                          
                          263,881
                          
                          
                          
                          39.0
                          
                          
                          
                          37.2
                          
                          
                          
                          281,894
                          
                          
                          
                          41,284
                          
                          
                          
                          74.1
                          
                          
                          
                          6.8POS
                          
                          
                          3,644
                          
                          
                          
                          0.8
                          
                          
                          
                          14,622
                          
                          
                          
                          2.1
                          
                          
                          
                          301.3
                          
                          
                          
                          25,895
                          
                          
                          
                          3,792
                          
                          
                          
                          6.8
                          
                          
                          
                          77.1Platform
      & Maintenance Services
                          
                          
                          239,492
                          
                          
                          
                          55.0
                          
                          
                          
                          398,316
                          
                          
                          
                          58.9
                          
                          
                          
                          66.3
                          
                          
                          
                          72,575
                          
                          
                          
                          10,629
                          
                          
                          
                          19.1
                          
                          
                          
                          (81.8
                          )Total
                          
                          
                          435,519
                          
                          
                          
                          100.0
                          
                          
                          
                          676,819
                          
                          
                          
                          100.0
                          
                          
                          
                          55.4
                          
                          
                          
                          380,364
                          
                          
                          
                          55,705
                          
                          
                          
                          100.0
                          
                          
                          
                          (43.8
                          )


60






Software
& Solutions revenue by solution type





We
provide different types of software-related solutions, including Channel
Solutions, Management Solutions and Business Solutions. We experienced rapid
growth in Channel Solutions and Business Solutions from 2007 to 2009. The
following table sets forth our Software & Solutions revenue by solution
type.




For
      the Year Ended December 31,2007
                        
                        
                        2008
                        
                        
                        2009Software
      & Solutions
                          revenue
      by type
                        
                        Amount
                        
                        
                        %
      of
                          total
                        
                        
                        Amount
                        
                        
                        %
      of
                          total
                        
                        
                        %
      change
                          from
                          2007
                        
                        
                        Amount
                        
                        
                        %
      of
                          total
                        
                        
                        %
      change
                          from
                          2008RMB
                        
                        
                        %
                        
                        
                        RMB
                        
                        
                        %
                        
                        
                        %
                        
                        
                        RMB
                        
                        
                        USD
                        
                        
                        %
                        
                        
                        %(in
      thousands, except percentages)Channel
      Solutions
                        
                        
                        49,365
                        
                        
                        
                        25.7
                        
                        
                        
                        97,748
                        
                        
                        
                        37.0
                        
                        
                        
                        98.0
                        
                        
                        
                        131,660
                        
                        
                        
                        19,282
                        
                        
                        
                        46.7
                        
                        
                        
                        34.7Management
      Solutions
                        
                        
                        97,494
                        
                        
                        
                        50.7
                        
                        
                        
                        93,850
                        
                        
                        
                        35.6
                        
                        
                        
                        (3.7
                        )
                        
                        
                        71,306
                        
                        
                        
                        10,443
                        
                        
                        
                        25.3
                        
                        
                        
                        (24.0
                        )Business
      Solutions
                        
                        
                        45,524
                        
                        
                        
                        23.6
                        
                        
                        
                        72,283
                        
                        
                        
                        27.4
                        
                        
                        
                        58.8
                        
                        
                        
                        78,928
                        
                        
                        
                        11,559
                        
                        
                        
                        28.0
                        
                        
                        
                        9.2Total
                        
                        
                        192,383
                        
                        
                        
                        100.0
                        
                        
                        
                        263,881
                        
                        
                        
                        100.0
                        
                        
                        
                        37.2
                        
                        
                        
                        281,894
                        
                        
                        
                        41,284
                        
                        
                        
                        100.0
                        
                        
                        
                        6.8





Revenues
by client types




Our
clients are primarily China’s banks; however, we also provide IT-related
solutions and services to certain non-banking clients, such as government
agencies and other corporations when such market demand arises. However, we
generally do not actively market our solutions and services to these clients and
we do not consider them as our core clients.




The
following table sets forth our revenues by client types:




2007
                                                          
                                                          
                                                          2008
                                                          
                                                          
                                                          2009Revenues by
                                                            client type
                                                          
                                                          Amount
                                                          
                                                          
                                                          % of total
                                                          
                                                          
                                                          Amount
                                                          
                                                          
                                                          % of total
                                                          
                                                          
                                                          % change
      from 2007
                                                          
                                                          
                                                          Amount
                                                          
                                                          
                                                          % of total
                                                          
                                                          
                                                          % change
                                                            from 2008RMB
                                                          
                                                          
                                                          %
                                                          
                                                          
                                                          RMB
                                                          
                                                          
                                                          %
                                                          
                                                          
                                                          %
                                                          
                                                          
                                                          RMB
                                                          
                                                          
                                                          USD
                                                          
                                                          
                                                          %
                                                          
                                                          
                                                          %(In
      thousands,except percentages)Top
      Four Banks (Tier I)
                                                          
                                                          
                                                          266,127
                                                          
                                                          
                                                          
                                                          61.1
                                                          
                                                          
                                                          
                                                          381,853
                                                          
                                                          
                                                          
                                                          56.4
                                                          
                                                          
                                                          
                                                          43.5
                                                          
                                                          
                                                          
                                                          138,692
                                                          
                                                          
                                                          
                                                          20,312
                                                          
                                                          
                                                          
                                                          36.5
                                                          
                                                          
                                                          
                                                          (63.7
                                                          )Joint-Stock
      Banks (Tier II)
                                                          
                                                          
                                                          49,757
                                                          
                                                          
                                                          
                                                          11.4
                                                          
                                                          
                                                          
                                                          107,341
                                                          
                                                          
                                                          
                                                          15.9
                                                          
                                                          
                                                          
                                                          115.7
                                                          
                                                          
                                                          
                                                          102,108
                                                          
                                                          
                                                          
                                                          14,954
                                                          
                                                          
                                                          
                                                          26.8
                                                          
                                                          
                                                          
                                                          (4.9
                                                          )SMBs (Tier III) and Other Banks(1)
                                                          
                                                          
                                                          70,883
                                                          
                                                          
                                                          
                                                          16.3
                                                          
                                                          
                                                          
                                                          115,784
                                                          
                                                          
                                                          
                                                          17.1
                                                          
                                                          
                                                          
                                                          63.3
                                                          
                                                          
                                                          
                                                          84,216
                                                          
                                                          
                                                          
                                                          12,333
                                                          
                                                          
                                                          
                                                          22.1
                                                          
                                                          
                                                          
                                                          (27.3
                                                          )Other(2)
                                                          
                                                          
                                                          48,752
                                                          
                                                          
                                                          
                                                          11.2
                                                          
                                                          
                                                          
                                                          71,841
                                                          
                                                          
                                                          
                                                          10.6
                                                          
                                                          
                                                          
                                                          47.4
                                                          
                                                          
                                                          
                                                          55,348
                                                          
                                                          
                                                          
                                                          8,106
                                                          
                                                          
                                                          
                                                          14.6
                                                          
                                                          
                                                          
                                                          (23.0
                                                          )Total
                                                          
                                                          
                                                          435,519
                                                          
                                                          
                                                          
                                                          100.0
                                                          
                                                          
                                                          
                                                          676,819
                                                          
                                                          
                                                          
                                                          100.0
                                                          
                                                          
                                                          
                                                          55.4
                                                          
                                                          
                                                          
                                                          380,364
                                                          
                                                          
                                                          
                                                          55,705
                                                          
                                                          
                                                          
                                                          100.0
                                                          
                                                          
                                                          
                                                          (43.8
                                                          )


(1)
            Includes
      PBOC, policy banks and foreign
banks.


(2)
            Includes
      mostly platform revenues from security brokage companies and telecom
      companies, and software revenues subcontracted from third parties, whose
      end customers are also banks in
China





We
provide Software & Solutions primarily to Top Four banks, in particular
China Construction Bank. In 2007, 2008 and 2009, our revenues from China
Construction Bank, our largest client, amounted to RMB257.8 million, RMB327.8
million and RMB 120.7 million (USD17.7 million), respectively, and accounted for
59.2%,47.8% and 31.7%, respectively, of our total revenues. Our contracts with
China Construction Bank were signed separately with different departments within
the bank group, branches at the provincial level and headquarters and we
consider each of them effectively separate clients, since the decision makers
and budgets are unrelated. China Construction Bank has been our client since
1999, and we have maintained a good relationship with various organizations
within the bank.




Starting
in 2007, we have actively expanded our client base to include more Joint-Stock
banks and SMBs, both through organic growth and through acquisitions of
companies with clients in those segments. As a result, revenues from our
Joint-Stock bank clients increased by RMB52.3 million, from RMB49.8 million in
2007 to RMB102.1 million (USD15.0 million) in 2009, and their percentage of our
total revenues increased from 11.4% in 2007 to 15.9% in 2008 and to 26.8% in
2009. Furthermore, our revenues from SMBs and other banks increased by
RMB13.3million from RMB70.9 million in 2007 to RMB84.2 million (USD12.3 million)
in 2009, and their percentage of our total revenues increased from 16.3% in 2007
to 17.1% in 2008 and to 22.1%in 2009.


61





The
following table sets forth our Software & Solutions revenue by client type
for the periods indicated.




2007
                              
                              
                              2008
                              
                              
                              2009Software
      &Solutions
      by
                                client
      type
                              
                              Amount
                              
                              
                              %
      of total
                              
                              
                              Amount
                              
                              
                              %
      of total
                              
                              
                              %
      change
                                from2007
                              
                              
                              Amount
                              
                              
                              %
      of total
                              
                              
                              %
      change
                                from2008RMB
                              
                              
                              %
                              
                              
                              RMB
                              
                              
                              %
                              
                              
                              %
                              
                              
                              RMB
                              
                              
                              USD
                              
                              
                              %
                              
                              
                              %(In
      thousands, except percentages)Top
      Four Banks (Tier I)
                              
                              
                              96,947
                              
                              
                              
                              50.4
                              
                              
                              
                              119,455
                              
                              
                              
                              45.3
                              
                              
                              
                              23.2
                              
                              
                              
                              121,551
                              
                              
                              
                              17,802
                              
                              
                              
                              43.2
                              
                              
                              
                              1.8Joint-Stock
      Banks (Tier II)
                              
                              
                              25,530
                              
                              
                              
                              13.3
                              
                              
                              
                              65,562
                              
                              
                              
                              24.8
                              
                              
                              
                              156.8
                              
                              
                              
                              59,283
                              
                              
                              
                              8,682
                              
                              
                              
                              21.0
                              
                              
                              
                              (9.6
                              )SMBs (Tier III)and Other Banks(1)
                              
                              
                              55,263
                              
                              
                              
                              28.7
                              
                              
                              
                              42,999
                              
                              
                              
                              16.3
                              
                              
                              
                              (22.2
                              )
                              
                              
                              75,050
                              
                              
                              
                              10,991
                              
                              
                              
                              26.6
                              
                              
                              
                              74.5Other(2)
                              
                              
                              14,643
                              
                              
                              
                              7.6
                              
                              
                              
                              35,865
                              
                              
                              
                              13.6
                              
                              
                              
                              144.9
                              
                              
                              
                              26,010
                              
                              
                              
                              3,809
                              
                              
                              
                              9.2
                              
                              
                              
                              (27.5
                              )Total
                              
                              
                              192,383
                              
                              
                              
                              100.0
                              
                              
                              
                              263,881
                              
                              
                              
                              100.0
                              
                              
                              
                              37.2
                              
                              
                              
                              281,894
                              
                              
                              
                              41,284
                              
                              
                              
                              100.0
                              
                              
                              
                              6.8


(1)
            Includes
      PBOC, policy banks and foreign
banks.


(2)
            Includes
      mostly platform revenues from security brokage companies and telecom
      companies, and software revenues subcontracted from third parties, whose
      end customers are also banks in
China..





From 2008
to 2009, our Software & Solutions revenue from SMBs grew at 74.5%, which is
much faster than our total revenue growth because we focused on providing
Software & Solutions to these bank clients. As a result, our percentage of
Software & Solutions revenue from SMBs increased to 26.6% in 2009, compared
to 16.3% in 2008, while Joint stock banks focused in 2009 on acquiring hardware.
This caused our percentage of Software & Solutions from Joint stock banks
decreased to 21.0%, compared to 24.8% in 2008.




As we
further penetrate into Joint-Stock banks and SMBs, we expect our revenue
contributions from these clients to continue to increase, in particular revenues
from Software & Solutions, resulting in further optimization of our revenue
mix. Meanwhile, we expect our revenue concentration on Top Four banks and China
Construction Bank to continue to decline.




COST
OF REVENUES




Our cost
of revenues includes costs directly attributable to revenues. Our overall cost
of revenues on a gross basis decreased 54.4% to RMB205.0 million (USD30.0
million) in 2009, compared to RMB449.3 million in 2008 primarily due to the
decrease in platform services revenue. The following table sets forth our cost
of revenues by revenue source for the periods indicated on a gross
basis.





For the Year Ended December
    31,2007
                    
                    
                    2008
                    
                    
                    2009Cost
      of revenues
                    
                    Amount
                    
                    
                    %
      of
                      total
                    
                    
                    Amount
                    
                    
                    %
      of
                      total
                    
                    
                    Amount
                    
                    
                    %
      of
                      totalRMB
                    
                    
                    %
                    
                    
                    RMB
                    
                    
                    %
                    
                    
                    RMB
                    
                    
                    USD
                    
                    
                    %(in
      thousands, except percentages)Software
      & Solutions
                    
                    
                    (82,621
                    )
                    
                    
                    29.7
                    
                    
                    
                    (118,167
                    )
                    
                    
                    26.3
                    
                    
                    
                    (156,678
                    )
                    
                    
                    (22,946
                    )
                    
                    
                    76.4POS
                    
                    
                    (1,088
                    )
                    
                    
                    0.4
                    
                    
                    
                    (9,157
                    )
                    
                    
                    2.0
                    
                    
                    
                    (13,642
                    )
                    
                    
                    (1,998
                    )
                    
                    
                    6.7Platform
      & Maintenance Services
                    
                    
                    (194,117
                    )
                    
                    
                    69.9
                    
                    
                    
                    (321,953
                    )
                    
                    
                    71.7
                    
                    
                    
                    (34,655
                    )
                    
                    
                    (5,075
                    )
                    
                    
                    16.9Total
                    
                    
                    (277,826
                    )
                    
                    
                    100.0
                    
                    
                    
                    (449,277
                    )
                    
                    
                    100.0
                    
                    
                    
                    (204,975
                    )
                    
                    
                    (30,019
                    )
                    
                    
                    100.0




Our cost
of revenues on a net basis grew from RMB96.1 million in 2007 to RMB143.6 million
in 2008 and to RMB194.5 million (USD28.5 million) in 2009, representing a CAGR
of 42.2%, including a CAGR of 37.7% for Software & Solutions and a CAGR of
39.3% for Platform & Maintenance Services. We have included a net basis
representation to reflect our costs and distinguishes between our own costs and
the cost of third-party hardware and software. Below are our costs of revenues
as recognized on a net basis.


62





For
      the Year Ended December 31,2007
                        
                        
                        2008
                        
                        
                        2009Cost
      of revenues
                        
                        Amount
                        
                        
                        %
      of
                          total
                        
                        
                        Amount
                        
                        
                        %
      of
                          total
                        
                        
                        Amount
                        
                        
                        %
      of
                          totalRMB
                        
                        
                        %
                        
                        
                        RMB
                        
                        
                        %
                        
                        
                        RMB
                        
                        
                        USD
                        
                        
                        %(in
      thousands, except percentages)Software
      & Solutions
                        
                        
                        (82,621
                        )
                        
                        
                        85.9
                        
                        
                        
                        (118,167
                        )
                        
                        
                        82.3
                        
                        
                        
                        (156,678
                        )
                        
                        
                        (22,946
                        )
                        
                        
                        80.6POS
                        
                        
                        (1,088
                        )
                        
                        
                        1.1
                        
                        
                        
                        (9,157
                        )
                        
                        
                        6.4
                        
                        
                        
                        (13,642
                        )
                        
                        
                        (1,998
                        )
                        
                        
                        7.0Platform
      & Maintenance Services
                        
                        
                        (12,440
                        )
                        
                        
                        13.0
                        
                        
                        
                        (16,314
                        )
                        
                        
                        11.3
                        
                        
                        
                        (24,140
                        )
                        
                        
                        (3,535
                        )
                        
                        
                        12.4Total
                        
                        
                        (96,149
                        )
                        
                        
                        100.0
                        
                        
                        
                        (143,638
                        )
                        
                        
                        100.0
                        
                        
                        
                        (194,460
                        )
                        
                        
                        (28,479
                        )
                        
                        
                        100.0




Software
& Solutions




Our cost
of revenues for Software & Solutions primarily relates to costs associated
with the design, implementation, delivery and maintenance of our solutions and
related services, which includes primarily staff costs, travel expenses and
outsourcing costs in connection with the development and implementation of IT
solutions and service projects for our clients, and to a lesser extent,
amortization of intangible assets related to our solutions that we provide to
our clients and allocated overhead costs relating to our project development and
implementation staff. The allocated overhead costs include primarily
communication costs, depreciation and other general office-related
costs.




Platform
& Maintenance Services




Our cost
of revenues for Platform & Maintenance Services primarily consists of costs
for purchase of third-party hardware and software that we resell to our clients.
It also includes related transportation and insurance costs as well as staff
costs for the procurement and installation of such hardware and software. We
expect cost of revenues relating to Platform & Maintenance Services to
increase generally in line with the increase in revenues from such
service.




POS
Merchant Acquiring Services




Cost of
revenues for our POS business is comprised primarily of services cost and
depreciation of POS terminals we deployed and the consumables, and they are
generally in proportion to the number of POS terminals we deploy. We grew our
deployed terminal base from 21,300 in 2008 to 23,269 in 2009, which caused our
costs to grow from RMB9.2 million in 2008 to RMB13.6 million (USD2.0 million) in
2009. During this period, our gross margin grew from 37.4% in 2008 to 47.3% in
2009 due to our focus on quality merchants and
higher yielding terminals.





GROSS PROFIT AND GROSS
MARGIN


The
following table sets forth our gross profit and gross margin for the periods
indicated on a net basis.





For
      the Year Ended December 31,2007
                          
                          
                          2008
                          
                          
                          2009Gross
                            profit
                          
                          
                          Gross
                            margin
                          
                          
                          Gross
      proft
                          
                          
                          Gross
                            margin
                          
                          
                          Gross
      proft
                          
                          
                          Gross
                            marginRMB
                          
                          
                          %
                          
                          
                          RMB
                          
                          
                          %
                          
                          
                          RMB
                          
                          
                          USD
                          
                          
                          %(in
      thousands, except percentages)Software
      & Solutions
                          
                          
                          109,762
                          
                          
                          
                          57.1
                          
                          
                          
                          145,714
                          
                          
                          
                          55.2
                          
                          
                          
                          125,216
                          
                          
                          
                          18,338
                          
                          
                          
                          44.4POS
                          
                          
                          2,556
                          
                          
                          
                          70.1
                          
                          
                          
                          5,465
                          
                          
                          
                          37.4
                          
                          
                          
                          12,252
                          
                          
                          
                          1,794
                          
                          
                          
                          47.3Platform
      & Maintenance Services
                          
                          
                          45,375
                          
                          
                          
                          78.5
                          
                          
                          
                          76,363
                          
                          
                          
                          82.4
                          
                          
                          
                          37,922
                          
                          
                          
                          5,554
                          
                          
                          
                          61.1Total
                          
                          
                          157,693
                          
                          
                          
                          62.1
                          
                          
                          
                          227,542
                          
                          
                          
                          61.3
                          
                          
                          
                          175,390
                          
                          
                          
                          25,686
                          
                          
                          
                          47.4




63




Our
overall gross margin as recognized on a net basis in 2009 decreased to 47.4%
from 61.3% in 2008, mainly due to the decrease of gross margin in Software &
Solutions, which was 44.4% in 2009 compared to 55.2% in 2008. When recognized on
a gross basis, as shown in the table below, our gross margin is more volatile
due to our revenue mix since Platform & Maintenance Services has a much
lower gross margin as compared to Software & Solutions.





For
      the Year Ended December 31,2007
                                
                                
                                2008
                                
                                
                                2009Gross
                                  profit
                                
                                
                                Gross
                                  margin
                                
                                
                                Grossproft
                                
                                
                                Gross
                                  margin
                                
                                
                                Gross
      proft
                                
                                
                                Gross
                                  marginRMB
                                
                                
                                %
                                
                                
                                RMB
                                
                                
                                %
                                
                                
                                RMB
                                
                                
                                USD
                                
                                
                                %(in
      thousands, except percentages)Software
      & Solutions
                                
                                
                                109,762
                                
                                
                                
                                57.1
                                
                                
                                
                                145,714
                                
                                
                                
                                55.2
                                
                                
                                
                                125,216
                                
                                
                                
                                18,338
                                
                                
                                
                                44.4POS
                                
                                
                                2,556
                                
                                
                                
                                70.1
                                
                                
                                
                                5,465
                                
                                
                                
                                37.4
                                
                                
                                
                                12,252
                                
                                
                                
                                1,794
                                
                                
                                
                                47.3Platform
      & Maintenance Services
                                
                                
                                45,375
                                
                                
                                
                                18.9
                                
                                
                                
                                76,363
                                
                                
                                
                                19.2
                                
                                
                                
                                37,921
                                
                                
                                
                                5,554
                                
                                
                                
                                52.3Total
                                
                                
                                157,693
                                
                                
                                
                                36.2
                                
                                
                                
                                227,542
                                
                                
                                
                                33.6
                                
                                
                                
                                175,389
                                
                                
                                
                                25,686
                                
                                
                                
                                46.1




Our gross
margin in Software & Solutions in 2009 decreased greatly mainly due to three
reasons: (1) Four projects that were close to 100% complete were cancelled
due to variety of customer reasons beyond our control; (2) lack of license sales
of our own proprietary software products; and (3) There are eight projects with
new banking customers with lower margins than normal. We were willing to
continue on with these projects because the customers will be strategically
important to Yucheng. With those projects mostly behind us, we expect major
projects from those customers in 2010.





OPERATING
EXPENSES




Our
operating expenses consist of research and development expenses, selling and
marketing expenses and general and administrative expenses. Our operating
expenses increased 25.3% from RMB155.0 million in 2008 to RMB194.1 million
(USD28.4 million) in 2009, primarily due to increase in general and
administrative and selling and marketing expenses, which will be analyzed in
greater detail in the following section. The following table sets forth our
operating expenses for the periods indicated.





For the Year Ended December
    31,2007
                  
                  
                  2008
                  
                  
                  2009RMB
                  
                  
                  RMB
                  
                  
                  RMB
                  
                  
                  USD(in
      thousands)Research
      and development
                  
                  
                  (8,370
                  )
                  
                  
                  (10,148
                  )
                  
                  
                  (13,829
                  )
                  
                  
                  (2,025
                  )Selling
      and marketing
                  
                  
                  (29,053
                  )
                  
                  
                  (49,383
                  )
                  
                  
                  (53,821
                  )
                  
                  
                  (7,882
                  )General
      and administrative
                  
                  
                  (50,668
                  )
                  
                  
                  (95,425
                  )
                  
                  
                  (126,492
                  )
                  
                  
                  (18,525
                  )Total
                  
                  
                  (88,091
                  )
                  
                  
                  (154,956
                  )
                  
                  
                  (194,142
                  )
                  
                  
                  (28,432
                  )





Research
and development expenses




R&D
expenses consist primarily of staff costs, which include salaries, bonuses and
benefits for research and development personnel. R&D expenses also include
travel expenses of our research and development personnel as well as
depreciation of hardware equipment and software tools and other materials used
in our research and development activities. We capitalize certain internal
software development expenses after technological feasibility is established,
which are amortized according to its estimated useful life. Our internal
software development expenses amounted to RMB10.7 million as of the end
of  2007, RMB13.7 million as of the end of 2008 and RMB22.2 million
(USD3.3 million) as of the end of 2009, of which RMB2.3 million, RMB3.6 million
and RMB8.4 million (USD1.2 million) were capitalized in 2007, 2008 and 2009,
respectively. The capitalized amounts will be amortized according to its useful
life. We also incur significant R&D related costs in connection with our
client projects, which we record as cost of revenues for the client projects
rather than R&D expenses.




64




Our
R&D expenses increased significantly in 2007, primarily due to an expansion
of our R&D staff resulting from the acquisition of e-Channels in November
2006 and the additional acquisitions in 2007. The number of our R&D
personnel totaled 35 in 2007, 40 in 2008 and 52 in 2009. Our depreciation and
amortization costs also increased significantly in 2009 due to increased R&D
activities in 2008 and in 2007. We expect our R&D expenses to continue to
increase as we further expand our solution and service offerings. Our R&D
expenses as a percentage of our Software & Solutions revenues were 4.4% in
2007, 3.8% in 2008 and 4.9% in 2009.




Selling
and marketing expenses




Selling
and marketing expenses consist primarily of salaries, bonuses, sales
commissions, and benefits for sales and marketing personnel. Selling and
marketing expenses also include expenses associated with business development
activities with our clients, travel expenses of our sales and marketing
personnel, as well as overhead costs allocated to our sales and marketing
personnel, such as office rent, furniture cost, communication cost and
depreciation. We generally do not advertise to promote our businesses. Instead,
we conduct targeted business development activities with our
clients.




Our total
sales and marketing expenses were RMB29.1 million, RMB49.4 million and RMB53.8
million (USD7.9 million) for 2007, 2008 and 2009 respectively. Our overall
selling and marketing expenses as a percentage of revenues increased from 7.3%
in 2008 to 14.1% in 2009, mainly due in part to the decrease in our revenues and
in part to the increase in our selling and marketing expenses. Our selling and
marketing expenses increased by 9% from RMB49.4 million in 2008 to RMB53.8
million (USD7.9million) in 2009, primarily due to the increase in personnel
cost. Other selling and marketing expenses, such as those associated with
business development activities, travel expenses and entertainment expenses also
grew faster than our revenues.




We expect
our selling and marketing expenses to continue increase with revenues as we
expand our product offerings and revenues, and in particular as we continue to
expand our POS merchant acquiring business.





General
and administrative expenses




General
and administrative expenses consist primarily of salaries, bonuses and benefits
for administrative personnel, such as personnel in our management, finance and
accounting, legal and human resource functions, their travel expenses and other
expenses for general administrative functions, costs for professional services,
including legal, tax and accounting services, and allocation of overhead costs
to general and administrative functions, such as rent, communication and
depreciation. Our general and administrative expenses also include amortization
of intangible assets relating to our acquisition of e-Channels, which amounted
to RMB9.2 million and was completely amortized as of December 31,
2009.




Our
general and administrative expenses were RMB50.7 million in 2007, RMB95.4
million in 2008 and RMB126.5 million (USD18.5 million) in 2009 respectively. Our
general and administrative expenses increased 32.6% from RMB95.4 million in 2008
to RMB126.5 million (USD18.5million) in 2009, primarily due to a number of
reasons : (1) We have made impairment on receivables of RMB18.3 million (USD2.7
million) in 2009. (2) Our rent expenses increased by RMB3.3 million from 2008 to
2009 while our branch offices increased from 19 in 2008 to 24 in 2009. (3)
expenses spent on IT system buildup to improve our management
efficiency.


Almost
all of the bad debt charge in 2009 can be divided into two categories: (1)
receivables related to projects that we inherited from the Easycon and Sunrisk
acquisitions we made in 2007. The requirement of those projects were not well
defined, coupled with the fact that personnel from both customers and sales
people changed a number of times. We tried to resolve the issues with those
projects in the past three years without significant progress. To our best
judgment of the situation, it is unlikely we will be able to collect the
receivables; and (2) a significant transaction related to a first time
non-banking customer. We only received the first payment of the project after
fulfilled our obligations. When the customer failed to secure its own end
customer, it became apparent that we will not be able to collect the remaining
payment.


65


Our
general and administrative expenses are shown net of technology subsidies,
value-added tax refunds, business tax and surcharges refunds and other
government credits we receive from the relevant PRC government authorities.
Technology subsidies are granted by the relevant local PRC government to
encourage development of high-tech enterprises. Value-added tax is charged at a
rate of 17% of the gross sales proceeds received. Pursuant to relevant PRC laws
and regulations, we are entitled to a refund of 14% of the value-added tax for
certain self-developed software products. Business tax and surcharges are levied
based on 5.5% of revenues. We received refunds for business tax and surcharges
for revenues generated from contracts relating to technology development. Others
include refund of certain loan interest and other supporting funds from local
governments. The table below sets forth the amount of technology subsidies and
other refunds that we received in the periods indicated.





2007
                  
                  
                  2008
                  
                  
                  2009RMB
                  
                  
                  RMB
                  
                  
                  RMB
                  
                  
                  USDValue-added
      tax refund for software products sold
                  
                  
                  2,554
                  
                  
                  
                  4,318
                  
                  
                  
                  3,920
                  
                  
                  
                  574Technology
      subsidy
                  
                  
                  3,303
                  
                  
                  
                  1,314
                  
                  
                  
                  395
                  
                  
                  
                  58Business
      tax and surcharges refund
                  
                  
                  1,460
                  
                  
                  
                  -
                  
                  
                  
                  60
                  
                  
                  
                  9Others
                  
                  
                  -
                  
                  
                  
                  531
                  
                  
                  
                  30
                  
                  
                  
                  4Total
                  
                  
                  7,317
                  
                  
                  
                  6,163
                  
                  
                  
                  4,405
                  
                  
                  
                  645





INCOME
FROM OPERATIONS




As a
result of the foregoing, our income from operations was RMB69.6 million in 2007,
RMB72.6 million in 2008 and loss from operations was RMB18.8 million (USD2.8
million) in 2009 and our operating margin decreased to -4.9% in 2009 from 10.7%
in 2008.




Other
income (expenses)




Total
other income was RMB3.1 million (USD0.5million) in 2009 as compared to total
other expense of RMB3.8 million in 2008, primarily due to an increase in
investment income of RMB1.7 million and an increase in other income of RMB7.7
million.





Non-controlling
interests




Non-controlling
interests amounted to RMB-3.7 million (USD-0.5 million) in 2009 as compared to
RMB -2.7 million in 2008, primarily due to the net losses occurred from Sunrisk
business.





INCOME
TAXES




Our PRC
subsidiaries are subject to PRC enterprise income tax, which is calculated based
on taxable income determined under PRC accounting principles. On March 1, 2007,
the Fifth Plenary Session of the Tenth National People’s Congress passed the
Corporate Income Tax Law of the PRC (“New Tax Law”) which was taken effect on
January 1, 2008. As a result of the new tax law, the statutory income tax rate
changed from 33% to 25% with effect from January 1, 2008. The preferential tax
rate previously enjoyed by the Company would be gradually transitioned to the
new standard rate of 25% over a five-year transitional period. In addition,
article 28 of the New Tax Law states that the income tax rate of the “high-tech”
company will remain at 15%. Accordingly, the carrying amount of the deferred tax
assets and liabilities, as a result of the change in tax rate, was adjusted in
the consolidated statements of operations of the Company for year ended December
31, 2008.




In 2005,
2006 and 2007, our PRC subsidiaries were taxed according to the old enterprise
income tax regime, which prescribed a statutory enterprise income tax rate of
33%. However, the old enterprise income tax regime provided for preferential tax
treatments to various enterprises, such as for foreign invested enterprises,
software enterprises or high-tech enterprises, in the forms of preferential
income tax rates or fixed-period tax holidays. Enterprises entitled to tax
holidays are either exempted from paying income taxes or pay income taxes at a
beneficial rate during the holiday period. The preferential tax rate and the tax
holidays can be applied at the same time to the same enterprise. A number of our
PRC subsidiaries had enjoyed preferential income tax rates and/or the various
tax holidays under the old enterprise income tax regime. Under the new
enterprise income tax regime, some of our subsidiaries reacquired the high-tech
enterprises qualifications and continued enjoying the preferential income tax
rate and /or the tax holidays. As a result, our income tax expenses were RMB5.5
million, RMB-9.5 million and RMB-7.7 million (USD-1.1 million) , and our
effective tax rate was 7.5%, -13.9% and -49.4% in 2007, 2008 and 2009,
respectively. Without the preferential income tax rate and the tax holiday, our
income tax expenses would have been RMB23.6 million, RMB21.7 million and RMB-2.1
million (USD-0.3 million) in 2007, 2008 and 2009, respectively.


66




The New
EIT Law reduced the statutory tax rate to 25%, but repealed most of the
preferential tax treatments, including the preferential tax rates and the tax
holidays. However, the New EIT Law provides a five-year transition period that
allows enterprises which enjoyed certain preferential tax treatment under the
old enterprise income tax regime to gradually transition to the 25% statutory
rate in a prescribed fashion. According to a notice issued by the PRC State
Council, for enterprises which enjoyed preferential income tax rate of 15%
pursuant to certain prior tax rules or regulations specified in the notice, the
applicable enterprise income tax rate will increase to 18% for 2008, 20% for
2009, 22% for 2010, 24% for 2011 and 25% for 2012 and thereafter. For tax
holidays specified in the notice, enterprises already enjoying the holidays
prior to January 1, 2008 can generally continue to enjoy such tax holidays until
their expiration, upon which time the 25% tax rate will apply. All other
preferential tax treatments have generally terminated on December 31, 2007. The
New EIT Law also provides that the State Council can grant tax waivers or
preferential tax rates for “qualified high-tech or new-tech companies in need of
special state support”. Due to the application of the New EIT Law and its
implementation rules, certain of our subsidiaries may no longer be able to enjoy
any preferential income tax treatment, and certain others may need to pay higher
transitional income tax rates starting January 1, 2008. As a result, we expect
our effective income tax rate to gradually increase from our 2008 level unless
we qualify for new tax benefits under the new tax regime.





In
addition, pursuant to the New EIT Law and its implementation rules, we may be
deemed as PRC resident enterprise if our “de facto management body” is
located in China, in which case our global income will be subject to PRC income
tax at the rate of 25%. However, it is currently unclear how the “de facto
management body” is determined. See “Item 3. Key information — D. Risk factors —
Risks related to doing business in China — We may be treated as a resident
enterprise for PRC tax purposes under the New EIT Law and we may therefore be
subject to PRC income tax for any dividends we receive from our subsidiaries,
which may materially and adversely affect the amount of dividends we must pay to
our shareholders.” If we are not deemed as a PRC resident enterprise, then our
dividend payable by our PRC subsidiaries to us will be subject to 10%
withholding tax if such dividend is derived from profits generated after January
1, 2008.





Income
tax expenses




Income
tax expenses were RMB-7.7 million (USD-1.1 million) in 2009 compared with
RMB-9.5 million in 2008 and RMB5.5 million in 2007. Our effective tax rate was
-49.4% in 2009 compared with -13.9% in 2008 and 7.5% in 2007.




NET
INCOME




As a
result of the previous factors, our net income decreased from RMB81.0 million in
2008 to RMB-4.2 million (USD-0.6 million). The corresponding net margin was
12.0% in 2008 and -1.1% in 2009. Our net income was RMB66.7 million in 2007 and
the corresponding net margin was 15.3% in 2007.


INFLATION




According
to the National Bureau of Statistics of China, China’s overall national
inflation rate, as represented by the general consumer price index, was
approximately 4.8% , 5.9% and -0.7% in 2007, 2008 and 2009, respectively. Given
the volatility and uncertainty, we cannot make any assurances that we will not
be adversely affected by inflation and/or deflation in the future.




67




B.   
Liquidity and capital resources.




LIQUIDITY
AND CAPITAL RESOURCES




We have
historically financed our operations through sales of equity interests, bank
loans and cash generated from operations. For the years ended December 31, 2007,
2008 and 2009, our operating activities, acquisitions and strategic investment
have been our principal uses of cash. As of December 31, 2009, we had RMB246.6
million (USD36.1 million) in cash and cash equivalents, consisting of cash on
hand and bank deposits with original maturity of three months or
less.




We
believe that our current cash and anticipated cash flow from operations is
sufficient to meet our current cash needs. We may, however, require additional
cash due to changing business conditions or other future developments, including
any investments or acquisitions we may decide to pursue. In the long-term, we
intend to rely primarily on cash flow from operations and additional borrowings
from banks to meet our anticipated cash needs. If our anticipated cash flow is
insufficient to meet our requirements, we may also seek to sell additional
equity, debt or equity-linked securities. We cannot assure you that any
financing will be available in the amounts we need or on terms acceptable to us,
if at all.




The
following table sets forth our outstanding borrowings as of the dates
indicated.




For the Year Ended December
    31,2007
                      
                      
                      2008
                      
                      
                      2009RMB
                      
                      
                      RMB
                      
                      
                      RMB
                      
                      
                      USD(in
      thousands)Short-term
      bank borrowings
                      
                      
                      35,000
                      
                      
                      
                      60,000
                      
                      
                      
                      80,000
                      
                      
                      
                      11,716Current
      portion of long-term bank borrowings
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      
                      35,000
                      
                      
                      
                      60,000
                      
                      
                      
                      80,000
                      
                      
                      
                      11,716




The
outstanding short-term borrowings of RMB80 million(USD11.7 million) as of
December 31, 2009 comprise three short-term loans we borrowed in 2009.  One
was for a principal amount of RMB50 million from September 25, 2009 to September
24, 2010 with an annual interest rate of 5.841%. The second was for a principal
amount of RMB20 million from November 19, 2009 to November 18, 2010 with an
annual interest rate of 5.841%. The third was for a principal amount of RMB10
million from December 9, 2009 to December 8, 2010 with an annual interest rate
of 5.841%. These three loans were guaranteed by Beijing Sihitech and Mr. Weidong
Hong, our Chief Executive Officer.





We
received cash in the amount of RMB252.6 million in June of 2007 in relation to
the conversion of our outstanding warrants.




The
following table sets forth a summary of our cash flows for the periods
indicated.




For
      the Year Ended December 31,2007
                  
                  
                  2008
                  
                  
                  2009RMB
                  
                  
                  RMB
                  
                  
                  RMB
                  
                  
                  USD(in
      thousands)Net
      cash (used in) provided by operating activities
                  
                  
                  (33,321
                  )
                  
                  
                  106,315
                  
                  
                  
                  64,974
                  
                  
                  
                  9,516Net
      cash used in investing activities
                  
                  
                  (62,576
                  )
                  
                  
                  (88,820
                  )
                  
                  
                  (55,438
                  )
                  
                  
                  (8,119
                  )Net
      cash provided by (used in) financing activities
                  
                  
                  220,033
                  
                  
                  
                  (238
                  )
                  
                  
                  (2,710
                  )
                  
                  
                  (397
                  )Net
      increase in cash
                  
                  
                  124,136
                  
                  
                  
                  17,257
                  
                  
                  
                  6,826
                  
                  
                  
                  1,000Cash
      and cash equivalents at beginning of year
                  
                  
                  98,358
                  
                  
                  
                  222,494
                  
                  
                  
                  239,751
                  
                  
                  
                  35,112Cash
      and cash equivalents at end of year
                  
                  
                  222,494
                  
                  
                  
                  239,751
                  
                  
                  
                  246,577
                  
                  
                  
                  36,112


We had a net cash inflow from operating
activities of RMB65.0 million (USD9.5 million) in 2009 compared with a net cash
inflow of RMB106.3 million in 2008, while our revenues decreased to RMB380.4
million (USD55.7 million) in 2009 compared with RMB676.8 million in 2008. Our
net cash inflow from operating activities in 2009 was primarily due to an
decrease in trade accounts receivables of RMB116.4 million, offset by a decrease
in trade accounts payable of RMB51 million and an increase inthe
billings in excess of costs and estimated earnings on uncompleted contracts of
RMB3.7 million.The decrease of
accounts receivables was mainly due to implementation of a new compensation
scheme gave incentive to our sales staff which resulted in quicker collection of
receivables from our customers.


68




We had a
net cash inflow from operating activities of RMB106.3 million in 2008 compared
with a net cash outflow of RMB33.3 million in 2007, while our revenues increased
to RMB676.8 million in 2008 compared with RMB435.5 million in 2007. Our net cash
inflow from operating activities in 2008 was primarily due to an increase in
trade accounts payable of RMB51.3 million, a decrease in other current assets of
RMB44.5 million, an increase in other current liabilities of RMB9.9 million. The
increase in trade accounts payable was primarily due to better credit terms we
were able to get from our suppliers and an increase in our business volume. The
decrease in other current assets was primarily due to a decrease of payment in
advance to our vendors as of December 31, 2008, the increase in other current
liabilities was primarily due to increased VAT payable which was resulted from
the increased revenue.




We had a
net cash outflow from operating activities of RMB33.3 million in 2007 compared
with a net cash outflow of RMB13.5 million in 2006, while our revenues increased
to RMB435.5 million in 2007 compared with RMB289.7 million in 2006. Our net cash
outflow from operating activities in 2007 was primarily due to an increase in
trade accounts receivable of RMB70.6 million, an increase in other current
assets of RMB56.0 million, an increase in costs and estimated earnings in excess
of billings on uncompleted contracts of RMB29.5 million, and a decrease in other
current liabilities of RMB19.1 million, which were partially offset by cash
received from our clients and an increase in trade accounts payable of RMB51.8
million. The increase in trade accounts receivable was primarily due to the
increase in our revenues; the increase in other current assets was primarily due
to an increase of payment in advance to our vendors for which equipment has not
been delivered to our clients as of December 31, 2007; the increase in costs and
estimated earnings in excess of billings on uncompleted contracts was primarily
due to an increase in our uncompleted projects as of December 31, 2007; the
decrease in other current liabilities was primarily due to payment of accrued
expenses and taxes; and the increase in trade accounts payable was primarily due
to better credit terms we were able to get from our suppliers and an increase in
our business volume.





Investing
activities




Net cash
used in investing activities was RMB55.4 million (USD8.1million) in 2009,
primarily comprising payment of capital expenditure of RMB35.6 million, advances
to investments under equity method of RMB22.8 million, payment of purchase of
subsidiaries of RMB11.1 million and investment in equity method investments of
RMB13.7 million, partially offset by collection of advances to investments under
equity method of RMB21.2 million and proceeds from disposal of investment under
equity method of RMB8.0 million.
  Net cash
used in investing activities was RMB88.8 million in 2008, primarily comprising
payment of purchase of subsidiary and establishment of a joint venture, Elegon
Infotech Ltd., of RMB62.7 million and capital expenditure of RMB29.7 million,
partially offset by proceeds from disposal of an affiliate of RMB3.6 million.
Payment of purchase of subsidiary related to our acquisitions of Sunrisk,
Recency, Easycon, Fujie and Fuyi, and capital expenditure related to the
purchase of POS terminals and other hardware equipment and software tools for
our research and development activities as well as office decoration expenses
due to the increase of our number of offices nationwide.




Net cash
used in investing activities was RMB62.6 million in 2007, primarily comprising
payment of purchase of subsidiary of RMB51.8 million and capital expenditure of
RMB34.3 million, partially offset by decrease in deposits paid for acquisitions
of businesses of RMB20.0 million. Payment of purchase of subsidiary related to
our acquisitions of Sunrisk, Recency, Easycon, Fujie and Fuyi, and capital
expenditure related to the purchase of POS terminals and other hardware
equipment and software tools for our research and development activities as well
as office decoration expenses due to the significant increase of our number of
offices nationwide.





Financing
activities




Net
cash used in financing activities was RMB2.7 million (USD0.4 million) in 2009,
primarily comprising repayment of bank borrowings of RMB188.5 million and deemed
distribution of RMB18.3 million, partially offset by proceeds from bank
borrowings of RMB208.5 million.


69




Net cash
used in financing activities was RMB0.2 million in 2008, primarily comprising
proceeds from bank borrowings of RMB60.0 million, partially offset by repayment
of bank borrowings of RMB35.0 million, and dividends paid to the shareholders of
Sihitech BVI and e-Channels BVI of RMB26.5 million.





Net cash
provided by financing activities was RMB220.0 million in 2007, primarily
comprising proceeds from exercise of warrants of RMB252.6 million and bank
borrowings of RMB55.0 million, partially offset by repayment of bank borrowings
of RMB55.5 million, deemed distribution of RMB26.6 million related to the cash
payment to the selling shareholders of Sihitech BVI in connection with the
exercise of our warrants (which was required under the three-party merger
agreement), and dividend paid to the shareholders of Sihitech BVI and e-Channels
BVI of RMB11.7 million.




CAPITAL
EXPENDITURES




Our
capital expenditures amounted to RMB34.3 million, RMB29.7 million and RMB35.6
million (USD5.2 million) in 2007, 2008 and 2009, respectively. Our capital
expenditures consisted principally of POS terminal purchases, which accounted
for 82.0% and 25.0% of overall capital expenditures in 2008 and 2009,
respectively. Our other capital expenditures were minor and can mainly be
classified into the following categories: developed software, development tools,
computer equipment, office equipment and furniture, and
vehicles.




C.   
Research and development, patents and license, etc.




For
information on our research and development activities and intellectual property
information, see “Item 4. Information on the Company — Business overview —
Research and development” and “Item 4. Information on the Company — Business
overview — Intellectual property.”




D.   
Trend information.




For
information on the principal trends and uncertainties affecting our results of
operations, financial condition and businesses, see “Item 3. Key Information —
Risk factors”, “Item 4. Information on the Company — Business overview” and
elsewhere in this Item.




E.   
Off-balance sheet arrangements.




We have
not entered into any financial guarantees or other commitments to guarantee
payment obligations of any third-parties.




F.   
Disclosure of contractual obligations.




The
following table sets forth our contractual obligations and commercial
commitments as of December 31, 2009.





Total
                    
                    
                    Within
      1
                      Year
                    
                    
                    1-3
      years
                    
                    
                    3-5
      years
                    
                    
                    More
      than
                      5
      years(RMB
      in thousands)Bank
      debt
                    
                    
                    80,000
                    
                    
                    
                    80,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Interest
      on bank debt
                    
                    
                    2,861
                    
                    
                    
                    2,861
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Capital
      leases
                    
                    
                    2,597
                    
                    
                    
                    2,282
                    
                    
                    
                    315
                    
                    
                    
                    -
                    
                    
                    
                    -Operating
      leases
                    
                    
                    11,633
                    
                    
                    
                    8,204
                    
                    
                    
                    3,429
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    
                    97,091
                    
                    
                    
                    93,347
                    
                    
                    
                    3,744
                    
                    
                    
                    -
                    
                    
                    
                    -




Our
capital leases primarily relate to leases of computers, and our operating leases
relate to the renting of our offices.




70




G.   
Safe harbor.




All
information included in Item 5.E and F of this Item is deemed to be a “forward
looking statement” as that term is defined in the statutory safe harbors, except
for historical facts. The safe harbor provided in Section 27A of the Securities
Act and Section 21E of the Exchange Act (“statutory safe harbors”) shall apply
to all forward-looking information provided in Item 5.E and F of this
Item.




ITEM
6.          DIRECTORS, SENIOR
MANAGEMENT AND EMPLOYEES




A.  
Directors and senior management.





The
following table sets forth certain information regarding our directors and
executive officers as of May 31, 2010.




Name
                              
                              Age
                              
                              PositionWeidong
      Hong
                              
                              43
                              
                              Chairman
      of the Board and Chief Executive OfficerShuo
      Zeng
                              
                              40
                              
                              Director,
      Chief Operating Officer,Steve
      Dai
                              
                              43
                              
                              Chief
      Financial OfficerLi
      Liao
                              
                              44
                              
                              Independent
      DirectorJeffrey
      R. Williams
                              
                              56
                              
                              Independent
      DirectorHenry
      Wang
                              
                              51
                              
                              Independent
      Director





Weidong Hong is our Chief
Executive Officer and Chairman of our board. Previously, Mr. Hong was the
founder, Chairman and Chief Executive Officer of Beijing Sihitech, which was
incorporated into Yucheng Technologies in 2006. Prior to founding Beijing
Sihitech in June 1999, Mr. Hong was part of the senior management of Secom China
Ltd., the Japanese publicly listed electronic security services provider, where
from December 1994 to May 1997 he served as Vice President of the PC Department.
From May 1997 to June 1999, Mr. Hong held the position of General Manager of
Beijing Global Infotech Co., Ltd., a company engaged in the business of
providing IT services to the Chinese banking industry. Mr. Hong holds a B.E. and
an E.M.B.A. degree from Tsinghua University.




Shuo Zeng is our Chief
Operating Officer and has served as a director of our board since November 2004.
Mr. Zeng is a founder and Chairman and Chief Executive Officer of e-Channels.
From July 1991 to May 2000, Mr. Zeng held several senior positions in the
Nantian Group, a manufacturer of electronic and communication equipment in China
that is publicly listed in the Shenzhen Stock Exchange, including general
manager of the Information Product Department and Finance Project & System
Integration Department. Mr. Zeng holds a B.E. in automation from Beijing
Polytechnic University.




Steve Dai is our Chief Financial Officer. Mr.
Dai joined the company in May 2009. Before that, from June 2007 to April 2009 he
was the Chief Financial Officer of Beyondsoft Limited, one of the leading IT
outsourcing companies in China. From 2004 to 2007, he was the Chief Financial
Officer of Airport City Development Co., Ltd. in Beijing, a leading logistics
property and airport city development company in China. He also worked in UBS in
New York City and IBM in Austin, Texas. Mr. Dai holds an M.B.A. in Finance and
Strategic Management from the Wharton Business School of University of
Pennsylvania, and an M.S. in Electrical and Computer Engineering from University
of Miami, and a B.S. in Electrical Engineering from the University of Science
and Technology of China.


Li Liao has been an
independent director of our board since November 2006. Mr. Li is a distinguished
academician, and has served as the Associate Dean and Director of EMBA Program
as well as a Professor of Finance at the prestigious School of Economics and
Management of Tsinghua University since September 2000. Between May 1999 and
August 2000, he served as the Assistant to Chairman at the Esquel Group, a
company engaged in apparel manufacturing. Mr. Liao holds a B.E. in Electrical
Engineering and a Ph.D. in Engineering Economics from Tsinghua University and an
M.B.A. in Financial Engineering from the MIT Sloan School of
Management.




71




Henry Wang is an independent
director and has served on our board since November 2006. Since February 2003,
Mr. Wang has served as the general manager of the Operating Center of China
Construction Bank. From July 2000 to February 2003, he served as the general
manager of Settlement Accounts Department of China Construction Bank. Before
that, he worked in the Funds Clearing Department and conducted project auditing
and consulting activities in the Investment and Research Department of China
Construction Bank. Mr. Wang graduated from Beihang University and later at South
Western University of Finance and Economics.




Jeffrey R. Williams is an
independent director and has served on our board since February 2009. He has
over 25 years of experience in China, Hong Kong and Taiwan in the financial
services industry. He currently serves as an independent director and risk
management committee chair of China Universal Asset Management Co. Prior to
that, Mr. Williams was the President of Shenzhen Development Bank, where he
served as the first foreign president of a Chinese commercial bank. Previously,
he held a number of senior executive positions at Citibank, American Express and
Standard Chartered within Greater China. Mr. Williams holds an A.B., magna cum
laude, from Harvard College and an M.B.A. from Harvard Business
School.





B.
Compensation.





In 2009,
the aggregate total cash compensation paid to our directors and executive
officers as a group was RMB2.2 million (USD0.3 million).





2006
PERFORMANCE EQUITY PLAN





Stock
options and other equity based awards may be granted under the China Unistone
Acquisition Corporation 2006 Performance Equity Plan, which became the Yucheng
Technologies Limited 2006 Performance Equity Plan (the “Plan”) by operation of
law under the terms of our merger with China Unistone Acquisition Corporation.
On December 13, 2005, China Unistone’s board approved its 2006 Performance
Equity Plan and its shareholders subsequently approved the plan. We obtained
shareholder approval of the Plan in November 2006, under which we could issue
share options and restricted stock to our directors, officers, employees, and
consultants with the right to purchase up to 1,500,000 ordinary shares. The
purpose of the Plan was to enhance its ability to recruit and retain employees,
officers, directors and consultants of outstanding ability and to further
motivate them by providing an opportunity to acquire a proprietary interest in
our company. We did not issue any shares or stocks under the Plan as of December
31, 2009




Administration. Our
compensation committee administers the Plan. Subject to the provisions of the
Plan, the compensation committee determines, among other things, the persons to
whom from time to time awards may be granted, the specific type of award to be
granted, the number of shares subject to each award, share prices, any
restrictions or limitations on the awards, and any vesting, exchange, surrender,
cancellation, acceleration, termination, exercise or forfeiture provisions
related to the awards. The committee makes all determinations of any questions
arising under the plan or any rule or regulation established pursuant to the
plan.





Eligible participants. Awards
may be granted to employees, officers, directors and consultants who are deemed
to have rendered or are able to render significant services to us, and who have
contributed or have the potential to contribute to our success. Incentive stock
options may only be awarded to individuals who are our employees at the time of
grant. However, an award may be granted in connection with an individual’s
hiring or retention, at any time on or after the date he or she reaches an
agreement with us.





Share reserve. The Plan
reserves 1,500,000 ordinary shares to be granted as awards. The total number of
ordinary shares available for issuance under the plan is subject to the
adjustment in the event of any merger, reorganization stock split, reverse stock
split, stock dividend payable on our ordinary shares, combination or exchange of
shares, or other extraordinary event resulting in a change of our shares as a
whole.


72





Options. Under the Plan our
compensation committee may award stock options that are intended to qualify as
“incentive stock options” within the meaning of Section 422 of the U.S. Internal
Revenue Code of 1986, as amended, or the Code, as well as those not intended to
be so qualified. Our compensation committee will fix the term of each stock
option. However, incentive stock options may be granted only within the ten-year
period commencing from the effective date of the Plan, and may only be exercised
within ten years from the date of the grant, or five years from the date of the
grant in the case of a participant who at the time the stock option is granted
owns more than 10% of the total combined voting power of all of our classes of
voting securities. The exercise price of stock options granted under the Plan
will be determined by our compensation committee at the time of the grant, but
in no event will the price be less than the market price of any share of common
stock. The number of shares covered by incentive stock options which become
exercisable for the first time by participants in any year cannot have an
aggregate fair market value in excess of USD100,000, measured at the date of the
grant. Payment of the exercise price may be made in cash, in shares of our
ordinary shares owned by the participant, in a combination of the two, or
otherwise, as reflected in the applicable award agreement. Unless otherwise
provided in the grant of a stock option, if a participant’s employment with us
or any of our subsidiaries is terminated for any reason other than due to death
or disability, the participant’s stock option will automatically terminate. In
addition, if a holder’s employment with us is terminated for cause, the
compensation committee may require this holder to return to us the economic
value of any shares realized by that holder during the six month period prior to
the holder’s termination. However, if the participant’s employment is terminated
without cause or due to retirement on or after the age of 65, then the portion
of his or her stock option which has vested as of the date of termination may be
exercised: for three months after termination or for the balance of the stock
option’s exercise period, whichever is shorter; or for a greater or lesser
period as may be specified by the compensation committee in the
grant.





Stock appreciation rights.
Under the Plan, our compensation committee may grant stock appreciation rights
to participants who have received or are receiving stock options. A stock
appreciation right entitles the holder to surrender to us all or a portion of a
stock option in exchange for a number of shares of our ordinary shares
determined by multiplying the excess of the fair market value per share of our
ordinary shares on the exercise date over the exercise price per share by the
number of shares subject to the stock option and then dividing it by the fair
market value of the ordinary shares on the date the stock appreciation right is
exercised





Restricted stock. Our
compensation committee may award shares of our ordinary shares which are subject
to restrictions as the compensation committee may determine in addition to, or
in lieu of, other awards granted to participants under the plan. The
compensation committee will determine at the time of the award, the period
during which the award may be subject to forfeiture and the vesting schedule of
the shares under the award. A participant will have the right to vote the
restricted stock granted to him and to receive dividend payments distributed on
the shares in the form of cash or cash equivalents.





Deferred stock. Our
compensation committee may award shares of our ordinary shares to be received at
the end of a specified deferral period and upon satisfaction of any other
applicable restrictions, terms and conditions provided for in the grant of the
award. Any deferred stock that does not vest will be forfeited. A participant
will not have any rights as a stockholder by virtue of the award of deferred
stock until the expiration of the applicable deferral period and the issuance
and delivery of a stock certificate evidencing the award of the deferred stock.
A participant may request that the compensation committee defer issuance of an
award of deferred shares for an additional specified period, subject to certain
conditions.





Stock reload options. Our
compensation committee may grant to a participant an option covering a number of
shares up to the amount of shares of our ordinary shares held by the participant
for at least six months, which is used to pay all or part of the exercise price
of an option, and any shares withheld by us as payment for withholding taxes.
Any stock reload option will have an exercise price equal to the fair market
value of our ordinary shares as of the date of the exercise of the stock option
to which it is related. Unless otherwise provided in the stock reload option
grant, a stock reload option may be exercised commencing one year after it is
granted and will expire on the date of expiration of the stock option to which
the reload option is related.





Other stock-based awards. Our
compensation committee may award other stock-based awards, subject to
limitations under applicable law, in addition to, or in lieu of, other awards
granted to participants under the Plan. These other stock-based awards are
payable in, valued in, or otherwise based on, or related to, our ordinary
shares. These other stock-based awards may be in the form of the right to
purchase our ordinary shares which are not subject to any restrictions or
conditions, convertible or exchangeable debentures or other rights convertible
into shares of our ordinary shares, as well as awards valued by reference to the
value of securities of, or the performance of, one of our
subsidiaries.


73





Change of control and accelerated
vesting.The Plan provides that in the event of a change of control
event, as described in the plan, not approved by our board, the vesting periods
with respect to options and awards granted and outstanding under the Plan shall
become fully vested and exercisable. Where such change of control event is
approved by our board, the compensation committee may (i) accelerate the vesting
of any and all stock options and other awards granted and outstanding under the
plan or (ii) require a holder of any award granted under the Plan to relinquish
the award to us upon payment by us to the holder of cash in an amount equal to
the fair market value of the award for ordinary shares, or the difference
between the fair market value of the award and the award’s exercise price (if
lower than the fair market value) for options or stock appreciation rights, or
USD0.01 per share for awards that are out-of-the money.





Transferability. With respect
to the transferability of stock options, except as expressly provided in the
Plan, expressly provided in the award agreement or in certain limited
circumstances, the right to exercise stock options, receive restricted stock
after the expiration of the restriction period or deferred stock after the
expiration of the deferral period, receive payment under other stock-based
awards, or exercise a stock appreciation right cannot be transferred except by
will or the laws of descent and distribution. However, with the approval of the
compensation committee, a participant may transfer a stock option under certain
limited circumstances.





Amendment and Termination.
The Plan will terminate when there are no awards outstanding and when no further
awards may be granted, provided that incentive options may only be granted until
December 13, 2015. Our board has the right to amend, suspend or discontinue any
provision of the Plan, provided that the action may not adversely affect awards
previously granted between a participant and us without the participant’s
consent.





EMPLOYMENT
AGREEMENTS





We have
entered into employment agreements with each of Messrs. Weidong Hong
and Shuo Zeng. Compensation of our executives is comprised of salaries and
bonuses, including equity bonuses. They are also provided regular benefits in
accordance with PRC laws and regulations. In addition, if the employment of an
executive is terminated by us without cause, the executive is entitled to
USD300,000 and other benefits throughout the term of the agreement. Our
employment agreements with independent directors can be terminated with or
without cause.





C.
Board Practices.





TERMS
OF DIRECTORS AND EXECUTIVE OFFICERS





Our board
consists of five directors. Our directors are not subject to a term of office
limitation, and hold office until the next annual meeting of members or until
such director’s earlier resignation, removal from office, death or incapacity.
Any vacancy on our board resulting from death, resignation, removal or other
cause, and any newly created directorship resulting from any increase in the
authorized number of directors between meetings of members, may be filled either
by the affirmative vote of a majority of all the directors then in office (even
if less than a quorum) or by a resolution of members.





Our
officers are appointed by our board. The officers shall hold office until their
successors are duly elected and qualified, but any officer elected or appointed
by the directors may be removed at any time, with or without cause, by
resolution of directors. Any vacancy occurring in any office may be filled by
resolution of directors.




74




INDEPENDENCE
OF DIRECTORS





We have
elected to follow the rules of NASDAQ to determine whether a director is
independent. Our board will also consult with counsel to ensure that our board’s
determinations are consistent with those rules and all relevant securities and
other laws and regulations regarding the independence of directors. The NASDAQ
listing standards define an “independent director” generally as a person, other
than an officer of the Company, who does not have a relationship with the
Company that would interfere with the director’s exercise of independent
judgment. Consistent with these considerations, our board has affirmatively
determined that, Messrs. Li Liao, Henry Wang and Jeffrey R. Williams are our
independent directors.





BOARD
COMMITTEES





Our board
has established an audit committee, a nominating committee and a compensation
committee.





Audit
Committee





Our audit
committee consists of Messrs. Williams, Wang, and Liao. Our board has determined
that all of our audit committee members are independent directors within the
meaning of NASDAQ Marketplace Rule 4200(a)(15), and meet the criteria for
independence set forth in Rule 10A-3(b)(1) of the Securities and Exchange Act of
1934, as amended, or the Exchange Act.





Our board
has determined that each of Messrs. Williams, Wang, and Liao has an
understanding of generally accepted accounting principles and financial
statements, the ability to assess the general application of such principles in
connection with our financial statements, including estimates, accruals and
reserves, experience in analyzing or evaluating financial statements of similar
breadth and complexity as our financial statements, an understanding of internal
controls and procedures for financial reporting, and an understanding of audit
committee functions.




We
adopted an audit committee charter under which the committee is responsible for
reviewing the scope, planning and staffing of the audit and preparation of the
financial statements. This includes consultation with management, the auditors
and other consultants and professionals involved in the preparation of the
financial statements and reports. The committee is responsible for performing
oversight of relationship with our independent auditors. The committee also has
a general compliance oversight role in assuring that our directors, officers and
management comply with our code of ethics, reviewing and approving of related
party transactions, dealing with complaints regarding accounting, internal
controls and auditing matters, and complying with accounting and legal
requirements applicable to us.





Pursuant
to the terms of its charter, the audit committee’s responsibilities include,
among other things:




·
            periodically reviewing and
      reassessing the adequacy of the committee’s formal
      charter;





·
              reviewing our annual audited
      financial statements with our management and our independent auditors and
      the adequacy of our internal accounting
  controls;





·
            reviewing analyses prepared by
      management and independent auditors concerning significant financial
      reporting issues and judgments made in connection with the preparation of
      our financial statements;





·
              the engagement of the independent
      auditors;





·
              reviewing the independence of the
      independent auditors;





·
            reviewing our auditing and
      accounting principles and practices with the independent auditors, and
      reviewing major changes to our auditing and accounting principles and
      practices as suggested by the independent auditors or our
      management;




75




·
            the appointment of the
      independent auditors to our board, which firm is ultimately accountable to
      the audit committee and our
board;





·
            approving professional services
      provided by the independent auditors, including the range of audit and
      non-audit fees; and





·
            reviewing all related party
      transactions on an ongoing basis for potential conflicts of
      interest.




The audit
committee will pre-approve the services to be provided by our independent
auditors. The audit committee will also review and recommend to the board of
directors whether or not to approve transactions between us and any officer or
director that occurs outside the ordinary course of business.





Compensation
Committee





Our
compensation committee consists of Messrs. Williams and Li Liao, each of whom is
an “independent director” as that term is used in the NASDAQ corporate
governance rules. Our compensation committee assists the board 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. The responsibilities of our compensation committee include,
among other things:





·
            reviewing and recommending to the
      board with respect to the total compensation package for our executive
      officers;





·
            reviewing and recommending to the
      board with respect to the compensation of our
      directors;





·
            reviewing
      periodically and recommending to the board with respect to any long-term
      incentive compensation or equity plans, programs or similar arrangements,
      annual bonuses, employee pension and welfare benefit plans; and administer
      our stock option plans, including authority to make and modify awards
      under such plans. Currently, our only equity award plan is the 2006
      Performance Equity Plan; and





·
            evaluating the risk to our
      company of the compensation structures, policies, and
      amounts.





Nominating
Committee





Our
nominating committee consists of Messrs. Williams and Li Liao. The nominating
committee is responsible for overseeing the selection of persons to be nominated
to serve on our board. The nominating committee will identify, evaluate and
recommend candidates to become members of our board with the goal of creating a
balance of knowledge and experience. The committee does not consider diversity
to be a factor in its evaluation process.





The
committee will also consider suggestions from individual shareholders, based
upon its assessment of certain criteria, including the proposed person’s merits.
The suggested nominee must provide a statement of consent to being considered
for nomination.




76




D.
Employees.





We had
1,674, 1,941 and 2,208 employees as of December 31, 2007, 2008 and 2009,
respectively. The following table sets forth our employees as of December 31,
2009 based on functional area.




Category
                                                            
                                                            Number
      of EmployeesProject
      development andimplementation
                                                            
                                                            
                                                            1,641Research
      and development
                                                            
                                                            
                                                            52Sales
      and marketing
                                                            
                                                            
                                                            191General
      and administrative
                                                            
                                                            
                                                            324Total
                                                            
                                                            
                                                            2,208


We pay
our sales staff a combination of salaries, sales commissions and bonuses. We pay
salaries to all other employees, which are supplemented by periodic cash bonuses
that are generally based on performance. We also contribute to social insurance
for our employees each month, which includes pension, medical insurance,
unemployment insurance, occupational injuries insurance and housing provision
funds in accordance with PRC regulations. Our compensation and benefits packages
are competitive in the industry. Our employees are not represented by any
collective bargaining agreement and we have never experienced any strike or
similar work stoppage. We consider our relations with our employees to be
good.





We invest
significant resources in the training and development of our employees. We
require our employees to participate in our various internal training programs.
Through these programs, we help ensure that each entry-level employee acquires
the necessary skills to execute its duties and other employees continue to
maintain and improve their current skill-sets. In addition to trainings on
technical skills and development, we also provide training programs that cover
topics ranging from our clients, our market and the financial services industry
in general.





E.
            Share
      ownership.





The
following table sets forth information with respect to the beneficial ownership
of our ordinary shares as of June 29, 2010, by:





·
            each of our directors and
      executive officers who beneficially own our ordinary shares;
      and





·
            each person known to us to own
      beneficially more than 5.0% of our ordinary
  shares.




77


Number
                                                
                                                
                                                Percentage ofof
                                                
                                                
                                                OutstandingOrdinary
                                                
                                                
                                                OrdinaryName
                                                
                                                Shares
                                                
                                                
                                                Shares(1)Directors
      and executive officers:Weidong
      Hong(2)(3)
                                                
                                                
                                                2,533,980
                                                
                                                
                                                
                                                13.7
                                                %Chairman
      and Chief Executive OfficerShuo
      Zeng(2)(4)
                                                
                                                
                                                642,066
                                                
                                                
                                                
                                                3.5
                                                %Chief
      Operating Office and DirectorLi
      Liao
                                                
                                                
                                                5,250
                                                
                                                
                                                
                                                *DirectorJeffrey
      R. Williams
                                                
                                                
                                                3,000
                                                
                                                
                                                
                                                *DirectorHenry
      Wang
                                                
                                                
                                                8,250
                                                
                                                
                                                
                                                *DirectorDirectors
      and executive officers:Directors
      and officers as a group (five persons)(3)(4)
                                                
                                                
                                                3,192,546
                                                
                                                
                                                
                                                17.2
                                                %Principal
      shareholders:Sihitech
      Company Limited(5)
                                                
                                                
                                                2,533,980
                                                
                                                
                                                
                                                13.7
                                                %Edward
      C. Johnson 3rd(6)
                                                
                                                
                                                1,926,550
                                                
                                                
                                                
                                                10.4
                                                %Martin
      Currie, Inc. and Martin Currie Investment Management Limited(7)
                                                
                                                
                                                1,874,427
                                                
                                                
                                                
                                                10.1
                                                %Philip
      J. Hempleman(8)
                                                
                                                
                                                1,041,500
                                                
                                                
                                                
                                                5.6
                                                %


(1)
                Beneficial
      ownership and percentage has been determined in accordance with Rule 13d-3
      under the Securities Exchange Act of 1934, based on 18,560,014 shares
      outstanding.
 
 (2)
                The
      business address of the person is c/o Beijing Global Trade Center, Tower D
      , Floor 9, 36 North Third Ring Road East, Dongcheng District, Beijing
      100013, P.R. China.
 
 (3)
                Includes
      675,807 shares held by Mr. Hong’s spouse. Represents shares held through
      Sihitech Company Limited, a BVI company owned by Mr. Hong and his spouse,
      of which Mr. Hong has voting and dispositive
  authority.
 
 (4)
                Represents
      shares held through Elite Concord International Limited, a BVI company
      owned by Mr. Zeng, of which Mr. Zeng has voting and dispositive
      authority.
 
 (5)
                A
      BVI company owned by Mr. Hong and his spouse, of which Mr. Hong has voting
      and dispositive authority. The business address of Sihitech Company
      Limited is TrustNet Chambers, P.O. Box 3444, Roadtown Tortola, British
      Virgin Islands.
 
 (6)
                Messrs.
      Johnson, as the Chairman of FMR LLC and FIL, directly, or indirectly
      through the various funds under FMR LLC and FIL, beneficially owns a total
      of 1,926,550 of our shares. Fidelity Management & Research Company
      beneficially owned 1,200,050 of our shares. Pyramis Global Advisors, LLC
      beneficially owned 148,900 of our shares. Pyramis Global Advisors Trust
      Company beneficially owned 262,100 of our shares. FIL Limited beneficially
      owned 315,500 of our shares. The information is derived from a Schedule
      13G filed by such entities with the SEC on January 10,
    2010.
 
 (7)
                Martin
      Currie, Inc. and Martin Currie Investment Management Limited directly
      owned 1,055,927 shares and 818,500 shares respectively, which in aggregate
      owned 1,874,427 shares. The information is derived from a Schedule 13G
      filed by such entities with the SEC on May 7,
  2010.
  78
  (8)
                Mr.
      Hempleman is the managing partner of Ardsley Advisory Partners and Ardsley
      Partners and in that capacity directs their operations. Ardsley Advisory
      Partners is the investment manager of Ardsley Offshore Fund Ltd. and the
      investment advisor of certain managed accounts. It is also the investment
      advisor of Ardsley Partners Fund II, L.P. and Ardsley Partners
      Institutional Fund, L.P. Ardsley Partners is the general partner of
      Ardsley Partners Fund II, L.P. and Ardsley Partners Institutional Fund,
      L.P. Ardsley Partners Fund II beneficially owned 485,100 of our shares.
      Ardsley Partners Institutional Fund, L.P. beneficially owned 368,000 of
      our shares. Ardsley Offshore Fund Ltd. owned 98,200 of our shares. Ardsley
      Advisory Partners beneficially owned 966,500 of our shares. Ardsley
      Partners I beneficially owned 853,100 of our shares. Mr. Hempleman
      directly, or indirectly through the companies listed above, beneficially
      owns a total of 1,041,500 of our shares. The address of Ardsley Offshore
      Fund Ltd. is Romasco Place, Wickhams Cay, Roadtown Tortola, British Virgin
      Islands. The address of all other parties is 262 Harbor Drive, Stamford,
      Connecticut 06902. The information is derived from a Schedule 13G filed by
      such entities with the SEC on February 16,
2010.
  None of
the above shareholders have voting rights that differ from the voting rights of
other shareholders.


ITEM 7.
              MAJOR SHAREHOLDERS AND RELATED
      PARTY TRANSACTIONS




A.
            Major
      shareholders





Please
refer to “Item 6. Directors, Senior Management and Employees — E. Share
ownership.”




B.
            Related
      party transactions.





CASH
ADVANCES AND BORROWINGS WITH RELATED PARTIES





In 2006,
we made cash advances to, and borrowed from certain related parties, including
our executive officers and investments under equity method. These transactions
had no fixed terms and were non-interest bearing and payable on demand. In
compliance with the provisions of the Sarbanes-Oxley Act of 2002, we, neither
directly nor indirectly nor through any subsidiary, will make loans, extend
credit, maintain credit or arrange for the extension of credit or renew an
extension of credit in the form of a personal loan to or for any director or
executive officer of the Company in the future. Moreover, we have adopted an
audit committee charter that requires our audit committee to review and approve
all related party transactions, assure compliance with the Company’s code of
ethics and monitor and discuss with the auditors and outside counsel policies
and compliance with applicable accounting and legal standards and
requirements.





Cash
advances made to and borrowings with our executives




We have
made cash advances to Mr. Weidong Hong, our Chief Executive Officer and
principal shareholder and Mr. Shuo Zeng, our Chief Operating Officer and
principal shareholder for incurring and paying operating expenses on behalf of
the Company.  In 2006, we received borrowings and payments from, and
made cash advances and repayments to, the two executives of an aggregate of
RMB1.1 million and RMB3.6 million, respectively. The net balance due from the
two executives as of December 31, 2006 was RMB0.4 million. In 2007, we received
borrowings and payments from, and made cash advances and repayments to, the two
executives of an aggregate of approximately RMB0.3 million and RMB54,000,
respectively. There was no balance due to the two executives as of December 31,
2007. In 2008, we made cash advances to the two executives of an aggregate of
approximately RMB0.2 million, and collected the amount in 2008. There was no
balance due to the two executives as of December 31, 2008. In 2009, we made cash
advances to the two executives of an aggregate of approximately RMB0.1 million
(USD0.01 million), and collected the amount in 2009. There was no balance due to
the two executives as of December 31, 2009.




Cash
advances made to and borrowings from our affiliates





Our
affiliate companies in 2007, 2008 and 2009 included the following:


·
            Beijing Hengli Plastic Machinery
      Co., Ltd., or Hengli, a plastic mold manufacturer, in which we held a 50%
      interest. In June 2008, we recorded RMB2.1 million in gains from the
      disposal of this affiliate.




79




·
            Shanghai Sihitech Sanjian
      Technology Co, Ltd., or Sanjian, a software and hardware technology
      company, in which we held 50% interest. Sanjian was closed on December 20,
      2007 due to business
considerations.





·
            Chengdu
      Elegon Information Technologies Limited, or Elegon, a software and
      solution services company, in which we held 49% interest. We sold our 49%
      equity stake in Elegon to 3i Infotech, Ltd. in June,
  2009.





·
            Hainan
      Baodaotong Technologies Limited, or Baodaotong, in which we held 15%
      interest.





·
            Beijing
      Sihitech Huazhi Consulting Service Co.,Ltd., or Huazhi, a consulting
      service company, in which we held 40%
interest.





In
2007, we received no borrowings and payments from the remaining affiliated
company, Hengli, and made cash advances and repayments to Hengli an aggregate of
approximately RMB69,000. There was no balance due to Hengli and RMB0.9 million
due from Sanjian as of December 31, 2007. In 2008, we collected RMB0.7 million
and RMB0.9 million from Hengli and Sanjian respectively; we made cash advances
to Elegon approximately RMB1.8 million, and collected from Elegon was
approximately RMB1.8 million. The balance due from Elegon was RMB143. In 2009,
we collected RMB143 from Elegon and there was no balance due from Elegon as of
December 31, 2009. We made cash advances of approximately RMB20.9 million
(USD3.1 million) to Baodaotong, and collected approximately RMB20.6 million
(USD3.0 million) from Baodaotong in 2009. The balance due from Baodaotong was
RMB0.3 million as of December 31, 2009. We made cash advances of approximately
RMB1.9 million (USD0.3 million) to Huazhi,and collected approximately RMB0.6
million (USD0.1 million) from Huazhi in 2009. The balance due from Huazhi was
RMB1.3 million (USD0.2 million) in 2009.




C.
            Interests
      of experts and counsel.





Not
applicable.




ITEM 8.
            FINANCIAL
      INFORMATION





A.
            Consolidated
      statements and other financial
information.





We have
appended consolidated financial statements filed as part of this annual report.
See “Item 18. Financial Statements.”





LEGAL
PROCEEDINGS





We are
subject to legal proceedings, investigations and claims incidental to the
conduct of our business from time to time. Other than the legal proceeding
described below, we are neither currently a party to, nor are we aware of, any
legal proceeding, investigation or claim that is likely to have a material
adverse effect on our business, financial condition or results of
operations.





The
Company was a defendant in the matter of Justin Jiang v. Yucheng Technologies
Limited et al., filed on March 21, 2007 in the United States District Court for
the Southern District of California, Civil Case No. 3:07-CV-00514-H-BLM
(“Federal Court”). The other defendants were Beijing Sihitech Co. and Chih T.
Cheung. As against the Company, Plaintiff alleged the Company breached an oral
contract with him regarding a finder’s fee. Plaintiff has requested specific
performance and/or a constructive trust.





Additionally,
Plaintiff has made a demand for general damages, $109,275.36 cash, the issuance
of 150,179 shares of the Company to Plaintiff, and the payment of 4% of any
future compensation which Sihitech and its shareholders are entitled to receive
as a result of China Unistone’s acquisition of Sihitech.





Counsel
for the Company filed a Motion to Dismiss the action on the ground that the
court lacked personal and subject matter jurisdiction over the Company. The
Motion to Dismiss was granted and the Federal Court dismissed the case on July
20, 2007. The grounds for dismissal at that time permitted the refiling of the
claims in a court of appropriate jurisdiction.




80




Plaintiff
refiled its action in the Superior Court of the State of California for the
County of San Diego (“State Court”) in which the matter was pending as Case No.
37-2007-00073543-CU-BC-CTL. The lawsuit named as defendants the Company, China
Unistone Acquisition Corporation, Beijing Sihitech Co., Ltd. and Chih T.
Cheung. Counsel for the Company moved to dismiss the action for lack of
proper service and lack of personal jurisdiction. On April 22, 2008, the State
Court granted the motion to dismiss and ordered the case dismissed for, among
other things, lack of personal jurisdiction over the defendants as they are not
residents of California and did not have sufficient contacts with California to
allow this matter to proceed in California.





On
September 9, 2008 plaintiff filed an appeal of the dismissal of the State Court
action and that appeal was not successful. The court of appeal issued its order
denying the appeal and affirming the dismissal on November 2009. The decision of
the court of appeal is now final, and plaintiff has no right to bring the claim
against the Company in California. Because the decision of the court was on
jurisdictional grounds only, it would not prevent plaintiff from bringing claims
in such other jurisdiction as might be appropriate.





DIVIDEND
POLICY





We have
never declared or paid any dividends, nor do we have any present plan to pay any
cash dividends on our ordinary shares in the foreseeable future. We currently
intend to retain most, if not all, of our available funds and any future
earnings to operate and expand our business.




Our board
of directors may, by resolution, authorize payment of dividends if the directors
are satisfied, on reasonable grounds, we will, immediately after the
distribution of dividends, satisfy the solvency test as stipulated in Section 56
of the BVI Business Companies Act. Even if our board decides to pay dividends,
the form, frequency and amount will depend upon our future operations and
earnings, capital requirements and surplus, general financial condition,
contractual restrictions and other factors that our board may deem
relevant.





Our
ability to pay dividends depends substantially on the payment of dividends to us
by our PRC subsidiaries. In particular, each of our PRC subsidiaries may pay
dividends only out of its accumulated distributable profits, if any, determined
in accordance with its articles of association and the accounting standards and
regulations in China. Moreover, pursuant to applicable PRC laws and regulations,
10% of after-tax profits of each of our consolidated PRC entities is required to
be set aside in a statutory surplus reserve fund annually until the reserve
balance reaches 50% of such PRC entity’s registered capital. As of December 31,
2009, the accumulated balance of our statutory reserve funds amounted to RMB43.1
million (USD6.3 million), and the accumulated profits of our consolidated PRC
entities that were available for dividend distribution amounted to RMB183.1
million (USD26.8 million). Our restricted reserves are not distributable as cash
dividends. Allocations to these statutory reserves may only be used for specific
purposes and are not distributable to us in the form of loans, advances, or cash
dividends. Furthermore, if any of our subsidiaries and consolidated variable
interest entities incurs debt on its own behalf in the future, the instruments
governing the debt may restrict its ability to pay dividends or make other
payments to us.





Under the
New EIT Law and its implementation rules issued by the PRC State Council, both
of which became effective on January 1, 2008, dividends from our PRC
subsidiaries to us may be subject to a withholding tax at the rate of 10% if
such dividend is derived from profits generated after January 1, 2008. If we are
deemed to be a PRC resident enterprise, the withholding tax may be exempted, but
in such a case we will be subject to a 25% tax on our global income, and our
non-PRC investors may be subject to PRC income tax withholding. See “Item 10.
Additional Information — E. Taxation — PRC Taxation”.





Cash
dividends on our ordinary shares, if any, will be paid in U.S.
dollars.





B.
            Significant
      changes.





We have
not experienced any significant changes since the date of our audited
consolidated financial statements included in this annual report.




81




ITEM 9.
            THE OFFER AND
      LISTING





A.
            Offering
      and listing details.





The
common stock of China Unistone was quoted on the Over-The-Counter Bulletin
Board, or OTCBB, under the symbol “CUAC.OB.” China Unistone merged with and into
Yucheng for the purpose of redomestication out of the United States. From
November 27, 2004 to March 13, 2007, our ordinary shares were quoted on the
OTCBB under the symbol “YCHTF.OB.” On March 14, 2007, our ordinary shares were
admitted for listing on the NASDAQ Global Market under the symbol
“YTEC.”





The
following table sets forth the historical high and low trading prices for our
ordinary shares, and those for the common stock of China Unistone, for the
periods indicated. The OTCBB market quotations reported below reflect
inter-dealer prices, without markup, markdown or commissions and may not
represent actual transactions.




The
      OTCBB
                                          
                                          
                                          The
      NASDAQPrice
      Per
                                          
                                          
                                          Global
      MarketCommon
      Stock
                                          
                                          
                                          Price
      Per ShareHigh
                                          
                                          
                                          Low
                                          
                                          
                                          High
                                          
                                          
                                          Low(USD)Annual
      Market PricesYear
      2004 (from November 24, 2004)
                                          
                                          
                                          5.20
                                          
                                          
                                          
                                          4.78
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/AYear
      2005
                                          
                                          
                                          6.75
                                          
                                          
                                          
                                          0.98
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/AYear
      2006
                                          
                                          
                                          8.85
                                          
                                          
                                          
                                          5.35
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/AYear
      2007 (until March 13, 2007)
                                          
                                          
                                          8.30
                                          
                                          
                                          
                                          6.47
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/AYear
      2007 (from March 14, 2007)
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          17.45
                                          
                                          
                                          
                                          7.25Year
      2008
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          18.49
                                          
                                          
                                          
                                          4.66Year
      2009
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          9.50
                                          
                                          
                                          
                                          4.07Quarterly
      Market PricesFirst
      Quarter 2007(until March 13, 2007)
                                          
                                          
                                          8.30
                                          
                                          
                                          
                                          6.47
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/AFirst
      Quarter 2007(from March 14, 2007)
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          8.80
                                          
                                          
                                          
                                          6.65Second
      Quarter 2007
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          9.50
                                          
                                          
                                          
                                          7.46Third
      Quarter 2007
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          11.00
                                          
                                          
                                          
                                          7.15Fourth
      Quarter 2007
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          18.01
                                          
                                          
                                          
                                          9.95First
      Quarter 2008
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          19.36
                                          
                                          
                                          
                                          10.74Second
      Quarter 2008
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          18.53
                                          
                                          
                                          
                                          10.80Third
      Quarter 2008
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          14.80
                                          
                                          
                                          
                                          8.22Fourth
      Quarter 2008
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          10.62
                                          
                                          
                                          
                                          4.20First
      Quarter 2009
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          8.20
                                          
                                          
                                          
                                          4.07Second
      Quarter 2009
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          9.50
                                          
                                          
                                          
                                          6.10Third
      Quarter 2009
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          8.69
                                          
                                          
                                          
                                          7.02Fourth
      Quarter 2009
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          9.19
                                          
                                          
                                          
                                          7.08Monthly
      Market PricesNovember
      2009
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          8.42
                                          
                                          
                                          
                                          7.16Dec-09
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          9.19
                                          
                                          
                                          
                                          7.86Jan-10
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          8.80
                                          
                                          
                                          
                                          3.55Feb-10
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          3.77
                                          
                                          
                                          
                                          3.24Mar-10
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          4.20
                                          
                                          
                                          
                                          3.56Apr-10
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          4.12
                                          
                                          
                                          
                                          3.82May-10
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          N/A
                                          
                                          
                                          
                                          3.82
                                          
                                          
                                          
                                          3.08




82




On June
29, 2010, the closing price of our ordinary shares was USD3.70 per
share.





B.
            Plan
      of distribution.





Not
applicable





C.
            Markets.





See Item
9.A above.





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.





SUMMARY
OF MEMORANDUM AND ARTICLES OF ASSOCIATION





Charter





Our
charter documents consist of our Memorandum of Association and Articles of
Association. The Memorandum of Association and the Articles of Association
loosely resemble the articles of incorporation and the bylaws, respectively, of
a corporation incorporated in a state in the United States. We may amend our
Memorandum of Association and Articles of Association by a resolution of our
shareholders or by a resolution of our directors. This description and summary
does not purport to be complete and does not address all differences between BVI
corporate laws and those in the United States. Copies of our Memorandum of
Association and Articles of Association have been filed as exhibits to our
initial registration statement on Form S-4 (file number
333-132814).





Corporate
Powers





Yucheng
was first incorporated as a company under the International Business Companies
Act, 1984, or the IBC Act, on November 17, 2005 and became subject to the BVI
Business Companies Act, 2004 on January 1, 2007 when the BVI Business Companies
Act, 2004 replaced the IBC Act. Our Memorandum of Association and Articles of
Association state that the Company can carry out any object not prohibited by
the laws of the BVI.





Directors





The
directors may fix their compensation for services rendered to us.





By a
resolution of directors, the directors may exercise all our powers to borrow
money, mortgage our property, issue debentures, and issue stock or other
securities for any debt, liability or obligation given by us.




83




A
director may resign or retire from our board at any time. The director must give
one month written notice of his resignation to us. Directors hold office until
the next annual meeting of members or until such director’s earlier resignation,
removal from office, death or incapacity. We currently do not have a staggered
election of directors.





The
shareholding qualification for directors may be fixed and varied by a resolution
of members and, unless it is fixed, no shareholding qualification is required. A
director must be an individual.





To the
fullest extent permitted by the BVI Business Companies Act, 2004, none of our
directors shall be personally liable to the Company or its shareholders for or
with respect to any acts or omissions in the performance of his or her duties as
a director of the Company.




Rights
of Shares





We are
authorized to issue 60,000,000 ordinary shares. The ordinary shares have one
vote each, are subject to purchase or acquisition by us for fair value and have
the same rights with regard to dividends and distributions upon our liquidation.
We are also authorized to issue 1,000,000 preferred shares in one series of no
par value. The directors are authorized to issue the preferred shares and to fix
the rights and preferences attached to the preferred shares.





Shareholder
Meetings





As of
November 2008, Yucheng has availed itself of the market place rules applicable
to foreign private issuers and will hold shareholder meetings as it sees fit;
however, there is no annual requirement. Special meetings of members may be
called by the directors pursuant to a resolution of directors to that effect or
upon the written request of members holding more than 50 percent of the votes of
our outstanding voting shares. No less than seven days’ notice of meetings is
required to be given to members.





A meeting
of members may be called on short notice if members holding not less than 90
percent of the total number of shares entitled to vote on all matters to be
considered at the meeting, or 90 percent of the votes of each class or series of
shares where members are entitled to vote thereon as a class or series together
with not less than a 90 percent majority of the remaining votes, have agreed to
a short notice of the meeting, or if all members holding shares entitled to vote
on all or any matters to be considered at the meeting have waived notice of the
meeting and for this purpose presence at the meeting shall be deemed to
constitute waiver.





The
inadvertent failure of the directors to give notice of a meeting to a member, or
the fact that a member has not received notice, does not invalidate the
meeting.





A member
may be represented at a meeting of members by a proxy who may speak and vote on
behalf of the member. A written instrument giving the proxy such authority must
be produced at the place appointed for the meeting before the time for holding
the meeting.





A meeting
of members is duly constituted if, at the commencement of the meeting, there are
present in person or by proxy not less than 50 percent of the votes of the
shares or class or series of shares entitled to vote on resolutions of members
to be considered at the meeting.





Limitations
on Ownership of Securities





There are
no limitations on the right of nonresidents or foreign persons to own our
securities imposed by BVI law or by our Memorandum and Articles of
Association.





Change
in Control of Company





There are
no provisions in our Memorandum and Articles of Association that would operate
only to delay, defer or prevent a change of control of our company. However, the
board of directors has the power to issue preferred shares with such rights
attaching to them as they decide and this power could be used in a manner that
would delay, defer or prevent a change of control of our company.




84




Ownership
Threshold





There are
no provisions governing the ownership threshold above which shareholder
ownership must be disclosed.





Changes
in Capital





Subject
to the provisions of the BVI Business Companies Act, 2004, we may, by a
resolution of directors or members, amend our Memorandum and Articles of
Association to increase or decrease the number of shares authorized to be
issued. The directors of a company may, by resolution, authorize a distribution
(including a capital distribution) by the company at a time, of an amount, and
to any members they think fit if they are satisfied, on reasonable grounds, that
the company will, immediately after the distribution, satisfy the solvency test.
The solvency test is satisfied if the value of the company’s assets exceeds its
liabilities, and the company is able to pay its debts as they fall
due.




DIFFERENCES
IN CORPORATE LAW





The
companies law of the BVI differs from laws applicable to U.S. corporations and
their shareholders. Set forth below is a summary of the significant differences
between the provisions of the companies law applicable to us and the laws
applicable to companies incorporated in the United States and their
shareholders.





Protection
for minority shareholders





Under the
laws of most U.S. jurisdictions, majority and controlling shareholders of a
company generally have certain “fiduciary” responsibilities to the minority
shareholders. Corporate actions taken by majority and controlling shareholders,
which are unreasonable and materially detrimental to the interests of minority
shareholders, may be declared null and void. Minority shareholders may have less
protection for their rights under BVI law than they would have under U.S.
law.





Powers
of directors





Unlike
most U.S. jurisdictions, the directors of a BVI company, subject in certain
cases to court’s approvals but without shareholders’ approval, may implement the
sale, transfer, exchange or disposition of any asset, property, part of the
business, or securities of the company, with the exception that shareholder
approval is required for the disposition of over 50% in the value of the total
assets of the company.





Conflict
of interests





Similar
to the laws of most U.S. jurisdictions, when a director becomes aware of the
fact that he has an interest in a transaction which the company is to enter
into, he must disclose it to our board. However, with sufficient disclosure of
interest in relation to that transaction, the director who is interested in a
transaction entered into or to be entered into by the Company may (i) vote on a
matter relating to the transaction; (ii) attend a meeting of directors at which
a matter relating to the transaction arises and be included in the quorum; and
(iii) sign a document on behalf of the company, or do any other thing in his
capacity as a director, that relates to the transaction.





Written
consent and cumulative voting





Similar
to the laws of most U.S. jurisdictions, under the BVI law, shareholders are
permitted to approve matters by way of written resolution in place of a formal
meeting. BVI law does not make a specific reference to cumulative voting, and
our current Memorandum and Articles of Association have no provision authorizing
cumulative voting.




85




Independent
directors





There is
no requirement for a majority of the directors of the company to be independent
as a matter of BVI law.





Redemption





Our
shares are not redeemable at the shareholders’ option. We may redeem our shares
only with the consent of the shareholders whose shares are to be redeemed,
except that the consent from the shareholders is not needed under the
circumstances of (i) the compulsory redemption with respect to fractional shares
held by our shareholders in the circumstance of share division and (ii) the
compulsory redemption, at the request of the shareholders holding 90% of the
votes of the outstanding shares entitled to vote, of the remaining issued
shares.





Takeover
provisions





The
Memorandum and Articles of Association of our company does not alter the general
provisions of BVI law and therefore measures such as a “poison pill” would have
to be in place before a takeover offer, as, if not, the directors could be seen
as exercising their powers for an improper purpose in trying to introduce such a
measure.





Furthermore,
the creation of additional class of shares would require an amendment to the
Memorandum and Articles of Association of our company. This can only be done by
a resolution of shareholders or a resolution of directors. The directors do not
however, have the power to amend the memorandum and articles to (a) restrict the
rights or powers of the members to amend the memorandum or articles, (b) to
change the percentage of members required to pass a resolution to amend the
memorandum and articles, or (c) in circumstances where the memorandum or
articles cannot be amended by the members. The introduction of a poison pill
would require an amendment to the Memorandum and Articles of Association of our
company which may only be done by way of shareholder resolution.





Shareholder’s
access to corporate records





A
shareholder is entitled, on giving written notice to the company, to inspect the
company’s (i) Memorandum and Articles of Association; (ii) register of members;
(iii) register of directors; and (iv) minutes of meetings and resolutions of
members and of those classes of members of which the shareholder is a
member.





The
directors may, if they are satisfied that it would be contrary to the company’s
interests to allow a member to inspect any document listed above (or any part
thereof), refuse the member to inspect the document or limit the inspection of
the document. Our board may also authorize a member to review the company
account if requested.





Indemnification





Under our
Memorandum and Articles of Association, we may indemnify our directors or any
person who is or was, at the request of the company, serving as a director of,
or in any other capacity is or was acting for, another body corporate or a
partnership, joint venture, trust or other enterprise against expenses
(including legal fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by such persons in connection with legal, administrative
or investigative proceedings to which they are a party or are threatened to be
made a party by reason of their acting as our directors or agents. To be
entitled to indemnification, these persons must have acted honestly and in good
faith and in the best interest of the company, and they must have had no
reasonable cause to believe their conduct was unlawful.





Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling us under the foregoing
provisions, we have been advised that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.


86




Mergers
and similar arrangements





Under the
laws of the BVI, two or more companies may merge or consolidate in accordance
with Section 170 of the BVI Business Companies Act, 2004. A merger means
the merging of two or more constituent companies into one of the constituent
companies, and a consolidation means the uniting of two or more constituent
companies into a new company. In order to merge or consolidate, the directors of
each constituent company must approve a written plan of merger or consolidation
which must be authorized by a resolution of shareholders.





While a
director may vote on the plan even if he has a financial interest in the plan of
merger of consolidation, in order for the resolution to be valid, the interest
must have been disclosed to our board forthwith upon him becoming aware of such
interest. The transaction will not be avoidable if the shareholders approve or
ratify it.





Shareholders
not otherwise entitled to vote on the merger or consolidation may still acquire
the right to vote if the plan of merger or consolidation contains any provision
which, if proposed as an amendment to the memorandum or articles of association,
would entitle them to vote as a class or series on the proposed amendment. In
any event, all shareholders must be given a copy of the plan of merger or
consolidation irrespective of whether they are entitled to vote at the meeting
or consent to the written resolution to approve the plan of merger or
consolidation.




The
shareholders of the constituent companies are not required to receive shares of
the surviving or consolidated company, but may receive debt obligations or other
securities of the surviving or consolidated company, or other assets, or a
combination thereof. Furthermore, some or all of the shares of a class or series
may be converted into a kind of asset while the other shares of the same class
or series may receive a different kind of asset. As such, not all the shares of
a class or series must receive the same kind of consideration.





After the
plan of merger or consolidation has been approved by the directors and
authorized by a resolution of the shareholders, articles of merger or
consolidation are executed by each company and filed with the Registrar of
Corporate Affairs in the BVI.





A
shareholder may dissent from a mandatory redemption of his shares, an
arrangement (if permitted by the court), a merger (unless the shareholder was a
shareholder of the surviving company prior to the merger and continues to hold
the same or similar shares after the merger) and a consolidation. A shareholder
properly exercising his dissent rights is entitled to payment of the fair value
of their shares.





A
shareholder dissenting from a merger or consolidation must object in writing to
the merger or consolidation before the vote by the shareholders on the merger or
consolidation, unless notice of the meeting was not given to the shareholder. If
the merger or consolidation is approved by the shareholders, the company must
within 20 days give notice of this fact to each shareholder who gave
written objection, and to each shareholder who did not receive notice of the
meeting. Such shareholders then have 20 days to give to the company their
written election in the form specified by the BVI Business Companies Act to
dissent from the merger or consolidation, provided that in the case of a merger,
the 20 days starts when the plan of merger is delivered to the
shareholder.





Upon
giving notice of his election to dissent, a shareholder ceases to have any
rights of a shareholder except the right to be paid the fair value of his
shares. As such, the merger or consolidation may proceed in the ordinary course
notwithstanding the dissent.





Within
seven days of the later of the delivery of the notice of election to dissent and
the effective date of the merger or consolidation, the company must make a
written offer to each dissenting shareholder to purchase his shares at a
specified price that the company determines to be their fair value. The company
and the shareholders then have 30 days to agree upon the price. If the
company and a shareholder fail to agree on the price within the 30 days,
then the company and the shareholder shall each designate an appraiser and these
two appraisers shall designate a third appraiser. These three appraisers shall
fix the fair value of the shares as of the close of business on the day before
the shareholders approved the transaction without taking into account any change
in value as a result of the transaction.




87




Shareholders’
suits





Similar
to the laws of most U.S. jurisdictions, BVI law permits derivative actions
against its directors. However, the circumstances under which such actions may
be brought, and the procedures and defenses available may result in the rights
of shareholders of a BVI company being more limited than those of shareholders
of a company incorporated and/or existing in the United States.





We are
not aware of any reported class action having been brought in a BVI court.
Reported derivative actions have been brought but unsuccessfully for technical
reasons. The court of the BVI may, on the application of a shareholder of a
company, grant leave to that shareholder to bring proceedings in the name and on
behalf of that company, or intervene in proceedings to which the company is a
party for the purpose of continuing, defending or discontinuing the proceedings
on behalf of the company. In determining whether to grant leave, the High Court
of the BVI must take into account (i) whether the shareholder is acting in
good faith; (ii) whether the derivative action is in the interests of the
company taking account of the views of the company’s directors on commercial
matters; (iii) whether the proceedings are likely to succeed; (iv) the
costs of the proceedings in relation to the relief likely to be obtained; and
(v) whether an alternative remedy to the derivative claim is
available.




Leave to
bring or intervene in proceedings may be granted only if the High Court of the
BVI is satisfied that (i) the company does not intend to bring, diligently
continue or defend, or discontinue the proceedings, as the case may be; or
(ii) it is in the interests of the company that the conduct of the
proceedings should not be left to the directors or to the determination of the
shareholders as a whole.





In
determining whether to grant leave to a shareholder in these circumstances, the
BVI Court must take the following matters into account:





(a)
whether the member is acting in good faith;





(b)
whether the derivative action is in the interests of the company taking account
of the views of the company’s directors on commercial matters;





(c)
whether the proceedings are likely to succeed;





(d) the
costs of the proceedings in relation to the relief likely to be obtained;
and





(e)
whether an alternative remedy to the derivative claim is available.





C.
            Material
      contracts.





We have
not entered into any material contracts related to our business operations other
than in the ordinary course of business and other than those described in “Item
4. Information on the Company” and in “Item 7. Major Shareholders and Related
Party Transactions” or elsewhere in this annual report.





D.
            Exchange
      controls.





BRITISH
VIRGIN ISLANDS





There are
no material exchange controls restrictions on payment of dividends, interest or
other payments to the holders of our ordinary or preferred shares or on the
conduct of its operations in the BVI, where we were incorporated. There are no
material BVI laws which impose any material exchange controls on us or that
affect the payment of dividends, interest or other payments to nonresident
holders of its ordinary or preferred shares. BVI law and our Memorandum and
Articles of Association impose no material limitations on the right of
nonresidents or foreign owners to hold or vote our ordinary or preferred
shares.





CHINA





For
exchange controls in China, see “Item 4. Information on the Company — B.
Business overview — Regulation — Regulations on foreign
exchange.”


88




E.
            Taxation.





BRITISH
VIRGIN ISLANDS TAXATION





Under the
present laws of the BVI, there are no applicable taxes on our profits or income.
There are no taxes on profits, income, nor are there any capital gains tax,
estate duty or inheritance taxes applicable to any ordinary shares held by
nonresidents of the BVI. In addition, there is no stamp duty or similar duty on
the issuance, transfer or redemption of the ordinary shares as the Company does
not hold any interest in land in the BVI. Dividends remitted to the holders of
ordinary shares resident outside the BVI will not be subject to withholding tax
in the BVI.




European
Union Directive on the Taxation of Savings Income (Directive
2003/48/EC)





The
European Union has formally adopted a new Directive regarding the taxation of
savings income, or the EU Savings Tax Directive. Since July 1, 2005, member
states are required to provide to the tax authorities of another member state
details of payments of interest and other similar income paid by a person within
its jurisdiction to or for an individual resident in that other member state,
except that Austria, Belgium and Luxembourg instead impose a withholding system
for a transitional period (unless during such period they elect
otherwise).





The BVI
is not a member of the European Union and not within the European Union fiscal
territory, but the government of the United Kingdom had requested that the
Government of the BVI voluntarily apply the provisions of the EU Savings Tax
Directive. The Mutual Legal Assistance (Tax Matters) (Amendment) Act introduces
a withholding tax system in respect of payments of interest, or other similar
income, made to an individual beneficial owner resident in a European Union
member state by a paying agent situated in the BVI. The withholding tax system
will apply for a transitional period prior to the implementation of a system of
automatic communication to European Union member states of information regarding
such payments. During this transitional period, such an individual beneficial
owner resident in a European Union member state will be entitled to request a
paying agent not to withhold tax from such payments but instead to apply a
system by which the details of such payments are communicated to the tax
authorities of the European Union member state in which the beneficial owner is
a resident.





No stamp
duty is payable in the BVI in respect of instruments relating to transactions
involving our company as our company does not hold any interest in land in the
BVI.





PRC
TAXATION





The New
EIT Law and its implementation rules became effective on January 1, 2008. Under
the previous income tax regime, foreign investors were exempted from PRC income
tax on dividends and gains realized upon liquidation of or transferring equity
interest in a foreign-invested enterprise. Under the New EIT Law and its
implementation rules, we, as a BVI company with substantially all of our
management located in China, may be deemed a resident enterprise for income tax
purposes, in which case our global income may be subject to 25% of PRC income
tax, and an income tax rate of 10% will normally be applicable to dividends
payable to our non-PRC investors, and gains realized on our liquidation or the
transfer of our shares by our non-PRC investors, if such income or gain is
derived from sources within China. According to a notice issued by the PRC State
Council, dividend from profits generated before January 1, 2008 will still be
exempt from such taxation. However, it is currently uncertain whether we may be
deemed a resident enterprise, or how to interpret whether any income or gain is
derived from sources within China. See “Item 3. Key information ─ D. Risk
factors ─ Risks related to doing business in China ─ We may be treated as a
resident enterprise for PRC tax purposes under the New EIT Law and we may
therefore be subject to PRC income tax for any dividends we receive from our
subsidiaries, which may materially and adversely affect the amount of dividends
we must pay to our shareholders.” and “Item 3. Key information ─ D. Risk factors
─ Risks related to doing business in China ─ Dividends payable by us to our
non-PRC shareholders, and gains on the sales of our ordinary shares, may be
subject to withholding taxes under PRC tax laws, which may materially reduce the
value of your investment.” If we are not deemed a resident enterprise, then
dividends payable to our non-PRC investors, and gains realized on our
liquidation or the transfer of our shares by our non-PRC investors will not be
subject to PRC income tax withholding.




89




UNITED
STATES FEDERAL TAXATION





The
following is a discussion of the material U.S. federal tax consequences of
purchasing, owning and disposing of shares by U.S. Holders (as described below),
but it does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to a particular person’s decision to acquire
the securities.





The
discussion applies to investors in shares that hold the shares as capital assets
for U.S. federal income tax purposes and it does not describe all of the tax
consequences that may be relevant to holders subject to special rules, such
as:




·
            certain financial
      institutions;





·
              insurance
      companies;





·
              dealers and traders in securities
      or foreign currencies;





·
              persons holding shares as part of
      a hedge, “straddle,” integrated transaction or similar
      transaction;





·
              persons whose functional currency
      for U.S. federal income tax purposes is not the U.S.
      dollar;





·
              partnerships or other entities
      classified as partnerships for U.S. federal income tax
      purposes;





·
              persons liable for the
      alternative minimum
tax;





·
              tax-exempt
      organizations;





·
              persons holding shares that own
      or are deemed to own 10% or more of our voting stock;
      or





·
              persons who hold the shares in
      connection with a trade or business outside the United States;
      or





·
              persons who acquired our shares
      pursuant to the exercise of any employee stock option or otherwise as
      compensation.





This
discussion is based on the U.S. Internal Revenue Code of 1986, as amended, or
the Code, administrative pronouncements, judicial decisions and final, temporary
and proposed Treasury regulations, all as of the date hereof. These laws are
subject to change, possibly on a retroactive basis. Persons considering the
purchase of ordinary shares should consult their own tax advisors with regard to
the application of the U.S. federal income tax laws to their particular
situations as well as any tax consequences arising under the laws of any state,
local or non-U.S. taxing jurisdiction.


90




As used
in this discussion, the term “U.S. Holder” means a beneficial owner of shares
that, for U.S. federal income tax purposes, is:




·
            a citizen or resident of the
      United States;





·
              a corporation, or other entity
      taxable as a corporation, created or organized in or under the laws of the
      United States or any political subdivision thereof;
    or





·
              an estate or trust the income of
      which is subject to U.S. federal income taxation, regardless of its
      source.





This
discussion assumes that we are not, and will not become, a passive foreign
investment company, a “PFIC,” for U.S. federal income tax purposes, as described
below.




Taxation
of dividends





The gross
amount of any distributions paid with respect to shares, other than certain pro
rata distributions of shares, generally will be treated as foreign source
dividend income for U.S. federal income tax purposes. U.S. Holders will not be
entitled to claim a dividends-received deduction with respect to distributions
paid by us. Dividends will be included in a U.S. Holder’s income on the date of
such U.S. Holder’s receipt of the dividend.





Subject
to applicable limitations, dividends received by certain non-corporate U.S.
Holders in taxable years beginning before January 1, 2011 will be taxable at a
maximum rate of 15%. Non-corporate U.S. Holders should consult their own tax
advisors to determine whether they are subject to any special rules that limit
their ability to be taxed at this favorable rate.





In the
event that we are deemed to be a Chinese “resident enterprise” under PRC tax
law, you may be subject to PRC withholding taxes on dividends paid to you with
respect to the ordinary shares. In addition, subject to certain conditions and
limitations, PRC withholding taxes on dividends not in excess of the rate
allowed under the Treaty, if applicable, may be treated as foreign taxes
eligible for credit against your U.S. federal income tax liability. The rules
governing the foreign tax credit are complex. We urge interested parties to
consult a tax advisor, regarding the availability of the foreign tax credit, to
review their particular circumstances.





Taxation
of capital gains





Upon sale
or other disposition of the shares, a U.S. Holder will generally recognize
capital gain or loss for U.S. federal income tax purposes in an amount equal to
the difference between such holder’s tax basis in the shares sold or disposed of
and the amount realized on the sale or other disposition. Such gain or loss will
be long-term capital gain or loss if the U.S. Holder has held the shares for
more than one year and will generally be U.S. source gain or loss for foreign
tax credit purposes. However, in the event that we are deemed to be a Chinese
“resident enterprise” under PRC tax law, gains on disposal may be subject to PRC
tax. In that event, a U.S. Holder may be eligible for the benefits of the
Treaty. Under the Treaty, if any PRC tax were to be imposed on any gain from the
disposition of the shares, the gain would be treated as PRC source income. We
urge interested parties to consult a tax advisor to review their particular
circumstances, regarding the tax consequences if a foreign tax is imposed on
gain on a disposition of our shares, including the availability of the foreign
tax credit.





Passive
foreign investment company rules





We
believe that we were not a PFIC for United States federal income tax purposes
for our taxable year ended December 31, 2009. However, since PFIC status depends
upon the composition of a company’s income and assets and the market value of
its assets (including goodwill) from time to time, and since we have and will
continue to have a significant amount of passive assets and the value of our
assets may be based, in part, on the market value of our shares, which is
subject to change, there can be no assurance that we will not be a PFIC for any
taxable year.




91




In
general, if we were a PFIC for any taxable year during which a U.S. Holder
held shares, gain recognized by such U.S. Holder on a sale or other disposition
(including certain pledges) of the shares would be allocated ratably over the
U.S. Holder’s holding period for the shares. The amounts allocated to the
taxable year of the sale or other disposition and to any year before we became a
PFIC would be taxed as ordinary income. The amount allocated to each other
taxable year would be subject to tax at the highest rate in effect for
individuals or corporations, as appropriate, for such taxable year, and an
interest charge would be imposed on the amount allocated to such taxable year.
Similar rules would apply to any distribution in respect of shares in excess of
125% of the average of the annual distributions on shares received by a U.S.
Holder during the preceding three years or such holder’s holding period,
whichever is shorter. Certain elections may be available that would result in
alternative treatments (such as a mark-to-market treatment) of the shares. U.S.
Holders should consult their tax advisers to determine whether such elections
are available and, if so, what the consequences of the alternative treatments
would be in those holders’ particular circumstances.




Information
reporting and backup withholding





Payment
of dividends and sales proceeds that are made within the United States or
through certain U.S.-related financial intermediaries generally are subject to
information reporting and to backup withholding unless (i) the U.S. Holder is a
corporation or other exempt recipient or (ii) in the case of backup withholding,
the U.S. Holder provides a correct taxpayer identification number and certifies
that backup withholding does not apply.





The
amount of any backup withholding from a payment to a U.S. Holder will be allowed
as a credit against the U.S. Holder’s U.S. federal income tax liability and may
entitle the U.S. Holder to a refund, provided that the required information is
furnished to the Internal Revenue Service.





F.
            Dividends
      and paying agents.





Not
applicable.





G.
            Statement
      by experts.





Not
applicable.





H.
            Documents
      on display.





We have
filed this annual report on Form 20-F with the SEC under the Securities Exchange
Act of 1934, as amended, or the Exchange Act. Statements made in this annual
report as to the contents of any document referred to are not necessarily
complete. With respect to each such document filed as an exhibit to this annual
report, reference is made to the exhibit for a more complete description of the
matter involved, and each such statement shall be deemed qualified in its
entirety by such reference.





We are
subject to the informational requirements of the Exchange Act and file reports
and other information with the SEC. Reports and other information which the
Company filed with the SEC, including this annual report on Form 20-F, may be
inspected and copied at the public reference room of the SEC at 100 F. Street
N.E., Washington, D.C. 20549. You can also obtain copies of this annual report
on Form 20-F by mail from the Public Reference Section of the SEC, 100 F. Street
N.E., Washington, D.C. 20549, at prescribed rates. Additionally, copies of this
material may be obtained from the SEC’s Internet site at http://www.sec.gov. The
SEC’s telephone number is 1-800-SEC-0330. As a foreign private issuer, we are
exempt from the rules under the Exchange Act prescribing the furnishing and
content of quarterly reports and proxy statements, and officers, directors and
principal shareholders are exempt from the reporting and short-swing profit
recovery provisions contained in Section 16 of the Exchange Act.





I.
            Subsidiaries
      information.





Not
applicable.




92




ITEM 11.
            QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET
RISK





INTEREST
RATE RISK





Our
exposure to interest rate risk primarily relates to the interest rates for our
outstanding debt and the interest income generated by bank deposits and other
interest earning short-term investments. As of December 31, 2009, we had
short-term bank borrowings in the amount of RMB80.0 million (USD11.7 million).
Our short-term bank borrowings are subject to floating interest rates. Assuming
the principal amount of the outstanding bank borrowings remains approximately
the same as of December 31, 2009, each 1% increase in applicable interest rate
would add RMB0.8 million per year to our interest expenses. On the other hand,
any decrease in interest rate would reduce interest income generated from our
interest-earning instruments. We have not used any derivative financial
instruments to manage our interest risk exposure. We have not been exposed to
material risks due to changes in interest rates. However, our future interest
expenses may be higher and interest income may be lower than expected due to
changes in market interest rates.




FOREIGN
EXCHANGE RISK





The value
of the Renminbi against the U.S. dollar and other currencies may fluctuate and
is affected by, among other things, changes in China’s political and economic
conditions. The conversion of Renminbi into foreign currencies, including U.S.
dollars, has been based on rates set by the People’s Bank of China, the central
bank of the PRC. On July 21, 2005, the PRC government changed its decade-old
policy of pegging the value of Renminbi to the U.S. dollar. Under this new
policy, the Renminbi is permitted to fluctuate within a narrow and managed band
against a basket of certain foreign currencies. As a result, from July 21, 2005
to June 29, 2010, the Renminbi has appreciated approximately 18% to the U.S.
dollar. While the international reaction to the Renminbi revaluation 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 more significant appreciation of the Renminbi against
the U.S. dollar.





We use
Renminbi as our reporting currency, and all of our revenues and a substantial
majority of our costs are denominated in Renminbi. However, proceeds from many
of our financing activities are denominated in U.S. dollars, and certain of our
costs, in particular third-party hardware and software products, are also
denominated in U.S. dollars. Fluctuations in exchange rates, primarily those
involving the U.S. dollar, may affect our costs and operating margins as well as
our net income. For example, to the extent that we need to convert U.S. dollars
we receive from our future financing activities into Renminbi for our
operations, appreciation of the Renminbi against the U.S. dollar would have an
adverse effect on the Renminbi amount we receive from the conversion.
Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose
of making payments for dividends on our common shares 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. We have not used any
forward contracts or currency borrowings to hedge our exposure to foreign
currency exchange risk.




ITEM 12.
            DESCRIPTION OF SECURITIES OTHER
      THAN EQUITY SECURITIES





Not
applicable.





PART
II





ITEM 13.
            DEFAULTS, DIVIDEND ARREARAGES AND
      DELINQUENCIES





Not
applicable.




ITEM
      14.
            MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS





Not
applicable.




93




ITEM
      15.
            CONTROLS AND
      PROCEDURES





EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES




Our
management has evaluated the effectiveness of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the end
of the fiscal year covered by this report.  Based on such evaluation,
our chief executive officer and chief financial officer have concluded that, as
of the end of the fiscal year covered by this report, our disclosure controls
and procedures were effective in (1) recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by us in the
reports that we file or submit under the Exchange Act and (2) ensuring that
information required to be disclosed by us in such reports is accumulated and
communicated to our management, including our Chief Executive Officer and our
Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure,.




MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING





The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over
financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under
the Securities Exchange Act of 1934 as a process designed by, or under the
supervision of, the Company’s principal executive and principal financial
officers and effected by the Company’s board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:




·
            Pertain to the maintenance of
      records that in reasonable detail accurately and fairly reflect the
      transactions and dispositions of the assets of the
      Company;





·
            Provide reasonable assurance that
      transactions are recorded as necessary to permit preparation of financial
      statements in accordance with generally accepted accounting principles,
      and that receipts and expenditures of the Company are being made only in
      accordance with authorizations of management and directors of the Company;
      and





·
              Provide reasonable assurance
      regarding prevention or timely detection of unauthorized acquisition, use
      or disposition of the Company’s assets that could have a material effect
      on the financial
statements.





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





The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2009. In making this
assessment, the Company’s management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Based on our assessment, management
believes that, as of December 31, 2009, the Company’s internal control over
financial reporting was effective based on those criteria.





There has
been no change in our internal control over financial reporting during the year
ended December 31, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




94





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of


Yucheng
Technologies Limited





We have
audited Yucheng Technologies Limited’s internal control over financial reporting
as of December 31, 2009, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“the COSO criteria”). Yucheng Technologies Limited’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s
Annual Report on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on the company’s internal control over financial
reporting based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.





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





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





In our
opinion, Yucheng Technologies Limited maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009,
based on the COSO criteria.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Yucheng
Technologies Limited as of December 31, 2008 and 2009, and the related
consolidated statements of income, stockholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2009 and our report dated
June 30, 2010 expressed an unqualified opinion thereon.





BDO
Limited





Hong
Kong


June 30,
2010


95





ITEM 16A.
            AUDIT COMMITTEE FINANCIAL
      EXPERT.





The board
of directors believes that Mr. Williams, Wang, and Liao , members of our audit
committee, meet the criteria for an “audit committee financial expert” as
established by the SEC.





Mr. Liao
will not be deemed an “expert” for any purpose, including, without limitation,
for purpose of Section 11 of the U.S. Securities Act of 1933, as amended, as a
result of being designated or identified as an audit committee financial expert.
The designation or identification of Mr. Williams and Wang as an audit committee
financial expert does not impose on him any duties, obligations or liabilities
that are greater than the duties, obligations and liabilities imposed as a
member of the audit committee and board of directors in the absence of such
designation or identification.




ITEM 16B.
            CODE OF
      ETHICS.





Our board
of directors adopted a code of ethics on March 20, 2006 that applies to our
directors, officers and employees and to those of our subsidiaries. A copy of
the form of our code of ethics was filed as Annex G to our registration
statement on Form S-4 filed with the SEC on March 29, 2006, and was effective as
of November 3, 2006.




ITEM 16C.
            PRINCIPAL ACCOUNTANT FEES AND
      SERVICES.






The
following are the fees billed by BDO Limited, our principal independent auditor,
for the years ended December 31, 2009 and 2008:




2008
                                              
                                              
                                              2009USD
                                              
                                              
                                              USDAudit
      Fees (1)
                                              
                                              
                                              260,000
                                              
                                              
                                              
                                              260,000Audit
      Related Fees (2)
                                              
                                              
                                              -
                                              
                                              
                                              
                                              90,000Tax
      Fees (3)
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -All
      Other Fees (4)
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -260,000
                                              
                                              
                                              
                                              350,000





(1)
              Audit
      Fees consist of the aggregate fees billed for professional services
      rendered for the audit of our annual financial statements included in our
      Form 20-F and for other services that are normally provided by our
      independent auditor in connection with our statutory and regulatory
      filings or engagements.


(2)
            Audit
      Related Fees consist of the aggregate fees billed for assurance and
      related services that are reasonably related to the performance of the
      audit or review of our financial statements and are not reported under (1)
      of this Item.


(3)
            Tax
      Fees consist of the aggregate fees billed for tax compliance, tax advice,
      and tax planning.


(4)
            All
      Other Fees consist of the aggregate fees billed for products and services
      provided by our independent auditor, other than the services reported in
      (1) through (3) of this Item.


Audit
Committee Pre-Approval Policies and Procedures.


The Audit
Committee is to pre-approve all auditing services and permitted non-audit
services to be performed for us by our independent auditor, including the fees
and terms thereof (subject to the de minimis exceptions for non-audit services
described in Section 10A(i)(l)(B) of the Exchange Act which are approved by the
Audit Committee prior to the completion of the audit).


96




ITEM
      16D.
            EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT
  COMMITTEES.




We have
not been granted an exemption from the applicable listing standards for the
audit committee of our board of directors.




ITEM
      16E.
            PURCHASES OF EQUITY SECURITIES BY
      THE ISSUER AND AFFILIATED
PURCHASERS.




None




ITEM
      16F.
            CHANGE IN REGISTRANT’S CERTIFYING
      ACCOUNTANTS.




BDO
McCabe Lo Limited changed its name to BDO Limited on May 1, 2009





ITEM
      16G.
            CORPORATE
      GOVERNANCES




As a
foreign private issuer with ordinary shares listed on NASDAQ, we may follow
certain home country corporate governance practices instead of certain NASDAQ
requirements.




PART
III




ITEM 17.
            FINANCIAL
      STATEMENTS




We have
elected to provide financial statements pursuant to Item 18.




ITEM 18.
            FINANCIAL
      STATEMENTS




The
consolidated financial statements for the Company and its subsidiaries are
included at the end of this annual report.




ITEM 19.
            EXHIBITS





ExhibitNumber
              
              Description1.1
              
              Memorandum
      of Association of Registrant (incorporated by reference from Registration
      Statement No. 333-132814 - Annex B)1.2
              
              Articles
      of Association of Registrant (incorporated by reference from Registration
      Statement No. 333-132814 - Annex C)2.1
              
              Specimen
      Common Stock Certificate of Registrant (incorporated by reference from
      Registration Statement No. 333-132814 – Exhibit 4.1)4.1
              
              Securities
      Purchase Agreement among Registrant, Yucheng Technologies Limited,
      Sihitech Company Limited, Mega Capital Group Services Limited, Profit
      Loyal Consultants Limited, Elite Concord International Limited, China
      Century Holdings Group Limited, Shinning Growth Investment Group Limited,
      Chih Cheung, James Li, James Preissler, for the acquisition of Ahead
      Billion Venture Limited, and Port Wing Development Company Limited, dated
      December 20, 2005 (incorporated by reference from Registration Statement
      No. 333-132814 – Annex A)




97


4.2
              
              Amendment
      to Securities Purchase Agreement dated June 29, 2006 (incorporated by
      reference from Registration Statement No. 333-132814 - Annex
      A)4.3
              
              Amendment
      to Securities Purchase Agreement dated October 27, 2006 (incorporated by
      reference from Registration Statement No. 333-132814 - Annex
      A)4.4
              
              Amendment
      to Securities Purchase Agreement dated July 31, 2007 (incorporated by
      reference from Foreign Issuer Report on Form 6-K, filed August 24,
      2007)4.5
              
              China
      Unistone/Yucheng 2006 Performance Equity Plan (incorporated by reference
      from Registration Statement No. 333-132814 –Annex D)4.6
              
              Equity Interest
      Transfer Agreement  re. Beijing Sunrisk Information Technology
      Company Limited (incorporated by reference from Exhibit 4.1 to Form 6-K
      filed February 13, 2007)4.7
              
              Form
      of Employment Agreement between Yucheng Technologies Limited and Hong
      Weidong (incorporated by reference from Registration Statement No.
      333-132814 – Exhibit 10.18)4.8
              
              Form
      of Employment Agreement between Yucheng Technologies Limited and Zeng Shuo
      (incorporated by reference from Registration Statement No. 333-132814 –
      Exhibit 10.19)8.1*
              
              List
      of subsidiaries11.1
              
              Code
      of Ethics (incorporated by reference from Registration Statement No.
      333-132814 - Annex G)12.1*
              
              CEO
      Certification Pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)) (17 CFR
      240.13a-14(a)) or Rule 15d-1(a) (17 CFR 240.15d-14(a))12.2*
              
              CFO
      Certification Pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule
      15d-1(a) (17 CFR 240.15d-14(a))13.1*
              
              CEO
      Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
      200213.2*
              
              CFO
      Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002





* Filed
with this annual report on Form 20-F




SIGNATURE




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.




Date: June
30, 2010




YUCHENG
      TECHNOLOGIESLIMITED/s/ Weidong HongName:
                Weidong
      HongTitle:
                Chief
      Executive Officer


98




INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS




PageReport
      of Independent Registered Public Accounting Firm
                  
                  F-1Consolidated
      Balance Sheets as of December 31, 2008 and 2009
                  
                  F-2Consolidated
      Statements of Income for the Years Ended December 31, 2007, 2008and
      2009
                  
                  F-4Consolidated
      Statements of Stockholders Equity for the Years Ended December 31, 2007,
      2008 and 2009
                  
                  F-5Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2007, 2008 and
      2009
                  
                  F-6Notes
      to the Consolidated Financial Statements for the Years Ended December 31,
      2007, 2008 and 2009
                  
                  F-8


99





YUCHENG
TECHNOLOGIES LIMITED


AND


SUBSIDIARIES





Consolidated
Financial Statements





Years
Ended December 31, 2007, 2008 and 2009







REPORT OF
INDEPENDENT REGISTERED




PUBLIC
ACCOUNTING FIRM




To the
Board of Directors and Stockholders of


Yucheng
Technologies Limited:




We have
audited the accompanying consolidated balance sheets of Yucheng Technologies
Limited (“the Company”) as of December 31, 2008 and 2009, and the related
consolidated statements of operations, stockholders’ equity and cash flows for
each of the three years in the period ended December 31, 2009.  These
consolidated financial statements are the responsibility of the Company’s
management.  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 audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation.  We believe that our audits
provide a reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Yucheng Technologies Limited
as of December 31, 2008 and 2009, and the results of its operations and its
cash flows for each of the three years in the period ended December 31,
2009, in conformity with
accounting principles generally accepted in the United States of
America.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Yucheng Technologies Limited's internal control
over financial reporting as of December 31, 2009, based on criteria established
in Internal Control –
Integrated Frameworkissued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) and our report dated June 30, 2010
expressed an unqualified opinion thereon.




As
discussed in Note 2(w) to the consolidated financial statements, the
accompanying 2008 and 2009 consolidated financial statements have been
retrospectively adjusted for the adoption of the new accounting standards
related to the presentation and disclosure requirements for non-controlling
interests.


BDO
Limited




Hong
Kong




June 30,
2010


F-1




YUCHENG
TECHNOLOGIES LIMITED AND SUBSIDIARIES
 Consolidated
Balance Sheets
 As
of December 31, 2008 and 2009


(Expressed
in Chinese Renminbi)




Assets
                                                                                      
                                                                                      2008
                                                                                      
                                                                                      
                                                                                      2009
                                                                                      
                                                                                      
                                                                                      2009RMB
                                                                                      
                                                                                      
                                                                                      RMB
                                                                                      
                                                                                      
                                                                                      USD(note
      2 (c))Current
      assets:Cash
      and cash equivalents
                                                                                      
                                                                                      
                                                                                      239,751,056
                                                                                      
                                                                                      
                                                                                      
                                                                                      246,577,140
                                                                                      
                                                                                      
                                                                                      
                                                                                      36,111,587Trade
      accounts receivable, net (note 3)
                                                                                      
                                                                                      
                                                                                      280,653,514
                                                                                      
                                                                                      
                                                                                      
                                                                                      147,978,704
                                                                                      
                                                                                      
                                                                                      
                                                                                      21,671,700Costs
      and estimated earnings in excess of billings on uncompleted contracts
      (note 4)
                                                                                      
                                                                                      
                                                                                      68,812,918
                                                                                      
                                                                                      
                                                                                      
                                                                                      105,684,112
                                                                                      
                                                                                      
                                                                                      
                                                                                      15,477,595Due
      from related parties (note 23)
                                                                                      
                                                                                      
                                                                                      1,568,248
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,697,890
                                                                                      
                                                                                      
                                                                                      
                                                                                      248,659Inventories
                                                                                      
                                                                                      
                                                                                      2,894,770
                                                                                      
                                                                                      
                                                                                      
                                                                                      3,393,227
                                                                                      
                                                                                      
                                                                                      
                                                                                      496,943Pre-contract
      costs
                                                                                      
                                                                                      
                                                                                      9,893,714
                                                                                      
                                                                                      
                                                                                      
                                                                                      11,879,098
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,739,711Other
      current assets (note 5)
                                                                                      
                                                                                      
                                                                                      43,737,165
                                                                                      
                                                                                      
                                                                                      
                                                                                      38,270,683
                                                                                      
                                                                                      
                                                                                      
                                                                                      5,604,799Deferred
      taxes (note 6)
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      5,735,143
                                                                                      
                                                                                      
                                                                                      
                                                                                      839,920Total
      current assets
                                                                                      
                                                                                      
                                                                                      647,311,385
                                                                                      
                                                                                      
                                                                                      
                                                                                      561,215,997
                                                                                      
                                                                                      
                                                                                      
                                                                                      82,190,914Investments
      under equity method (note 2(t))
                                                                                      
                                                                                      
                                                                                      2,250,225
                                                                                      
                                                                                      
                                                                                      
                                                                                      7,570,143
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,108,659Properties
      and equipment, net (note 7)
                                                                                      
                                                                                      
                                                                                      57,497,398
                                                                                      
                                                                                      
                                                                                      
                                                                                      64,147,083
                                                                                      
                                                                                      
                                                                                      
                                                                                      9,394,435Intangible
      assets, net (note 8)
                                                                                      
                                                                                      
                                                                                      36,027,982
                                                                                      
                                                                                      
                                                                                      
                                                                                      30,248,409
                                                                                      
                                                                                      
                                                                                      
                                                                                      4,429,924Goodwill
      (note 9)
                                                                                      
                                                                                      
                                                                                      187,815,784
                                                                                      
                                                                                      
                                                                                      
                                                                                      189,009,599
                                                                                      
                                                                                      
                                                                                      
                                                                                      27,680,736Deferred
      taxes (note 6)
                                                                                      
                                                                                      
                                                                                      12,984,716
                                                                                      
                                                                                      
                                                                                      
                                                                                      15,926,809
                                                                                      
                                                                                      
                                                                                      
                                                                                      2,332,505Total
      assets
                                                                                      
                                                                                      
                                                                                      943,887,490
                                                                                      
                                                                                      
                                                                                      
                                                                                      868,118,040
                                                                                      
                                                                                      
                                                                                      
                                                                                      127,137,173





See
accompanying notes to consolidated financial statements.


F-2


YUCHENG
TECHNOLOGIES LIMITED AND SUBSIDIARIES


Consolidated
Balance Sheets (continued)


As
of December 31, 2008 and 2009


(Expressed
in Chinese Renminbi)





Liabilities
      and stockholders’ equity
                                                            
                                                            2008
                                                            
                                                            
                                                            2009
                                                            
                                                            
                                                            2009RMB
                                                            
                                                            
                                                            RMB
                                                            
                                                            
                                                            USD(note
      2 (c))Current
      liabilities:Short-term
      loan (note 10)
                                                            
                                                            
                                                            60,000,000
                                                            
                                                            
                                                            
                                                            80,000,000
                                                            
                                                            
                                                            
                                                            11,716,118Obligations
      under capital leases (note 11)
                                                            
                                                            
                                                            2,867,754
                                                            
                                                            
                                                            
                                                            2,282,497
                                                            
                                                            
                                                            
                                                            334,275Trade
      accounts payable
                                                            
                                                            
                                                            145,048,310
                                                            
                                                            
                                                            
                                                            94,005,387
                                                            
                                                            
                                                            
                                                            13,767,228Billings
      in excess of costs and estimated earnings on uncompleted contracts (note
      4)
                                                            
                                                            
                                                            10,013,178
                                                            
                                                            
                                                            
                                                            14,065,351
                                                            
                                                            
                                                            
                                                            2,059,891Employee
      and payroll accruals
                                                            
                                                            
                                                            12,483,980
                                                            
                                                            
                                                            
                                                            3,573,117
                                                            
                                                            
                                                            
                                                            523,288Dividends
      payable to ex-owners
                                                            
                                                            
                                                            5,521,408
                                                            
                                                            
                                                            
                                                            3,960,391
                                                            
                                                            
                                                            
                                                            580,005Deemed
      distribution to ex-owners (note 1)
                                                            
                                                            
                                                            45,003,233
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -Outstanding
      payment in relation to business acquisitions (note 21)
                                                            
                                                            
                                                            22,403,149
                                                            
                                                            
                                                            
                                                            1,727,563
                                                            
                                                            
                                                            
                                                            253,004Income
      taxes payable
                                                            
                                                            
                                                            9,793,362
                                                            
                                                            
                                                            
                                                            11,633,628
                                                            
                                                            
                                                            
                                                            1,703,762Deferred
      taxes  (note 6)
                                                            
                                                            
                                                            980,549
                                                            
                                                            
                                                            
                                                            1,641,265
                                                            
                                                            
                                                            
                                                            240,366Other
      current liabilities (note 12)
                                                            
                                                            
                                                            53,237,096
                                                            
                                                            
                                                            
                                                            52,810,194
                                                            
                                                            
                                                            
                                                            7,734,133Total
      current liabilities
                                                            
                                                            
                                                            367,352,019
                                                            
                                                            
                                                            
                                                            265,699,393
                                                            
                                                            
                                                            
                                                            38,912,070Obligations
      under capital leases (note 11)
                                                            
                                                            
                                                            2,597,032
                                                            
                                                            
                                                            
                                                            314,535
                                                            
                                                            
                                                            
                                                            46,064Deferred
      taxes (note 6)
                                                            
                                                            
                                                            3,379,185
                                                            
                                                            
                                                            
                                                            916,748
                                                            
                                                            
                                                            
                                                            134,259Total
      liabilities
                                                            
                                                            
                                                            373,328,236
                                                            
                                                            
                                                            
                                                            266,930,676
                                                            
                                                            
                                                            
                                                            39,092,393Commitments
      and contingencies (note 19)EquityPreferred
      stock, $0.0001 par value, authorised 2,000,000 shares and none
      issued;
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -Common
      stock, $0.0001 par value, authorised 60,000,000 shares; 17,575,685 shares
      and 18,560,014 shares issued and outstanding as of December 31, 2008 and
      2009 (note 1)
                                                            
                                                            
                                                            20,007,320
                                                            
                                                            
                                                            
                                                            20,007,998
                                                            
                                                            
                                                            
                                                            2,930,201Additional
      paid-in capital
                                                            
                                                            
                                                            347,254,459
                                                            
                                                            
                                                            
                                                            385,713,676
                                                            
                                                            
                                                            
                                                            56,488,339Reserves
      (note 14)
                                                            
                                                            
                                                            38,008,846
                                                            
                                                            
                                                            
                                                            43,135,361
                                                            
                                                            
                                                            
                                                            6,317,238Retained
      earnings
                                                            
                                                            
                                                            156,017,235
                                                            
                                                            
                                                            
                                                            146,691,122
                                                            
                                                            
                                                            
                                                            21,483,132Accumulated
      other comprehensive loss (note 15)
                                                            
                                                            
                                                            (2,752,249
                                                            )
                                                            
                                                            
                                                            (2,230,354
                                                            )
                                                            
                                                            
                                                            (326,639
                                                            )Total
      Yucheng’s
      equity
                                                            
                                                            
                                                            558,535,611
                                                            
                                                            
                                                            
                                                            593,317,803
                                                            
                                                            
                                                            
                                                            86,892,271Non-controlling
      interests (note 13)
                                                            
                                                            
                                                            12,023,643
                                                            
                                                            
                                                            
                                                            7,869,561
                                                            
                                                            
                                                            
                                                            1,152,509Total
      stockholders’ equity
                                                            
                                                            
                                                            570,559,254
                                                            
                                                            
                                                            
                                                            601,187,364
                                                            
                                                            
                                                            
                                                            88,044,780Total
      liabilities and stockholders’
      equity
                                                            
                                                            
                                                            943,887,490
                                                            
                                                            
                                                            
                                                            868,118,040
                                                            
                                                            
                                                            
                                                            127,137,173


Approved
on behalf of the Board:


Weidong
      Hong
                        Steve
      DaiSee
      accompanying notes to consolidated financial
  statements.


F-3


YUCHENG
TECHNOLOGIES LIMITED AND
SUBSIDIARIES


Consolidated
Statements of Operations
 For
the year ended December 31, 2007, 2008 and 2009


(Expressed
in Chinese Renminbi)





2007
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2009RMB
                            
                            
                            RMB
                            
                            
                            RMB
                            
                            
                            USD(note
      2 (c))Revenues
      (note 16):Software
      & Solutions
                            
                            
                            198,459,951
                            
                            
                            
                            269,360,417
                            
                            
                            
                            286,892,256
                            
                            
                            
                            42,015,796Platform
      & Maintenance Services
                            
                            
                            241,601,795
                            
                            
                            
                            401,024,801
                            
                            
                            
                            74,826,991
                            
                            
                            
                            10,958,524POS
                            
                            
                            3,851,643
                            
                            
                            
                            15,415,803
                            
                            
                            
                            27,355,261
                            
                            
                            
                            4,006,218Total
      revenues
                            
                            
                            443,913,389
                            
                            
                            
                            685,801,021
                            
                            
                            
                            389,074,508
                            
                            
                            
                            56,980,538Business
      taxes
                            
                            
                            (8,394,547
                            )
                            
                            
                            (8,982,017
                            )
                            
                            
                            (8,710,040
                            )
                            
                            
                            (1,275,598
                            )Net
      revenues
                            
                            
                            435,518,842
                            
                            
                            
                            676,819,004
                            
                            
                            
                            380,364,468
                            
                            
                            
                            55,704,940Cost
      of revenues:Software
      & Solutions
                            
                            
                            (82,621,173
                            )
                            
                            
                            (118,167,472
                            )
                            
                            
                            (156,677,911
                            )
                            
                            
                            (22,945,712
                            )Platform
      & Maintenance Services
                            
                            
                            (194,116,942
                            )
                            
                            
                            (321,952,491
                            )
                            
                            
                            (34,654,821
                            )
                            
                            
                            (5,075,250
                            )POS
                            
                            
                            (1,088,023
                            )
                            
                            
                            (9,156,836
                            )
                            
                            
                            (13,642,753
                            )
                            
                            
                            (1,998,002
                            )Total
      cost of revenues
                            
                            
                            (277,826,138
                            )
                            
                            
                            (449,276,799
                            )
                            
                            
                            (204,975,485
                            )
                            
                            
                            (30,018,964
                            )Gross
      profit
                            
                            
                            157,692,704
                            
                            
                            
                            227,542,205
                            
                            
                            
                            175,388,983
                            
                            
                            
                            25,685,976Operating
      expenses:Research
      and development expenses
                            
                            
                            (8,369,567
                            )
                            
                            
                            (10,148,304
                            )
                            
                            
                            (13,828,380
                            )
                            
                            
                            (2,025,187
                            )Selling
      and marketing expenses
                            
                            
                            (29,052,598
                            )
                            
                            
                            (49,382,763
                            )
                            
                            
                            (53,821,391
                            )
                            
                            
                            (7,882,222
                            )General
      and administrative expenses (note 17)
                            
                            
                            (50,668,370
                            )
                            
                            
                            (95,425,234
                            )
                            
                            
                            (126,491,934
                            )
                            
                            
                            (18,524,931
                            )Total
      operating expenses
                            
                            
                            (88,090,535
                            )
                            
                            
                            (154,956,301
                            )
                            
                            
                            (194,141,705
                            )
                            
                            
                            (28,432,340
                            )Other
      income (expense):Interest
      income
                            
                            
                            1,818,536
                            
                            
                            
                            1,259,336
                            
                            
                            
                            425,126
                            
                            
                            
                            62,260Interest
      expense
                            
                            
                            (1,937,368
                            )
                            
                            
                            (3,783,067
                            )
                            
                            
                            (2,860,851
                            )
                            
                            
                            (418,976
                            )Income
      (loss) from short-term investment
                            
                            
                            3,494,446
                            
                            
                            
                            (529,036
                            )
                            
                            
                            1,203,274
                            
                            
                            
                            176,221Loss
      from equity method investees
                            
                            
                            -
                            
                            
                            
                            (1,280,200
                            )
                            
                            
                            (3,829,962
                            )
                            
                            
                            (560,904
                            )Other
      income, net
                            
                            
                            1,078,033
                            
                            
                            
                            492,958
                            
                            
                            
                            8,170,357
                            
                            
                            
                            1,196,562Income
      (loss) before income taxes
                            
                            
                            74,055,816
                            
                            
                            
                            68,745,895
                            
                            
                            
                            (15,644,778
                            )
                            
                            
                            (2,291,201
                            )Income
      tax (expenses) benefits (note 6)
                            
                            
                            (5,528,247
                            )
                            
                            
                            9,538,321
                            
                            
                            
                            7,729,936
                            
                            
                            
                            1,132,061Net
      income (loss)
                            
                            
                            68,527,569
                            
                            
                            
                            78,284,216
                            
                            
                            
                            (7,914,842
                            )
                            
                            
                            (1,159,140
                            )Loss
      attributable to non-controlling interests
                            
                            
                            (1,813,141
                            )
                            
                            
                            2,710,968
                            
                            
                            
                            3,715,244
                            
                            
                            
                            544,103Net
      income (loss) attributable
      to shareholders of Yucheng Technologies
                            
                            
                            66,714,428
                            
                            
                            
                            80,995,184
                            
                            
                            
                            (4,199,598
                            )
                            
                            
                            (615,038
                            )Foreign
      currency translation adjustment
                            
                            
                            (1,424,650
                            )
                            
                            
                            (1,188,399
                            )
                            
                            
                            521,895
                            
                            
                            
                            76,433Comprehensive
      income (loss)
                            
                            
                            65,289,778
                            
                            
                            
                            79,806,785
                            
                            
                            
                            (3,677,703
                            )
                            
                            
                            (538,605
                            )Earnings
      (loss) per share (note 18)–
      basic
                            
                            
                            5.08
                            
                            
                            
                            4.61
                            
                            
                            
                            (0.23
                            )
                            
                            
                            (0.03
                            )–diluted
                            
                            
                            4.34
                            
                            
                            
                            4.33
                            
                            
                            
                            N/A
                            
                            
                            
                            N/AWeighted
      average common shares outstanding–
      basic
                            
                            
                            13,144,681
                            
                            
                            
                            17,566,898
                            
                            
                            
                            18,541,289
                            
                            
                            
                            18,541,289–diluted
                            
                            
                            15,370,197
                            
                            
                            
                            18,691,852
                            
                            
                            
                            N/A
                            
                            
                            
                            N/A





See
accompanying notes to consolidated financial statements.


F-4


YUCHENG
TECHNOLOGIES LIMITED AND
SUBSIDIARIES


Consolidated
Statements of Stockholders’ Equity
 (Expressed
in Chinese Renminbi)




Common
      shares
                            
                            
                            Additionalpaid-in
                            
                            
                            
                            
                            
                            Retained
                            
                            
                            Accumulated
                                  other
                                comprehensive
                            
                            
                            Non-controlling
                            
                            
                            Totalstockholders’Shares
                            
                            
                            Amount
                            
                            
                            capital
                            
                            
                            Reserves
                            
                            
                            earnings
                            
                            
                            loss
                            
                            
                            interest
                            
                            
                            equityRMB
                            
                            
                            RMB
                            
                            
                            RMB
                            
                            
                            RMB
                            
                            
                            RMB
                            
                            
                            RMB
                            
                            
                            RMBBalance
      as at January 1, 2007
                            
                            
                            9,528,320
                            
                            
                            
                            20,001,229
                            
                            
                            
                            176,450,960
                            
                            
                            
                            18,985,144
                            
                            
                            
                            27,331,325
                            
                            
                            
                            (139,200
                            )
                            
                            
                            0
                            
                            
                            
                            242,629,458Warrant
      exercise
                            
                            
                            6,866,486
                            
                            
                            
                            5,229
                            
                            
                            
                            252,601,693
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            252,606,922Unit
      purchase option exercise
                            
                            
                            216,047
                            
                            
                            
                            158
                            
                            
                            
                            158
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0Deemed
      distribution (note 1)
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            (67,428,081
                            )
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            (67,428,081
                            )Net
      income
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            66,714,428
                            
                            
                            
                            0
                            
                            
                            
                            1,813,141
                            
                            
                            
                            68,527,569Incease
      (decrease) in non-controlling interest
                              arising
      from acquistion/disposal of subsidiary,
      net
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            3,386,171
                            
                            
                            
                            3,386,171Transfer
      to reserves
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            5,883,688
                            
                            
                            
                            (5,883,688
                            )
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0Foreign
      currency translation adjustment
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            (1,424,650
                            )
                            
                            
                            0
                            
                            
                            
                            (1,424,650
                            )Balance
      as at December 31, 2007
                            
                            
                            16,610,853
                            
                            
                            
                            20,006,616
                            
                            
                            
                            361,624,414
                            
                            
                            
                            24,868,832
                            
                            
                            
                            88,162,065
                            
                            
                            
                            (1,563,850
                            )
                            
                            
                            5,199,312
                            
                            
                            
                            498,297,389Bonus
      shares
                            
                            
                            952,832
                            
                            
                            
                            696
                            
                            
                            
                            43,290,856
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            43,291,552Shares
      issued to independent directors
                            
                            
                            12,000
                            
                            
                            
                            8
                            
                            
                            
                            973,078
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            973,086Deemed
      distribution (note 1)
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            (41,540,598
                            )
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            (41,540,598
                            )Decrease
      of interests in Sunrisk
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            (18,820,019
                            )
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            (18,820,019
                            )Net
      income
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            80,995,184
                            
                            
                            
                            0
                            
                            
                            
                            (2,710,968
                            )
                            
                            
                            78,284,216Incease
      (decrease) in non-controlling interest
                              arising
      from acquistion/disposal of subsidiary,
      net
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            9,535,299
                            
                            
                            
                            9,535,299Transfer
      to reserves
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            13,140,014
                            
                            
                            
                            (13,140,014
                            )
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0Foreign
      currency translation adjustment
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            (1,188,399
                            )
                            
                            
                            0
                            
                            
                            
                            (1,188,399
                            )Reversal
      of stock issuance cost
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            1,726,728
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            1,726,728Balance
      as at December 31, 2008
                            
                            
                            17,575,685
                            
                            
                            
                            20,007,320
                            
                            
                            
                            347,254,459
                            
                            
                            
                            38,008,846
                            
                            
                            
                            156,017,235
                            
                            
                            
                            (2,752,249
                            )
                            
                            
                            12,023,643
                            
                            
                            
                            570,559,254Bonus
      shares
                            
                            
                            952,832
                            
                            
                            
                            656
                            
                            
                            
                            37,887,742
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            37,888,398Shares
      issued to independent directors
                            
                            
                            5,250
                            
                            
                            
                            4
                            
                            
                            
                            221,452
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            221,456Shares
      issued to ex-owners
                            
                            
                            26,247
                            
                            
                            
                            18
                            
                            
                            
                            1,411,185
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            1,411,203Increase
      of interests in Yuxinyicheng Information
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            (1,061,162
                            )
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            (1,061,162
                            )Net
      loss
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            (4,199,598
                            )
                            
                            
                            0
                            
                            
                            
                            (3,715,244
                            )
                            
                            
                            (7,914,842
                            )Incease
      (decrease) in non-controlling interest
                              arising
      from acquistion/disposal of subsidiary,
      net
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            (438,838
                            )
                            
                            
                            (438,838
                            )Transfer
      to reserves
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            5,126,515
                            
                            
                            
                            (5,126,515
                            )
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0Foreign
      currency translation adjustment
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            521,895
                            
                            
                            
                            0
                            
                            
                            
                            521,895Balance
      as at December 31, 2009
                            
                            
                            18,560,014
                            
                            
                            
                            20,007,998
                            
                            
                            
                            385,713,676
                            
                            
                            
                            43,135,361
                            
                            
                            
                            146,691,122
                            
                            
                            
                            (2,230,354
                            )
                            
                            
                            7,869,561
                            
                            
                            
                            601,187,364In USD(note 2 (c))
                            
                            
                            
                            
                            
                            
                            2,930,201
                            
                            
                            
                            56,488,339
                            
                            
                            
                            6,317,238
                            
                            
                            
                            21,483,132
                            
                            
                            
                            (326,639
                            )
                            
                            
                            1,152,509
                            
                            
                            
                            88,044,780






See
accompanying notes to consolidated financial statements.


F-5





YUCHENG
TECHNOLOGIES LIMITED AND
SUBSIDIARIES
 Consolidated
Statements of Cash Flows
 (Expressed
in Chinese Renminbi)





2007
                
                
                2008
                
                
                2009
                
                
                2009RMB
                
                
                RMB
                
                
                RMB
                
                
                USD(note
      2 (c))Cash
      flows from operating activities:Net
      income (loss)
                
                
                66,714,428
                
                
                
                80,995,184
                
                
                
                (4,199,598
                )
                
                
                (615,038
                )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization
                
                
                16,585,488
                
                
                
                28,481,819
                
                
                
                33,100,808
                
                
                
                4,847,662Impairment
      loss on receivables
                
                
                -
                
                
                
                -
                
                
                
                18,348,463
                
                
                
                2,687,160Loss
      on disposal of equipment
                
                
                217,107
                
                
                
                243,958
                
                
                
                243,455
                
                
                
                35,654Gain
      on disposal of subsidiary
                
                
                -
                
                
                
                (247,256
                )
                
                
                -
                
                
                
                -Gain
      on disposal of investments under equity method
                
                
                (869,798
                )
                
                
                (2,102,566
                )
                
                
                (6,291,960
                )
                
                
                (921,467
                )Non-controlling
      interests
                
                
                1,813,141
                
                
                
                (2,710,968
                )
                
                
                (3,715,244
                )
                
                
                (544,103
                )Loss
      from equity method investees
                
                
                -
                
                
                
                2,791,802
                
                
                
                3,829,961
                
                
                
                560,903Income
      from short term investment
                
                
                (3,494,446
                )
                
                
                -
                
                
                
                -
                
                
                
                -Shares
      issued to independent directors
                
                
                -
                
                
                
                973,086
                
                
                
                221,456
                
                
                
                32,433Compensation
      expenses to ex-owners
                
                
                -
                
                
                
                -
                
                
                
                1,411,203
                
                
                
                206,673(Increase)
      decrease in trade accounts receivable
                
                
                (70,622,155
                )
                
                
                (77,576,334
                )
                
                
                116,403,846
                
                
                
                17,047,516Increase
      in costs and estimated earnings in excess of billings on uncompleted
      contracts
                
                
                (29,541,323
                )
                
                
                (22,248,611
                )
                
                
                (36,871,193
                )
                
                
                (5,399,841
                )Decrease
      (increase) in due from related parties
                
                
                386,867
                
                
                
                (1,568,105
                )
                
                
                1,477,963
                
                
                
                216,450(Increase)
      decrease in inventories
                
                
                (3,570,912
                )
                
                
                5,682,947
                
                
                
                (498,457
                )
                
                
                (73,000
                )Decrease
      (Increase) in pre-contract costs
                
                
                3,188,660
                
                
                
                (6,968,278
                )
                
                
                (1,985,384
                )
                
                
                (290,762
                )(Increase)
      decrease in other current assets
                
                
                (56,002,843
                )
                
                
                44,470,781
                
                
                
                4,294,739
                
                
                
                628,971Decrease
      (increase) in current deferred tax assets
                
                
                427,601
                
                
                
                -
                
                
                
                (5,735,143
                )
                
                
                (839,920
                )Increase
      in non-current deferred tax assets
                
                
                (2,442,782
                )
                
                
                (10,398,508
                )
                
                
                (2,942,093
                )
                
                
                (430,874
                )Increase
      (decrease) in trade accounts payable
                
                
                51,805,698
                
                
                
                51,288,579
                
                
                
                (51,042,923
                )
                
                
                (7,475,312
                )Increase
      in billings in excess of costs and estimated earnings
      on  uncompleted contracts
                
                
                5,950,320
                
                
                
                3,091,360
                
                
                
                4,052,173
                
                
                
                593,447(Decrease)
      increase in employee and payroll accruals
                
                
                (249,769
                )
                
                
                4,076,500
                
                
                
                (8,910,863
                )
                
                
                (1,305,009
                )Increase
      (decrease) in income taxes payable
                
                
                6,700,763
                
                
                
                (1,066,768
                )
                
                
                1,840,266
                
                
                
                269,510(Decrease)
      increase in other current liabilities
                
                
                (19,108,790
                )
                
                
                9,875,681
                
                
                
                3,744,120
                
                
                
                548,332Decrease
      in non-current deferred tax liabilities
                
                
                (1,208,111
                )
                
                
                (768,891
                )
                
                
                (1,801,721
                )
                
                
                (263,865
                )Net
      cash (used in) provided by operating activities
                
                
                (33,320,856
                )
                
                
                106,315,412
                
                
                
                64,973,874
                
                
                
                9,515,520Cash
      flows from investing activities:Capital
      expenditure
                
                
                (34,295,309
                )
                
                
                (29,716,811
                )
                
                
                (35,646,705
                )
                
                
                (5,220,512
                )Investment
      in trust
                
                
                (80,000,000
                )
                
                
                -
                
                
                
                -
                
                
                
                -Collection
      of investment in trust
                
                
                83,494,446
                
                
                
                -
                
                
                
                -
                
                
                
                -Additional
      investment in a subsidiary
                
                
                -
                
                
                
                -
                
                
                
                (1,500,000
                )
                
                
                (219,677
                )Payment
      of purchase of subsidiaries, net of cash acquired
                
                
                (51,811,896
                )
                
                
                (57,684,392
                )
                
                
                (11,117,440
                )
                
                
                (1,628,165
                )Investment
      in equity method investments
                
                
                -
                
                
                
                (5,042,027
                )
                
                
                (13,746,920
                )
                
                
                (2,013,257
                )Decrease
      in deposits paid for acquisitions of businesses
                
                
                20,000,000
                
                
                
                -
                
                
                
                -
                
                
                
                -Advances
      to investments under equity method
                
                
                (69,440
                )
                
                
                (1,828,333
                )
                
                
                (22,830,589
                )
                
                
                (3,343,574
                )Collection
      of advances to investments under equity method
                
                
                -
                
                
                
                3,494,585
                
                
                
                21,222,984
                
                
                
                3,108,137Proceeds
      from disposal of equipment
                
                
                105,773
                
                
                
                353,063
                
                
                
                192,918
                
                
                
                28,253Proceeds
      from disposal of investment under equity method
                
                
                -
                
                
                
                3,628,834
                
                
                
                7,988,321
                
                
                
                1,169,901Proceeds
      from disposal of subsidiary, net of cash disposed
                
                
                -
                
                
                
                (2,025,391
                )
                
                
                -
                
                
                
                -Net
      cash used in investing activities
                
                
                (62,576,426
                )
                
                
                (88,820,472
                )
                
                
                (55,437,431
                )
                
                
                (8,118,894
                )





See
accompanying notes to consolidated financial statements.


F-6


YUCHENG
TECHNOLOGIES LIMITED AND
SUBSIDIARIES
 Consolidated
Statements of Cash Flows (continued)
 (Expressed
in Chinese Renminbi)





2007
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2009RMB
                  
                  
                  RMB
                  
                  
                  RMB
                  
                  
                  USD(note
      2 (c))Cash
      flows from financing activities:Proceeds
      from warrant exercise
                  
                  
                  252,561,431
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Deemed
      distribution
                  
                  
                  (26,613,939
                  )
                  
                  
                  (5,778,611
                  )
                  
                  
                  (18,281,588
                  )
                  
                  
                  (2,677,366
                  )Capital
      received
                  
                  
                  -
                  
                  
                  
                  4,460,000
                  
                  
                  
                  -
                  
                  
                  
                  -Proceeds
      from bank borrowings
                  
                  
                  55,000,000
                  
                  
                  
                  60,000,000
                  
                  
                  
                  208,540,000
                  
                  
                  
                  30,540,992Repayments
      of bank borrowings
                  
                  
                  (55,500,000
                  )
                  
                  
                  (35,000,000
                  )
                  
                  
                  (188,540,000
                  )
                  
                  
                  (27,611,962
                  )Repayment
      of capital leases
                  
                  
                  (699,755
                  )
                  
                  
                  (3,167,113
                  )
                  
                  
                  (2,867,754
                  )
                  
                  
                  (419,987
                  )Dividends
      paid to ex-owners
                  
                  
                  (11,726,593
                  )
                  
                  
                  (20,751,999
                  )
                  
                  
                  (1,561,017
                  )
                  
                  
                  (228,613
                  )Contributions
      from non-controlling interests
                  
                  
                  7,012,320
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      cash provided by (used in) financing activities
                  
                  
                  220,033,464
                  
                  
                  
                  (237,723
                  )
                  
                  
                  (2,710,359
                  )
                  
                  
                  (396,936
                  )Net
      increase in cash and cash equivalents
                  
                  
                  124,136,182
                  
                  
                  
                  17,257,217
                  
                  
                  
                  6,826,084
                  
                  
                  
                  999,690Cash
      and cash equivalents at beginning of year
                  
                  
                  98,357,657
                  
                  
                  
                  222,493,839
                  
                  
                  
                  239,751,056
                  
                  
                  
                  35,111,897Cash
      and cash equivalents at the end of year
                  
                  
                  222,493,839
                  
                  
                  
                  239,751,056
                  
                  
                  
                  246,577,140
                  
                  
                  
                  36,111,587Supplemental
      disclosures of cash flow information:Interest
      paid
                  
                  
                  1,937,367
                  
                  
                  
                  3,783,067
                  
                  
                  
                  2,860,851
                  
                  
                  
                  418,976Income
      taxes paid
                  
                  
                  2,050,777
                  
                  
                  
                  2,255,268
                  
                  
                  
                  1,112,009
                  
                  
                  
                  162,855Supplemental
      disclosures of non-cash investing activitiesCapital
      lease obligation
                  
                  
                  4,561,060
                  
                  
                  
                  4,062,450
                  
                  
                  
                  -
                  
                  
                  
                  -Additional
      consideration on acquisitions
                  
                  
                  55,352,938
                  
                  
                  
                  20,787,876
                  
                  
                  
                  -
                  
                  
                  
                  -Deemed
      distributions to ex-owners
                  
                  
                  40,814,149
                  
                  
                  
                  41,540,599
                  
                  
                  
                  -
                  
                  
                  
                  -





See
accompanying notes to consolidated financial statements.


F-7





1
            Organization
      and description of business





Yucheng
Technologies Limited (“Yucheng”), incorporated on November 24, 2006 under the
laws of the British Virgin Islands (“BVI”), and its subsidiaries are engaged in
systems integration, software solution services,  information
technology (“IT”) consulting and training services, maintenance and support,
launching Point of Sale (“POS”) merchant-acquiring outsourced services, sales of
self-developed IT products, computer software, hardware and peripheral
equipment, communication equipment and undertaking computer network projects.
Its major customers are first and second tier state-owned commercial banks in
China.





On
January 15, 2007, Beijing Yuxinyicheng Technologies Limited (“Yuxinyicheng”)
established a subsidiary, Beijing Yuxinyicheng Information Technology Limited.
On July 18, 2007, Yuxinyicheng established another subsidiary, Shanghai
Yuxinhongzhi Information Technology Limited. During 2007, Yuxinyicheng acquired
5 companies, Beijing Sunrisk Information Technology Limited, Beijing Easycon
Electronics Limited, Chengdu Recency Technologies Limited, Shanghai Fujie
Business Consulting Limited, and Shanghai Fuyi Business Consulting Limited. For
the acquisition effect, see footnote 21.





On
January 22, 2008, Beijing Sihitech acquired a further 25% equity interest of
Easycon from its minority shareholders at an aggregate consideration of
RMB7,200,000.





On April
28, 2008, the registered capital of BeijingSunriskInformation Technology Limitedwas increased to RMB20,000,000 from RMB1,000,000.  Yuxinyicheng
introduced a strategic investor to acquire 49% of Sunrisk’s equity interest. As
a result, Yuxinyicheng’s equity interest in Sunrisk was diluted to 51% from
100%. On July 21, 2008,Beijing
Sunrisk Information Technology Limited was renamed to Beijing Yuxinhengsheng
Information Technology Limited (“Sunrisk”).





On 1
January 30, 2009, Yuxinyicheng acquired a further 20% equity interest in Beijing
Yuxinyicheng Information Technology Limited at a consideration of
RMB1,500,000.





On March 5, 2009,Guangzhou
Sihitech Technology Co.,
Ltd. was renamed to Guangzhou Shenglihongtai Technology Co., Ltd (“Guangzhou
Sihitech”). On August 30, 2009,
Yuxinyicheng transferred its interest in Guangzhou Sihitech at carrying value to
a third party.





On June
30, 2009 Yuxinyicheng transferred 49% equity interest of Chengdu Elegon Infotech
Limited (“Elegon”) to 3i Infotech Limited at a consideration of RMB 8,389,000.
The gain on disposal of the equity interest of Elegon is approximately RMB 6.3
million.





On August 13, 2009,Shanghai
Sihitech Software Co., Ltd. was renamed to Shanghai Yuxinyicheng Software Co.,
Ltd.


F-8





On
October 14, 2009, Yuxinyicheng established a wholly owned subsidiary named
Tianjin Yuxinyicheng Technologies Limited in Tianjin. The registered capital of
Tianjin Yuxinyicheng is RMB 50 million.





On November 30, 2009,Shanghai
Fuyi Business Consulting Limited which had been inactivewas closed.





On May
12, 2009, the Company has issued 5,250 ordinary shares to the independent
directors as compensatory shares in connection with their services as
directors.





On August
20, 2009, the Company issued 26,247 common shares to the ex-owners of Easycon as
compensation expenses for the services provided by the ex-owners.





At
December 31, 2007, 2008 and 2009, details of Yucheng’s subsidiaries
(collectively with Yucheng referred to as the “Company”) are as
follows:





Name
                            
                            Date of
                              incorporation
                              or
                              establishment
                            
                            Place of
                              incorporation
                              or
                              establishment
                            
                            Percentage of
                              ownership
                            
                            Principal  activity2007
                            
                            2008
                            
                            2009Port
      Wing Development Co., Ltd.
                              (“e-Channels
      BVI”)
                            
                            November
      3, 2005
                            
                            BVI
                            
                            100%
                            
                            100%
                            
                            100%
                            
                            Investment
      holdingAhead
      Billion Venture Ltd.
                              (“Sihitech
      BVI”).
                            
                            November
      3, 2005
                            
                            BVI
                            
                            100%
                            
                            100%
                            
                            100%
                            
                            Investment
      holdingBeijing
      Yuxinyicheng Technologies Ltd.
                              (“Yuxinyicheng”)
                            
                            October
      19, 2006
                            
                            People’s
      Republic of China (“PRC”)
                            
                            100%
                            
                            100%
                            
                            100%
                            
                            System
      integration, software development, information technology consulting,
      maintenance and supportBeijing
      e-Channels Century Technology Co., Ltd.
                              (“e-Channels”)
                            
                            February
      5, 2001
                            
                            PRC
                            
                            100%
                            
                            100%
                            
                            100%
                            
                            Technology
      development, technology transfer, consulting and training services, sales
      of self-developed products, computer software, hardware and peripheral
      equipment, communication equipment and undertaking computer network
      projects


F-9




1
            Organization
      and description of business -
Continued




Name
                          
                          Date of
                            incorporation
                            or
                            establishment
                          
                          Place of
                            incorporation
                            or
                            establishment
                          
                          Percentage of
                            ownership
                          
                          Principal  activity2007
                          
                          2008
                          
                          2009Beijing
      Sihitech Technology Co., Ltd.
                            (“Beijing
      Sihitech”)
                          
                          June
      16, 1999
                          
                          PRC
                          
                          100%
                          
                          100%
                          
                          100%
                          
                          System
      integration, software development, information technology consulting,
      maintenance and supportBeijing
      Sihitech Software Co., Ltd.
                            (“Beijing
      Software”)
                          
                          January
      28, 2002
                          
                          PRC
                          
                          100%
                          
                          100%
                          
                          100%
                          
                          System
      integration, software development, information technology consulting,
      maintenance and supportShanghai  Sihitech
      Technology Co., Ltd.
                            (“Shanghai
      Sihitech”)
                          
                          June
      20, 2001
                          
                          PRC
                          
                          100%
                          
                          100%
                          
                          100%
                          
                          System
      integration, software development, information technology consulting,
      maintenance and supportShanghai
      Yuxinyicheng Software Co., Ltd.
                            (“Shanghai
      Software”)
                          
                          May
      28, 2005
                          
                          PRC
                          
                          100%
                          
                          100%
                          
                          100%
                          
                          System
      integration, software development, information technology consulting,
      maintenance and supportGuangzhou
      Shenglihongtai Technology Co., Ltd.
                            (“Guangzhou
      Sihitech”)
                          
                          January
      5, 2000
                          
                          PRC
                          
                          100%
                          
                          100%
                          
                          -
                          
                          System
      integration, software development, information technology consulting,
      maintenance and supportBeijing
      Yuxinyicheng Information   Technology Limited
                            (“Yuxinyicheng
                            Information”)
                          
                          January
      15, 2007
                          
                          PRC
                          
                          80%
                          
                          80%
                          
                          100%
                          
                          Launching
      Point of Sale (POS) merchant-acquiring outsourced services for bank in
      China and providing related maintenance supportShanghai
      Yuxinhongzhi Information Technology Limited
                            (“Hongzhi”)
                          
                          July
      18, 2007
                          
                          PRC
                          
                          60%
                          
                          -
                          
                          -
                          
                          System
      integration,
                            Software
      development, information technology consulting, maintenance and
      supportBeijing
      Yuxinhengsheng Information Technology Limited
                            (“Sunrisk”)
                          
                          April
      14, 2005
                          
                          PRC
                          
                          100%
                          
                          51%
                          
                          51%
                          
                          Software
      development, information technology consulting, maintenance and
      supportBeijing
      Easycon Electronics Limited
                            (“Easycon”)
                          
                          December
      25, 1997
                          
                          PRC
                          
                          75%
                          
                          100%
                          
                          100%
                          
                          System
      integration, software development, information technology consulting,
      maintenance and
support


F-10




1
            Organization
      and description of business -
Continued




Name
                              
                              Date of
                                incorporation
                                or
                                establishment
                              
                              Place of
                                incorporation
                                or
                                establishment
                              
                              Percentage of
                                ownership
                              
                              Principal  activity2007
                              
                              2008
                              
                              2009Chengdu
      Recency Technologies Limited
                                (“Recency”)
                              
                              July
      15,
                                1997
                              
                              PRC
                              
                              100%
                              
                              100%
                              
                              100%
                              
                              Software
      development, information technology consulting, maintenance and
      supportShanghai
      Fujie Business Consulting Limited
                                (“Fujie”)
                              
                              December
      13, 2005
                              
                              PRC
                              
                              100%
                              
                              100%
                              
                              100%
                              
                              Software
      development, information technology consulting, maintenance and
      supportShanghai
      Fuyi Business Consulting Limited
                                (“Fuyi”)
                              
                              December
      6, 2005
                              
                              PRC
                              
                              100%
                              
                              100%
                              
                              -
                              
                              Software
      development, information technology consulting, maintenance and
      supportBeijing
      Yuxinyicheng Software Co. , Ltd.
                                (“Yuxinyicheng
      Software”)
                              
                              August
      6,
                                2007
                              
                              PRC
                              
                              100%
                              
                              100%
                              
                              100%
                              
                              Launching
      Point of Sale (POS) merchant-acquiring outsourced services for bank in
      China and providing related maintenance supportGuangzhou
      Yuxinyicheng Information Technology Limited
                                (“Guangzhou
      Yuxinyicheng”)
                              
                              November
      26, 2007
                              
                              PRC
                              
                              100%
                              
                              100%
                              
                              100%
                              
                              System
      integration, software development, information technology consulting,
      maintenance and supportXiamen
      Yucheng Technology Limited
                                (“Xiamen
      Yucheng”)
                              
                              April
      9,
                                2007
                              
                              PRC
                              
                              100%
                              
                              100%
                              
                              100%
                              
                              System
      integration, software development, information technology consulting,
      maintenance and supportTianjin
      Yuxinyicheng Technology Limited
                                (“Tianjin
      Yuxinyicheng”)
                              
                              October
      14,
                                2009
                              
                              PRC
                              
                              -
                              
                              -
                              
                              100%
                              
                              System
      integration, software development, information technology consulting,
      maintenance and
support


F-11




1
            Organization
      and description of business -
Continued




The IT
industry is characterized by rapid technological change and competitive pricing
pressures. The Company financial results are affected by a wide variety of
factors, including general economic conditions in the local market, economic
conditions specific to the IT industry, technological and creative skills of its
personnel, the timely development of new products and the ability to safeguard
patents and intellectual property in a rapidly evolving market. As a result, the
Company may experience significant period-to-period fluctuations in future
operating results due to the factors mentioned above or other
factors.





The
majority of the revenues of the Company are from customers who are concentrated
in the financial services industry in PRC.  Any unfavourable economic
conditions affecting the local financial services industry could have a material
adverse effect on the Company’s future financial position and results of
operations.




The trade
accounts receivable of the Company include amounts due from banks and IT service
companies. The Company performs ongoing credit evaluations of its customers (see
Note 2 (s)).  Sales to the Company's largest customer, a bank and its
subsidiaries, were approximately 59.2%, 47.8% and 31.7% of revenues in 2007,
2008 and 2009, respectively.  The Company’s total revenue from its
largest customer in 2009 resulted from 111 separate and independent contracts.
The
head office of the largest
customer, which is one of theprimarybanks
inChina,
contributed to20.0%of
theCompany’s total
revenues.
Trade accounts receivable as at December 31, 2008 and 2009 included receivables
from the Company’s largest bank customer and its subsidiaries totalling RMB110.4
million and, RMB29.3 million, respectively.




The
Share Exchange Transactions





On
December 20, 2005, China Unistone Acquisition Corporation (“CUAC”) entered into
a Stock Purchase Agreement with Sihitech BVI and e-Channels BVI and all
stockholders of Sihitech BVI and e-Channels BVI for CUAC’s acquisition of
Sihitech BVI and e-Channels BVI. For the acquisition, CUAC formed its wholly
owned subsidiary, Yucheng. On November 24, 2006, the closing date of the
acquisition (the “Closing Date”), CUAC merged with and into Yucheng for the
purpose of redomestication out of the United States of America. The
redomestication merger was achieved by a one-for-one exchange of all the
outstanding common stock of CUAC for common stock of Yucheng and the assumption
of all the rights and obligations of CUAC by Yucheng, including assumption of
the outstanding warrants of CUAC. Immediately after the redomestication merger,
Yucheng acquired all the common stock of Sihitech BVI and e-Channels BVI by the
issuance of shares and payments of cash consideration to the shareholders of
Sihitech BVI (“Sihitech BVI Shareholders) and of e-Channels BVI (“e-Channels BVI
Shareholders”) or their designee, making them wholly owned subsidiaries (the
“Share Exchange Transactions”).





Sihitech
BVI Shareholders and their designee were paid an aggregate of USD2,731,884 in
cash, using the funds held in the trust account of CUAC, and were issued an
aggregate of 3,754,484 ordinary shares of Yucheng for all the outstanding common
stock of Sihitech BVI. This transaction was accounted for as a recapitalisation
of Sihitech BVI. Since Yucheng is not an operating company, this transaction is
treated as the issuance of shares of Sihitech BVI for the net tangible assets
(consisting principally of cash and short-term investments) of Yucheng. The
carrying value of the assets of Yucheng approximated their fair value,
therefore, no "purchase accounting" fair value adjustments were required and no
goodwill had been recorded in this portion of this transaction. The payment of
the cash consideration was accounted for as a deemed distribution.




F-12




1
            Organization
      and description of business -
Continued




The
Share Exchange Transactions - Continued





e-Channels
BVI Shareholders and their designee were paid an aggregate of USD1,268,116 in
cash, using the funds held in the trust account of CUAC, and were issued an
aggregate of 1,573,836 shares of common stock of Yucheng for all the outstanding
common stock of e-Channels BVI. This transaction, between the recapitalized
Sihitech BVI and e-Channels BVI, was accounting for using the purchase method of
accounting with Sihitech BVI treated as the accounting acquirer.





As a
result of the Share Exchange Transactions the historical financial statements of
Yucheng for the periods prior to the Closing Date are those of Sihitech and its
subsidiaries and all references to the consolidated financial statements of
Yucheng apply to the historical consolidated financial statements of Sihitech
and its subsidiaries prior to the Closing Date and the consolidated financial
statements of Yucheng and its subsidiaries subsequent to the Closing Date.
Yucheng’s equity components are stated in terms of Sihitech before the Closing
Date, with an adjustment to reflect the effect of the recapitalisation on the
equity components at the Closing Date.





The
aggregate consideration paid at the Closing Date were USD4,000,000 and 5,328,320
common shares of Yucheng. Of the USD4,000,000, as security for the
indemnification obligations of Sihitech BVI Shareholders and e-Channels BVI
Shareholders, USD250,000 had been held back by Yucheng pending resolution of an
outstanding claim.  The holdback amount is not a limitation on the
indemnification amounts, which are generally limited to the full consideration
paid.





Of the
total number of shares issued at the Closing Date, an aggregate of 773,045
shares of common stock issued to Sihitech BVI Shareholders were subject to
return and cancellation if the net profit as shown in the audited consolidated
financial statements of Yucheng prepared in accordance with the generally
accepted accounting principles in the United States of America (“US GAAP”) for
the year ended December 31, 2006 plus all compliance expenses of being public is
less than USD6,073,941. Pursuant to the supplemental agreement dated May 9,
2007, this clause was amended such that the 773,045 shares would be returned and
cancelled if the proforma table in the notes to the audited consolidated
financial statements of Sihitech and its subsidiaries and e-Channels under US
GAAP for the year ended December 31, 2006 was lower than
USD6,073,941.  The condition was met and accordingly, no adjustment
for the purchase price in respect to the 773,045 shares of common stock was
recorded in the consolidated financial statements of Yucheng for the year ended
December 31, 2006.





Additional
purchase price payment will be made to Sihitech BVI Shareholders, e-Channels BVI
Shareholders and their designee up to an amount of USD9,960,000 has been paid or
accrued based on the following events:





(1)
            Yucheng
      will pay an additional USD5,000,000 to Sihitech BVI Shareholders,
      e-Channels BVI Shareholders and their designee if Yucheng receives at
      least USD34,500,000 in gross proceeds in additional financing, including
      from the exercise of outstanding public warrants, the successful
      completion of a secondary offering, or a private investment by a strategic
      investor. According to an amendment agreement dated on August 24, 2007
      (the “Amendment”), the additional USD5,000,000 was changed to
      USD4,960,000.





(2)
            Yucheng
      will pay an additional USD1,000,000 if the average closing price of the
      stock of Yucheng in any sixty consecutive trading days of 2006 is above
      USD10.00; USD2,000,000 if the average closing price of the stock of
      Yucheng in any sixty consecutive trading days of 2007 is above USD12.00;
      and USD3,000,000 if the average closing price of the stock of Yucheng in
      any sixty consecutive trading days of 2008 is above
    USD14.40.


F-13




1
            Organization
      and description of business -
Continued




The
Share Exchange Transactions - Continued





Notwithstanding
the foregoing, the maximum amount to be paid under the above events shall not
exceed USD10,000,000.





As of
December 31, 2007, Yucheng received USD34,332,430 (equivalent to approximately
RMB252,606,922) in gross proceeds as a result of the exercise of outstanding
public warrants (note 20). Accordingly, Yucheng paid an additional USD4,960,000
(equivalent to approximately RMB37,772,880) to Sihitech BVI Shareholders,
e-Channels BVI Shareholders and their designee. Among the payments of the
additional purchase price, USD3,494,707(equivalent to approximately
RMB26,613,939) was paid to Sihitech BVI Shareholders and their designee which
are accounted for as a deemed distribution. The remaining of USD1,465,293
(equivalent to approximately RMB11,158,941) was paid to e-Channels BVI
Shareholders and their designee which are accounted for as an adjustment to the
purchase price in respect of the acquisition of e-Channels.





As of
December 31, 2008, only the 2007 and 2008 average closing price of the stock of
Yucheng in any sixty consecutive trading days targets were
met.  USD1,200,000 has been paid in relation to the 2007 stock price
target and USD800,000 has been accrued.  USD3,000,000 has been accrued
in relation to the 2008 stock price target.





In
addition, the condition of the average closing price of the stock of Yucheng in
any sixty consecutive trading days of 2007 being above USD12.00 was achieved,
Yucheng was obligated to make payments of the additional purchase price of
USD2,000,000 to Sihitech BVI Shareholders, e-Channels BVI Shareholders and their
designee. Among the obligations of the additional purchase price, USD1,409,156
(equivalent to approximately RMB10,293,321) was accrued to Sihitech BVI
Shareholders and their designee which are accounted for as a deemed
distribution. The remaining balance of USD590,844 (equivalent to approximately
RMB4,315,879) was accrued to e-Channels BVI Shareholders and their designee
which are accounted for as an adjustment to the purchase price in respect of the
acquisition of e-Channels.





In
addition, the condition of the average closing price of the stock of Yucheng in
any sixty consecutive trading days of 2008 being above USD14.40 was achieved,
Yucheng was obligated to make payments of the additional purchase price of
USD3,000,000 to Sihitech BVI Shareholders, e-Channels BVI Shareholders and their
designee. Among the obligations of the additional purchase price, USD2,113,734
(equivalent to approximately RMB14,836,299) was accrued to Sihitech BVI
Shareholders and their designee which are accounted for as a deemed
distribution. The remaining balance of USD886,266 (equivalent to approximately
RMB6,057,274) was accrued to e-Channels BVI Shareholders and their designee
which are accounted for as an adjustment to the purchase price in respect of the
acquisition of e-Channels.





Following
to the Amendment, additional common shares, on an all-or-none basis, may be
issued to Sihitech BVI shareholders, e-Channels BVI shareholders and their
designee on a pro rate basis, based on the amount of consideration shares issued
on November 24, 2006, aggregating 952,832 common shares each year for four years
beginning in 2008, if the Company achieves net profit targets in the prior year
as indicated in the following table according to the financial statements
audited each year in accordance with accounting principles generally accepted in
the United States of America (“US GAAP”), where net profit shall be determined
for this purpose only, as net profit (determined on the basis of US GAAP) before
the amortization expenses related to the acquisition of
e-Channels.  If the net profits of the Company are not achieved, the
obligation of Yucheng to issue the common shares for that year is terminated,
with no effect on subsequent years.


F-14




1
            Organization
      and description of business -
Continued





The
Share Exchange Transactions - Continued





Year ended/ ending December 31,
                                
                                Net Profit2007
                                
                                USD
                                8.5
      million2008
                                
                                USD
                                11.9
      million2009
                                
                                USD
                                16.7
      million2010
                                
                                USD
                                23.3
      million





As the
net profit target for year ended December 31, 2009 has not been achieved, no
shares was issued to Sihitech BVI shareholders, e-Channels BVI shareholders and
their designee.





As the
net profit target for year ended December 31, 2008 was achieved, Yucheng issued
952,832 common shares valued at USD5,545,482 (equivalent to approximately
RMB37,901,151), to Sihitech BVI shareholders, e-Channels BVI shareholders and
their designee in 2009 as additional purchase price. Of the 952,832 common
shares issued, 671,344 common shares, amounting to USD3,907,222 (equivalent to
approximately RMB26,704,299), were issued to Sihitech BVI Shareholders and their
designee which was accrued as a liability and a deemed distribution as of
December 31, 2008.  The remaining 281,488 common shares, amounting to
USD1,638,260 (equivalent to approximately RMB11,196,852), were issued to
e-Channels BVI Shareholders and their designee which was accrued as a liability
and an adjustment to the purchase price in respect of the acquisition of
e-Channels as of December 31, 2008.





As the
net profit target for year ended December 31, 2007 was achieved, Yucheng issued
952,832 common shares, valued at USD5,930,220 (equivalent to approximately
RMB43,317,887),  to Sihitech BVI shareholders, e-Channels BVI
shareholders and their designee in 2008 as additional purchase price. Of the
952,832 common shares issued, 671,344 common shares, amounting to USD4,178,302
(equivalent to approximately RMB30,520,828), were issued to Sihitech BVI
Shareholders and their designee which was accrued as a liability and a deemed
distribution as of December 31, 2007.  The remaining 281,488 common
shares, amounting to USD1,751,918 (equivalent to approximately RMB12,797,059),
were issued to e-Channels BVI Shareholders and their designee which was accrued
as a liability and an adjustment to the purchase price in respect of the
acquisition of e-Channels as of December 31, 2007.


F-15




2
            Summary
      of significant accounting policies and
practices





The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States (U.S.
GAAP).





(a)
            Principles
      of consolidation





The
consolidated financial statements include the financial statements of Yucheng
and its subsidiaries.  All significant inter-company transactions and
balances are eliminated upon consolidation. Investments under equity method are
accounted for under the equity method. Yucheng’s share of these companies’
earnings or losses is included in the consolidated statement of operations as
loss from equity method investees.





(b)
            Use
      of estimates




The
preparation of the consolidated financial statements requires management of the
Company to make a number of estimates and assumptions relating to the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period. Significant items subject to such
estimates and assumptions include the carrying amounts of properties and
equipment, intangible assets, goodwill, valuation allowances for receivables and
inventories, percentage of completion calculations relating to revenue
recognition, pre-contract costs and valuation allowance for deferred tax
assets.  Actual results could differ from those
estimates.





(c)
            Convenience
      translation into United States
dollars




The
translation of Renminbi amounts into United States dollars has been made for the
convenience of the reader and has been made at the exchange rate quoted by the
People’s Bank of China on December 31, 2009 of RMB6.8282 (2008: RMB6.8346) to
USD1.00.  Such translation amounts should not be construed as
representations that the Renminbi amounts could be readily converted into United
States dollars at that rate or any other rate.





(d)
            Cash
      and cash equivalents




Cash and
cash equivalents include cash on hand, cash accounts, interest bearing savings
accounts and time certificates of deposit which are unrestricted as to
withdrawal or use, and which have maturities of three months or less when
purchased.





(e)
            Inventories




Inventories
are stated at the lower of cost or market.  Cost is determined using
the first-in, first-out method (FIFO). Inventories consist of IT hardware
equipment, all of which are finished goods.


F-16




2
            Summary
      of significant accounting policies and practices -
    Continued




(f)
            Properties
      and equipment




Properties
and equipment are stated at cost less accumulated depreciation and impairment
losses (2(i)). Depreciation is calculated on the straight-line method over the
estimated useful lives of the assets as follows:





Estimated
      useful lifeProperties
              
              20
      yearsOffice
      equipment and furniture
              
              3-5
      yearsMachinery
              
              3-5
      yearsMotor
      vehicles
              
              5-10
      yearsLeasehold
      improvements
              
              Shorter
      of lease terms or 5 years





(g)
            Leases





Leases
are categorized as either operating or capital leases depending on certain
criteria defined in Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) Topic 840, Leases.





Where a
lease is classified as a capital lease, the asset is treated as if it had been
purchased outright. The amount initially recognized as an asset is the lower of
fair value of the leased asset or the present value at the beginning of the
lease term of minimum lease payments during the lease term, excluding that
portion of the payments representing executory costs such as insurance,
maintenance, and taxes to be paid by the lessor, together with any profit
thereon. The corresponding lease commitment is shown as liability. Lease
payments are analyzed between capital and interest. The interest element is
charged to the income statement over the period of the lease and is calculated
so that it represents a constant proportion of the lease liability. The capital
element reduces the balance owed to the lessor.





Where a
lease is classified as an operating lease, the total rental payments made under
the leases are recognized in the consolidated statement of operations on a
straight-line basis over the terms of the leases.  Lease incentives
received are recognised in the consolidated statement of operations as an
integral part of the total lease payments made.


F-17






2
            Summary
      of significant accounting policies and practices -
    Continued





(h)
            Intangible
      assets




(i)
            Cost
      of intangible assets





Intangible
assets consist primarily of purchased software, capitalized costs for computer
software development, customer relationships and other technology. Intangible
assets are stated at cost or fair value less accumulated amortization and any
impairment write-downs.  Fair value of identifiable intangible assets
is estimated based upon discounted future cash flow projections.





The
Company capitalizes development costs for marketable software incurred from the
time of technological feasibility until the software is ready for use in
accordance with ASC Topic 985-20, Costs of Software to be Sold,
Leased, or Marketed.  All costs to establish technological
feasibility of a computer product to be sold, leased or otherwise marketed are
charged to research and development expense as incurred. Technological
feasibility is established through completeness of the working model and its
consistency with the product design. Costs incurred for modification, components
of large products, and enhancements are expensed. As the working model is
normally built during the process of project implementation for clients, there
are no high-risk development issues.





Under the
provisions of ASC Topic 350-40, Internal-Use Software, the
Company capitalizes costs associated with software developed or obtained for
internal use when both the preliminary project stage is completed and management
has authorized further funding for the project which it deems probable of
completion and use for the function intended. Technological feasibility is
established upon completeness of the product design and planning phases
indicating that product can be built by existing technology and tools.
Capitalized internal-use software costs include only (1) external direct costs
of materials and services consumed in developing or obtaining the software, (2)
payroll and payroll-related costs for employees who are directly associated with
and who devote time to the project, and (3) interest costs incurred, when
material, while developing the software. Capitalization of these costs ceases no
later than the point at which the project is substantially complete and ready
for its intended purpose.





The
consolidated financial statements included intangible assets obtained through
the acquisitions of subsidiaries of RMB4,911,000, nil and nil in 2007, 2008 and
2009 respectively, whose values have been estimated by the management in the
absence of ready ascertainable market values.  However, because of the
inherent uncertainty of the valuation, it is reasonably possible that those
estimated values may differ significantly from the values that would have been
used had a ready market for these intangible assets existed, and the differences
could be material to the consolidated financial statements.





Software
development costs include payroll, employee benefits, and other
headcount-related costs associated with product development. The Company records
expenditure incurred before technological feasibility is established into
research and development cost and capitalizes expenditures incurred after that
point into the cost of intangible assets.  Software development costs
were RMB10,697,667, RMB13,720,874 and RMB22,204,930 in 2007, 2008 and 2009,
respectively, among which RMB2,328,100, RMB3,572,570 and RMB8,376,550 were
capitalized in 2007, 2008 and 2009.


F-18




2
            Summary
      of significant accounting policies and practices -
    Continued





(h)
            Intangible
      assets - Continued




(ii)
            Amortization





The
Company amortizes capitalized software development costs for marketable software
on a product-by-product basis.  The annual amortization is the greater
of the amount computed using (a) the ratio that current gross revenues for a
product bear to the total of current and anticipated revenues for that product
or (b) the straight-line method over the remaining estimated economic life of
the product including the period being reported upon.





Purchased
computer software and capitalized computer software development costs for
internal use are amortized on a straight-line basis over their estimated useful
lives, and are monitored on a regular basis to assess that the amortization
method is still appropriate and the remaining estimated useful life of the asset
is reasonable.





Customer
relationships and other technology are amortized on a straight-line basis over
their estimated economic useful lives.





The
estimated useful lives are as follows:


Estimated
      useful lifeSoftware
      development costs-   Internal-use
      software
                
                3
      years-   Marketable
      software
                
                3
      yearsCustomer
      relationships
                
                3-5
      yearsOther
      technology
                
                3-5
      yearsPurchased
      software
                
                5-10
      years





The
straight-line method of amortization reflects an appropriate allocation of the
cost of the intangible assets to earnings in proportion to the amount of
economic benefits obtained by the Company in each reporting period.





(i)
            Impairment
      of long-lived assets




The
Company evaluates for impairment its long-lived assets to be held and used,
including properties and equipment, intangible assets and other non-current
assets, when events or changes in circumstances indicate, in management’s
judgment, that the carrying value of such assets may not be recoverable in
accordance with ASC Topic 360, Property, Plant and
Equipment, or ASC Topic 350-30, General Intangibles Other than
Goodwill, as appropriate.  Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
estimate undiscounted future cash flows expected to be generated by the
asset.  If the carrying value of an asset exceeds its estimated future
cash flows, an impairment charge is recognized by the amount that the carrying
value exceeds the estimated fair value.





Assets to
be disposed of would be separately presented in the balance sheet and reported
at the lower of carrying amount or estimated fair value less the cost to sell,
and are no longer depreciated.





Judgments
and assumptions are inherent in management’s estimate of undiscounted future
cash flows used to determine recoverability of an asset and the estimate of an
asset’s fair value used to calculate the amount of impairment to recognize. The
use of alternate judgments and/or assumptions could result in the recognition of
different levels of impairment charges in the consolidated financial
statements.


F-19




2
            Summary
      of significant accounting policies and practices -
    Continued





(j)
            Goodwill




Goodwill
represents the excess of the purchase price and related costs over the fair
value assigned to net tangible and identifiable intangible assets of business
acquired and accounted for under the purchase method.





In
accordance with ASC Topic 350, Goodwill, the impairment
evaluation of goodwill is conducted annually, or more frequently, if events or
changes in circumstances indicate that an asset might be impaired. The
evaluation is performed by using a two-step process. In the first step, the fair
value of each reporting unit is compared with the carrying amount of the
reporting unit, including goodwill. The estimated fair value of the reporting
unit is generally determined on the basis of discounted future cash flows. If
the estimated fair value of the reporting unit is less than the carrying amount
of the reporting unit, then a second step must be completed in order to
determine the amount of the goodwill impairment that should be recorded. In the
second step, the implied fair value of the reporting unit’s goodwill is
determined by allocating the reporting unit’s fair value to all of its assets
and liabilities other than goodwill (including any unrecognized intangible
assets) in a manner similar to a purchase price allocation. The resulting
implied fair value of the goodwill that results from the application of the
second step is then compared to the carrying amount of the goodwill and an
impairment charge is recorded for the difference.





The
assumptions used in the estimate of fair value are generally consistent with the
past performance of each reporting unit and are consistent with the projections
and assumptions that are used in current operating plans. Such assumptions are
subject to change as a result of changing economic and competitive
conditions.





(k)
            Revenue
      recognition




The
Company generates revenues primarily from Software & Solutions, Platform
& Maintenance Services and POS services. Revenue is recognized as
follows:





(i)
            Software &
      Solutions–they mainly consist of services including implementation,
      customization, training, consulting and post-contract customer support
      (“PCS”). Revenue from software and solutions services is generated
      primarily from customer orders in which customers purchase bundled
      solutions that include the Company’s software or software system and
      services, and third party hardware. Our bundled solutions generally
      require significant production, modifications, or customization of
      software or software system, contract accounting is therefore applied in
      accordance with ASC Topic 605-35, Construction-Type and
      Production-Type Contracts, and ASC Topic 985-605, Software - Revenue
      Recognition. Based on our fact pattern, we apply the
      percentage-of-completion method of revenue recognition to account for the
      bundled solutions to the period from the start of the significant
      production, modification, or customization through to the last element
      delivered, which is the end of the PCS service period. Labor costs and
      direct project expenses are used to determine the stage of completion.
      Revisions in estimated contract profits are made in the period in which
      the circumstances requiring the revision become known. Provisions, if any,
      are made for anticipated losses on uncompleted
  contracts.


F-20




2
            Summary
      of significant accounting policies and practices -
    Continued





(k)
            Revenue
      recognition - Continued




(i)
            Continued





In a
typical bundled solutions contract that includes PCS, the Company generally
offers the PCS to customers for one year. In limited circumstances, the Company
would offer PCS for more than one year.  In dealing with one-year PCS,
the Company follows ASC Topic 985-605 to recognize PCS revenue upon delivery of
the software & solutions, as it considers that (i) the PCS fee is included
with the initial solution service fee; (ii) the PCS included with the initial
solution service is for one year or less; (iii) the estimated cost of providing
PCS during the arrangement is insignificant and (iv) unspecified
upgrades/enhancements offered during the PCS arrangements historically have been
and are expected to continue to be minimal and infrequent.  In dealing
with bundled solutions contract that include multi-year PCS, the Company
recognizes the revenue from the bundled solutions services using the
percentage-of-completion method as mentioned above.





Costs and
estimated earnings in excess of billings on uncompleted contracts consist of
recognized recoverable costs and accrued profits on contracts for which billings
had not been presented to customers as of the balance sheet
date.  Billings in excess of revenue recognized for which payments
have been received are deferred until the applicable revenue recognition
criteria have been met.





(ii)
              Platform & Maintenance
      Services–Platform &
      Maintenance Services consist of system integration service, agency sales
      and maintenance services. System integration services mainly consist of
      value added services of planning, designing, installing, integrating and
      testing of hardware sold to customers.  Revenue from system
      integration services is recognized in accordance with FASB ASC Topic 605,
      Revenue
      Recognition, when the following conditions are all
      met:  persuasive evidence of an arrangement exists, system
      integration services have been rendered and products have been delivered
      and accepted, the price is fixed or determinable and, collectibility is
      reasonably assured. Customer’s acknowledgement evidences their acceptance
      of the system integration work being completed at which time revenue is
      recognized. The contract revenue and related costs are deferred if the
      customer’s acknowledgement is not
obtained.




Revenue
from sales of IT equipment and software to the end users, which are limited to
passing the IT equipment and software from vendors to end users, is treated as
agency sales. The Company records the net difference between the amount it bills
to end users and the fees charged by third party vendors as revenue. The Company
considers the criteria set out in ASC Topic 605-45, Principal Agent
Considerations, in determining whether it should recognize such revenues
at gross or net of revenue.  The Company believes that based on its
arrangement with the system integrators, end users (banks) and the third party
IT manufacturers, the net approach is appropriate as the Company is not the
primary obligor to the end users, does not take general inventory risk, does not
have latitude in establishing price and does not have discretion in supplier
selection with respect to the IT equipment or software delivered to end
users.




Maintenance
service revenue is recognized ratably over the maintenance
period.


F-21




2
            Summary
      of significant accounting policies and practices -
    Continued




(k)
            Revenue
      recognition - Continued




(iii)
                                          POS
      service–POS service is a business process outsourcing service,
      including merchant acquisition, deployment, installation and maintenance
      of POS terminals, merchant training and technical support. POS revenue is
      recognized in accordance with ASC Topic 605, when the following conditions
      are all met: persuasive evidence of an arrangement exists, service is
      performed, the price is fixed or determinable and, collectibility is
      reasonably assured.
 (l)
              Pre-contract
      costs


Due to
the business environment in which the Company operates, it is common practice
that the Company commences the software development or IT consulting project for
its banking clients without commercial contracts being signed. If the contracts
are not obtained during the reporting period where implementation costs have
been incurred, the Company defers revenue recognition for the related contracts
until contracts are obtained. In accordance with ASC Topic 720-15, Start-Up Costs, costs that
are incurred for a specific anticipated contract and that will result in no
future benefits unless the contract is obtained, including cost of equipment,
direct labour costs, and other ancillary costs, are deferred until receipt of
the signed contract, and are then included in contract costs or
inventory.  Such deferred costs, subject to their not being related to
costs of start-up activities, are evaluated periodically for probability of
recoverability.  If deemed unrecoverable, deferred costs are expensed
to operating expenses.





Costs of
start-up activities, including organization costs, are expensed as
incurred.





Costs
incurred in connection with anticipated contracts are deferred outside the
contract cost or inventory classification if their recovery from future contract
revenue or from other dispositions is considered probable.





(m)
            Net
      earnings per common share




The
Company computes net earnings per common share in accordance with ASC Topic 260
Earnings Per
Share.  Under the provisions of ASC Topic 260, basic earnings
per common share is computed by dividing the net earnings available to common
shareholders for the period by the weighted average number of shares of common
stock outstanding during the period.  The calculation of diluted net
earnings per share gives effect to common stock equivalents, however; potential
common stock in the diluted net earning per common share computation is excluded
in net loss periods if their effect is anti-dilutive.





(n)
            Retirement
      benefits




Pursuant
to the relevant laws and regulations in the PRC, the Company participates in a
defined contribution retirement plan for its employees arranged by a
governmental organization. The Company makes contributions to the retirement
scheme at the applicable rate based on the employees’ salaries.  The
required contributions under the retirement plans are charged to the
consolidated statement of operations on an accrual basis when they are
due.  The Company’s contributions totaled RMB6,341,262, RMB13,119,630
and RMB16,453,429 in 2007, 2008 and 2009, respectively.


F-22




2
            Summary
      of significant accounting policies and practices -
    Continued





(o)
            Interest




Interest
costs are expensed as incurred, except for those capitalized that are directly
attributable to the acquisition, construction or production of qualifying
assets.  No interest costs were capitalized for each of the years in
the three-year period ended December 31, 2009.





(p)
            Income
      taxes




Income
taxes are accounted for under the asset and liability
method.  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 operating losses 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.  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. The Company records a valuation allowance against deferred tax
assets to the extent that it is more likely than not that some portion, or all
of, the deferred tax assets will not be realized.





(q)
            Government
      subsidies




Government
subsidies are recognized when received and when all the conditions for their
receipt have been met.  Such amounts are included as a credit in the
operating expense section of the consolidated statement of
operations.





(r)
            Tax
      refunds




Pursuant
to the laws and regulations of the PRC, the Company is entitled to a refund of
the 14.0% value-added tax (“VAT”) for certain self-developed software products.
The Company recognizes the VAT refunds at the same time as the revenues from
sales of the related enterprise software products are recognized. VAT refunds
are included as a credit in the operating expense section of the consolidated
statement of operations.


F-23




2
            Summary
      of significant accounting policies and practices -
    Continued




(s)
            Financial
      instruments




Exposure
to credit and interest rates arises in the normal course of the Company’s
business.  Financial assets of the Company include cash and cash
equivalents and trade accounts receivable, other receivables and amounts due
from related parties.  Financial liabilities of the Company include
trade accounts payable and other payables, short-term loans, employee and
payroll accruals, dividend payable to ex-owners, deemed distribution to
ex-owners, outstanding payment in relation to business acquisitions and income
tax payable.  Adjustments are made for financial assets if their
carrying amount exceeds the value realizable in the foreseeable
future.  Financial liabilities are stated at their carrying
amounts.





Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash and cash equivalents and trade and other
accounts receivable. The Company’s cash is maintained with high quality
financial institutions and the composition and maturities are regularly
monitored by management. Generally, any cash equivalents may be redeemed upon
demand and bear minimal risk.





The trade
and other accounts receivable of the Company arises primarily through the
provision of goods and services, and deposits and payments made for various
contracts. The Company generally does not require collateral.  An
allowance for doubtful accounts is determined with respect to those amounts that
the Company has determined to be doubtful of collection. The Company performs
ongoing credit evaluations of its customers based on individual accounts
receivable which show signs of uncollectibility and an aging
analysis.  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 does not have any off-balance-sheet
credit exposure related to its customers.





The fair
values of the above noted financial assets and financial liabilities are not
materially different from their carrying amounts.





The
Company has no off-balance sheet concentration of credit risk such as those
arising fromforeign
exchange contracts, option contracts or other foreign hedging
arrangements.





(t)
            Investments
      under equity method




The
investments, in which the Company has significant influence, but not control, or
the Company has joint control, are accounted for using the equity
method.  Investments under the equity method consist of a 50% equity
interest in Beijing Hengli Plastic Machinery Co., Ltd. (“Hengli”), a plastic
mould manufacturing company, a 50% equity interest in Shanghai Sihitech Sanjian
Technology Co., Ltd. (“Sanjian”), a software and hardware technology company, a
49% equity interest in Chengdu Yuxinruizhi Information Technologies Limited
(“Elegon”), a software and hardware technology company, a 15% enquity interest
in Baodaotong, and a 40% equity interest in Yucheng Sinowise
Consultancy  Services Ltd, (“Sinowise”), a software and service
technology company.


F-24




2
            Summary
      of significant accounting policies and practices -
    Continued




(t)
            Investments under equity
      method - Continued




Where the
Company’s share of losses exceeds its carrying value, the Company’s interest is
reduced to nil and recognition of further losses is discontinued except to the
extent that the Company has incurred legal or constructive obligations or made
payments on behalf of the equity method investees.  As at December 31,
2008 , there was no excess of the carrying value over the Company’s share of net
assets of the equity method invests. As at December 31, 2009, carrying value of
investment in Sinowise reduces to nil as the Company’s share of loss exceeded
the carrying value.





Unrealized
profits and losses resulting from transactions between the Company and its
equity method investees are eliminated to the extent of its carrying value,
except where unrealized losses provide evidence of an impairment of the asset
transferred, in which case they are recognized immediately in the consolidated
statement of operations.  None of the investments under equity method
provided products or services to the Company in 2007, 2008 and
2009.





On
December 20, 2007, Sanjian was disposed of due to business consideration. The
gain resulted from the disposal was RMB869,798.





On June
6, 2008, Beijing Sihitech sold its entire interest in Hengli to a third party
company due to business consideration. The gain resulted from the disposal was
RMB2,102,566.





On June
30, 2009, Yuxinyicheng sold its entire interest in Elegon to 3i Infotech Limited
due to business consideration. The gain resulted from the disposal was
RMB6,291,960.





On March
31, 2009, Yuxinyicheng established a joint-venture, Hainan Baodaotong
Technologies Limited (“Baodaotong”) in Haikou city. Total registered capital of
Baodaotong is RMB50 million. Haikou Gas Holding Company, Yuxinyicheng and
Guangzhou Sihitech holds 45%, 35% and 20% of Baodaotong’s equity interests,
respectively. On December 16, 2009, Yuxinyicheng transferred 20% of Baodaotong’s
equity interest to a third party.





On April
3, 2009, Yuxinyicheng established a joint-venture, Yucheng Sinowise Consultancy
Services Ltd (“Sinowise”). Total registered capital of Sinowise is RMB1 million.
Yucinyicheng holds 40% equity interest of Sinowise.





The
carrying amounts of the investments under equity method at December 31, 2008 and
2009 are as follows:


2008
                        
                        
                        2009
                        
                        
                        2009RMB
                        
                        
                        RMB
                        
                        
                        USDHengli
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Elegon
                        
                        
                        2,250,225
                        
                        
                        
                        -
                        
                        
                        
                        -Sinowise
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Baodaotong
                        
                        
                        -
                        
                        
                        
                        7,570,143
                        
                        
                        
                        1,108,659Total
                        
                        
                        2,250,225
                        
                        
                        
                        7,570,143
                        
                        
                        
                        1,108,659


F-25




2
            Summary
      of significant accounting policies and practices -
    Continued




(t)
            Investments under equity
      method - Continued




Summary
of the combined financial information for the affiliates as of and for the years
ended December 31, 2007, 2008 and 2009 is as follows:


2007
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2009RMB
                      
                      
                      RMB
                      
                      
                      RMB
                      
                      
                      USDFinancial
      positionCurrent
      assets
                      
                      
                      1,949,665
                      
                      
                      
                      4,249,670
                      
                      
                      
                      44,108,369
                      
                      
                      
                      6,459,736Property,
      plant and equipment, net
                      
                      
                      2,553,756
                      
                      
                      
                      2,736,155
                      
                      
                      
                      7,967,488
                      
                      
                      
                      1,166,850Other
      non-current assets
                      
                      
                      -
                      
                      
                      
                      47,417
                      
                      
                      
                      13,250
                      
                      
                      
                      1,941Total
      assets
                      
                      
                      4,503,421
                      
                      
                      
                      7,033,242
                      
                      
                      
                      52,089,107
                      
                      
                      
                      7,628,527Current
      liabilities
                      
                      
                      795,442
                      
                      
                      
                      2,459,459
                      
                      
                      
                      2,363,144
                      
                      
                      
                      346,086Total
      liabilities
                      
                      
                      795,442
                      
                      
                      
                      2,459,459
                      
                      
                      
                      2,363,144
                      
                      
                      
                      346,086Owners’
      equity
                      
                      
                      3,707,979
                      
                      
                      
                      4,573,783
                      
                      
                      
                      49,725,963
                      
                      
                      
                      7,282,441Total
      liabilities and equity
                      
                      
                      4,503,421
                      
                      
                      
                      7,033,242
                      
                      
                      
                      52,089,107
                      
                      
                      
                      7,628,527Results
      of operationsSales
                      
                      
                      -
                      
                      
                      
                      92,172
                      
                      
                      
                      6,117,739
                      
                      
                      
                      895,952Operating
      (loss) profit
                      
                      
                      (53,189
                      )
                      
                      
                      (7,605,154
                      )
                      
                      
                      (1,294,897
                      )
                      
                      
                      (189,640
                      )Net
      (loss) income
                      
                      
                      (53,189
                      )
                      
                      
                      (5,697,554
                      )
                      
                      
                      (1,279,906
                      )
                      
                      
                      (187,444
                      )


F-26




2
            Summary
      of significant accounting policies and practices -
    Continued





(u)
            Share-based
      compensation




Yucheng
has adopted ASC Topic 718, Compensation – Stock
Compensation, which requires that share-based payment transactions with
employees, such as share options, be measured based on the grant-date fair value
of the equity instrument issued and recognized as compensation expense over the
requisite service period, with a corresponding addition to equity. Under this
method, compensation cost related to employee share options or similar equity
instruments is measured at the grant date based on the fair value of the award
and is recognized over the period during which an employee is required to
provide service in exchange for the award, which generally is the vesting
period.




(v)
            Segment
      Information




Management
views the business as consisting of revenue steams; however they do not produce
reports for, assess the performance of, or allocate resources to these revenue
steams based upon any asset-based metrics, or based upon income or expenses,
operating income or net income. Therefore, the Company believes that it operates
in one business segment.




(w)
            Non-controlling
      interests  Effective
April 1, 2009, the Company adopted ASC 810-10-65 (formerly SFAS 160,
Non-controlling Interests in Consolidated Financial Statements – an amendment of
ARB No. 51” or SFAS160), which amends previously issued guidance to establish
accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
non-controlling interest in subsidiary, which is sometimes referred to as
minority interest, is an ownership interest in the consolidated entity that
should be reported as equity. Among other requirements, this statement requires
that the consolidated net income (loss) attributable to the parent and the
non-controlling interest be clearly identified and presented on the face of the
consolidated statements of operations. The presentation and disclosure
requirements of the ASC Topics have been applied retrospectively for all periods
presented in the accompanying consolidated balance sheets statements of income
(loss) and comprehensive income (loss), and statements of shareholders’ equity
and statements of cash flows, to conform to the provisions of ASC810
(SFAS160)-


(x)
            Recently
      Issued Accounting Standards




Recently
Adopted Accounting Pronouncements




In May
2009, the FASB issued ASC Topic 855-10, Subsequent Events (“ASC
855-10”). ASC 855-10 provides general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. ASC 855-10 is applicable
for interim or annual periods after June 15, 2009.  The Company
adopted this amended topic effective July 1, 2009.




In June
2009, the FASB issued SFAS No. 168, The ‘FASB Accounting Standards
Codification’ and the Hierarchy of Generally Accepted Accounting
Principles, which is codified as ASC Topic 105 (“ASC 105”). ASC 105
establishes the “FASB Accounting Standards Codification” ( “Codification”),
which officially launched July 1, 2009, to become the source of authoritative
U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to
be applied by nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (“SEC”) under authority of federal securities
laws are also sources of authoritative U.S. GAAP for SEC registrants. The
subsequent issuances of new standards will be in the form of Accounting
Standards Updates that will be included in the Codification. Generally, the
Codification is not expected to change U.S. GAAP. All other accounting
literature excluded from the Codification will be considered
non-authoritative.  ASC 105 is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The
Company has adopted ASC 105 for the year ending March 31, 2010. The adoption of
this Statement will not impact the results of operations or financial position,
as it only required disclosures. Beginning with this Annual Report on Form 10-K
for March 31, 2010, and in all filings thereafter, references to Financial
Accounting Standards that have been codified in the FASB Accounting Standards
Codification have been replaced with references to the appropriate guidance in
the Codification.





In
December 2009, the FASB issued ASU 2010-02, Accounting and Reporting for
Decreases in Ownership of a Subsidiary - a Scope Clarification, under ASC Topic 810, Consolidation. This update provides
amendments to ASC Subtopic 810-10 and related guidance within U.S. GAAP to
clarify the scope of the decrease in ownership provisions of the Subtopic and
related guidance. The amendments in ASU 2010-02 also clarify that the decrease
in ownership guidance does not apply to certain transactions even if they
involve businesses. The amendments were effective for transactions occurred
after December 15, 2009.The adoption of ASU No.
2010-02 did not have a material impact on the Company’s consolidated financial
statements.


F-27




2
            Summary
      of significant accounting policies and practices -
    Continued




(x)
            Recently
      Issued Accounting Standards -
Continued




Recently
Adopted Accounting Pronouncements - Continued




In
January 2010, the FASB issued ASU 2010-04, Accounting for Various
Topics—Technical Corrections to SEC
Paragraphs (SEC Update). The adoption of ASU 2010-04 did not have a
material impact on the Company’s consolidated financial statements.





In
February 2010, the FASB issued ASU No. 2010-09, “Subsequent Events (Topics 855):
Amendments to certain Recognition and Disclosure Requirements.” An entity that
is an SEC filer is not required to disclose the date through which subsequent
events have been evaluated. This change alleviates potential conflicts between
the ASC and the SEC’s requirements. In addition, the scope of the “reissuance”
disclosure requirements is refined to include revised financial statements only.
This update was effective February 24, 2010. The adoption of ASU No. 2010-09 did
not have a material impact on the Company’s financial statements.





Recent
Accounting Pronouncements Not Yet Adopted





In
October 2009, the FASB amended the Accounting Standards Codification (“ASC”) as
summarized in ASU 2009-14, Software (ASC Topic 985): Certain Revenue
Arrangements That Include Software Elements, and ASU 2009-13, Revenue
Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. As
summarized in ASU 2009-14, ASC Topic 985 has been amended to remove from the
scope of industry specific revenue accounting guidance for software and software
related transactions, tangible products containing software components and
non-software components that function together to deliver the product’s
essential functionality. As summarized in ASU 2009-13, ASC Topic 605 has been
amended (1) to provide updated guidance on whether multiple deliverables exist,
how the deliverables in an arrangement should be separated, and the
consideration allocated; (2) to require an entity to allocate revenue in an
arrangement using estimated selling prices of deliverables if a vendor does not
have vendor-specific objective evidence (“VSOE”) or third-party evidence of
selling price; and (3) to eliminate the use of the residual method and require
an entity to allocate revenue using the relative selling price method. The
accounting changes summarized in ASU 2009-14 and ASU 2009-13 are both effective
for fiscal years beginning on or after June 15, 2010, with early adoption
permitted. Adoption may either be on a prospective basis or by retrospective
application.The
Company is currently evaluating the impact of ASU 2009-13 and ASU 2009-14, if
any, that they may have on the Company’s consolidated financial
statements.





In
January 2010, the FASB issued ASU No. 2010-06 (ASU No. 2010-06), Improving
Disclosure about Fair Value Measurements, under ASC Topic 820, Fair value Measurements and
Disclosures, to improve and provide new disclosures for recurring and
nonrecurring fair value measurements under the three-level hierarchy of inputs
for transfers in and out of Levels 1 and 2, and activity in Level 3.  This
update also clarifies existing disclosures of the level of disaggregation for
the classes of assets and liabilities and the disclosure about inputs and
valuation techniques. ASU No. 2010-06 new disclosures and clarification of
existing disclosure is effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements.  Those disclosures are effective for financial
statements issued for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years.  The Company is currently
accessing the impact, if any, of ASU No. 2010-06 disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements the Company’s consolidated financial
statements.


F-28




2
            Summary
      of significant accounting policies and practices -
    Continued




(x)
            Recently
      Issued Accounting Standards -
Continued




Recent
Accounting Pronouncements Not Yet Adopted - Continued





In
February 2010, the FASB issued ASU No. 2010-08, Technical Corrections to Various
Topics. This update’s purpose is to eliminate GAAP inconsistencies,
update outdated provisions, and provide needed clarifications. The company does
not expect the adoption of ASU No. 2010-08 will have a material impact on the
Company’s consolidated financial statements.





3
            Trade
      accounts receivable, net





Trade
accounts receivable at December 31, 2008 and 2009 consist of the
following:


December 312008
                  
                  
                  2009
                  
                  
                  2009RMB
                  
                  
                  RMB
                  
                  
                  USDPrimary
      bank customers and its subsidiaries
                  
                  
                  110,433,492
                  
                  
                  
                  29,259,016
                  
                  
                  
                  4,285,026Other
      bank customers
                  
                  
                  117,976,557
                  
                  
                  
                  76,759,800
                  
                  
                  
                  11,241,586General
      contractors
                  
                  
                  52,243,465
                  
                  
                  
                  41,959,888
                  
                  
                  
                  6,145,088Total
                  
                  
                  280,653,514
                  
                  
                  
                  147,978,704
                  
                  
                  
                  21,671,700


Included
in the above balance was the allowance for doubtful debt of RMB36,000 and
RMB16,306,960 equivalent to USD2,388,178 as at December 31, 2008 and 2009
respectively.  The movement in allowance for doubtful debt mainly
represented increase in allowance for doubtful debt.




The
balance billed but not paid by customers pursuant to retainage provisions in
contracts will be due upon completion of the contracts and acceptance by the
customers.  The retention balance as at December 31, 2009 is
RMB21,590,389 equivalent to USD3,161,944 (2008: RMB16,153,157 equivalent to
USD2,363,441), of which RMB996,300 equivalent to USD145,910 (2008: RMB2,882,875
equivalent to USD421,806) is expected to be collected after one
year.


F-29




4
            Costs
      and estimated earnings on uncompleted
contracts





December 312008
                          
                          
                          2009
                          
                          
                          2009RMB
                          
                          
                          RMB
                          
                          
                          USDCosts
      incurred on uncompleted contracts
                          
                          
                          68,293,420
                          
                          
                          
                          204,759,580
                          
                          
                          
                          29,987,344Estimated
      earnings
                          
                          
                          80,431,044
                          
                          
                          
                          162,671,693
                          
                          
                          
                          23,823,510148,724,464
                          
                          
                          
                          367,431,273
                          
                          
                          
                          53,810,854Less:
      Billings to date
                          
                          
                          (89,924,724
                          )
                          
                          
                          (275,812,512
                          )
                          
                          
                          (40,393,150
                          )58,799,740
                          
                          
                          
                          91,618,761
                          
                          
                          
                          13,417,704




The
amounts are included in the accompanying consolidated balance sheets under the
following captions:




Costs
      and estimated earnings in excessof billings on uncompleted
      contracts
                            
                            
                            68,812,918
                            
                            
                            
                            105,684,112
                            
                            
                            
                            15,477,595Billings
      in excess of costs and estimatedearnings on uncompleted
      contracts
                            
                            
                            (10,013,178
                            )
                            
                            
                            (14,065,351
                            )
                            
                            
                            (2,059,891
                            )58,799,740
                            
                            
                            
                            91,618,761
                            
                            
                            
                            13,417,704


Cost and
estimated earnings in excess of billings and billings in excess of costs and
estimated earnings on uncompleted contracts comprise principally amounts of
revenue recognized on contracts for which billings had not been presented to
customers because the amounts were not billable at the balance sheet date. The
unbilled amounts receivable at December 31, 2009 is RMB105,684,112 equivalent to
USD15,463,101 (2008: RMB68,812,918 equivalent to USD10,068,317), of which
RMB1,296,364 equivalent to USD189,854 (2008: RMB2,346,910 equivalent to
USD343,387) is expected to be collected after one year.


5
            Other
      current assets




December 312008
                  
                  
                  2009
                  
                  
                  2009RMB
                  
                  
                  RMB
                  
                  
                  USDPayments
      in advance
                  
                  
                  5,516,656
                  
                  
                  
                  8,433,317
                  
                  
                  
                  1,235,072Project
      and tendering deposits
                  
                  
                  18,385,637
                  
                  
                  
                  10,144,161
                  
                  
                  
                  1,485,628Other
      receivables
                  
                  
                  18,684,594
                  
                  
                  
                  19,392,902
                  
                  
                  
                  2,840,119Prepaid
      expenses
                  
                  
                  1,150,278
                  
                  
                  
                  300,303
                  
                  
                  
                  43,980Total
                  
                  
                  43,737,165
                  
                  
                  
                  38,270,683
                  
                  
                  
                  5,604,799





Payments
in advance represent part of purchase contract amount for which the equipment
has not been delivered to customers as of the end of year.





Other
receivables mainly include considerations for the disposals of a subsidiary and
an equity accounted investment, deposits and staff advances for
operations.





Included
in other receivables was allowance for doubtful debt of nil and RMB2,077,500
equivalent to USD304,253 as at December 31, 2008 and 2009 respectively. The
movement in allowance for doubtful debt mainly represented increase in allowance
for doubtful debt.


F-30




6
            Income
      taxes





A
reconciliation of the expected tax with the actual tax expense (benefit) for the
years ended December 31, 2007, 2008 and 2009 are as follows:




2007
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2009RMB
                    
                    
                    RMB
                    
                    
                    RMB
                    
                    
                    USDIncome
      (loss) before non-controlling interests and income taxes
                    
                    
                    74,055,816
                    
                    
                    
                    68,745,895
                    
                    
                    
                    (15,644,778
                    )
                    
                    
                    (2,291,201
                    )Expected
      PRC income tax expense (benefit) (note (i))
                    
                    
                    11,108,372
                    
                    
                    
                    17,186,474
                    
                    
                    
                    (3,911,194
                    )
                    
                    
                    (572,800
                    )Tax
      holiday benefits and preferential tax rates
                    
                    
                    (4,726,606
                    )
                    
                    
                    (31,249,966
                    )
                    
                    
                    (5,603,066
                    )
                    
                    
                    (820,577
                    )Tax
      effect related to foreign entities not subject to income
    taxes
                    
                    
                    -
                    
                    
                    
                    570,147
                    
                    
                    
                    898,695
                    
                    
                    
                    131,615Tax
      rate difference
                    
                    
                    (1,067,540
                    )
                    
                    
                    53,533
                    
                    
                    
                    (34,185
                    )
                    
                    
                    (5,006
                    )Non-taxable
      income
                    
                    
                    (236,647
                    )
                    
                    
                    (538,568
                    )
                    
                    
                    (907,459
                    )
                    
                    
                    (132,899
                    )Additional
      deductible research and development expense
                    
                    
                    (500,198
                    )
                    
                    
                    (379,810
                    )
                    
                    
                    (1,060,680
                    )
                    
                    
                    (155,338
                    )Non-deductible
      expenses
                    
                    
                    978,492
                    
                    
                    
                    2,281,976
                    
                    
                    
                    3,133,196
                    
                    
                    
                    458,861Under
      (over) provision in prior years
                    
                    
                    223,041
                    
                    
                    
                    493,203
                    
                    
                    
                    (861,749
                    )
                    
                    
                    (126,204
                    )Under
      (over) provision of deferred tax in prior years
                    
                    
                    -
                    
                    
                    
                    842,751
                    
                    
                    
                    16,284
                    
                    
                    
                    2,385Utilization
      of tax loss previously not recognized
                    
                    
                    (842,751
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Change
      in valuation allowance
                    
                    
                    -
                    
                    
                    
                    1,383,117
                    
                    
                    
                    103,757
                    
                    
                    
                    15,195Others
                    
                    
                    592,084
                    
                    
                    
                    (181,178
                    )
                    
                    
                    496,465
                    
                    
                    
                    72,707Actual
      income tax expenses (benefits)
                    
                    
                    5,528,247
                    
                    
                    
                    (9,538,321
                    )
                    
                    
                    (7,729,936
                    )
                    
                    
                    (1,132,061
                    )Representing:Current
      tax expenses
                    
                    
                    8,751,539
                    
                    
                    
                    786,327
                    
                    
                    
                    2,749,021
                    
                    
                    
                    402,598Deferred
      tax expenses (benefits)
                    
                    
                    (3,223,292
                    )
                    
                    
                    (10,324,648
                    )
                    
                    
                    (10,478,957
                    )
                    
                    
                    (1,534,659
                    )Total
      income tax expenses (benefits)
                    
                    
                    5,528,247
                    
                    
                    
                    (9,538,321
                    )
                    
                    
                    (7,729,936
                    )
                    
                    
                    (1,132,061
                    )


F-31




6
            Income
      taxes - Continued




Notes:


(i)
            Yucheng,
      and its subsidiaries, Port Wing and Ahead Billion are incorporated in the
      British Virgin Islands and are not subject to taxation under the British
      Virgin Islands. Yuxinyicheng and its major subsidiaries (together, the
      “PRC entities”) are incorporated in the PRC and governed by the PRC
      laws.





The
      normal statutory rate of the tax rate of PRC Enterprise Income tax (“EIT”)
      is 33% (30% of state income tax plus 3% local income tax) before January
      1, 2008. On March 1, 2007, the Fifth Plenary Session of the Tenth National
      People’s Congress passed the Corporate Income Tax Law of the PRC (“New Tax
      Law”) which was taken effect on January  1, 2008.  As
      a result of the new tax law, the statutory income tax rate changed from
      33% to 25% with effect from January 1, 2008.  The preferential
      tax rate previously enjoyed by the Company would be gradually transitioned
      to the new standard rate of 25% over a five-year transitional
      period.  In addition, article 28 of the New Tax Law states that
      the income tax rate of the “high-tech” company will remain at
      15%.  Accordingly, the carrying amount of the deferred tax
      assets and liabilities, as a result of the change in tax rate, was
      adjusted in the consolidated statements of operations of the Company for
      year ended December 31, 2008.





EIT
      rates applicable to the subsidiaries of the Company, except for Fujie and
      Fuyi, ranged from 0% to 25% for the year ended December 31, 2009 (2008: 0%
      to 25%; 2007: 0% to 33%). EIT for Fujie and Fuyi are calculated at 2.5% of
      revenue for the year ended December 31, 2009 (2008: 2.5% of revenue; 2007:
      3.3% of revenue) as they were classified small enterprise by the Local Tax
      Bureau in Shanghai City.





Beijing
      Sihitech was subject to the EIT rate of 15% for 2006 and
      2007.  From 2008, the applicable EIT rate was 25% pursuant to
      the New Tax Law.





Pursuant
to the approval issued by the Beijing Haidian District Local Tax Bureau,
e-Channels was qualified as high-tech company and entitled to an additional 50%
tax exemption of the applicable EIT rate of 15% to 7.5% for 2004, 2005 and 2006.
The EIT rate in 2007 was resumed to 15% after the expiration of the tax
exemption. In 2008, e-Channels was qualified as high-tech company , thus its
applicable EIT rate was 15% from 2008.





Pursuant
to the approval issued by the Local Tax Bureau in Beijing Haidian District in
2005, Beijing Software was entitled to an additional 50% tax exemption of the
applicable EIT rate of 15% to 7.5% from 2005 to 2007. In 2008, Beijing Software
was qualified as high-tech company, thus its applicable EIT rate was 15% from
2008.





The
applicable EIT rate of Shanghai Sihitech was 15% before January 1, 2008 since it
was registered in the Pudong District of Shanghai.  Pursuant to the
New Tax Law, its applicable EIT rates are 18%, 20%, 22%, 24% and 25% in 2008,
2009, 2010, 2011 and 2012 respectively.





Pursuant
to the approval issued by the Local Tax Bureau in Pudong District of Shanghai in
2006, Shanghai Software was qualified as a software development company and
entitled to a tax holiday from 2006 to 2007, and an additional 50% tax exemption
of the applicable EIT rate of 15% to 7.5% from 2008 to 2010. Pursuant to the New
Tax Law, its applicable EIT rates are 9%, 10% and 11% in 2008, 2009 and 2010
respectively.





Pursuant
to the approval issued by the Guangzhou Local Tax Bureau, Guangzhou Sihitech was
entitled to the EIT rate of 15% in 2006 and 2007. In 2008 and 2009, the
applicable EIT rate was 25% pursuant to the New Tax Law.





Pursuant
to the approval issued by the Guangzhou Local Tax Bureau, Guangzhou Yuxinyicheng
was qualified as a software development company and entitled to a tax holiday
from 2009 and 2010 and an additional 50% tax exemption of the applicable EIT
rate of 25% to 12.5% from 2011 to 2013.


F-32


6
              Income
      taxes - Continued
  (i)
              Continued
  Pursuant
to the approval issued by the Local Tax Bureau in Beijing Haidian District in
2007 and 2008, Yuxinyicheng was qualified as a high-tech company and entitled to
a tax holiday from 2007 to 2008, and an additional 50% tax exemption to the
applicable EIT rate of 15% to 7.5% from 2009 to 2011.
  Pursuant
to the approval issued by the Local Tax Bureau in Beijing Haidian District in
2005, Sunrisk was qualified as a high-tech company and entitled to a tax holiday
from 2005 to 2007. From 2008, its applicable EIT rate was 25% pursuant to the
New Tax Law.
  The
applicable EIT rate of Easycon was 15% since it was qualified as a high-tech
company in the Haidian district of Beijing since October 10, 2001. From 2008,
the applicable EIT rate was 25% pursuant to the New Tax Law.
  Pursuant
to the approval issued by the Local Tax Bureau of Chengdu Hi-Tech Development
District in 2007, Recency was qualified as a high-tech company and subject to
the applicable EIT rate of 15% in 2007. From 2008, the applicable EIT rate was
25% pursuant to the New Tax Law.
  The
applicable EIT rate of Hongzhi was 15% since it was registered in the Zhangjiang
High-Technology Zone in Shanghai. From 2008, the applicable EIT rate was 25%
pursuant to the New Tax Law.
  The
applicable EIT rate of Yuxinyicheng Information, Yuxinyicheng Software,
Guangzhou Yuxinyicheng and Xiamen Yucheng was 33% before 2008. From 2008, the
applicable EIT rate was 25% pursuant to the New Tax Law.
  F-33
  6
              Income
      taxes - Continued
  (ii)
Pre-tax income and income tax expenses are both domestic.
  The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities at December 31, 2008 and 2009 are presented
below.
  December 312008
                            
                            
                            2009
                            
                            
                            2009RMB
                            
                            
                            RMB
                            
                            
                            USDDeferred
      tax assets:Intangible
      assets
                            
                            
                            158,036
                            
                            
                            
                            202,841
                            
                            
                            
                            29,706Future
      benefit of tax losses
                            
                            
                            14,209,797
                            
                            
                            
                            22,030,262
                            
                            
                            
                            3,226,364Total
      deferred tax assets
                            
                            
                            14,367,833
                            
                            
                            
                            22,233,103
                            
                            
                            
                            3,256,070Less:
      valuation allowance
                            
                            
                            (1,383,117
                            )
                            
                            
                            (269,895
                            )
                            
                            
                            (39,526
                            )Net
      deferred tax assets
                            
                            
                            12,984,716
                            
                            
                            
                            21,963,208
                            
                            
                            
                            3,216,544Deferred
      tax liabilities:Deferred
      costs on unsigned contractsfor
      tax purposes
                            
                            
                            (980,549
                            )
                            
                            
                            (789,768
                            )
                            
                            
                            (115,663
                            )Capitalized
      internal-useand
      marketable software
                            
                            
                            (797,161
                            )
                            
                            
                            (1,108,921
                            )
                            
                            
                            (162,403
                            )Additional
      intangible assets throughacquisition
                            
                            
                            (2,582,024
                            )
                            
                            
                            (960,580
                            )
                            
                            
                            (140,678
                            )Total
      deferred tax liabilities
                            
                            
                            (4,359,734
                            )
                            
                            
                            (2,859,269
                            )
                            
                            
                            (418,744
                            )Net
      deferred tax assets
                            
                            
                            8,624,982
                            
                            
                            
                            19,103,939
                            
                            
                            
                            2,797,800
  The
following is the analysis of the deferred tax balances for financial reporting
purposes:
  December 312008
                        
                        
                        2009
                        
                        
                        2009RMB
                        
                        
                        RMB
                        
                        
                        USDDeferred
      tax assets - current
                        
                        
                        -
                        
                        
                        
                        5,735,143
                        
                        
                        
                        839,920Deferred
      tax assets - non-current
                        
                        
                        12,984,716
                        
                        
                        
                        15,926,809
                        
                        
                        
                        2,332,505Deferred
      tax liabilities - current
                        
                        
                        (980,549
                        )
                        
                        
                        (1,641,265
                        )
                        
                        
                        (240,366
                        )Deferred
      tax liabilities - non-current
                        
                        
                        (3,379,185
                        )
                        
                        
                        (916,748
                        )
                        
                        
                        (134,259
                        )8,624,982
                        
                        
                        
                        19,103,939
                        
                        
                        
                        2,797,800
  2007
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2009RMB
                          
                          
                          RMB
                          
                          
                          RMB
                          
                          
                          USDValuation
      allowance on deferred tax assetsat
      the beginning of the year
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,383,117
                          
                          
                          
                          202,560Decrease
      resulted from disposal of a subsidiary
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (1,216,979
                          )
                          
                          
                          (178,228
                          )Increase
      in valuation allowance
                          
                          
                          -
                          
                          
                          
                          1,383,117
                          
                          
                          
                          103,757
                          
                          
                          
                          15,195Total
                          
                          
                          -
                          
                          
                          
                          1,383,117
                          
                          
                          
                          269,895
                          
                          
                          
                          39,527
  F-34
  6
              Income
      taxes - Continued
  (ii)   Continued
  A
significant portion of the deferred tax assets recognized relates to net tax
loss and credit carry forwards. The Company operates through the PRC entities
and the valuation allowance is considered on each individual basis. Where no
valuation allowance was recorded, the Company expects to generate sufficient
taxable income in the future.
  The net
tax loss attributable to those PRC entities can only be carried forward for a
maximum period of five years.  The expiration period of unused tax
losses is as follows:
  December 312008
                            
                            
                            2009
                            
                            
                            2009RMB
                            
                            
                            RMB
                            
                            
                            USDYear
      ending December 31,2007
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -2008
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -2009
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -2010
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -2011
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -2012
                            
                            
                            9,891,908
                            
                            
                            
                            9,891,908
                            
                            
                            
                            1,448,6852013
                            
                            
                            42,473,273
                            
                            
                            
                            43,286,869
                            
                            
                            
                            6,339,4262014
                            
                            
                            -
                            
                            
                            
                            44,820,227
                            
                            
                            
                            6,563,989Tax losses that can
      be carried forward
      indefinitely
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -52,365,181
                            
                            
                            
                            97,999,004
                            
                            
                            
                            14,352,100
  Under the
New EIT Law and the implementation rules, profits of our PRC subsidiaries earned
on or after January 1, 2008 and distributed by our PRC subsidiaries to
Yucheng are subject to a withholding tax at a rate of 10%, unless Yucheng
will be deemed as a resident enterprise for tax purposes.  Since the
Company intends to reinvest the earnings of the PRC subsidiaries in business
expansion in mainland China, the PRC subsidiaries do not intend to declare
dividends to their immediate non-PRC established holding companies in the
foreseeable future. Accordingly, no deferred taxation on undistributed earnings
of the PRC subsidiaries has been recognized as of December 31, 2009. The
accumulated undistributed earnings of the PRC subsidiaries amounted to
approximately RMB183.1 million and RMB193.0 million as of December 31, 2009 and
2008 respectively.
  F-35
  6
              Income
      taxes - Continued
  (ii)   Continued
  On
January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes- an interpretation of FASB Statement No. 109(FIN48). This
Interpretation provides guidance for recognizing and measuring uncertain tax
positions, as defined in SFAS No. 109, Accounting for Income Taxes. FIN 48
prescribes a threshold condition that a tax position must meet for any of the
benefits of the uncertain tax position to be recognized in the financial
statements. Guidance is also provided regarding derecognition, classification
and disclosure of these uncertain tax positions. The Company classified all
interest and penalties related to tax uncertainties as income tax expense. The
Company’s liability for income taxes includes the liability for unrecognized tax
benefits, interest and penalties which relate to tax years still subject to
review by taxing authorities. Audit periods remain open for review until the
statute of limitations has passed. The completion of review or the expiration of
the statue of limitations for a given audit period could result in an adjustment
to the Company’s liability for income taxes. Any such adjustment could be
material to the Company’s results of operations for any given quarterly or
annual period based, in part, upon the results of operations for the given
period. On January 1, 2007, the Company had an uncertain tax positions arisen
from the Share Exchange Transactions. Yucheng considered that it is more likely
than not such contingent tax liabilities would not affect the Company’s
consolidated financial position and results of operations or cash flow (note
19). There are no estimated interest costs and penalties provided in the
Company’s consolidated financial statements for year ended December 31,
2009.
  Under the
New EIT Law, an enterprise established outside of the PRC with "de facto
management bodies" within the PRC is considered a resident enterprise and will
normally be subject to the enterprise income tax at the rate of 25% on its
global income. However, despite the present uncertainties resulting from the
limited PRC tax guidance on this issue, the Company does not believe that its
legal entities established outside of the PRC should be treated as residents for
the New EIT Law’s purpose.  If the PRC tax authorities subsequently
determine that Yucheng or any of the non-PRC subsidiaries should be classified
as PRC resident enterprise, then such entity's global income will be subject to
PRC income tax at a tax rate of 25%. The income generated by Yucheng’s non-PRC
established subsidiaries in 2008 was not significant to the Company and related
to a one-time hardware pass-through contract. No income was generated by
the non-PRC established subsidiaries in 2009.
  7
              Properties
      and equipment, net
  December 312008
                      
                      
                      2009
                      
                      
                      2009RMB
                      
                      
                      RMB
                      
                      
                      USDProperties
                      
                      
                      3,925,312
                      
                      
                      
                      10,769,736
                      
                      
                      
                      1,577,244Office
      equipment and furniture
                      
                      
                      24,036,930
                      
                      
                      
                      29,901,879
                      
                      
                      
                      4,379,175Machinery
                      
                      
                      39,260,392
                      
                      
                      
                      43,877,283
                      
                      
                      
                      6,425,893Motor
      vehicles
                      
                      
                      4,113,163
                      
                      
                      
                      4,289,692
                      
                      
                      
                      628,232Leasehold
      improvements
                      
                      
                      6,036,410
                      
                      
                      
                      9,032,114
                      
                      
                      
                      1,322,76677,372,207
                      
                      
                      
                      97,870,704
                      
                      
                      
                      14,333,310Accumulated
      depreciation
                      
                      
                      (19,874,809
                      )
                      
                      
                      (33,723,621
                      )
                      
                      
                      (4,938,875
                      )Properties
      and equipment, net
                      
                      
                      57,497,398
                      
                      
                      
                      64,147,083
                      
                      
                      
                      9,394,435
  F-36
  7
              Properties
      and equipment, net - Continued
  Depreciation
expense on properites and equipment were RMB4,200,931, RMB12,016,483 and
RMB16,607,137, which included amortization of properites and equipment acquired
under capital lease obligations of RMB699,755, RMB2,458,969 and RMB2,867,754 for
2007, 2008, and 2009 respectively. Gross assets remaining under capital leases
were RMB8,623,510 and RMB8,623,510 at December 31, 2008 and 2009.
Accumulated depreciation associated with capital leases were RMB3,158,724 and
RMB6,026,478 at December 31, 2008 and 2009.
  8
              Intangible
      assets, net
  Capitalized
                                                      
                                                      
                                                      Capitalized
                                                      
                                                      
                                                      CustomerPurchased
                                                      
                                                      
                                                      marketable
                                                      
                                                      
                                                      internal-use
                                                      
                                                      
                                                      relation-
                                                      
                                                      
                                                      Othersoftware
                                                      
                                                      
                                                      software
                                                      
                                                      
                                                      software
                                                      
                                                      
                                                      ships
                                                      
                                                      
                                                      technology
                                                      
                                                      
                                                      TotalBalance
      as atJanuary
      1, 2008
                                                      RMB
                                                      
                                                      5,937,516
                                                      
                                                      
                                                      
                                                      4,807,366
                                                      
                                                      
                                                      
                                                      145,176
                                                      
                                                      
                                                      
                                                      8,419,592
                                                      
                                                      
                                                      
                                                      21,898,020
                                                      
                                                      
                                                      
                                                      41,207,670Additions
                                                      
                                                      
                                                      411,800
                                                      
                                                      
                                                      
                                                      3,572,570
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      8,000,000
                                                      
                                                      
                                                      
                                                      11,984,370Elimination
      from disposalof
      subsidiary
                                                      
                                                      
                                                      (1,173,613
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (1,173,613
                                                      )Amortization
                                                      
                                                      
                                                      (1,260,918
                                                      )
                                                      
                                                      
                                                      (2,505,094
                                                      )
                                                      
                                                      
                                                      (145,176
                                                      )
                                                      
                                                      
                                                      (3,816,916
                                                      )
                                                      
                                                      
                                                      (8,262,341
                                                      )
                                                      
                                                      
                                                      (15,990,445
                                                      )Balance
      as atDecember
      31, 2008
                                                      RMB
                                                      
                                                      3,914,785
                                                      
                                                      
                                                      
                                                      5,874,842
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      4,602,676
                                                      
                                                      
                                                      
                                                      21,635,679
                                                      
                                                      
                                                      
                                                      36,027,982Additions
                                                      
                                                      
                                                      2,390,307
                                                      
                                                      
                                                      
                                                      6,333,129
                                                      
                                                      
                                                      
                                                      1,990,662
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      10,714,098Amortization
                                                      
                                                      
                                                      (1,269,894
                                                      )
                                                      
                                                      
                                                      (2,898,002
                                                      )
                                                      
                                                      
                                                      (70,951
                                                      )
                                                      
                                                      
                                                      (3,620,476
                                                      )
                                                      
                                                      
                                                      (8,634,348
                                                      )
                                                      
                                                      
                                                      (16,493,671
                                                      )Balance
      as atDecember
      31, 2009
                                                      RMB
                                                      
                                                      5,035,198
                                                      
                                                      
                                                      
                                                      9,309,969
                                                      
                                                      
                                                      
                                                      1,919,711
                                                      
                                                      
                                                      
                                                      982,200
                                                      
                                                      
                                                      
                                                      13,001,331
                                                      
                                                      
                                                      
                                                      30,248,409(note
      2(c))USD
                                                      
                                                      737,412
                                                      
                                                      
                                                      
                                                      1,363,459
                                                      
                                                      
                                                      
                                                      281,144
                                                      
                                                      
                                                      
                                                      143,845
                                                      
                                                      
                                                      
                                                      1,904,064
                                                      
                                                      
                                                      
                                                      4,429,924
  Amortization
expense was RMB12,384,557, RMB15,990,445 and RMB16,493,671 for the years ended
December 31, 2007, 2008 and 2009 respectively. Estimated annual amortization
expense for each of the next five years is as follows:
  Year
      endingDecember 31
                        
                        RMB2010
                        
                        
                        10,186,0002011
                        
                        
                        9,331,0002012
                        
                        
                        6,263,0002013
                        
                        
                        1,806,0002014
                        
                        
                        773,00028,359,000
  F-37
  9
              Goodwill
  December 312008
                            RMB
                          
                          
                          2009
                            RMB
                          
                          
                          2009
                            USDBalance
      as at January 1
                          
                          
                          169,361,506
                          
                          
                          
                          187,815,784
                          
                          
                          
                          27,505,900Additional
      considerations (Note (a))
                          
                          
                          30,763,835
                          
                          
                          
                          1,193,815
                          
                          
                          
                          174,836Acquisition
      (Note (b))
                          
                          
                          7,666,968
                          
                          
                          
                          -
                          
                          
                          
                          -Disposal
      (Note (c))
                          
                          
                          (19,976,525
                          )
                          
                          
                          -
                          
                          
                          
                          -Balance
      as at December 31
                          
                          
                          187,815,784
                          
                          
                          
                          189,009,599
                          
                          
                          
                          27,680,736
  No
impairment has been included in the above balances.
  Notes:
 (a)
              Based
      on the actual earnings of Fujie and Fuyi, an additional consideration of
      RMB1,193,815 was recognized in
2009.
  (b)
              In
      2008, Beijing Sihitech acquired further non-controlling interest of 25%
      and resulted in an addition of RMB 7,666,968 to
  goodwill.
  (c)
              During
      the year 2008, the registered capital of Sunrisk was increased to
      RMB20,000,000 from RMB1,000,000 and Yuxinyicheng’s ownership in Sunrisk
      was diluted to 51% from 100%. Goodwill for Sunrisk has been reduced by
      RMB19,976,525.
  10
              Short-term
      loan
  December 312008
                      
                      
                      2009
                      
                      
                      2009RMB
                      
                      
                      RMB
                      
                      
                      USDShort-term
      borrowing from bank
                      
                      
                      60,000,000
                      
                      
                      
                      80,000,000
                      
                      
                      
                      11,716,118
  The
short-term borrowing of RMB60,000,000 as of December 31, 2008 represented the
sum of three borrowings, comprising:
  (i)
              the
      borrowing of RMB20,000,000 effective from April 24, 2008 to April 23, 2009
      with an annual interest rate of 8.217%;
and
  (ii)
              the
      borrowing of RMB20,000,000 effective from May 23, 2008 to May 22, 2009
      with an annual interest rate of
  8.217%;  and
  F-38
  (iii)
              the
      borrowing of RMB20,000,000 effective from November 12, 2008 to November
      11, 2009 with an annual interest rate
  of  7.326%.
  The
short-term borrowing of RMB80,000,000 as of December 31, 2009 represented the
sum of three borrowings, comprising:
  (i)
              the
      borrowing of RMB50,000,000 effective from September 25, 2009 to September
      24, 2010 with an annual interest rate of 5.841%;
  and
  (ii)
              the
      borrowing of RMB20,000,000 effective from November 19, 2009 to November
      18, 2010 with an annual interest rate of
      5.841%;  and
  (iii)
              the
      borrowing of RMB10,000,000 effective from December 9, 2009 to December 8,
      2010 with an annual interest rate
  of  5.841%.
  All the
above three borrowings were guaranteed by Beijing Sihitech and Mr. Weidong Hong
without bearing guarantee fee.
  11
              Capital
      leases
  Certain
of office equipment have been acquired under capital leases. Obligations under
capital leases - non-current were as follows:
  December 312008
                              RMB
                            
                            
                            2009
                              RMB
                            
                            
                            2009
                              USDNet
      minimum lease payments due:Within
      one year
                            
                            
                            3,118,336
                            
                            
                            
                            2,373,829
                            
                            
                            
                            347,651Later
      than one year
                            
                            
                            2,694,580
                            
                            
                            
                            320,751
                            
                            
                            
                            46,974Total
      net minimum lease payments
                            
                            
                            5,812,916
                            
                            
                            
                            2,694,580
                            
                            
                            
                            394,625Less:
      Amount representing interest
                            
                            
                            (348,130
                            )
                            
                            
                            (97,548
                            )
                            
                            
                            (14,286
                            )Present
      value of net minimum lease payments2,597,032 380,339
                            
                            
                            5,464,786
                            
                            
                            
                            2,597,032
                            
                            
                            
                            380,339Less:
      current portion
                            
                            
                            (2,867,754
                            )
                            
                            
                            (2,282,497
                            )
                            
                            
                            (334,275
                            )Obligations
      under capital leases – non-current
                            
                            
                            2,597,032
                            
                            
                            
                            314,535
                            
                            
                            
                            46,064
  F-39
  12
              Other
      current liabilities
  December 312008
                        
                        
                        2009
                        
                        
                        2009RMB
                        
                        
                        RMB
                        
                        
                        USDAdvances
      from customers
                        
                        
                        12,199,004
                        
                        
                        
                        14,413,697
                        
                        
                        
                        2,110,907Taxes
      payable, excluding income tax
                        
                        
                        23,220,563
                        
                        
                        
                        14,406,450
                        
                        
                        
                        2,109,846Accrued
      expenses
                        
                        
                        3,313,148
                        
                        
                        
                        2,171,390
                        
                        
                        
                        318,003Others
                        
                        
                        14,504,381
                        
                        
                        
                        21,818,657
                        
                        
                        
                        3,195,377Total
                        
                        
                        53,237,096
                        
                        
                        
                        52,810,194
                        
                        
                        
                        7,734,133
  13
              Non-controlling
      interest
  December 312008
                        
                        
                        2009
                        
                        
                        2009RMB
                        
                        
                        RMB
                        
                        
                        USDBalance
      as of January 1
                        
                        
                        5,199,312
                        
                        
                        
                        12,023,643
                        
                        
                        
                        1,760,880Addition
      for the year
                        
                        
                        11,770,462
                        
                        
                        
                        -
                        
                        
                        
                        -Share
      of loss for the year
                        
                        
                        (2,710,968
                        )
                        
                        
                        (3,715,244
                        )
                        
                        
                        (544,103
                        )Decrease
      on disposal of a subsidiary
                        
                        
                        (2,235,163
                        )
                        
                        
                        -
                        
                        
                        
                        -Decrease
      on additional investment in non-controlling interest of a
      subsidiary
                        
                        
                        -
                        
                        
                        
                        (438,838
                        )
                        
                        
                        (64,268
                        )Balance
      as of December 31
                        
                        
                        12,023,643
                        
                        
                        
                        7,869,561
                        
                        
                        
                        1,152,509
  Non-controlling
interests as of December 31, 2008 represented the minority shareholders’ equity
interests in Yuxinyicheng Information, Hongzhi and Sunrisk.
  Non-controlling
interest as of December 31, 2009 represented the minority shareholder’s equity
interest in Sunrisk.
  14
              Reserves
  During
the three years ended December 31, 2009, the Company has followed the PRC
Company Law to make appropriation of its profit to the statutory surplus
reserve.
  Statutory
surplus reserve
  In
accordance with PRC Company Law, the Company is required to appropriate at least
10% of the profit arrived at for each year to the statutory surplus
reserve.  Appropriation to the statutory surplus reserve by the
Company is based on profit arrived at under PRC accounting standards for
business enterprises for each year.
  The
profit arrived at must be set off against any accumulated losses sustained by
the Company in prior years, before allocation is made to the statutory surplus
reserve.  Appropriation to the statutory surplus reserve must be made
before distribution of dividends to owners.  The appropriation is
required until the statutory surplus reserve reaches 50% of the registered
capital. This statutory surplus reserve is not distributable in the form of cash
dividends but only on liquidation. It can be used to make good of previous
losses, if any, and may be utilized for business expansion or converted into
capital by increasing registered capital to existing equity owners in proportion
to their equity holding, provided that remaining reserve balance after such
conversion is not less than 25% of the registered capital.
  F-40
  15
              Accumulated
      other comprehensive income (loss)
  As of
December 31, 2008 and 2009, the only component of accumulated other
comprehensive income (loss) was translation reserve.
  16
              Revenues
  2007
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2009Revenues
                            
                            RMB
                            
                            
                            RMB
                            
                            
                            RMB
                            
                            
                            USDSoftware
      & SolutionsChannel
      Solutions
                            
                            
                            50,050,552
                            
                            
                            
                            99,207,955
                            
                            
                            
                            133,683,101
                            
                            
                            
                            19,578,088Management
      Solutions
                            
                            
                            102,594,941
                            
                            
                            
                            96,092,473
                            
                            
                            
                            72,395,869
                            
                            
                            
                            10,602,482Business
      Solutions
                            
                            
                            45,814,458
                            
                            
                            
                            74,059,990
                            
                            
                            
                            80,813,286
                            
                            
                            
                            11,835,226Platform
      & Maintenance ServicesPlatform
      services
                            
                            
                            204,947,047
                            
                            
                            
                            339,773,531
                            
                            
                            
                            12,575,504
                            
                            
                            
                            1,841,701Maintenance
      & Ancillary Services
                            
                            
                            36,654,748
                            
                            
                            
                            61,251,269
                            
                            
                            
                            62,251,487
                            
                            
                            
                            9,116,823POS
                            
                            
                            3,851,643
                            
                            
                            
                            15,415,803
                            
                            
                            
                            27,355,261
                            
                            
                            
                            4,006,218Total
      revenues
                            
                            
                            443,913,389
                            
                            
                            
                            685,801,021
                            
                            
                            
                            389,074,508
                            
                            
                            
                            56,980,538Business
      taxes
                            
                            
                            (8,394,547
                            )
                            
                            
                            (8,982,017
                            )
                            
                            
                            (8,710,040
                            )
                            
                            
                            (1,275,598
                            )Net
      revenues
                            
                            
                            435,518,842
                            
                            
                            
                            676,819,004
                            
                            
                            
                            380,364,468
                            
                            
                            
                            55,704,940
  During
the year ended December 31, 2008, the Company realigned its revenue streams
based on different types of services offered to customers, namely “Software
& Solutions”, “Platform & Maintenance Services” and “POS”. As required
by ASC Topic 280, the prior years’ information has been reclassified to conform
with the current year’s presentation.
  17
              General
      and administrative expenses
  General
and administrative expenses are shown net of the following credits:
  2007
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2009RMB
                          
                          
                          RMB
                          
                          
                          RMB
                          
                          
                          USDValue-added
      tax refund for softwareproducts
      sold
                          
                          
                          2,554,227
                          
                          
                          
                          4,317,995
                          
                          
                          
                          3,920,346
                          
                          
                          
                          574,140Technology
      subsidy
                          
                          
                          3,302,741
                          
                          
                          
                          1,313,732
                          
                          
                          
                          395,000
                          
                          
                          
                          57,849Business
      tax and surcharges refund
                          
                          
                          1,459,746
                          
                          
                          
                          -
                          
                          
                          
                          59,555
                          
                          
                          
                          8,722Other
                          
                          
                          -
                          
                          
                          
                          530,777
                          
                          
                          
                          30,427
                          
                          
                          
                          4,456Total
                          
                          
                          7,316,714
                          
                          
                          
                          6,162,504
                          
                          
                          
                          4,405,328
                          
                          
                          
                          645,167
  Some of
the subsidiaries of the Company were granted subsidies by the local government
to encourage development of high-tech enterprises.  There were no
performance obligations related with such subsidies.
  F-41
  18
              Earnings
      per share
  The
following table sets forth the computation of basic and diluted net earnings per
share for the years indicated:
  2007
                                
                                
                                2008
                                
                                
                                2009
                                
                                
                                2009RMB
                                
                                
                                RMB
                                
                                
                                RMB
                                
                                
                                USDNet
      income (numerator)-
      basic and diluted
                                
                                
                                66,714,428
                                
                                
                                
                                80,995,184
                                
                                
                                
                                (4,199,598
                                )
                                
                                
                                (615,038
                                )Shares
      (denominator):Weighted
      average ordinary shares outstanding used in computing basic net earnings
      per share
                                
                                
                                13,144,681
                                
                                
                                
                                17,566,898
                                
                                
                                
                                18,541,289
                                
                                
                                
                                18,541,289Incremental
      weighted averagecommon
      shares from assumed exercise of Warrants (note 20)
                                
                                
                                1,191,573
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -common
      shares from assumed exercise of  UPOs (note 20)
                                
                                
                                81,111
                                
                                
                                
                                172,122
                                
                                
                                
                                -
                                
                                
                                
                                -contingent
      considerations in relation to Share Exchange transaction (note
      1)
                                
                                
                                952,832
                                
                                
                                
                                952,832
                                
                                
                                
                                -
                                
                                
                                
                                -Weighted
      average common share outstanding used in computing diluted net earnings
      per share
                                
                                
                                15,370,197
                                
                                
                                
                                18,691,852
                                
                                
                                
                                N/A
                                
                                
                                
                                N/ANet
      earnings (loss) per share - basic
                                
                                
                                5.08
                                
                                
                                
                                4.61
                                
                                
                                
                                (0.23
                                )
                                
                                
                                (0.03
                                )Net
      earnings (loss) per share - diluted
                                
                                
                                4.34
                                
                                
                                
                                4.33
                                
                                
                                
                                N/A
                                
                                
                                
                                N/A
  For the
years prior to the date of the Share Exchange Transactions, the number of shares
included in the net earnings per common share above has been retrospectively
restated to reflect the number of shares to which Sihitech BVI Shareholders and
their designee are entitled at the date of the Share Exchange
Transaction.
  As
disclosed in note 1, the Share Exchange Transactions during 2006 provides for
potential purchase price reduction by return and cancellation of an aggregate of
773,045 common shares of Yucheng, the return and cancellation of which is
contingent upon failure of the attainment of certain amounts of earnings. As of
December 31, 2009, no adjustment was made to the number of shares, to which
Sihitech BVI Shareholders and their designee are entitled.  The date
of the Share Exchange Transaction is made in calculating the earnings per share
for each of the three years ended December 31, 2009.
  No
diluted loss per share for the year December 31, 2009 has been presented as the
effect of the assumed exercise of UPOs is anti-dilutive.
  F-42
  19
              Commitments
      and contingencies
  Other
than the capital leases disclosed in note 11, the Company also leases office
space under operating leases. The leases typically run for one to three years
with an option to renew the lease annually thereafter.  Lease payments
are increased annually to reflect market rentals.  None of these
leases includes contingent rentals.
  Non-cancellable
operating lease rentals at December 31, 2009 are payable as
follows:
  2008
                        
                        
                        2009
                        
                        
                        2009RMB
                        
                        
                        RMB
                        
                        
                        USDPayable:Within
      1 year
                        
                        
                        8,439,208
                        
                        
                        
                        8,204,305
                        
                        
                        
                        1,201,532Within
      1-2 years
                        
                        
                        5,847,273
                        
                        
                        
                        3,276,727
                        
                        
                        
                        479,882Within
      2-3 years
                        
                        
                        4,799,852
                        
                        
                        
                        152,408
                        
                        
                        
                        22,32019,086,333
                        
                        
                        
                        11,633,440
                        
                        
                        
                        1,703,734
  The
Company recognized RMB5,277,626, RMB7,041,392 and RMB9,482,032, of rental
expense for the three years ended December 31, 2009, respectively.
  In 2007,
the Company acquired 5 entities. As of December 31, 2009, the maximum
contractual obligation for the consideration in relations to the acquisitions is
RMB120,367.
  Yucheng
has assessed the contingent tax liabilities that may arise from the Share
Exchange Transactions and consider such contingent tax liabilities to be remote.
As of December 31, 2009, such contingent tax liabilities are reasonably possible
to be approximately USD175,000 based on the information currently
available.  If these contingent tax liabilities are undertaken, an
amount of USD175,000 would will be recorded as income tax payable and be charged
to equity because the assumption of such liabilities by Yucheng is part of the
recapitalisation in connection with the Stock Exchange
Transactions.  However, Yucheng does not expect to incur any tax
liabilities in connection to our Share Exchange Transactions.
  On August
21, 2007, a suit was filed in San Diego Superior Court (the “Court”) against
China Unistone Acquisition Corporation, Beijing Sihitech and its non-executive
chairman; and on February 22, 2008 the Company was added as a Doe defendant in
this lawsuit. The plaintiff alleged China Unistone Acquisition Corporation
breached an oral contract regarding a finder’s fee and seeks general damages,
USD109,275 cash, the issuance of 150,179 shares of the Company and the payment
of 4% of any future compensation which Beijing Sihitech and its original
shareholders are entitled to receive as a result of the Company’s acquisition of
Beijing Sihitech. On August 22, 2008, the Court dismissed the case. On September
9, 2008, the Company received a notice of appeal from the attorneys of the
plaintiff, who appealed to the Court from that certain Minute Order entered on
August 22, 2008 and from those certain rulings by the Court. On 23 November
2009, the court of appeal issued its order denying the appeal and affirming the
dismissal. The decision of the court of appeal is final, and the plaintiff has
no right to bring his claim against the Company in California. Accordingly, no
contingent loss is required to be recorded.
  F-43
  19
              Commitments
      and contingencies - Continued
  The
Company provides indemnifications of varying scope and size to certain customers
against claims of intellectual property infringement made by third parties
arising from the use of the products.  Due to the nature of the
indemnification provided, the Company cannot estimate the fair value, nor
determine the total nominal amount of the indemnification.  The
Company evaluates estimated losses for such indemnifications under SFAS No. 5,
Accounting for
Contingencies, as interpreted by FIN 45, Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others.  The Company considers such factors as the
degree of probability of an unfavourable outcome and the ability to make a
reasonable estimate of the amount of loss.  To date, the Company has
not encountered material costs as a result of such obligations and have not
accrued any liabilities related to such indemnifications in the financial
statements.
  The
product warranty accrual reflects management’s best estimate of probable
liability under its product warranties.  Management determines the
warranty accrual based on known product failures (if any), historical
experience, and other currently available evidence.  As at December
31, 2008 and 2009, the warranty accrual was nil.  There has been no
significant activity impacting the results of operations for any period
presented.
  20
              Warrants
      and unit purchase options
  As part
of the Share Exchange Transaction, Yucheng assumed 4,200,000 shares of common
stock, 6,900,000 redeemable common stock purchase warrants (“Warrants”) and
300,000 unit purchase options (“UPOs”) issued by CUAC.  There was no
remeasurement required for these assumed Warrants and UPOs because such
assumption is part of the recapitalisation in connection with the Stock Exchange
Transactions set forth in note 1.
  Each
Warrant entitled the holder to purchase from Yucheng one share of common stock
at an exercise price of USD5.00 commencing on the date of the Stock Exchange
Transactions and expired on November 17, 2009 (being five years after the date
of the prospectus of CUAC). The Warrants were redeemable at a price of USD0.01
per Warrant upon 30 days’ notice after the Warrants become exercisable, only in
the event that the last sale price of the common stock is at least USD8.50 per
share for any 20 trading days within 30 trading day period ending on the third
day prior to the date on which notice of redemption was given. 6,866,486
warrants were exercised before December 31, 2007, and 33,514 warrants were
redeemed.
  UPOs were
granted and recorded in connection were exercisable with the initial public
offering of CUAC in 2004 to the underwriters for nominal consideration. UPOs
were exercisable for cash or on a cashless basis at the holders’ option, such
that the holders may use the appreciated value of the UPOs to exercise the
option with the payment of any cash.  UPOs were convertible into
shares and Warrants at the discretion of Yucheng and the UPOs holders. The
150,000 UPOs were converted to 216,047 common shares before December 31, 2007.
The remaining 150,000 UPOs not exercised expired on November 18,
2009.
  F-44
  21
              Acquisition
      of subsidiaries
  Acquisition of
e-Channels
 On
November 24, 2006, Yucheng acquired all of the outstanding shares of e-Channels
BVI in exchange for an aggregate consideration of approximately RMB81.5 million,
which was satisfied by cash consideration of RMB9,902,287 and 1,573,836 shares
of common stock of Yucheng with a fair value of approximately RMB71,550,128. The
fair value of Yucheng’s shares was based upon the actual number of shares issued
to the e-Channels BVI shareholders using the average closing trading price of
Yucheng’s common stock on the Over-the-Counter Bulletin Board for the period
from 2 days before and after the announcement date of the
acquisition.
  Under the
Share Exchange Transaction, Yucheng is obligated to make additional payment in
relation to acquisition of e-Channels if the contingent conditions described in
note 1 are achieved. During the years ended December 31, 2007 and 2008, the
contingency became certain and Yucheng was obligated to make an additional
payment of RMB28,271,879 of which RMB11,158,941 was settled by cash and the
remaining amount, equal to RMB17,112,938 to be settled with cash and common
stock was accrued and included in the outstanding payment in relation to
business acquisitions under current liabilities as of December 31, 2007; of the
consideration of RMB17,112,938, RMB2,422,909 was paid in 2008, RMB1,892,970
remains accrued and 281,488 common shares, amounting to RMB12,797,059, were
issued to e-Channels BVI shareholders in 2008. The balance of consideration
amounting to RMB19,310,524 was settled by cash of RMB8,117,439
and  281,488 common shares, amounting to RMB11,193,085. An additional
payment of RMB17,417,554 was accrued and included in the outstanding payment in
relation to business acquisitions under current liabilities as of December 31,
2008.
  Additional
cash purchase consideration
  This
acquisition was recorded by allocating the cost of the assets acquired,
including intangible assets and liabilities assumed, based on their estimated
fair values at the acquisition date. The excess of the cost of the acquisition
over the net of amounts assigned to the fair value of the assets acquired and
the liabilities assumed is recorded as goodwill. The valuation of assets and
liabilities has been determined and the purchase price has been allocated as
follows:
  RMBPlant
      and equipment
                      
                      
                      1,153,323Intangible
      assets
                      
                      
                      32,178,383Goodwill
                      
                      
                      82,963,040Inventories
                      
                      
                      1,085,475Trade
      receivables
                      
                      
                      13,574,386Cost
      and estimated earnings in excess of billings on uncompleted
      Contracts
                      
                      
                      10,302,776Pre-contract
      costs
                      
                      
                      77,815Other
      current assets
                      
                      
                      4,033,438Cash
      and bank balances
                      
                      
                      2,109,202Short
      term loan
                      
                      
                      (2,000,000
                      )Trade
      payables
                      
                      
                      (1,864,975
                      )Billings
      in excess of costs and estimated earnings on uncompleted
      Contracts
                      
                      
                      (1,250
                      )Other
      current liabilities
                      
                      
                      (859,087
                      )Income
      taxes payables
                      
                      
                      (800,804
                      )Dividend
      payables to subsidiary ex-owners
                      
                      
                      (10,000,000
                      )Deferred
      taxes
                      
                      
                      (4,809,874
                      )Long-term
      liability
                      
                      
                      -Total
      purchase price
                      
                      
                      127,141,848
  F-45
  21
              Acquisition
      of subsidiaries - Continued
  Acquisition of e-Channels –
Continued
  Additional
cash purchase consideration - Continued
  RMBSatisfied
      by:Cash
      paid
                    
                    
                    31,601,576Other
      payables
                    
                    
                    -Common
      stock
                    
                    
                    95,540,272127,141,848
 Analysis
of net outflow of cash and cash equivalents in respect of the purchase of the
subsidiary:
 RMBCash
      consideration
                          
                          
                          (31,601,576
                          )Cash
      and bank balances acquired in the acquisition
                          
                          
                          2,109,202Net
      cash consideration
                          
                          
                          (29,492,374
                          )Less:
      cash paid during the year ended December 31, 2006, 2007 and
      2008
                          
                          
                          21,374,935Net
      cash paid during the year ended December 31, 2009
                          
                          
                          (8,117,439
                          )
  The
goodwill from the acquisition of e-Channels of RMB82,963,040 is expected to be
non-deductible for tax purposes.
  Included
as intangible assets listed in the above table as of the acquisition date are
the following components of intangible assets based on management best
estimate:
  Amount
                    
                    Estimated
                      useful lifeRMBPurchased
      software
                    
                    
                    185,243
                    
                    5
      yearsCapitalized
      marketable software
                    
                    
                    2,029,692
                    
                    3
      yearsCapitalized
      internal-use software
                    
                    
                    134,214
                    
                    3
      yearsCustomer
      relationships
                    
                    
                    9,682,788
                    
                    3
      yearsOther
      technology
                    
                    
                    20,146,446
                    
                    3-5
      years32,178,383
 
 Acquisition of Sunrisk,
Easycon, Recency, Fujie and Fuyi
  In 2007,
the Company acquired five entities for an aggregate consideration of
RMB106,740,000, of which RMB68,500,000 was settled in cash and RMB38,240,000 was
accrued and included in the outstanding payment in relation to business
acquisitions under current liabilities in 2007. Additional consideration was to
be paid in 2008 contingent on achieving specified earnings levels in 2008. As of
December 31, 2007, the contingency was not achieved and accordingly no
adjustment for the purchase price in respect of the further consideration of
RMB6,210,000 was recorded in the consolidated financial statements for the year
2007. Additional details of the acquisitions are stated in the following
paragraphs.
  On
January 18, 2007, Yuxinyicheng acquired 100% equity interest of Sunrisk.
According to the acquisition agreement, the total consideration would be
RMB45,000,000. As of December 31, 2007, the targets were achieved, total
consideration of RMB45,000,000 was earned, of which RMB34,500,000 was paid and
the remaining RMB10,500,000 was accrued and included in the outstanding payment
in relation to business acquisitions under current liabilities in 2007. The
balance of the purchase price amounting to  RMB10,500,000 was paid in
2008.
  F-46
  21
              Acquisition
      of subsidiaries - Continued
  Acquisition of Sunrisk,
Easycon, Recency, Fujie and Fuyi – Continued
  On May
14, 2007, Beijing Sihitech acquired a 75% equity interest of Easycon. According
to the acquisition agreement the total consideration would be RMB22,250,000, of
which RMB17,250,000 was paid in 2007, and the remaining contingent payment of
RMB5,000,000 was accrued and included in the outstanding payment in relation to
business acquisitions under current liabilities in 2007. The balance of the
purchase price, equal to RMB5,000,000, was paid in 2008. On January 22, 2008,
Beijing Sihitech acquired a further 25% equity interest of Easycon from its
minority shareholders at an aggregate consideration of RMB7,200,000, which was
fully paid during 2008.
  On August
20, 2009, the Company issued 26,247 common shares to the ex-owners of Easycon as
compensation expenses for the services provided by the ex-owners.
  On June
26, 2007, Yuxinyicheng acquired 100% equity interest of Recency. According to
the acquisition agreement, the total consideration would be RMB25,000,000.
According to the amendment acquisition agreement, the total consideration was
changed to RMB30,000,000. During 2007, RMB14,750,000 was paid and the remaining
RMB10,250,000 was accrued and included in the outstanding payment in relation to
business acquisitions under current liabilities in 2007. According to the
amendment acquisition agreement, the balance of the purchase price, equal to
RMB15,250,000, was paid in 2008. In addition, as Recency’s 2007 annual audited
revenue exceeded the expected target of RMB30,000,000, additional consideration
of RMB2,235,883 was paid in 2008 based on the acquisition
agreement.
  On
October 31, 2007, Yuxinyicheng acquired 100% of interests of Fujie and Fuyi.
According to the acquisition agreement, the total consideration would be
RMB14,490,000 with a maximum further consideration of RMB6,210,000 contingent on
the audited net income of the two companies for 2008. If the audited net income
of the two companies for 2008 is not less than RMB5,200,000, a further
consideration of RMB6,210,000 would be paid. RMB2,000,000 was paid during 2007
and RMB12,490,000 was accrued and included in the outstanding payment in
relation to business acquisitions under current liabilities in 2007. The
remaining contingent payment of RMB6,210,000 in relation to 2008 specified
earnings levels was not accrued or recorded as the Company did not consider the
above contingency to be probable and accordingly.
  Based on
the estimated level of earnings of Fujie and Fuyi attained in 2008,
consideration of RMB15,075,600 was paid in 2008. RMB3,533,749 of consideration
has been accrued as of December 31, 2008. Based on their actual earnings in
2008, an additional consideration of RMB1,193,815 was accrued in 2009,
RMB3,000,000 of which has been paid and the remaining balance of RMB1,727,563
has been recorded in the outstanding payment in relation to business acquisition
under current liabilities as of December 31, 2009.
  The
management believe that the above five acquisitions broaden Yucheng’s existing
IT solution and service offerings and give Yucheng a platform to serve small to
medium sized banks. All the purchase price amounts were identified based on the
market and negotiation.
  Additional
cash purchase consideration
  These
acquisitions were recorded by allocating the cost of acquisitions to the assets
acquired, including intangible assets and liabilities assumed, based on their
estimated fair values at the acquisition date. The excess of the cost of the
acquisitions over the net of amounts assigned to the fair value of the assets
acquired and the liabilities assumed is recorded as goodwill. The valuation of
assets and liabilities has been determined and the purchase price has been
allocated as follows:
  F-47
  21
              Acquisition
      of subsidiaries - Continued
  Acquisition of Sunrisk,
Easycon, Recency, Fujie and Fuyi – Continued
  Additional
cash purchase consideration - Continued
  RMBPlant
      and equipment
                      
                      
                      2,296,850Intangible
      assets
                      
                      
                      4,911,000Goodwill
                      
                      
                      126,023,083Trade
      receivables
                      
                      
                      16,222,361Pre-contract
      costs
                      
                      
                      5,243,183Other
      current assets
                      
                      
                      11,469,185Cash
      and bank balances
                      
                      
                      3,097,045Trade
      payables
                      
                      
                      (5,211,542
                      )Other
      current liabilities
                      
                      
                      (37,492,048
                      )Income
      taxes payables
                      
                      
                      (74,253
                      )Long-term
      liability
                      
                      
                      (770,000
                      )Deferred
      taxes
                      
                      
                      (384,999
                      )Non-controlling
      interests
                      
                      
                      3,159,181Total
      purchase price
                      
                      
                      128,489,046Satisfied
      by:Cash
                      
                      
                      126,761,483Other
      payables
                      
                      
                      1,727,563128,489,046
 Analysis
of net outflow of cash and cash equivalents in respect of the purchase of the
subsidiary:
 RMBCash
      consideration
                      
                      
                      (126,761,483
                      )Cash
      and bank balances acquired in the acquisition
                      
                      
                      3,097,045Net
      cash consideration
                      
                      
                      (123,664,438
                      )Less:
      cash paid during the year ended December 31, 2006, 2007 and
      2008
                      
                      
                      120,664,438Net
      cash paid during the year ended December 31, 2009
                      
                      
                      (3,000,000
                      )
  The
goodwill from the acquisition of Sunrisk, Easycon, Recency, Fujie and Fuyi of
RMB126,023,083 is expected to be non-deductible for tax purposes.
  Included
as intangible assets listed in the above table as of the acquisition date are
the following components of intangible assets based on management best
estimate:
  Amount
                    
                    Estimated
                      useful lifeRMBCustomer
      relationships
                    
                    
                    1,964,400
                    
                    5
      yearsOther
      technology
                    
                    
                    2,946,600
                    
                    5
      years4,911,000
  F-48
  21
              Acquisition
      of subsidiaries - Continued
  Pro
Forma Results
  The
following unaudited pro forma financial information presents the combined
results of the operations of Sihitech, e-Channels and all companies acquired in
2007 as if the acquisitions had occurred as of January 1, 2006. The unaudited
pro forma information is not intended to represent or be indicative of the
Company’s consolidated results of operations or financial condition that would
have been reported had the acquisition been completed as of the beginning of the
periods presented and should not be taken as indicative of the Company’s future
consolidated results of operations or financial condition.
  2006
                                                
                                                
                                                2007
                                                
                                                
                                                2007RMB
                                                
                                                
                                                RMB
                                                
                                                
                                                USDRevenues:Software
      & Solutions
                                                
                                                
                                                177,725,847
                                                
                                                
                                                
                                                211,343,087
                                                
                                                
                                                
                                                28,932,876Platform
      & Maintenance Services
                                                
                                                
                                                215,273,111
                                                
                                                
                                                
                                                251,806,813
                                                
                                                
                                                
                                                34,472,362POS
                                                
                                                
                                                -
                                                
                                                
                                                
                                                3,643,916
                                                
                                                
                                                
                                                498,852Total
      revenues
                                                
                                                
                                                392,998,958
                                                
                                                
                                                
                                                466,793,816
                                                
                                                
                                                
                                                63,904,090Software
      & Solutions
                                                
                                                
                                                (77,245,974
                                                )
                                                
                                                
                                                (94,831,324
                                                )
                                                
                                                
                                                (12,982,412
                                                )Platform
      & Maintenance Services
                                                
                                                
                                                (183,077,482
                                                )
                                                
                                                
                                                (195,949,155
                                                )
                                                
                                                
                                                (26,825,446
                                                )POS
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (1,088,024
                                                )
                                                
                                                
                                                (148,950
                                                )Total
      cost of revenues
                                                
                                                
                                                (260,323,456
                                                )
                                                
                                                
                                                (291,868,503
                                                )
                                                
                                                
                                                (39,956,808
                                                )Gross
      profit
                                                
                                                
                                                132,675,502
                                                
                                                
                                                
                                                174,925,313
                                                
                                                
                                                
                                                23,947,282Operating
      incomes (expenses):Research
      and development expenses
                                                
                                                
                                                (3,764,931
                                                )
                                                
                                                
                                                (8,369,567
                                                )
                                                
                                                
                                                (1,145,794
                                                )Selling
      and marketing expenses
                                                
                                                
                                                (28,459,647
                                                )
                                                
                                                
                                                (35,719,639
                                                )
                                                
                                                
                                                (4,890,020
                                                )General
      and administrative expenses
                                                
                                                
                                                (43,555,893
                                                )
                                                
                                                
                                                (55,452,862
                                                )
                                                
                                                
                                                (7,591,499
                                                )Total
      operating expenses
                                                
                                                
                                                (75,780,471
                                                )
                                                
                                                
                                                (99,542,068
                                                )
                                                
                                                
                                                (13,627,313
                                                )Other
      income (expenses):Interest
      income
                                                
                                                
                                                169,082
                                                
                                                
                                                
                                                1,833,507
                                                
                                                
                                                
                                                251,007Interest
      expense
                                                
                                                
                                                (1,624,712
                                                )
                                                
                                                
                                                (2,452,510
                                                )
                                                
                                                
                                                (335,749
                                                )Income
      from short-term investment
                                                
                                                
                                                -
                                                
                                                
                                                
                                                3,494,446
                                                
                                                
                                                
                                                478,390Loss
      from equity method investees
                                                
                                                
                                                (134,986
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Other
      income (expense), net
                                                
                                                
                                                48,493
                                                
                                                
                                                
                                                (474,155
                                                )
                                                
                                                
                                                (64,912
                                                )Income
      before income taxesand
      non-controlling interests
                                                
                                                
                                                55,352,908
                                                
                                                
                                                
                                                77,784,533
                                                
                                                
                                                
                                                10,648,705Income
      tax expense
                                                
                                                
                                                (3,982,389
                                                )
                                                
                                                
                                                (5,833,532
                                                )
                                                
                                                
                                                (798,611
                                                )Income
      before non-controlling interests
                                                
                                                
                                                51,370,519
                                                
                                                
                                                
                                                71,951,001
                                                
                                                
                                                
                                                9,850,094Non-controlling
      interests
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (1,813,141
                                                )
                                                
                                                
                                                (248,219
                                                )Net
      income
                                                
                                                
                                                51,370,519
                                                
                                                
                                                
                                                70,137,860
                                                
                                                
                                                
                                                9,601,875Earnings
      Per Share–
      Basic
                                                
                                                
                                                6.33
                                                
                                                
                                                
                                                5.34
                                                
                                                
                                                
                                                0.73–
      Diluted
                                                
                                                
                                                4.99
                                                
                                                
                                                
                                                4.56
                                                
                                                
                                                
                                                0.62Weighted
      average common shares outstanding–
      basic
                                                
                                                
                                                8,118,335
                                                
                                                
                                                
                                                13,144,681
                                                
                                                
                                                
                                                13,144,681–diluted
                                                
                                                
                                                10,292,308
                                                
                                                
                                                
                                                15,370,197
                                                
                                                
                                                
                                                15,370,197
  F-49
  22
              Disposal
      of subsidiaries
  On May 8,
2006, Beijing Sihitech disposed of its entire interest in Sihitech Consulting.
The results, assets and liabilities of Sihitech Consulting had been excluded
from the consolidated financial statements since the effective date of the
disposal. The disposal proceeds and preliminary fair value of the disposed
assets were not material to the consolidated financial statements.
  On
December 20, 2008, Yuxinyicheng disposed of its entire interest in Hongzhi at a
consideration of RMB3,600,000. The consideration has been fully settled during
2009. The entire assets and liabilities and results of Hongzhi had been excluded
from the consolidated financial statements since the effective date of the
disposal.
  On August
30, 2009, Yuxinyicheng disposed of its entire interest in Guangzhou Sihitech at
a consideration appropriate the net asset value of Guanzhou Sihitech as of the
date of disposal.
  23
              Significant
      related party transactions
  (a)
              Identity
      of related parties
  Related
parties identified for the years ended December 31, 2007, 2008, and 2009 are
summarized as follows:
  Relationship
      with
              
              Shareholding in Yucheng or shareholding
                being
      held by the Companythe
      Company
              
              for
      2007
              
              
              for
      2008
              
              
              for
      2009Mr.
      Weidong Hong
              
              Shareholder
      and CEO
              
              
              13.56
              %
              
              
              15.10
              %
              
              
              16.47
              %Mr.
      Shuo Zeng
              
              Shareholder
      and COO
              
              
              4.91
              %
              
              
              4.65
              %
              
              
              5.19
              %Beijing
      Hengli Plastic Machine Co., Ltd.
              
              Investment
      under equity method
              
              
              50
              %
              
              
              0
              %
              
              
              0
              %Chengdu
      Elegon  Infotech  Limited (“Elegon”)
              
              Investment
      under equity method
              
              
              0
              %
              
              
              49
              %
              
              
              0
              %Sihitech
      (HK) Co., Ltd.
              
              Controlled
      by Mr. Weidong Hong
              
              
              N/A
              
              
              
              N/A
              
              
              
              N/AHainan
      Baodaotong Technologies Limited (“Baodaotong”)
              
              Investment
      under equity method
              
              
              0
              %
              
              
              0
              %
              
              
              15
              %Yucheng
      Sinowise Consultancy Services Limited
              
              Investment
      under equity method
              
              
              0
              %
              
              
              0
              %
              
              
              40
              %
 
 Note 1:
                Before
      the Share Exchange Transaction was completed on November 24, 2006, Mr.
      Weidong Hong held 42% of
Sihitech.
 Note 2:
                Before
      the Share Exchange Transaction was completed on November 24, 2006, Mr.
      Shuo Zeng held 43% of
e-Channels.
  F-50
  23
              Significant
      related party transactions -
Continued
  (b)
              Related
      party transactions
  The
significant related party transactions of the Company are summarised as
follows:
  2007
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2009RMB
                    
                    
                    RMB
                    
                    
                    RMB
                    
                    
                    USDAdvances
      to investments under equity method-Hengli
                    
                    
                    69,440
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    --Elegon
                    
                    
                    -
                    
                    
                    
                    1,828,333
                    
                    
                    
                    -
                    
                    
                    
                    --Yuxing
      Huazhi
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,915,718
                    
                    
                    
                    280,560-Hainan
      Baodaotong
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    20,914,872
                    
                    
                    
                    3,063,014Collection
      of advances to investments under equity method-Hengli
                    
                    
                    -
                    
                    
                    
                    (728,942
                    )
                    
                    
                    -
                    
                    
                    
                    --Sanjian
                    
                    
                    -
                    
                    
                    
                    (937,457
                    )
                    
                    
                    -
                    
                    
                    
                    --Elegon
                    
                    
                    -
                    
                    
                    
                    (1,828,190
                    )
                    
                    
                    -
                    
                    
                    
                    --
      Yuxing Huazhi
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (625,391
                    )
                    
                    
                    (91,589
                    )-Hainan
      Baodaotong
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (20,597,593
                    )
                    
                    
                    (3,016,548
                    )Advances
      to shareholders
                    
                    
                    53,804
                    
                    
                    
                    173,022
                    
                    
                    
                    116,160
                    
                    
                    
                    17,012Collection
      of advances to shareholders
                    
                    
                    (333,063
                    )
                    
                    
                    (173,022
                    )
                    
                    
                    (116,160
                    )
                    
                    
                    (17,012
                    )Sales
      to Sihitech (HK) Co., Ltd.
                    
                    
                    -
                    
                    
                    
                    57,296,777
                    
                    
                    
                    -
                    
                    
                    
                    -Collection
      from Sihitech (HK) Co., Ltd
                    
                    
                    -
                    
                    
                    
                    (55,728,672
                    )
                    
                    
                    (1,568,105
                    )
                    
                    
                    (229,651
                    )Sales
      to Hainan Baodaotong
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    6,770,864
                    
                    
                    
                    991,603Collection
      from Hainan Baodaotong
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    6,680,579
                    
                    
                    
                    978,381
  The
transactions do not have fixed terms.  Balances relating to the above
transactions are non-interest bearing and payable on demand. Other than this
matter, the Board of Directors of the Company is of the opinion that the above
transactions were in the normal course of business and on normal commercial
terms.
  (c)
              Related
      party balances
  The
balances of related party receivables at the year-end are summarized as
follows:
  December 312008
                        
                        
                        2009
                        
                        
                        2009RMB
                        
                        
                        RMB
                        
                        
                        USDDue
      from an investment under equity method
                        
                        
                        143
                        
                        
                        
                        1,697,890
                        
                        
                        
                        248,659Due
      from Sihitech (HK) Co., Ltd.
                        
                        
                        1,568,105
                        
                        
                        
                        -
                        
                        
                        
                        -1,568,248
                        
                        
                        
                        1,697,890
                        
                        
                        
                        248,659
  F-51
  24
              Share
      option plan
  On
November 24, 2006, Yucheng adopted the 2006 performance equity plan (the “Plan”)
which allows Yucheng to offer a variety of incentive awards to employees.
Options to purchase 1,500,000 share of common stock of Yucheng are authorized
under the Plan.
  As of
December 31, 2009, no options under the Plan have been granted.
  25
              Subsequent
      events
  On March
15, 2010, Yuxinyicheng and NTT Data Group established a joint-venture, Yuxin
Data Technologies Limited (“Yuxin Data”) in Tianjin. The registered capital of
Yuxin Data is RMB60 million. NTT Data Group and Yuxinyicheng hold 51% and 49% of
equity interests, respectively.
  On May 3,
2010, Yuxinyicheng transferred its interests of 15% in Baodaotong to Hainan
Yinjiang Net Technologies Limited, an independent third party at a total
consideration of RMB7,227,273. The loss from the disposal of interest in
Baodaotong is approximately RMB14,000.
  F-52