UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 20-F

(Mark One)



| |  ̈ | 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 ended June 30, 2013



OR



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



For the transition periodfrom ___________
to ___________.



OR



| |  ̈ | 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: 001-33602



HOLLYSYS AUTOMATION TECHNOLOGIES LTD.

(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)



No. 2 Disheng Middle Road,

Beijing Economic-Technological Development
Area,

Beijing, P. R. China 100176

(Address of principal executive offices)



Jennifer Zhang, Tel: (86 10) 5898 1386,
Email: zhangqiuju@hollysys.com

Address: No. 2 Disheng Middle Road, Beijing
Economic-Technological Development Area, Beijing, P.R. China 100176

(Name, Telephone, E-mail and/or Facsimile
number and Address of Company Contact Person)



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



|Title of each class |  | Name of each exchange on which registered
|------------------- |  | -----------------------------------------
|Ordinary Shares     |  | The NASDAQ Global Select Market          



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



None



(Title of Class)



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



None



Indicate the number of outstanding shares of each of the issuer’s
classes of capital or ordinary shares as of the close of the period covered by the annual report (June 30, 2013): 57,554,824 ordinary
shares.



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



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



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



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



Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer.



Large accelerated filer  ̈     Accelerated
filer x      Non-accelerated
filer  ̈



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



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



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



 ̈ Item 17            ̈
Item 18



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











HOLLYSYS AUTOMATION TECHNOLOGIES LTD.



ANNUAL REPORT ON FORM 20-F

FOR THE FISCAL YEAR ENDED JUNE 30,
2013



TABLE OF CONTENTS



|          |                                                                                | Page
|--------- | ------------------------------------------------------------------------------ | ----
|          |                                                                                |     
|PART I   
|          |                                                                                |     
|ITEM 1.   | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                          | 5   
|          |                                                                                |     
|ITEM 2.   | OFFER STATISTICS AND EXPECTED TIMETABLE                                        | 5   
|          |                                                                                |     
|ITEM 3.   | KEY INFORMATION                                                                | 5   
|          |                                                                                |     
|ITEM 4.   | INFORMATION ON THE COMPANY                                                     | 23  
|          |                                                                                |     
|ITEM 4A.  | UNRESOLVED STAFF COMMENTS                                                      | 38  
|          |                                                                                |     
|ITEM 5.   | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                   | 38  
|          |                                                                                |     
|ITEM 6.   | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                     | 58  
|          |                                                                                |     
|ITEM 7.   | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                              | 67  
|          |                                                                                |     
|ITEM 8.   | FINANCIAL INFORMATION                                                          | 70  
|          |                                                                                |     
|ITEM 9.   | THE OFFER AND LISTING                                                          | 71  
|          |                                                                                |     
|ITEM 10.  | ADDITIONAL INFORMATION                                                         | 72  
|          |                                                                                |     
|ITEM 11.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                     | 83  
|          |                                                                                |     
|ITEM 12.  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                         | 84  
|          |                                                                                |     
|PART II  
|          |                                                                                |     
|ITEM 13.  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                                | 84  
|          |                                                                                |     
|ITEM 14.  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITIES HOLDERS AND USE OF PROCEEDS | 84  
|          |                                                                                |     
|ITEM 15.  | CONTROLS AND PROCEDURES                                                        | 84  
|          |                                                                                |     
|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT                                               | 85  
|          |                                                                                |     
|ITEM 16B. | CODE OF ETHICS                                                                 | 85  
|          |                                                                                |     
|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                         | 86  
|          |                                                                                |     
|ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                     | 86  
|          |                                                                                |     
|ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS         | 86  
|          |                                                                                |     
|ITEM 16F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT                                   | 87  
|          |                                                                                |     
|ITEM 16G. | CORPORATE GOVERNANCE                                                           | 87  
|          |                                                                                |     
|ITEM 16H. | MINE SAFETY DISCLOSURE                                                         | 87  
|          |                                                                                |     
|PART III 
|          |                                                                                |     
|ITEM 17.  | FINANCIAL STATEMENTS                                                           | 87  
|          |                                                                                |     
|ITEM 18.  | FINANCIAL STATEMENTS                                                           | 87  
|          |                                                                                |     
|ITEM 19.  | EXHIBITS                                                                       | 87  



2







USE OF CERTAIN DEFINED TERMS



Except as otherwise indicated by the context, references in
this annual report to:



| | · | “Hollysys” “we,” “us,” or “our,” and the “Company,” are references
to the combined business of Hollysys Automation Technologies Ltd., a BVI company, and its consolidated subsidiaries, HI, HAP, Bond,
Concord, CSHK, CDME, GTH, Clear Mind, World Hope, Helitong, Beijing Hollysys Group, Hangzhou Hollysys, Hangzhou System, Hollysys
A&D, Beijing Hollysys, Hollysys Electronics, Hollycon, Haotong, Xi’an Hollysys and Hollysys Investment;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “HI” are references toHollysys International Pte. Limited, a Singapore company;
| | - | -------------------------------------------------------------------------------



| | · | “HAP” are references to Hollysys (Asia Pacific) Pte. Limited, a Singapore company;
| | - | ----------------------------------------------------------------------------------



| | · | “Concord” are references to a Singapore Group, including Concord Corporation Pte. Ltd.  (“CCPL”),
and its subsidiaries Concord Electrical Pte. Ltd. (“CEPL”), Concord Electrical Sdn. Bhd. (“CESB”) and Concord
Corporation Pte. Ltd, Dubai Branch (“CCPL Dubai”);
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “CSHK” are references to Concord Solutions (HK) Limited, a Hong Kong company;
| | - | -----------------------------------------------------------------------------



| | · | “CMDE” are references to Concord M Design and Engineering Company Limited, a Macau company;
| | - | -------------------------------------------------------------------------------------------



| | · | “Bond” are references to a Southeastern Asia Group, including Bond Corporation Pte. Ltd., a Singapore company (“BCPL”),
Bond M&E Pte. Ltd., a Singapore Company (“BMSG”), Bond M&E Sdn. Bhd., a Malaysia company (“BMJB”),
and Bond M&E (K.L.) Sdn. Bhd.,a Malaysia company (“BMKL”);
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “GTH” are references to Gifted Time Holdings Limited, a BVI company;
| | - | --------------------------------------------------------------------



| | · | “Clear Mind” are references to Clear Mind Limited, a BVI company;
| | - | -----------------------------------------------------------------



| | · | “World Hope” are references to World Hope Enterprises Limited, a Hong Kong company;
| | - | -----------------------------------------------------------------------------------



| | · | “Helitong” are references Beijing Helitong Science & Technology Exploration Co., Ltd.;
| | - | --------------------------------------------------------------------------------------



| | · | “Beijing Hollysys Group” are references to Beijing Hollysys Group Co., Ltd., formerly named as Beijing Hollysys
Science & Technology Co., Ltd;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------



| | · | “Hangzhou Hollysys” are references to Hangzhou Hollysys Automation Co., Ltd.;
| | - | -----------------------------------------------------------------------------



| | · | “Hangzhou System” are references to Hangzhou Hollysys System Engineering Co., Ltd.;
| | - | -----------------------------------------------------------------------------------



3







| | · | “Hollysys A&D” are references to Beijing Hollysys Automation & Drive Co., Ltd.;
| | - | -------------------------------------------------------------------------------



| | · | “Beijing Hollysys” are references to Beijing Hollysys Co., Ltd.;
| | - | ----------------------------------------------------------------



| | · | “Hollysys Electronics” are references to Beijing Hollysys Electronics Technology Co., Ltd.;
| | - | -------------------------------------------------------------------------------------------



| | · | “Hollycon” are references to Beijing Hollycon Medicine & Technology. Co., Ltd.;
| | - | -------------------------------------------------------------------------------



| | · | “Haotong” are references to Beijing Haotong Science and Technology Development Co., Ltd.;
| | - | -----------------------------------------------------------------------------------------



| | · | “WoDeWeiYe” are references to Beijing WoDeWeiye Technology Exploration Co., Ltd.;
| | - | ---------------------------------------------------------------------------------



| | · | “Xi’an Hollysys” are references to Xi’an Hollysys Co., Ltd;
| | - | -----------------------------------------------------------



| | · | “Hollysys Investment” are references to Hollysys (Beijing) Investment Co., Ltd.;
| | - | --------------------------------------------------------------------------------



| | · | “RMB,” are references to Renminbi, the legal currency of China; “SGD”, “S$”, are to the
Singapore dollar, the legal currency of Singapore; “US dollar,” “$” and “US$” are to the legal
currency of the United States; “MYR” is to the Malaysian Ringgit, the legal currency of Malaysia; “AED”
is to the United Arab Emirates Dirham, the legal currency of Dubai; and “HKD” is to the Hong Kong dollar, the legal
currency of Hong Kong;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “BVI” are references to the British Virgin Islands;
| | - | ---------------------------------------------------



| | · | “China” and “PRC” are references to the People’s Republic of China and references to “Hong
Kong” are references to the Hong Kong Special Administrative Region of China;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “Exchange Act” are references to the Securities Exchange Act of 1934, as amended; and
| | - | -------------------------------------------------------------------------------------



| | · | “Securities Act,” are references to the Securities Act of 1933, as amended.
| | - | ---------------------------------------------------------------------------



FORWARD-LOOKING INFORMATION



This annual report contains forward-looking statements and information
relating to us that are based on the current beliefs, expectations, assumptions, estimates and projections of our management regarding
our company and industry. When used in this annual report, the words “may”, “will”, “anticipate”,
“believe”, “estimate”, “expect”, “intend”, “plan” and similar expressions,
as they relate to us or our management, are intended to identify forward-looking statements. These statements reflect
management's current view of us concerning future events and are subject to certain risks, uncertainties and assumptions, including
among many others: our potential inability to achieve similar growth in future periods as we did historically, a decrease in the
availability of our raw materials, the emergence of additional competing technologies, changes in domestic and foreign laws, regulations
and taxes, changes in economic conditions, uncertainties related to China’s legal system and economic, political and social
events in China, the volatility of the securities markets, and other risks and uncertainties which are generally set forth under
the heading, “Key information — Risk Factors” and elsewhere in this annual report. Should any of these
risks or uncertainties materialize, or should the underlying assumptions about our business and the commercial markets in which
we operate prove incorrect, actual results may vary materially from those described as anticipated, estimated or expected 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.



4







PART I



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



Not applicable.



| | ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE
| | ------- | ---------------------------------------



Not applicable.



| | ITEM 3. | KEY INFORMATION
| | ------- | ---------------



| | A. | Selected Consolidated Financial Data
| | -- | ------------------------------------



The following table presents selected financial data regarding
our business. It should be read in conjunction with our consolidated financial statements and related notes contained
elsewhere in this annual report and the information under Item 5, “Operating and Financial Review and Prospects.” The
selected consolidated statement of comprehensive income data for the fiscal years ended June 30, 2011, 2012 and 2013 and the consolidated
balance sheet data as of June 30, 2012 and 2013 have been derived from the audited consolidated financial statements of Hollysys
that are included in this annual report beginning on page F-1. The selected statement of comprehensive income data for
the fiscal years ended June 30, 2009 and 2010, and balance sheet data as of June 30, 2009, 2010 and 2011 have been derived
from our audited financial statements that are not included in this annual report.



The audited consolidated financial statements for the years
ended June 30, 2011, 2012 and 2013 are prepared and presented in accordance with generally accepted accounting principles in the
United States, or US GAAP. The selected financial data information is only a summary and should be read in conjunction
with the historical consolidated financial statements and related notes of Hollysys contained elsewhere herein. The
financial statements contained elsewhere fully represent our financial condition and operations; however, they are not indicative
of our future performance.



Financial information in this report is reported in United States
dollars, the reporting currency of the Company.



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | Years Ended June 30, |            
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | -----------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | 2009                 |            
|Statement
                                                                                                                                of
                                                                                                                                Comprehensive
                                                                                                                                Income
                                                                                                                                Data |  |                      |            
|Revenue                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                      | 157,502,067
|Operating (loss) income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                      | (5,550,479 
|(Loss) income before income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                      | (5,603,121 
|Net (loss) income attributable to
    Hollysys                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                      | (13,851,064
|Add: Share-based compensation costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                      | 39,559,026 
|Amortization of acquired intangible assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |                      | -          
|Acquisition-related consideration fair value adjustments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                      | -          
|Non-GAAP net income attributable to Hollysys                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                      | 25,707,962 
|Weighted average ordinary shares:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                      |            
|Basic                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |                      | 44,950,883 
|Diluted                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                      | 44,950,883 
|Earnings (loss) per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |                      |            
|Basic                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |                      | (0.31      
|Diluted                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                      | (0.31      
|Non-GAAP earnings per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                      |            
|Basic                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |                      | 0.57       
|Diluted                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                      | 0.51       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                      |            
|Balance Sheet Data                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                      |            
|Total current assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |                      | 283,971,473
|Total assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                      | 345,443,522
|Total current liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                      | 101,121,574
|Total liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                      | 149,424,388
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                      |            
|Net assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |                      | 196,019,134
|Noncontrolling interests                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                      | 22,479,241 
|Stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |                      | 173,539,893



5







In evaluating our results, the non-GAAP
measures of “Non-GAAP general and administrative expenses (hereafter “Non-GAAP G&A expenses”), “Non-GAAP
cost of integrated contracts”, “Non-GAAP other income, net”, “Non-GAAP interest expenses”, “Non-GAAP
net income attributable to Hollysys” and “Non-GAAP earnings per share” serve as additional indicators of
our operating performance and not as a replacement for other measures in accordance with US GAAP. We believe these non-GAAP measures
are useful to investors, as they exclude the 1) share-based compensation expenses, 2) amortization of acquired intangibles and
3) acquisition-related consideration adjustments. They will not result in any cash inflows or outflows. We believe
that using non-GAAP measures help our shareholders to have a better understanding of our operating results and growth prospects.
In addition, given the business nature of Hollysys, it has been a common practice for investors and analysts to use such non-GAAP
measures to evaluate the Company. Definitions of Non-GAAP Measures are as follows:

1) Share-based compensation expenses,
which is calculated based on the number of shares or options granted and the fair value as of the grant date.



2) Amortization of acquired intangibles,which is non-cash expenses relating primarily to acquisitions. At the time of an acquisition, the identifiable definite-lived
intangible assets of the acquired company, such as customer relationships and order backlog, are valued and amortized over their
estimated lives. Value is also assigned to acquired indefinite-lived intangible assets, which comprise goodwill that are not subject
to amortization.

3) Acquisition-related consideration adjustments are
accounting adjustments to report contingent consideration liabilities at fair value and cash consideration at present value.
These adjustments can be highly variable and are excluded from our assessment of performance because they are considered
non-operational in nature and, therefore, are not indicative of current or future performance or ongoing costs of doing
business.





The following table provides a reconciliation of U.S. GAAP
measures to the non-GAAP measures for the periods indicated:



6











|                                                                                         |  | Years ended June 30, |            
|---------------------------------------------------------------------------------------- |  | -------------------- | -----------
|                                                                                         |  | 2009                 |            
|Cost of integrated contracts                                                             |  |                      | 99,423,487 
|Less: amortization of acquired intangibles                                               |  |                      | -          
|Non-GAAP cost of integrated contracts                                                    |  |                      | 99,423,487 
|                                                                                         |  |                      |            
|G&A expenses                                                                             |  |                      | 48,981,078 
|Less: share based compensation costs                                                     |  |                      | 39,559,026 
|Non-GAAP G&A expenses                                                                    |  |                      | 9,422,052  
|                                                                                         |  |                      |            
|Other income (expense), net                                                              |  |                      | 322,713    
|Add: acquisition-related incentive share contingent consideration fair value adjustments |  |                      | -          
|Non-GAAP other income , net                                                              |  |                      | 322,713    
|                                                                                         |  |                      |            
|Interest expenses                                                                        |  |                      | (1,768,561 
|Add: acquisition-related cash consideration adjustments                                  |  |                      | -          
|Non-GAAP interest expenses                                                               |  |                      | (1,768,561 
|                                                                                         |  |                      |            
|Net (loss) income attributable to Hollysys                                               |  |                      | (13,851,064
|Add: share based compensation costs                                                      |  |                      | 39,559,026 
|Amortization of acquired intangible assets                                               |  |                      | -          
|Acquisition-related consideration adjustments                                            |  |                      | -          
|Non-GAAP net income attributable to Hollysys                                             |  |                      | 25,707,962 
|Weighted average number of ordinary shares outstanding used in computation:              |  |                      | -          
|Basic                                                                                    |  |                      | 44,950,883 
|Diluted                                                                                  |  |                      | 50,015,536 
|Non-GAAP earnings per share:                                                             |  |                      |            
|Basic                                                                                    |  |                      | 0.57       
|Diluted                                                                                  |  |                      | 0.51       



Exchange Rate Information



A majority of our business is conducted in China. We also operate
in Singapore and Malaysia through HAP, Concord, Bond, and several other jurisdictions in Asia and the Middle East. We use US dollars
as our reporting currency in our financial statements and in this annual report. For entities whose functional currencies
are not US dollars, balance sheet items are translated into US dollars at the rates of exchange as of the balance sheet date; equity
accounts are translated at historical exchange rates and revenues, expenses, gains and losses are translated using the average
rate for the year as published by the Federal Reserve Bank of New York and the Federal Reserve Board. Translation adjustments are
reported as cumulative translation adjustments and are shown as a separate component of other comprehensive income in the consolidated
statement of comprehensive income and changes in equity. Transactions and amounts in other parts of this annual report in foreign
currencies recorded at the rates of exchange prevailing when the transactions occurred. With respect to amounts not recorded in
our consolidated financial statements included elsewhere in this annual report, all transactions from Renminbi into US dollars
and from US dollars to Renminbi in this annual report on Form 20-F were made at a rate of RMB 6.2806 to $1.00, and all transactions
from Singapore dollars into US dollars and from US dollars to Singapore dollars in this annual report on Form 20-F were made at
a rate of SGD 1.2463 to $1.00, as set forth by the Federal Reserve Bank of New York. We make no representation that any Renminbi,
Singapore dollar, US dollar or other currency amounts could have been, or could be, converted into the other stated currencies
at any particular rate, the rates stated below, or at all. The Chinese government imposes control over its foreign-currency reserves
in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade.
On August 30, 2013, the closing buying rate was RMB 6.1193 to $1.00, and SGD 1.2758 to $1.00, as set forth by the Federal Reserve
Board.



7







The following table sets forth information concerning exchange
rates between the Renminbi, Singapore dollars and the US dollar for the periods indicated. These rates are provided solely for
your convenience and are not necessarily the exchange rates that we used in this annual report on Form 20-F or will use in the
preparation of our periodic reports or any other information to be provided to you.



|                   |  | Exchange Rate between
    RMB and US$ |        |  | Exchange Rate between
    SGD and US$ | 
|------------------ |  | ------------------------------------- | ------ |  | ------------------------------------- | 
|Period             |  | Period
    End                        |        |  | Average                               | 
|Calendar year 2008 |  |                                       | 6.8225 |  |                                       | 
|Calendar year 2009 |  |                                       | 6.8259 |  |                                       | 
|Calendar year 2010 |  |                                       | 6.6    |  |                                       | 
|Calendar year 2011 |  |                                       | 6.2939 |  |                                       | 
|Calendar year 2012 |  |                                       | 6.2301 |  |                                       | 
|January 31, 2013   |  |                                       | 6.2186 |  |                                       | 
|February 28, 2013  |  |                                       | 6.2213 |  |                                       | 
|March 29, 2013     |  |                                       | 6.2108 |  |                                       | 
|April 30, 2013     |  |                                       | 6.1647 |  |                                       | 
|May 31, 2013       |  |                                       | 6.134  |  |                                       | 
|June 28, 2013      |  |                                       | 6.1374 |  |                                       | 
|July 31, 2013      |  |                                       | 6.1284 |  |                                       | 
|August 30, 2013    |  |                                       | 6.1193 |  |                                       | 



| | B. | Capitalization and Indebtedness
| | -- | -------------------------------



Not applicable.



| | C. | Reasons for the Offer and Use of Proceeds
| | -- | -----------------------------------------



Not applicable.



| | D. | Risk Factors
| | -- | ------------



An investment in our capital stock involves a high degree
of risk. You should carefully consider the risks described below, together with all of the other information included in this annual
report, before making an investment decision. If any of the following risks actually occurs, our business, prospects, financial
condition or results of operations could suffer. In that case, the trading price of our capital stock could decline, and you may
lose all or part of your investment.



RISKS RELATED TO OUR BUSINESS



We commit substantial resources to new product and service
development and acquisition opportunities in order to stay competitive and grow our business, and we may fail to offset the increased
cost of such investment with a sufficient increase in net sales or margins.



The success of our business depends in great measure on
our ability to keep pace with, or even lead, changes that occur in our industry and expand our product and service offerings.
Traditionally, the automation and control systems business was relatively stable and slow moving. Successive
generations of products offered only marginal improvements in terms of functionality and reliability. However, the
emergence of computers, computer networks and electronic components as key elements of the systems that we design and build
has accelerated the pace of change in our industry. Where there was formerly as much as a decade or more between
successive generations of automation systems, the time between generations is now as little as two to three
years. Technological advances and the introduction of new products, new designs and new manufacturing techniques
by our competitors could adversely affect our business unless we are able to respond with similar advances. To
remain competitive, we must continue to incur significant costs in product development, equipment and facilities and to make
capital investments and seek complementary acquisitions. These costs may increase, resulting in greater fixed
costs and operating expenses than we have incurred to date. As a result, we could be required to expend
substantial funds for and commit significant resources to the following:



8







| | · | Research and development activities on existing and potential product solutions;
| | - | --------------------------------------------------------------------------------

| | · | Additional engineering and other technical personnel;
| | - | -----------------------------------------------------

| | · | Advanced design, production and test equipment;
| | - | -----------------------------------------------

| | · | Manufacturing services that meet changing customer needs;
| | - | ---------------------------------------------------------

| | · | Technological changes in manufacturing processes;
| | - | -------------------------------------------------

| | · | Expansion of manufacturing capacity; and
| | - | ----------------------------------------

| | · | Acquiring technology through licensing and acquisitions.
| | - | --------------------------------------------------------



Our future operating results will depend to a significant extent
on our ability to continue providing new product and service solutions that compare favorably on the basis of time to market, cost
and performance, with competing third-party suppliers and technologies. Our failure to increase net sales sufficiently
to offset the increased costs needed to achieve those advances would adversely affect our operating results.



We may experience trade barriers in expanding to our targeted
emerging markets and may be subject to tariffs and taxes that will result in significant additional costs for our business and
products.



We may experience barriers to conducting business and trade
in our planned expansion to emerging markets. These barriers may be in the form of delayed customs clearances, customs
duties or tariffs. In addition, we may be subject to repatriation taxes levied upon the exchange of income from local
currency into foreign currency, substantial taxes of profits, revenues, assets and payroll, as well as value-added tax. The
markets into which we may expand may impose onerous and unpredictable duties, tariffs and taxes on our business and products. These
barriers or expenses could have an adverse effect on our operations and financial results.



To the extent we acquire businesses and technologies from
others, we will need to integrate these into our business, which if not successful will adversely impact our business and increase
our financial expenses.



One important aspect of our expansion has been and will be the
use of acquisitions, which may include acquiring an operating business or specific assets. Examples of this strategy have been
the acquisitions of Concord in 2011 and Bond in 2013. As with any acquisition, we will have to integrate the business with our
operations so as to achieve the value of our investment. Accommodating different business cultures, operating systems and product
lines, as well as understanding and implementing different regulatory issues, often takes time and can result in unexpected expenses.
Acquisitions are not always successful, resulting in unintended expenses and write-downs.



As we expand our business outside of China, we will encounter
the increasing need for international certifications and compliance with the regulation of different governments, which if not
obtained and complied with may adversely impact our business.



We are expanding our business outside of China, including seeking
business opportunities in Hong Kong SAR, Singapore, Malaysia and the Middle East. For our marketing both in China and in other
jurisdictions, we seek international certifications and have obtained certificates such as the European Safety Standard Certification
Level 4. As we operate in jurisdictions other than China, we will have to comply with local law, some of which relate to various
safety and quality requirements for the kinds of products we provide. The failure to have any necessary or beneficial certifications
and the failure to comply with local law will have an adverse impact on our marketing and business, and may result in additional
costs and expenses.



9







During our expansion into overseas market, a lack of qualified
local engineers and the inability to send enough China’s experienced engineers to overseas could delay our international
projects’ execution and lose potential business opportunities.



In our international business expansion to Southeast Asia
and the Middle East, we may not be able to find adequate and qualified local engineers to bid and complete sizable rail
transportation orders and industrial automation projects, and because of the visa problems, it may not be that easy to send
adequate engineers from China to various foreign countries and have them stay there long enough to finish the projects, which
could cause adverse impact on our international business expansion.



We do not have long-term purchase commitments from our
customers, so our customers are free to choose products from our competitors, which increases our marketing expenses to continually
find new clients and win new contracts.



We are engaged in the design, production and installation of
automation and process control systems. As a result, our revenues result from numerous individual contracts that are nonrecurring
in nature. Furthermore, customers may change or delay or terminate orders for products and services without notice for any number
of reasons unrelated to us, including lack of market acceptance for the products to be produced by the process our system was designed
to control. As a result, in order to maintain and expand our business, we must expend increasing amounts on marketing to identify
clients and win contracts so as to be able to replenish the orders in our pipeline on a continuous basis. Increased marketing expenses
and the inability to continue with current contracts or win new sources of revenue will result in a decline in revenues and profitability.



Although we do not have a concentration of business with
any customer at this time, as parts of our business has become more dependent on a few significant customers.



We have developed significant customer relationships with
the several local subway providers and the railway authorities in respect of the high speed train system in China. We
currently also have significant contracts with the MTR Corporation Ltd. of Hong Kong, and SMRT Corporation Ltd. and Thales
Solutions Asia Pte. Ltd. of Singapore. We expect that these relationships will continue to grow, and we will win more
contracts with them over time. We also are expanding into the business of control systems for conventional and nuclear plants
and building retrofitting which may develop into a significant customer base in the future. To the extent that these customer
groups or specific customers with a group represent an increasing proportion of our business, we will become more dependent
on them for our revenues and business growth. In that case, our cash flows also will become more dependent on those
customers’ payment practices and overall public funding policies, including the lengthening of collection times under
contracts that have been performed. Therefore, the loss of one or more of these customers or market groups as customers would
have a material adverse impact on our revenues and our business operations and development.



We have a backlog of contracts, the execution of the unfinished
contracts in the backlog may be lengthened due to various external reasons, and the increase of backlog may not necessarily reflect
our business expansion.



To date, our backlog has been a reflection of our ability to
sell our products and services and increase our business. This represents an amount of unrealized revenue to be earned from contracts
secured by the Company. Backlog, however, can also reflect upon our ability to perform our contracts on a timely basis. Therefore,
when evaluating our backlog, analysis should be made as to whether or not it is a reflection of an expanding business, successful
marketing and increasing acceptance of our products and services in the marketplace or problems in our contract performance and
acceptance.



A lack of adequate engineering resources could cause our
business to have diminished profitability and lose potential business prospects.



Among the competitive advantages and key business advantages
that we enjoy are the plentiful supply of engineering talent in China and the comparatively lower cost of our engineering staff
compared to those of our Western and Japan-based competitors. Recently, however, our costs for these persons has been subject to
increased wage pressures due to the economic growth of China and certain inflationary pressures and additional employment related
taxation. If the available supply of engineers were to be absorbed by competing demands, or otherwise not as plentiful
as we have experienced to date, then the costs of hiring, training and retaining capable engineers would likely increase. If
we are unable to pass any additional costs through to our customers, this could result in a reduction in our profitability, and
the inability to have qualified and trained persons could adversely affect our business prospects or could even cause a change
in our business strategy.



10







Our products may contain design or manufacturing defects,
which could result in reduced demand for our products or services, customer claims and uninsured liabilities.



Our products are very complex, integrated systems, often with
elements designed specifically for the particular situation of a customer, which may have undetected design or manufacturing issues
or defects until put into actual use. Also, we manufacture spare parts for maintenance and replacement purposes after completion
of integrated solution contracts. While there have been no significant issues or defects identified so far, any issues
or defects in the design, manufacture and spare parts we provide may result in returns, claims, delayed shipments to customers
or reduced or cancelled customer orders and other forms of damages asserted against the company. If these issues or
defects occur, we will incur additional costs, and if they occur in large quantity or frequency, we may sustain a permanent increase
in costs, a loss of business reputation and legal liability. Moreover, we are increasingly active in the conventional
and nuclear power generation and railway control systems sectors. Each of these sectors poses a substantially higher risk of liability
in the event of a system failure, than was present in the industrial process controls markets in which we traditionally compete.



We generally do not carry large amounts of insurance, and in
the future we may not be able to obtain adequate insurance coverage. The typical practice of the industries with which
we are involved is for the customers to obtain insurance to protect their own operational risks. As a practice, we do
not carry insurance coverage to protect against the risks related to product failure. It is possible that customers
could assert claims against us for any damages caused by a failure in one of our systems, and as a result, the failure of any of
our designs, manufacture and installation of our products could result in a liability that would seriously impair our financial
condition or even force us out of business.



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



Our business is based on a number of proprietary products and
systems, some of which are patented and others of which we protect as trade secrets. We strive to strengthen and differentiate
our product portfolio by developing new and innovative products and product improvements. As a result, we believe that
the protection of our intellectual property will become increasingly important to our business as the functionality of automation
systems increases to meet customer demand and as we try to open new markets for our products.



Currently, we hold 103 PRC utility patents that relate to various
product configurations and product components and 128 software copyrights and have 37 pending PRC patent applications. We will
continue to rely on a combination of patents, trade secrets, trademarks and copyrights to provide protection in this regard, but
this protection may be inadequate.



Our pending or future patent applications may not be approved
or, if allowed, they may not be of sufficient strength or scope. As a result, third parties may use the technologies
and proprietary processes that we have developed and compete with us, which could negatively affect any competitive advantage we
enjoy, dilute our brand and harm our operating results.



In addition, policing the unauthorized use of our proprietary
technology can be difficult and expensive. Litigation may be necessary to enforce our intellectual property rights.
Protection of intellectual property and proprietary rights in China may not be as effective as in other countries. Given the fact
that the majority of our intellectual property rights are in China and under Chinese law, the relative unpredictability of China’s
legal system and potential difficulties of enforcing a court judgment in China may result in an outcome that is unfavorable to
us when we assert intellectual property ownership in a particular situation. Furthermore, any litigation may be costly and
may divert management attention away from our business operations. An adverse determination in any lawsuit involving
our intellectual property is likely to jeopardize our business prospects and reputation and result in additional expense for penalties,
licensing and redesign. We have no insurance coverage against litigation costs so we would be forced to bear all litigation
costs if we cannot recover them from other parties. All of the foregoing factors could harm our business and financial
condition.



11







As we are going to sell more of our proprietarily developed
products and systems to foreign countries, we may not continue to have the protection of our patents and software copyright in
foreign countries for some of our proprietary products, which could negatively impact our competitive position and our business
expansion in overseas.



We may develop new products that do not gain market acceptance,
which would result in the failure to recover the significant costs for design and manufacturing services for new product solutions,
thus adversely affecting operating results.



We operate in an industry characterized by increasingly frequent
and rapid technological advances, product introductions and new design and manufacturing improvements. As a result,
we must expend funds and commit resources to research and development activities, possibly requiring additional engineering and
other technical personnel; purchasing new design, production, and test equipment; and enhancing our design and manufacturing processes
and techniques. We may invest in equipment employing new production techniques for existing products and new equipment
in support of new technologies that fail to generate adequate returns on the investment due to insufficient productivity, functionality
or market acceptance of the products for which the equipment may be used. We could, therefore, incur significant costs
for design and manufacturing services for new product solutions that do not generate a sufficient return on that investment, which
would adversely affect our future operating results. Our future operating results will depend significantly on our ability
to provide timely design and manufacturing services for new products that compete favorably with design and manufacturing capabilities
of third party suppliers.



RISKS RELATING TO THE INDUSTRY IN WHICH WE OPERATE



The company mainly operates in the industrial and manufacturing
automation sectors, the high-speed rail, subway and nuclear power automation sectors; in some industry verticals within the industrial
automation sector, we may experience the inconstant growth rate from time to time, which may present variation of business opportunities;
the contracts for high-speed rail, subway and nuclear power are substantially larger which may result in a greater dependence on
a particular customer or business sector, and could cause significant fluctuations in our revenues.



The principal focus of our business has been to provide Distributed
Control Systems, Programmable Logic Controller and related industrial automation and control software and hardware devices to industrial
and manufacturing companies. Even though there are enormous opportunities in the industrial automation arena, some industry verticals
may experience slower growth or decreased growth that will provide us with fewer opportunities and contract awards from the industry
and manufacturing sectors. Both high-speed rail and nuclear power sectors have one or few customers and are closely related to
the national development policies, and the contract size for these two sectors is usually much larger, and as a result, there could
be severe fluctuation of these sectors’ growth, which may affect our business and revenues.



Although China is committed to expanding its energy production
with nuclear power and building a high speed railway network, both these industries have experienced various setbacks due to higher
than expected accidents for various reasons. The future growth rate of these two sectors may not be as fast as the market previously
expected but on a more sustainable and safer basis, thus we will, likely experience slower annual growth or possibly even a reduction
in these sectors’ revenues.



12







To the extent that our business is more dependent on large
contracts and contracts from a few customers, our revenues, cash flow and profits will be influenced by this type of contracting
and the timely payment for our products and services.



As we develop our business with the entities responsible for
building municipal subway systems and railroads, power plants and larger system contract customers, such as building retrofits,
we will be entering into contracts for larger sized projects than in the past, which will be for significantly greater contract
value. These contracts will require us to commit greater operating resources to a more limited number of customers and contract
fulfillment. Therefore, our revenues, cash flow and profit will become increasingly dependent on our ability to perform these contracts
and collect the payments due on a timely basis. Some of the entities ultimately responsible for the funding of infrastructure projects
are governmental authorities or ministries, our contract requirements and collections will become subject to these entities being
able to adequately budget and have the revenues to timely pay for our products and services. We expect a long collection period
in some of our business. To some extent, we may become subject to delays and reductions in scope of project due to changes in the
policies, objectives and budgeting of any of the public entities which control the projects on which we are contracting. We will
also become increasingly subject to government contract requirements in the performance of contracts that are ultimately the responsibility
of public bodies.



At this time, contracting with the entities that provide the
subway and rail systems and power plants for which we provide control systems is similar to contracting with the customers we have
sold to in the past. Therefore, our contracts are written on a similar basis as before, and we expect that we will be operating
under these contracts and accounting for their revenues in a similar manner as before.



Many of our competitors have substantially greater resources
than we do, allowing them to compete on an advantageous basis.



We operate in a very competitive environment with many major
international and domestic companies, such as Honeywell, General Electric, ABB, Siemens, Emerson and Hitachi. Many of
our competitors are much better established and more experienced than we are, have substantially greater financial resources, operate
in many international markets and are much more diversified than we are. As a result, they are in a strong position
to compete effectively with us. These large competitors are also in a better position than we are to weather any extended
weaknesses in the market for automation and control systems. Other emerging companies or companies in related industries
may also increase their participation in our market, which would add to the competitive pressures that we face.





A decrease in the rate of growth in China’s industrial
activity and the Chinese economy in general may lead to a slower growth or decrease in our revenues because industrial companies
in China are significant sources of revenues for us.



Industrial companies operating in China are significant sources
of revenues for us. Our business benefited in the past from the rapid expansion of China’s industrial activity,
which has created additional demand from existing companies and led to the formation of numerous additional companies that have
need for our products and services. We have also benefited from the infrastructure projects of the different governmental authorities
of China, such as power production and transportation systems. China’s industrial and infrastructure expansion
has been fueled in large measure by international demand for the low-cost goods that China is able to produce due to labor advantages
and other comparative advantages, such as governmental subsidies to offset research and development expenses and taxes and reduced
land use/facilities costs for targeted industries. The Chinese economy may not be able to sustain this rate of growth
in the future and any reduction in the rate of China’s industrial growth or a shrinking of China’s industrial base
could adversely affect our revenues.  We may also be impacted as major infrastructure projects are completed. The resulting
increase in competition for customers might also cause erosion of profit margins that we have been able to achieve historically.



Our efforts to operate in the international automation
market may not prove successful, and we may expend capital resources without achieving value and needlessly divert management’s
time and attention from our principal market.



We are penetrating international markets, emphasizing Southeast
Asia and the Middle East with the objective of diversifying our products, clients and places of operations and growing our overall
business.  Our expansion is likely to use substantial resources, including substantial amounts of capital and equity and deploy
meaningful amounts of management time and attention. Our products and our overall approach to the automation and controls
system business may not be accepted in other markets to the extent needed to make that effort profitable. In addition,
the additional demands on our management from these activities may detract from our efforts in the domestic Chinese market and
market of surrounding countries, causing the operating results in our principal markets to be adversely affected.



13







We depend heavily on key personnel, and loss of key employees
and senior management could harm our business.



Our future business and results of operations depend in significant
part upon the continued contributions of our key technical and senior management personnel, including Dr. Changli Wang, our Chairman
and Chief Executive Officer. We also will depend in significant part upon its ability to attract and retain additional
qualified senior executives and management, technical, marketing and sales and support personnel for our operations. If
we lose a key employee, if a key employee fails to perform in his or her current position or if we are not able to attract and
retain skilled employees as needed, our business could suffer. Turnover in our senior management could significantly deplete institutional
knowledge held by our existing senior management team and impair our operations.



In addition, if any of these key personnel joins a competitor
or forms a competing company, we may lose some of our customers. We have entered into confidentiality and non-competition agreements
with key personnel. However, if any disputes arise between these key personnel and us, it is not clear, in light of uncertainties
associated with the PRC legal system, what the court decisions will be and the extent to which these court decisions could be enforced
in China, where all of these key personnel reside and hold some of their assets.



Our control systems are used in infrastructure projects
such as subway systems, surface railways and nuclear plants; to the extent that our systems do not perform as designed, we could
be found responsible for the damage resulting from that failure.



We face potential responsibility for the failure of our control
systems in performing the various functions for which they are designed and the damages resulting from any such problem. To the
extent that we contract to provide control systems in larger scale projects, the level of damages for which we may be held responsible
is likely to increase. To the extent that any of our installed control systems do not perform as designed for their intended purposes,
and we are held responsible for the consequences of those performance failures and resulting damages, there may be an adverse impact
on our business, business reputation, revenues and profits. To date, we do believe our control systems have performed as designed,
and there are no claims asserted against us based on any significant, non-performance event. Notwithstanding our record, no assurance
can be given that no claims will be sought in the future based on the design and performance of our control systems.



We may be exposed to potential risks relating to our internal
controls over financial reporting and our ability to have those controls positively attested to by our independent auditors.



As directed by Section 404 of the Sarbanes-Oxley Act of 2002,
the SEC adopted rules requiring public companies to include a report of management on the Company’s internal controls over
financial reporting in their annual reports and the independent registered public accounting firm auditing a company’s financial
statements to attest to and report on the operating effectiveness of such company’s internal controls. No material
weakness has been identified as of June 30, 2013. In the event we identify material weaknesses in our internal controls
that we cannot remediate in a timely manner or we are unable to receive a positive attestation from our independent auditors with
respect to our internal controls, investors and others may lose confidence in the reliability of our financial statements.



Our auditor, like other independent registered public
accounting firms operating in China, is not permitted to be subject to inspection by the Public Company Accounting Oversight Board,
and as such, investors may be deprived of the benefits of such inspection.



The independent registered public accounting firm that issues
the audit reports included in our annual report filed with the SEC, as an auditor of companies that are traded publicly in the
United States and a firm registered with the Public Company Accounting Oversight Board (United States), or the PCAOB, is required
by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United
States and professional standards. Because our auditor is located in China, a jurisdiction where the PCAOB is currently unable
to conduct inspections without the approval of the PRC authorities like other independent registered public accounting firms operating
in China, our auditor is currently not inspected by the PCAOB.



14







Inspections of firms that the PCAOB has conducted have identified
deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection
process to improve future audit quality. The inability of the PCAOB to conduct inspections of independent registered public accounting
firms operating in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality
control procedures. As a result, investors may be deprived of the benefits of the PCAOB inspections.



We may be adversely affected by the outcome of the administrative
proceedings brought by the SEC against five accounting firms in China.



The SEC has brought administrative proceedings against five
accounting firms in China recently, alleging that they refused to hand over documents to the SEC for ongoing investigations into
certain other China-based companies. We were not and are not subject to any SEC investigations, nor are we involved in the proceedings
brought by the SEC against the accounting firms. However, the independent registered public accounting firm that issues the audit
reports included in our annual reports filed with the SEC is one of the five accounting firms named in the SEC’s proceedings
and we may be adversely affected by the outcome of the proceedings, along with other U.S.-listed companies audited by these accounting
firms. If the SEC prevails in the proceedings, our independent auditors and other four accounting firms in China that were named
in the proceedings may be barred from practicing before the SEC and hence unable to continue to be the auditors for China-based
companies like ourselves. If none of the China-based auditors are able to continue to be auditors for China-based companies listed
in the U.S., we will not be able to meet the reporting requirements under the Exchange Act, which may ultimately result in our
deregistration from the SEC and delisting from NASDAQ.



RISKS RELATED TO DOING BUSINESS IN CHINA



A significant portion of our operating assets are located
in China and a substantial portion of our revenue will be derived from our operations in China so our business, results of operations
and prospects are subject to the economic, political and legal policies, developments and conditions in China.



Because a substantial portion of our business is conducted in
China, despite the significant operations in other Southeast Asian and Middle Eastern jurisdictions, the PRC’s economic,
political and social conditions, as well as government policies, will influence our business. The PRC economy differs
from the economies of most developed countries in many respects. China’s GDP has grown consistently since 1978
(National Bureau of Statistics of China). However, we cannot assure you that such growth will be sustained in the future.
If, in the future, China’s economy experiences a downturn or grows at a slower rate than expected, there may be less demand
for spending in certain industries. A decrease in demand for spending in certain industries could impair our ability to remain
profitable. The PRC’s economic growth has been uneven, both geographically and among various sectors of the economy. The
PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these
measures benefit the overall PRC economy, but may have a negative effect on us. For example, our financial condition
and results of operations may be hindered by PRC government control over capital investments or changes in tax regulations.



The PRC economy has been transitioning from a planned economy
to a more market-oriented economy. Although in recent years the PRC government has implemented measures emphasizing the use of
market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate
governance in business enterprises, a substantial portion of productive assets in China is still owned by the PRC government. In
addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. It
also exercises significant control over PRC economic growth through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.



15







If the China Securities Regulatory Commission, or CSRC,
or another PRC regulatory agency, determines that CSRC approval of our initial merger was required or if other regulatory obligations
are imposed upon us, we may incur sanctions, penalties or additional costs which would damage our business.



On August 8, 2006, six PRC regulatory agencies, including the
CSRC, promulgated the Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Regulations,
which became effective on September 8, 2006. Under these regulations, the prior approval of the CSRC is required for the overseas
listing of offshore special purpose vehicles that are directly or indirectly controlled by PRC companies or individuals and used
for the purpose of listing PRC onshore interests on an overseas stock exchange.



On September 20, 2007, we completed a merger transaction with
Chardan North China Acquisition Corporation, or Chardan, which resulted in our current ownership and corporate structure. We
believe that CSRC approval was not required for our merger transaction or for the listing and trading of our securities on a trading
market because we are not an offshore special purpose vehicle that is directly or indirectly controlled by PRC companies or individuals. Although
the M&A Regulations provide specific requirements and procedures, there are still many ambiguities in the meaning of many provisions. Further
regulations are anticipated in the future, but until there has been clarification either by pronouncements, regulation or practice,
there is some uncertainty in the scope of the regulations and the regulators have wide latitude in the enforcement of the regulations
and approval of transactions. If the CSRC or another PRC regulatory agency subsequently determines that the CSRC’s
approval was required, we may face sanctions by the CSRC or another PRC regulatory agency. If this happens, these regulatory
agencies may impose fines and penalties on our operations in China, limit our operating privileges in China, restrict or prohibit
payment or remittance of dividends paid by Hollysys, or take other actions that could damage our business, financial condition,
results of operations, reputation and prospects, as well as the trading price of our securities.



We anticipate that the PRC will experience inflation in
the near term, which may have an adverse effect on our cost of operations and profitability.



The PRC economy is experiencing general inflationary pressures
due to a number of factors which overall will affect Hollysys. If we are unable to increase the value of our contracts commensurate
with increases in our operating expenses, we will experience a reduction in our profit margins. If we raise our contract prices,
we may not win the kind and amount of contracts that will permit us to operate profitably and grow our business.



If the PRC imposes restrictions designed to reduce inflation,
future economic growth in the PRC could be severely curtailed which could hurt our business and profitability.



While the economy of the PRC has experienced rapid growth, this
growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid
economic growth often can lead to growth in the supply of money and rising inflation. In order to control inflation
in the past, the PRC has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. Imposition
of similar restrictions may lead to a slowing of economic growth, a decrease in demand for our products and generally damage our
business and profitability.



Fluctuations in exchange rates could harm our business
and the value of our securities.



The value of our securities will be indirectly affected by the
foreign exchange rate between US dollars and RMB and between those currencies and other currencies in which our sales may be denominated.
Because a large portion of our earnings and cash assets are denominated in RMB, Singapore Dollar and Malaysian Ringgit, and our
financial results are reported in US dollars, fluctuations in the exchange rate between the US dollar and the RMB will affect our
balance sheet and our earnings per share as stated in US dollars. In addition, appreciation or depreciation in the value
of the RMB relative to the US dollar would affect our financial results reported in US dollar terms without giving effect to any
underlying change in our business or results of operations.  Fluctuations in the exchange rate will also affect the relative
value of any dividend we issue that will be exchanged into US dollars as well as earnings from, and the value of, any US dollar-denominated
investments we make in the future. Since July 2005, the RMB has no longer been pegged to the US dollar. Although
the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations
in the exchange rate, the RMB may appreciate or depreciate significantly in value against the US dollar in the medium to long term.
Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and
lessen intervention in the foreign exchange market.



16







Very limited hedging transactions are available in China to
reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While
we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited,
and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses
may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.



Exchange controls that exist in the PRC may limit our
ability to utilize our cash flow effectively.



We are subject to the PRC’s rules and regulations on currency
conversion. In the PRC, the State Administration for Foreign Exchange, or SAFE, regulates the conversion of the RMB
into foreign currencies. Currently, foreign investment enterprises, or FIEs, are required to apply to the SAFE for “Foreign
Exchange Registration Certificates for FIEs.” We believe Beijing Helitong is an FIE. With such registration
certificates, which need to be renewed annually, FIEs are allowed to open foreign currency accounts including a “basic account”
and “capital account.” Currency conversion within the scope of the “basic account,” such as remittance
of foreign currencies for payment of dividends, can be effected without requiring the approval of the SAFE. However,
conversion of currency in the “capital account,” including capital items such as direct investment, loans and securities,
still require approval of the SAFE. We cannot assure you that the PRC regulatory authorities will not impose further
restrictions on the convertibility of the RMB. Any future restrictions on currency exchanges may limit our ability to use our cash
flow for the distribution of dividends to our shareholders or to fund operations it may have outside of the PRC.



A failure by our shareholders or beneficial owners who
are PRC citizens or residents in China to comply with certain PRC foreign exchange regulations could restrict our ability to distribute
profits, restrict our overseas and cross-border investment activities or subject us to liability under PRC laws.



SAFE Circular No. 75 effective from November 2005 and a series
of implementation rules and guidance issued by SAFE, including the most recent circular relating to operating procedures that came
into effect as of July 1, 2011, require approvals from, and registrations with, PRC government authorities in connection with direct
or indirect offshore investment activities by PRC residents and PRC corporate entities. The SAFE regulations require
retroactive approval and registration of direct or indirect investments previously made by PRC residents in offshore companies.



As it is uncertain how the SAFE regulations described above
will be interpreted or implemented, we cannot predict how these regulations will affect our business operations or future strategy.
In the event that a PRC shareholder with a direct or indirect stake in an offshore parent company fails to obtain the required
SAFE approval and make the required 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 the various SAFE approval and registration
requirements described above, as currently drafted, could result in liability under PRC law for foreign exchange evasion.



Because Chinese law governs many of our material agreements,
we may not be able to enforce our rights within the PRC or elsewhere, which could result in a significant loss of business, business
opportunities or capital.



Chinese law governs many of our material agreements, some of
which may be with Chinese governmental agencies. We cannot assure you that we will be able to enforce any of our material agreements
or that remedies will be available outside of the PRC. The system of laws and the enforcement of existing laws and contracts
in the PRC may not be as certain in implementation and interpretation as in the United States. The Chinese judiciary is relatively
inexperienced in enforcing corporate and commercial law, leading to a higher than usual degree of uncertainty as to the outcome
of any litigation. The inability to enforce or obtain a remedy under any of our future agreements could result in a
significant loss of business, business opportunities or capital.



17







If any dividend is declared in the future and paid in
a foreign currency, you may be taxed on a larger amount in US dollars than the US dollar amount that you will actually ultimately
receive.



If you are a U.S. holder, you will be taxed on the US dollar
value of your dividends at the time you receive them, even if you actually receive a smaller amount of US dollars when the payment
is in fact converted into US dollars. Specifically, if a dividend is declared and paid in a foreign currency, the amount of the
dividend distribution that you must include in your income as a U.S. holder will be the US dollar value of the payments made in
the foreign currency, determined at the conversion rate of the foreign currency to the US dollar on the date the dividend distribution
is includible in your income, regardless of whether the payment is in fact converted into US dollars. Thus, if the value of the
foreign currency decreases before you actually convert the currency into US dollars, you will be taxed on a larger amount in US
dollars than the US dollar amount that you will actually ultimately receive.



Legal regulations 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 generally rely on our subsidiaries to provide us with cash flow and to meet our other obligations. For PRC subsidiaries,
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). 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 U.S. GAAP.



The ability, as well as the decision, to declare dividends
will also be influenced by the withholding taxes imposed on payments by companies in one jurisdiction to a company in another
jurisdiction. For example, there is a 10% withholding tax imposed on a PRC company paying dividends to a company located in
the BVI. This will reduce the value of any potential dividend to the ultimate shareholders, and therefore the board may
determine that it would be a more prudent use of funds to reinvest funds that could be available for dividends into the
business or acquire other businesses and assets.



Based on the articles of association and the Companies Act in
Singapore and Malaysia, no dividend shall be payable except out of the profits of the companies. There is no limit to the number
of dividend payable as long as there are sufficient profits. There is no withholding tax imposed on a Singapore and Malaysia
company paying dividends to a company located outside of Singapore and Malaysia upon remittance.



Our business could be severely harmed if the Chinese government
changes its policies, laws, regulations, tax structure or its current interpretations of its laws, rules and regulations relating
to our operations in China.



Our results of operations, financial state of affairs and future
growth are, to a significant degree, subject to China’s economic, political and legal development and related uncertainties.
Our operations and results could be materially affected by a number of factors, including, but not limited to



| | · | Changes in policies by the Chinese government resulting in changes in laws or regulations or the interpretation of laws or
regulations,
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| | · | Changes in taxation,
| | - | --------------------

| | · | Changes in employment restrictions,
| | - | -----------------------------------

| | · | Restrictions on imports and sources of supply,
| | - | ----------------------------------------------

| | · | Import duties, and
| | - | ------------------

| | · | Currency revaluation.
| | - | ---------------------



18







Over the past several years, the Chinese government has pursued
economic reform policies including the encouragement of private economic activities and greater economic decentralization. If
the Chinese government does not continue to pursue its present policies that encourage foreign investment and operations in China,
or if these policies are either not successful or are significantly altered, then our business could be harmed. Following
the Chinese government’s policy of privatizing many state-owned enterprises, the Chinese government has attempted to augment
its revenues through increased tax collection. It also exercises significant control over China’s economic growth
through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and
providing preferential treatment to particular industries or companies. Continued efforts to increase tax revenues could
result in increased taxation expenses being incurred by us. Economic development may be limited as well by the imposition
of austerity measures intended to reduce inflation, the inadequate development of infrastructure and the potential unavailability
of adequate power and water supplies, transportation and communications. In addition, the Chinese government continues
to play a significant role in regulating industry by imposing industrial policies.



The Chinese laws and regulations which govern our current
business operations are sometimes vague and uncertain and may be changed in a way that hurts our business.



China’s legal system is a civil law system based on written
statutes, in which system decided legal cases have less value as precedents, unlike the common law system prevalent in the United
States or the BVI. There are substantial uncertainties regarding the interpretation and application of Chinese laws and regulations,
including but not limited to the laws and regulations governing our business, or the enforcement and performance of our arrangements
with customers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. The Chinese
government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing
laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce,
taxation and trade. However, because these laws and regulations are relatively new, and because of the limited volume
of published cases and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws
and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses
may also be applied retroactively.  We are considered an FIE under Chinese laws, and as a result, we must comply
with Chinese laws and regulations. We cannot predict what effect the interpretation of existing or new Chinese laws
or regulations may have on our business. If the relevant authorities find us to be in violation of Chinese laws or regulations,
they would have broad discretion in dealing with such a violation, including, without limitation: levying fines; revoking our business
and other licenses; requiring that we restructure our ownership or operations; and requiring that we discontinue any portion or
all of our business.



A slowdown or other adverse developments in the Chinese
economy may materially and adversely affect our customers’ demand for our services and our business.



A substantial portion of our operations are conducted in China
and much of our revenues are generated from sales to businesses operating in China. Although the Chinese economy has
grown significantly in recent years, such growth may not continue. Currently, some sectors of the economy are experiencing a slowdown
in business activity and the construction of high-speed rail in China is delayed, the economic slowdown is having a negative impact
on the middle-end and low-end of the industrial automation market in China. We do not know how sensitive we might be to a slowdown
in general economic growth or other adverse changes in Chinese economy which may affect demand for our products and services. A
slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in China may materially
reduce the demand for our products and services and, in turn, reduce our results of operations.



The implementation of PRC employment law is likely to
result in increased labor costs in China, which may affect our business and profitability.



The Labor Contract Law, which became effective on January 1,
2008, imposes on employers requirements to enter into fixed-term employment contracts, and effects the recruitment of temporary
employees and dismissal of employees. In addition, under the Regulations on Paid Annual Leave for Employees, which also
became effective on January 1, 2008, employees who have worked continuously for more than one year are entitled to paid vacation
time ranging from 5 to 15 days, depending on the length of the employee’s service. Employees who waive such vacation
entitlements at the request of the employer will be compensated for three times their normal daily salaries for each vacation day
so waived. On July 1, 2011, China promulgated the Social Insurance Law to unify pervious scattered laws relating to social insurance
matters. The law clarifies that the social insurance system in China includes pension insurance, medical insurance, unemployment
insurance, work-related injury insurance and maternity insurance, all of which are mandatory benefits for employees of companies
operating in China. Employers are required to make contributions under these insurance schemes, which although local in rates,
are overall expected to increase employee expense over time. There is no assurance that disputes, work stoppages or strikes will
not arise in the future over these and other matters. Increases in the labor costs or future disputes with our employees could
damage our business, financial condition or operating results.



19







Under the EIT Law, we may be classified as a “resident
enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC
shareholders.



Under the Enterprise Income Tax Law, or the EIT Law, and implementing
rules, both of which became effective on January 1, 2008, an enterprise established outside of China with “de facto management
bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar
to a Chinese domestic enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de
facto management as “substantial and overall management and control over the production and operations, personnel, accounting,
and properties” of the enterprise.



On April 22, 2009, the State Administration of Taxation issued
the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as
Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application of
the EIT Law and its implementation for non-Chinese enterprises or group controlled offshore entities. Pursuant to the
Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified
as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations
reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons
in China; (iii) substantial assets and properties, accounting books, corporate chops, board and shareholder minutes are kept in
China; and (iv) at least half of its directors with voting rights or senior management often resident in China. A resident
enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a
rate of 10% when paying dividends to its non-PRC shareholders. However, it remains unclear as to whether the Notice
is applicable to an offshore enterprise incorporated by a Chinese natural person. Nor are detailed measures on imposition
of tax from non-domestically incorporated resident enterprises are available. Therefore, it is unclear how tax authorities
will determine tax residency based on the facts of each case.



We may be deemed to be a resident enterprise by Chinese tax
authorities. If the PRC tax authorities determine that Hollysys is a “resident enterprise” for PRC enterprise
income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income
tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In
our case, this would mean that income such as interest on financing proceeds and non-China source income would be subject to PRC
enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing rules, dividends paid
to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will
not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have
not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises
for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new
“resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends
we pay to our non-PRC shareholders and with respect to gains derived by our non-PRC shareholders from transferring our shares.



RISKS RELATED TO OUR SHARES



The market price of our ordinary shares is volatile, leading
to the possibility of its value being depressed at a time when you want to sell your holdings.



The market price of our ordinary shares is volatile, and this
volatility may continue. Numerous factors, many of which are beyond our control, may cause the market price of our ordinary
shares to fluctuate significantly. These factors include:



| | · | our earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating results or our failure
to meet the expectations of financial market analysts and investors;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



20







| | · | changes in financial estimates by us or by any securities analysts who might cover our stock;
| | - | ---------------------------------------------------------------------------------------------

| | · | speculation about our business in the press or the investment community;
| | - | ------------------------------------------------------------------------

| | · | significant developments relating to our relationships with our customers or suppliers;
| | - | ---------------------------------------------------------------------------------------

| | · | stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the same
industry as we are;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

| | · | customer demand for our products;
| | - | ---------------------------------

| | · | investor perceptions of the automation and control industry in general and our company in particular;
| | - | -----------------------------------------------------------------------------------------------------

| | · | the operating and stock performance of comparable companies;
| | - | ------------------------------------------------------------

| | · | general economic conditions and trends;
| | - | ---------------------------------------

| | · | major catastrophic events;
| | - | --------------------------

| | · | announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures;
| | - | -------------------------------------------------------------------------------------------------------------------------

| | · | changes in accounting standards, policies, guidance, interpretation or principles;
| | - | ----------------------------------------------------------------------------------



| | · | loss of external funding sources;
| | - | ---------------------------------

| | · | failure to maintain compliance with NASDAQ rules;
| | - | -------------------------------------------------

| | · | sales of our ordinary shares, including sales by our directors, officers or significant shareholders; and
| | - | ---------------------------------------------------------------------------------------------------------

| | · | additions or departures of key personnel.
| | - | -----------------------------------------



Securities class action litigation is often instituted against
companies following periods of volatility in their stock price. This type of litigation could result in substantial costs to us
and divert our management’s attention and resources.



Moreover, securities markets may from time to time experience
significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. These market
fluctuations may adversely affect the price of our ordinary shares and other interests in our company at a time when you want to
sell your interest in us.



We are a “foreign private issuer,” and have
disclosure obligations that are different than those of other U.S. domestic reporting companies so you should not expect to receive
the same information about us at the same time as a U.S. domestic reporting company may provide.



We are a foreign private issuer and, as a result, we are not
subject to certain of the requirements imposed upon U.S. domestic issuers by the SEC. For example, we are not required to issue
quarterly reports or proxy statements. Also, we are allowed four months to file our annual report with the SEC. We
are not required to disclose certain detailed information regarding executive compensation that is required from U.S. domestic
issuers. Further, our directors and executive officers are not required to report equity holdings and transactions in
our equity under Section 16 of the Securities Act. As a foreign private issuer, we are also exempt from the requirements
of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific
information about an issuer before other investors. We are, however, still subject to the anti-fraud and anti-manipulation
rules of the SEC, such as Rule 10b-5. Since many of the disclosure obligations required of us as a foreign private issuer
are different than those required by other U.S. domestic reporting companies, our shareholders should not expect to receive information
about us in the same amount and at the same time as information is received from, or provided by, other U.S. domestic reporting
companies. We are liable for violations of the rules and regulations of the SEC which do apply to us as a foreign private
issuer. Violations of these rules could affect our business, results of operations and financial condition.



The payment of cash dividends depends on the decision
of the Board of Directors and the cash and legal requirements of our company.



The Board of Directors decides if and when the company will
pay cash dividends. The decision to pay dividends will depend on many factors from time to time, including the cash needs of the
company and its subsidiaries, the legal requirements of Chinese companies to maintain stated capital amounts, and the tax policies
of the various jurisdictions in which we operate. There can be no assurance that there will be regular cash dividends.



21







You may have difficulty enforcing judgments obtained against
us.



We are a BVI company and substantially all of our assets are
located outside of the United States. In addition, our directors and officers are nationals and residents of countries other
than the United States. The assets of these persons are located mostly outside the United States. As a result, it may be difficult
for you to effect service of process within the United States upon these persons. It also may be difficult for you to
enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities
laws against us and our officers and directors. In addition, there is uncertainty as to whether the courts of the British
Virgin Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil
liability provisions of the securities laws of the United States or any state. It is uncertain whether such British
Virgin Islands or PRC courts would be competent to hear original actions brought in the BVI or the PRC against us or such persons
based upon the securities laws of the United States or any state thereof.



Because we are incorporated under the laws of the BVI,
it may be more difficult for our shareholders to protect their rights than it would be for a shareholder of a corporation incorporated
in another jurisdiction.



Our corporate affairs are governed by our Memorandum and Articles
of Association and by the BVI Business Companies Act, 2004 of the BVI. Principles of law relating to such matters as
the validity of corporate procedures, the fiduciary duties of management and the rights of our shareholders differ from those that
would apply if we were incorporated in the United States or another jurisdiction. The rights of shareholders under BVI
law are not as clearly established as are the rights of shareholders in many other jurisdictions. Under the laws of
most jurisdictions in the United States, majority and controlling shareholders generally have certain fiduciary responsibilities
to the minority shareholders. Shareholder action must be taken in good faith, and actions by controlling shareholders which are
obviously unreasonable may be declared null and void. BVI law protecting the interests of minority shareholders may not be as protective
in all circumstances as the law protecting minority shareholders in US jurisdictions. In addition, the circumstances
in which a shareholder of a BVI company may sue the company derivatively, and the procedures and defenses that may be available
to the company, may result in the rights of shareholders of a BVI company being more limited than those of shareholders of a company
organized in the US. Furthermore, our directors have the power to take certain actions without shareholder approval
which would require shareholder approval under the laws of most US jurisdictions. The directors of a BVI corporation,
subject in certain cases to court approval but without shareholder approval, may implement a reorganization, merger or consolidation,
the sale of any assets, property, part of the business, or securities of the corporation. The ability of our board of
directors to create new classes or series of shares and the rights attached by amending our Memorandum of Association and Articles
of Association without shareholder approval could have the effect of delaying, deterring or preventing a change in our control
without any further action by the shareholders, including a tender offer to purchase our ordinary shares at a premium over then
current market prices. Thus, our shareholders may have more difficulty protecting their interests in the face of actions by our
board of directors or our controlling shareholders than they would have as shareholders of a corporation incorporated in another
jurisdiction.



We may be classified as a passive foreign investment company,
which could result in adverse United States federal income tax consequences to U.S. shareholders.



We believe that we are not considered a “passive foreign
investment company,” or PFIC, for United States federal income tax purposes for our tax year ended June 30, 2013. However,
each year we must make a separate determination as to whether we are a PFIC. We cannot assure you that we will not be
a PFIC for our tax year ending June 30, 2014 or any following tax year. If a non-U.S. corporation either (i) has at
least 75% of its gross income is passive income for a tax year or (ii) has at least 50% of the value of its assets (based on an
average of the quarterly values of the assets during a tax year) attributable to assets that produce or are held for the production
of passive income, then the non-U.S. corporation will be deemed a PFIC. The market value of our assets may be determined
to a large extent by the market price of our ordinary shares. If we are treated as a PFIC for any tax year during which U.S.
shareholders hold ordinary shares, certain adverse United States federal income tax consequences could apply to such U.S. holders.



22







Our Shareholder Rights Plan and charter documents may
hinder or prevent change of control transactions.



Our shareholder rights plan and provisions contained in our
Memorandum and Articles of Association may discourage transactions involving an actual or potential change in our ownership. In
addition, our Memorandum and Articles of Association authorizes our board of directors to issue up to 90,000,000 shares of preferred
stock without any further action by the stockholders. Please see Item 10, Additional Information for more information
regarding our shareholder rights plan. Such restrictions and issuances could make it more difficult, delay, discourage,
prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent our stockholders from recognizing
a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our ordinary
shares, even if you or our other stockholders believe that such actions are in the best interests of us and our stockholders.



| | ITEM 4. | INFORMATION ON THE COMPANY
| | ------- | --------------------------



| | A. | History and Development of the Company
| | -- | --------------------------------------



We were established under the laws of the BVI on February 6,
2006, as HLS Systems International, Ltd., in order to merge with Chardan, a Delaware special purpose acquisition company, originally
established on March 10, 2005, with the primary purpose of effecting a business combination with an unidentified operating business
that has its primary operating facilities located in China, in any city or province north of Yangtze River. On September 20, 2007,
we acquired all of the issued and outstanding ordinary shares of GTH, a BVI company. On August 1, 2008, Hollysys got listed
on NASDAQ Global Market. On July 17, 2009, we changed our name to Hollysys Automation Technologies Ltd. to more accurately
reflect our core value of leveraging proprietary technologies to provide state-of-the-art automation and control solutions for
our clients.



On July 1, 2011, we purchased 100% of Concord Electrical Pte.
Ltd., Concord Electrical Sdn. Bhd. incorporated in Malaysia, and Concord Corporation Pte. Ltd. Dubai Branch. The consideration
was a combination of cash and stock, with a total value of approximately $42.9 million which, consisted of:



| | 1) | SGD 41.5 million cash (approximately $33,789,285), which was paid in two equal installments of SGD 20.75 million each in May
2011 and July 2011, respectively; and
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | 1,006,788 ordinary shares of Hollysys, with a market value of approximately $9,121,499 as of July 1, 2011, the closing date,
which were issued to the seller on September 2, 2011.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Concord provides electric solutions with end-to-end design,
engraving, engineering, procurement, project management, construction and commissioning, and maintenance, active in the rail industry
in Singapore, UAE and Saudi Kingdom and the building retrofit market in Singapore. Through the acquisition, the Company seeks to
expand the existing distribution and marketing channels to cross sell the Company’s existing product lines in rail and industrial
segments to fast growing South-East Asia and the Middle East markets. The operating results of Concord are included in our consolidated
financial statements effective from July 1, 2011.





On April 1, 2013, we purchased 100% of the equity of Bond for
a purchase price of approximately US$73 million, payable 50% in cash and 50% in ordinary shares of Hollysys. The stock will be
issued to the Bond shareholders in three installments over three years, 60% of which are incentive shares and will be based on
certain performance targets for calendar years 2013 and 2014. Additional ordinary shares, as a premium on performance, will be
issuable to the Bond shareholders, if Bond outperforms the established targets, but the premium will not exceed 15% of the total
incentive shares in any case. The operating results of Bond have been included in our consolidated financial statements effective
from April 1, 2013. Bond provides complete mechanical and electrical solutions with end to end capabilities in design, engineering,
procurement, project management, construction and commissioning, and maintenance to a wide array of industries, including factories,
data centers, banks, hospitals, airports, power stations, gas and instrumentation plants, hotels, commercial centers, residential
buildings and infrastructure works. We seek to take advantage of Bond’s strong presence and brand name in Southeast Asia
and to strengthen our Southeast Asian business.



23







| | B. | Business Overview
| | -- | -----------------



We are a leading provider of automation and control technologies
and products in China and increasingly in Southeast Asia and the Middle East that enable our diversified industry and utility customers
to improve operating safety, reliability, and efficiency. Founded in 1993, we have approximately 3,813 employees with a nationwide
China presence in over 60 cities and with subsidiaries and offices in Southeast Asia and the Middle East. We serve over approximately
5,000 customers in the industrial, railway, subway, nuclear power, building retrofit and mechanical and electronic industries in
China, Southeast Asia, and Middle East. Our proprietary technologies are applied through our industrial automation solution
suite, including the DCS (Distributed Control System), PLC (Programmable Logic Controller), RMIS (Real-time Management Information
System), HAMS (HolliAS Asset Management System), OTS (Operator Training System), HolliAS BATCH (Batch Application Package), HolliAS
APC Suite (Advanced Process Control Package), SIS (Safety Instrumentation System), high-speed railway signaling system of TCC (Train
Control Center), ATP (Automatic Train Protection), Subway Supervisory and Control platform, SCADA (Surveillance Control and Data
Acquisition), nuclear power non-safety automation and control system HolliAs-NMS and other products.



We historically focused our efforts on the area of DCS, which
are networks of controllers, sensors, actuators and other devices that can be programmed to control outputs based on input conditions
and/or algorithms, which are mainly used to control continuous manufacturing processes. Our DCS have been widely used in the industries
involving continuous flow of material handling, such as power generation, petro-chemical, chemical, cement manufacturing, paper
mills, and waste water recycling. We have also entered the PLC market, which is mainly used in discreet control applied to a wide
array of industries. PLCs are usually integrated together into machines providing control at the machinery level. With more of
our proprietary products introduced into the market and the behavioral change of customers’ purchasing practice, we gradually
changed our market and sales positioning from a single DCS/PLC product provider, to a total solution provider encompassing third-party
hardware-centric products such as instrumentation and actuators, our proprietary DCS/PLC products, and valued-added software packages
such as AMS (Asset Management System), MES (Manufacturing Execution System), APC (Advanced Process Control), OTS Simulation (Operator
Training System),and others. The safety system SIS (Safety Instrumentation System), certified under European safety standards and
newly introduced to the market in July 2012 will further round out our proprietary product suite in the industrial automation segment.



We have branched out from the industrial automation domain
into the subway and surface rail businesses, leveraging on our core competency and strong research and development
capabilities, and have already established a leading position in the high-speed rail signaling market and subway SCADA
(Surveillance Control and Data Acquisition) market. We also command a position in China’s nuclear power automation and
control market as the only proven local automation and control product provider to the non-safety control for both nuclear
island and conventional island of nuclear power reactors in nuclear power stations. Through our joint venture with China
General Nuclear Power Corporation, China Techenergy Co., Ltd., we have access to all the nuclear reactors being contracted to
our joint venture partner, which is currently holding roughly 60% of China’s nuclear market share. Through
Concord, we are able to provide end-to-end complete electrification related services in rail, power, semi-conductor,
pharmaceutical, petrochemical and other industrial sectors.  With the recent purchase of Bond, we are expanding and
deepening our ability to offer mechanical and electrical solutions in design, engineering, procurement, project management,
construction and commissioning, and maintenance to a wide range of industries, such as manufacturing, banks, hospitals,
airports, power plants, commercial centers, hotels, and infrastructure works. The Bond acquisition is also deepening our
capacities in Southeast Asia, complementing our business presence established through Concord. We believe that our
present leadership position in the high-growth segments is attributable to our vision, execution, and strong research and
development capabilities.



We have a substantial reputation in the PRC domestic industrial
automation industry for our comprehensive capabilities and have focused on the development of this market. We sell our
products and services to, or carry out engineering projects for, national or multi-provincial companies with subsidiaries located
across 30 provinces in China. To date, we have served more than 5, 000 industrial enterprise customers including state-owned
enterprises, multinational corporations and local private companies and have undertaken over 18,000 projects. We believe
that the quality of our systems is unsurpassed by local Chinese competitors and is comparable to high-end foreign suppliers of
DCS and the history of our projects supports that view. For example, after three years of review and analysis, BASF,
a large multi-national company, has designated us as a potential qualified DCS vendor for the company, a distinction shared with
large multinationals such as ABB and Emerson.



24







Internationally, we have a strong presence through Concord and Bond in Southeast Asia and increasingly in the Middle East and in Hong Kong SAR. During the past several
years we have achieved a number of significant contract wins, including (i) contracts with MTR Corporation of Hong Kong SAR to
provide a complete suite of high-speed rail signaling systems to Guangzhou-Shenzen-Hong Kong Express Rail Hong Kong Section; (ii)
a contract with Sendan International Co., Ltd. to provide electrical, instrumentation and control installation works for the Rabigh
Power Plant II in Rabigh, Saudi Arabia, which is powered by natural gas and oil; (iii) a contract with SMRT Trains Ltd. in Singapore
to provide design, electrification and installation for station renovations on North-South and East-West lines and a contract with
Thales Solutions Asia Pte. Ltd. to provide design, installation, testing and commission for replacing the existing signaling systems
for the North-South and East-West lines and install new signaling systems for the Tuas West Extension line in Singapore. Our international
stature will be enhanced by our obtaining international certifications such as the European Safety Standard Certification Level
4, which relates to our proprietary subway signaling systems.





Our revenue increased from approximately $174.1 million in fiscal
year 2010, to approximately $349.1 million in fiscal year 2013, representing a compounded annual growth rate (CAGR) of approximately
26.1% for the past three years. During the same period, our non-GAAP net income attributable to Hollysys increased by a CAGR
of approximately 30.0% from $26.2 million in fiscal year 2010 to $57.6 million in fiscal year 2013. These significant increases
reflect our success in exploring new business areas and our increasing market penetration. We continually seek to broaden
our market reach by introducing new products and improving our profit margin through new business areas such as railway control
systems and nuclear power plant control, while exploring international market to fulfill our mission of sustainable and high growth.



Strategy



Our goal for Hollysys is to become one of the world's well-known
automation and control technology and product providers. To meet this goal we plan to enhance the core competencies
that have made us a leading domestic automation and control technology and application provider in China, the only Chinese
company qualified to design and manufacture non-safety control systems of nuclear power stations, and a leader in the industrial
automation and in the high-speed rail and subway sectors. The principal elements of our core business strategies are as follows:



| | · | To further establish our leadership position as a dominant automation and control technology and application provider across
all the addressable market segments– We seek to be a potential industry consolidator in China and Southeast Asia
to become a leading provider of industrial automation and control technology applications for clients in various industries, by
presenting ourselves as a total solution provider. We seek to further penetrate the high-speed rail and subway business
with more proprietary products to enhance our leading position and market share. Since the majority of our customers operate in
a wide range of industries, we stand to be a prime beneficiary of China’s and increasingly Southeast Asia’s, drive
for environment protection, clean energy, lower carbon emission, national economic development, and rising labor costs in the Asia
region. Our combination of patented technologies, strong research and development capabilities, ability to leverage
strategic alliances and acquisitions to enter and penetrate new market segments, and a comprehensive understanding of the Chinese
and Southeast markets should allow us to capitalize on these growth opportunities.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | To continuously enhance our leadership position in technology – We have long been recognized as a pioneer in
                                                                                                               the development of industrial automation and control technology and applications in China. We are continuously seeking
                                                                                                               ways to improve our existing product lines while being committed to the development of new applications, platforms, and
                                                                                                               products. In order to maintain our leadership in technology, we have devoted significant resources to the research and
                                                                                                               development that is undertaken by a group of trained and skilled engineers. In July 2012, we released 5th generation DCS
                                                                                                               named HOLLiAS-K, which is superior to the performance of the 4th generation in terms of reliability, flexibility, and
                                                                                                               ease of use. Hollysys has applied its years of experiences in nuclear DCS into the design of HOLLiAS-K. Flexible
                                                                                                               architectures of P-to-P (Peer to Peer), C/S (Client/Server), or hybrid system can be selected according to the project scale.
                                                                                                               Industry specific software solutions are designed for better customization leveraging our deep industry knowhow and
                                                                                                               expertise. Further advantages such as vertical mounting, modular connection, and tilted I/O design make the engineering and
                                                                                                               wiring more effective and deliver the customers faster and more stable field installation. Also in July 2012, we developed
                                                                                                               China’s first proprietary Safety Instrumented System, named HiaGuard-SIS, and passed Safety Integrity Level 3
                                                                                                               certification in compliance with the most stringent European standards. HiaGuard-SIS is a critical safety protection system
                                                                                                               comprising sensors, logic solvers and actuators for the purposes of taking a process to a safe state when normal
                                                                                                               predetermined set points are exceeded, or safe operating conditions are violated. The SIS developed by Hollysys is applicable
                                                                                                               to ESD (Emergency Shutdown System), PSD (Process Shutdown System), FGS (Fire and Gas Systems), BMS (Burner Management
                                                                                                               System), and ETS (Emergency Trip System). Besides, we are continuously devoting resources to research and development on our
                                                                                                               addressable market related technologies and products, and international market, including subway signaling system, industrial
                                                                                                               automation motion control, machinery control products and technologies to complement our existing product portfolio.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



25







| | · | To actively explore and prepare for international market expansion– Management is pursuing a strategy for Hollysys
to have meaningful revenue generated from the international market and to become one of the prominent and well-known automation
and control players in the world. We made significant progress in this business objective through the acquisitions of the Concord
Group and Bond, both of which are headquartered in Singapore, by which we obtained a well-established distribution channel and
customer/partner bases to cross-sell our products in the rail and industrial automation segments and building automation and retrofit
segments, and seasoned management teams to form the core of our international team. We have also increased our mechanical and engineering
solution capabilities and are expanding to be able to serve a wider array of industries. Because the China Railway Corporation
employs its own administrative admission system to allow or disallow use of products and entry of system providers to supply the
China’s national rail industry, our high-speed rail signaling products that are currently deployed in China’s high-speed
rail lines have not needed and do not have European safety standard certification, which is a prerequisite for the rail market
outside of China. To satisfy international requirements, we have redesigned the whole set of our high-speed rail signaling systems,
based wholly on our own proprietary technologies, and passed European Safety Standards SIL 4 certification (Safety Integrity Level
4).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The high-speed rail signaling system includes the
onboard ATP (automatic train protection) system that is used to protect the train from travelling at excessive speeds, the ground
based TCC (train control center) for ground safety control of trains, and other auxiliary interfacing products. Based on our own
technologies, we are able to customize our system platforms to meet every level of requirements from conventional rail signaling
systems to the most state-of-the-art, high-speed rail applications, not only for the Chinese market but also for the international
market.





We currently have proprietary ATP (Automatic Train
Protection), TCC (Train Control Center), LEU (Line-Side Electronic Unit), BTM (Balise Transmission Module), TSRS (Temporary Speed
Restriction Server), HVC (Hollysys Vital Computer) and Interlocking system certified according to international standards and have
passed the Safety Integrity Level 4 (SIL4) certification for the high-speed rail sector. In the subway sector, the proprietary
ATS (Automatic Train Supervision) and CBI (Computer Based Interlocking) passed SIL2 and SIL4 certification respectively in 2011.
And in early 2013, we finished the development and certified ZC (Zone Controller), LEU (Line-side Electronic Unit) and Balise for
subway signaling system according to SIL4 requirements. The certification of ATO (Automatic Train Operation), and ATP (Automatic
Train Protection) for subway signaling system will be finished by the end of this calendar year.



Products and Services



As a leading provider of automation and control technology and
applications in China, and increasingly in Southeast Asia, we provide our customers with our standard and customized products and
corresponding services based on each client’s specific requirements.  We are committed to providing reliable, advanced
and cost-effective solutions to help customers optimize their processes to achieve higher quality, greater reliability and better
productivity and profitability.



26







Industrial Automation: Our principal offering is a comprehensive
suite of automation systems for a wide spectrum of industrial market clientele, ranging from petrochemical, thermal power industries,
to cement production and paper making industries. Our comprehensive suite of automation solution consists of third-party hardware-centric
products such as instrumentation and actuators, our proprietary software-centric DCS/PLC, and valued-added software packages such
as RMIS (Real-time Management Information System), HAMS (HolliAS Asset Management System), OTS (Operator Training System), HolliAS
BATCH (Batch Application Package), HolliAS APC Suite (Advanced Process Control Package), and SIS (Safety Instrumentation System).
The Safety Instrumentation System which was certified under European safety standards and was introduced to the market in July
2012, further round out our proprietary product suite in the industrial automation segment. The two mainstream products for this
market segment are our DCS products and our PLC. DCS are a network of controllers, sensors, actuators and other devices
that can be programmed to control outputs based on input conditions through logic calculations. In an automated production line,
sensors or so-called “instrumentations” are distributed across the production facility to monitor sub-systems like
the robots, CNC machines, and logistic tools. These sensors are like human eyes, which monitor the process, and detect
any abnormal situations. The information collected from those sensors is then transmitted to the DCS for centralized
data processing through communication networks. The central computer (brain) processes information and generates commands,
based on sophisticated algorithmic and pre-set parameters. These commands are then sent to actuators (muscles/bones)
through communication devices to execute the orders and maintain production flow. PLCs are small computer devices installed
on machines or equipment, for example, on a factory assembly line, for manufacturing automation.



High-speed Rail: Over the years, Hollysys
has successfully scaled its automation application from industrial manufacturing to rail and subway industry, with proprietary
product lines including, TCC (Train Control Center) and ATP (Automation Train Protection). An ATP essentially acts as
the train over-speed protection mechanism, which collects real-time information like speed limit ahead, train operation status,
line data, instructions from train control center, then combines that information with the train parameters to produce train protection
curves. In case of any human errors, like driver’s negligence at the red light, it applies emergency brakes automatically. TCCs
are an on-ground control center at railway stations or equipment stations which monitors route condition, track status, train schedules,
distance between trains, and the working status of other essential function devices, and then through logic calculation, generates
control instructions and commands. The command information from the TCC is then transmitted to the ATP located on the
locomotives/trains, through track circuits and electronic beacons located at various points along the railway line, or wireless.



Nuclear Automation and Control: As the only
proven domestic automation control systems provider to the nuclear power industry in China, we provide our HOLLiAS NMS product
to China’s nuclear power industry. In a nuclear power station, the nuclear island operates to transform nuclear
energy to heat energy, and pass on the steam generated by the steam generator to the conventional island, where steam drives the
turbine to generate the electricity, and pass on to the transformer for loading onto the grid. Our HOLLiAS NMS proprietary
control systems are now used for non-safety operation control. The know-how was accumulated from our industrial DCS applications
in high-end, conventional energy power plants, with much more sophisticated software and hardware specifications, and more stringent
production and quality assurance process. Our nuclear joint venture with China General Nuclear Power Corporation, China Techenergy
Co., Ltd., has already successfully completed developing its proprietary safety nuclear power automation and control system and
has started to commercialize such technology. Specifically, in April 2013, we successfully applied our proprietary HOLLiAS-N Distributed
Control System to Unit 1 of Ningde Nuclear Power Plant. Our HOLLiAS-N DCS is China’s first domestic proprietary 1GW DCS system
application in nuclear power plants. It is one of the high-end DCS products we developed for 1GW level nuclear power plant. HOLLiAS-N
DCS has successfully passed a series of rigorous tests before the commercial operation of Unit 1 of Ningde NPP and it met all the
parameters and delivered outstanding performance. In June 2013, Unit 1 of Hongyanhe Nuclear Power station started its commercial
operation, of which Hollysys provided the proprietary HOLLiAS-N Distributed Control System.



Subway Automation: We have provided our SCADA
system to China’s subway market for many years, including the Beijing Subway, Guangzhou Metro, Shenzhen Metro, and Dalian
Metro. SCADA is an open software platform to enable integrated and unified monitoring of all necessary sub-systems of
the subway, including the Power Supervisory Control and Data Acquisition System, Building Automatic System, Fire Alarm System,
Platform Screen Door System, Access Control System, Closed Circuit Television, Passenger Information System, Passenger Train Information
System, and Alarm System. Given the exponential growth in China’s subway market and the continued growth expected
for the decades to come, Hollysys is developing its proprietary Subway Signaling System, based on its strong research and development
capability and technical know-how of signaling application accumulated from high-speed rail. Currently the development and certification
according to the European safety standards are basically finished. The current subway signaling market is predominantly occupied
by multi-national corporations, such as Siemens, Alstom.



27









Overseas: We have successfully provided our industrial
automation products to overseas countries mainly in South and Southeast Asia, and are supplying the entire high-speed rail signaling
system to Shenzhen-Hong Kong high-speed rail line for the Hong Kong MTR, which marked our breakthrough to the international high-speed
rail signaling market. We further established a stronger foot hold in Southeast Asia through two acquisitions of Concord and Bond
in 2011 and 2013 respectively. Both of them provide design, engineering, procurement, project management, construction and commissioning,
and maintenance related services, Concord operates mainly in the rail and subway industries in Singapore, UAE and Saudi Kingdom,
and Bond focuses on factories, data centers, banks, hospitals, airports, power stations, gas and instrumentation plants, hotels,
commercial centers, residential buildings and infrastructure works in Malaysia. Through the acquisitions, the Company seeks to
expand the existing distribution and marketing channels to cross sell the Company’s existing product lines in rail and industrial
segments to the fast growing South-East Asia and the Middle East markets.





Project Implementation.We establish a project group
for each potential customer, which has a team of systems engineers and managers to provide total integrated solutions to our customers
to meet their specific requirements. Each project group is staffed with a dedicated team of sales engineers, technical engineers
and project management professionals. The sales engineers and technical engineers work together to offer the best customized solutions
as a result of their understanding of the customer’s detailed requirements through on-site studies. The technical engineers
are responsible for hardware assembly, software configuration, testing and installation, commissioning and trial operation, and
start-up and training; while the project management professionals oversee budgetary matters, coordinate the work force, ensure
adequacy of resources and monitor progress and quality to ensure the timely completion of each project.  Our integrated solutions
projects involve one or more of the following activities:



| | · | Solution planning – We provide our customers with strategic and tactical reviews of their current operations and
future requirements. The planning includes defining client business requirements, developing appropriate hardware and software,
and selecting preferred technology.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Solution design – We detail the industry specifications and implementation tactics necessary to achieve our
customer’s objectives. Hollysys also considers how the new technology will integrate hardware and software integrated in
the solution with the customer’s existing hardware and software and how it will be managed on an ongoing basis. Examples
of these services include defining functional requirements for the system and our components, developing integration plans and
designing of customer-specific system and services applications.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Solution implementation – We install the recommended systems and provide essential services throughout the whole
solution implementation process, to better meet our customers' specific requirements. Key activities include project management,
hardware procurement and production, software development, configuration and field installation and testing, and development of
customized system and services management applications.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our integrated solutions based on our proprietary technology
and products create value for and improve the competitive strengths of our customers by:



| | · | Generating synergy and improving efficiency of our customers through integrating communications, marketing and service functions;
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| | · | Utilizing our industry and process knowledge to develop customized solutions that improve the efficiency of our customers;
| | - | --------------------------------------------------------------------------------------------------------------------------





| | · | Providing a software platform for the optimization of management operations, which provides real-time automation and information
solutions throughout a business; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



28







| | · | Offering maintenance and training services to our customers, which help to cut costs and improve operating efficiency.
| | - | ----------------------------------------------------------------------------------------------------------------------



We customize our floor plans based on careful on-site studies,
build design-specific network systems using our advanced DCS technology and proprietary software, and offer manufacturing execution
system services to ensure that real-time management control is available to our customers in a streamlined and easy-to-use manner.



We believe that our product design and applications that are
integrated in the solutions are unmatched among our domestic competitors.  We also believe that the sophistication and quality
of our products rival those of the multi-national automation and control product suppliers, while our ability to understand and
meet the needs of our Chinese customers gives it a leading edge over foreign competitors. The value of this combination
is reflected in our strong revenue and profit growth over the years.



Markets



Industrial Automation and Control Market



According to the ARC Advisory Group, or ARC, an industry research
group, the DCS market in Asia, as measured by revenue, exceeded US$4,592.6 million in 2009 and will grow at a compounded annual
growth rate of approximately 7.7% through 2014; the PLC market in Asia, which exceeded US$2,550.0 million in 2009, will grow at
a compounded annual growth rate of approximately 8.0% through 2014; and the DCS and PLC market in Asia, as measured by revenue,
will exceed US$6,654.2 million and US$3,742.5 million by 2014, respectively.



The industrial automation and control industry is a healthily
growing market with huge potential. China is facing a shortage of labor and increased labor cost because of demographic change.
To solve this problem and improve manufacturing efficiency, manufacturers begin to adopt or consider adopting automation and control
technologies and devices to replace labor and more scientifically manage the whole manufacturing process. China is undergoing industrial
upgrading, and as a result automation and control technologies innovation and application will play an important role in that process.
Besides, the consciousness and trend for environmental protection and waste material emission treatment and recycling will bring
the demand for automation and control technology applications as well.



Currently, the vast majority of the global automation market
is still controlled by a handful of multi-national companies, most of them with western roots. Our competition includes some very
recognizable names: Honeywell (US); Siemens (Germany); Emerson (US); ABB (Sweden); Rockwell (US); and Hitachi (Japan). The western
roots of automation are not surprising, as that is also where industrialization began and progressed the farthest during the 19th
and 20th centuries. However, a new focus of the automation market is China and increasingly Southeast Asia, where the
tremendous growth in industrialization is by now a very familiar story. Manufacturing jobs in the US and other western economies
over the past two decades have steadily decreased, while the industrial base in China, Southeast Asia and the Middle East has expanded.
In particular, China’s shift from a developing country to one of the world’s leading manufacturers of industrial equipment
and consumer goods has created a substantial and growing demand for the automation systems that help to make those manufacturing
processes more efficient, reliable and safe.



We believe China’s industrial automation growth rate will
continue to be significant. We see China is enjoying a healthy growth rate given its relative current lower penetration rate and
the rising cost of labor. The client base includes large state-owned enterprises, multi-national companies, and other
domestic companies. Our main competitors in this field are global players such as ABB, Siemens, and Emerson, as well as Supcon
from China. We believe that the Hollysys brand recognition and market reputation and our strong research and development
capabilities will enable us to enter and penetrate high-margin market segments currently dominated by foreign companies, and will
ensure our revenue from this industrial market to grow at a rate continuously exceeding the industry average.



29







High-Speed Rail and Subway Market



Another important end-market for Hollysys is the high-speed
rail market in China, where we command a leading position in providing high-speed rail signaling systems to ensure the safety of
passenger train movement. High-speed rail development is still in its early stage in China. The previous Ministry of Railways of
China developed a national high-speed rail signaling technological standard, the China Train Control System, or the CTCS. Under
the CTCS, the standard governing the 200-250km/hour speed category is called C2, while C3 governs the 300-350km/hour category.
These standards are different from the international standards propounded by European organizations or Japan.



According to China’s 12th Five Year Plan and the recent
industry estimate, China is planning to have 16,000 to 18,000 kilometers of high-speed railway lines in operation by the end of
2015. China’s high-speed rail network will consist of artery lines and inter-city lines. The artery lines are
“the Four Horizontals and the Four Verticals” referring to their positions on the map of China. The Four
Vertical lines include the Beijing-Guangzhou line, Beijing–Shanghai line, Harbin-Dalian-Shenyang-Beijing line, and Shanghai-Hangzhou-Shenzhen
line. The Four Horizontal lines include the Lanzhou-Xian-Zhengzhou-Lianyungang line, Shanghai-Wuhan-Chongqing-Chengdu
line, Hangzhou-Changsha-Kunming line, and Taiyuan-Shijiazhuang-Qingdao line. The inter-city high-speed lines are mainly
planned for economically well-developed regions with high densities of population, such as Zhu Jiang River Delta (Guangzhou-Shenzhen
region), Yangtze River Delta (Shanghai-Hangzhou region), and Beijing-Tianjin-Tangshan region. As one of the three high-speed
rail signaling products providers in the C2 category in China, and one of the only two high-speed rail signaling products providers
to the C3 segment, we believe that Hollysys is well positioned to benefit from this unprecedented, world leading high-speed railway
build-out.



We also provide our proprietary software platform and
solutions of SCADA to the subway market. China’s subway market is expected to receive significant government investment
due to urbanization and environmental concerns. It is estimated China is going to have 3,000 km to 3,200 km of subway lines
by 2015 and approximately 6,100 km of subway lines by 2020. Leveraging on our know-how from high-speed surface rail signaling
technology and our well-recognized brand name, we are almost finished the development of our proprietary subway signaling
system, and are preparing for bidding in both China and abroad. We believe it will present a better value positioning to our
subway customers by bundling our proprietary subway SCADA system with our proprietary signaling system, in this way we are
also expecting our market share and gross margin expansion in this business sector.



Nuclear Market



We are well-positioned to benefit from China’s
nuclear power development. At present, China’s nuclear power sector is relatively under developed, with the vast
majority of power generated by coal-fired power plants. There are currently 17 nuclear reactors in operation, providing
approximately 14.77 GW of power, in comparison to the total electricity-generating capacity in China of approximately 1185.00
GW. This represents approximately 1.3 % of the total installed gross capacity of power generation. In terms of
electricity generated watt per hour, China has 2.0% electricity generated from nuclear power, lagging far behind the world
average of 15%, with France being the highest with 70% of its power generated from nuclear power plants.



Driven by clean energy initiatives and China’s commitment
of reducing its carbon emission by 45% per GDP unit by 2020, China’s installed nuclear power generating capacity is expected
to reach 70GW-80 GW by 2020. Typically, one nuclear reactor generates 1GW electricity. During the year 2005, we formed a joint
venture, China Techenergy Co., Ltd., with China’s leading nuclear station operator, China General Nuclear Power Corporation,
to provide its proprietary non-safety automation and control products to the nuclear stations constructed by China General Nuclear
Power Corporation. We believe this strategic alliance positions us to be the dominant nuclear automation system provider
in China. China General Nuclear Power Corporation currently has approximately 60% of China’s nuclear market share.



Southeast Asia and Middle East





Hollysys is penetrating to international market with primary
focus in Singapore, Malaysia, Indonesia, India and the Middle East, all of which are largely developing areas. The strong growth
of infrastructure and increased demand for automation technologies will benefit us in these areas. According to the “Distributed
Control Systems Worldwide Outlook – Market Analysis and Forecast through 2014” and “Programmable Logic Controller
Worldwide Outlook including PLC-based PACs - Market Analysis and Forecast through 2014” by ARC Advisory Group, the DCS market
in Asia will increase from US$5,750.0 million to US$6,654.2 million from 2012 to 2014; the PLC market in Asia will increase from
US$3,237.2 million to US$3,742.5 million from 2012 to 2014; the DCS market in EMEA will increase from US$5,890.9 million to US$6,283.8
million from 2012 to 2014; the PLC market in EMEA will increase from US$4,035.2 million to US$4,540.8 million from 2012 to 2014.





30







Due to the demand for convenient transportation for large populations
in high density areas, there are several subway lines in construction in Hong Kong and Southeast Asia, including Hong Kong Shatin
to Central Link, South Island Line East, Kwun Tong Line Extension and West Island Line in Hong Kong, and Thomson Line (TSL) in
Singapore and MRT Line No. 2 in Kuala Lumpur, Malaysia. Besides, the reconstruction of subway signaling systems will be a huge
opportunity, like the North-South and East-West lines which Hollysys has participated in the signaling reconstruction in Singapore.
As more and more subway signaling systems in developed countries approach its over mature period, it will offer continuous opportunities
for Hollysys to be the replacement and upgrading provider.





Hollysys is accelerating its international market penetration
by the two highly complementary acquisitions of Concord and Bond accomplished in 2011 and 2013, respectively. Bond provides complete
mechanical and electrical solutions to a wide array of industries, including factories, data centers, power stations, gas and instrumentation
plants, hotels, and commercial centers in Malaysia and Singapore. With Bond’s local resources and sales channels combing
Hollysys’ proprietary industrial automation products and systems, Hollysys is well positioned for tackling the South and
Southeast Asia industrial automation market. Concord is a major player in the rail transportation signaling field in Southeast
Asia and in the Middle East. Concord has cooperated with Thales, GE and Siemens several times for subcontracting the installation
and engineering works and accumulated expertise and customers’ recognition. With Concord’s assistance, we successfully
signed the contract with Hong Kong MTR Corporation to supply the entire high-speed rail signaling system to Shenzhen-Hong Kong
Express Rail valued at US$63.15 million in March 2012. With our proprietary subway signaling system that is coming to the market
in the near future, we believe that we will make additional progress in the rail transportation field together with the Concord
team in the Southeast Asia and Middle Eastern markets.



Integrated Contracts



The main channel through which we get our automation system
business is the procurement bidding process. Customers seeking bids propose their requirements and specifications in
legal bidding documents and those companies that are interested in obtaining these contracts make a bid in written form. If
we win the bid, we finalize an integrated contract. We derive over 90% of our total consolidated revenues from the integrated
contracts that we win through the bid process. In addition, we have a revenue stream through the sale of spare parts
and component products to customers for maintenance and replacement purposes after the completion of the integrated solution
contract, which tends to provide a recurring revenue stream, even though this revenue does not have to be in the form of multiple-year
contracts.



The purpose of an integrated contract is to furnish an automation
system that provides the customer with a total solution for the automation or process control requirement being addressed. The
automation system and total solution that we offer consists of hardware, software and services, all of which are customized to
meet the particular needs and technical specifications of our customers. None of the hardware, software and service
has independent functionality, and therefore cannot be sold separately to customers.



The major terms of an integrated solution contract include solution
planning and design, system installation, customer acceptance, payment milestones and warranty. The process of fulfilling
an integrated contract consists of the following four stages:



| | · | Solution planning and design - We provide customers with a customized plan for achieving the required solution by establishing
a project group for each contract. The project group includes system engineers who propose and discuss and agree on
the system design and implementation plan with the technical personnel of the customers.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



31







| | · | System manufacturing and installation - Based on the design and implementation plan, and in accordance with the project
schedule, we enter into the process of purchasing the necessary hardware, manufacturing components for the hardware, developing
software platform, re-configuring the software embedded in the hardware, and fabricating the integrated hardware into cabinets,
on-site installation and testing, and training customer’s personnel about how to use the automation and total solution.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Customer acceptance - The procedures for customer inspection and acceptance of the system are typically contained in
the contracts. The initial inspection usually occurs when the hardware is delivered to the customer’s site for the purpose
of detecting any obvious physical damage during shipping and to confirm that the entire order was delivered. A final
acceptance will be performed upon the satisfaction of integrated solution testing.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Warranty period - The integrated solution contracts customarily provide our customers with a one-year warranty (although
sometimes the warranty period may be more than one year depending on the customer and the negotiations for the contract), which
runs from the date of the final customer acceptance. The end of the warranty period represents fulfillment of the entire contract.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





Because of the nature of customized integrated contracts, a
customer does not have the right to return the products that we deliver, so long as such products conform and perform to the customer’s
specification. Prior to delivering our products to a customer’s site, we perform an internal test to ensure that the
automation system works as intended. After installing the products on a customer’s site, any problems are solved during trial
runs. Once the testing requirements have been satisfied, a customer will sign and date a customer acceptance document, which
marks the beginning of the warranty period. Due to the nature of this process, many companies in the automation systems
business generally do not carry product liability insurance.



The size of an integrated contract is determined by a
customer’s needs in terms of the amount of equipment needed and the complexity of the integrated solution. The size
of an integrated contract drives the revenues generated by the contract. Because certain contracts will require working periods
longer than one year, the best way to measure the contract revenue realized is to use the percentage-of-completion method. Ultimately,
our revenue stream will be driven by the average price of an integrated contract and how many integrated contracts have started
in each reporting period.



Our backlog of contracts presents the amount of unrealized revenue
to be earned from the contracts that we have won. Accordingly, any increase or decrease in new contracts won by us, or any
change of scheduled delivery dates will have a future impact on our future revenue streams. In the event of a delay in the
delivery schedule, then the time of inspection, installation, trial run and customer acceptance will be delayed accordingly, all
of which will affect our revenue recognition. If the delay of delivering the specified automation systems was a result of
our inability to deliver the system on a timely basis, then we will be held responsible for this delay, in accordance with the
terms specified in the respective integrated contracts.



Competition



We compete with various domestic and international corporations
offering automation and control systems. We believe that our proprietary technology and products provide us with a strong
competitive advantage over our domestic Chinese competitors. However, a number of multinational companies, some of whom have substantially
greater financial and other resources than we currently have, have been offering first rate automation systems in competition with
us. We believe that our primary competitors in the industrial automation market for our products are multi-national
corporations, such as ABB, Honeywell, Emerson and Siemens, and the local company Supcon, a private company affiliated with Zhejiang
University.



In the PRC high-speed rail business, as the China Railway Corporation
employs an administrative admission system and China has established its national rail technology standard, the China Train Control
Standard (CTCS), we believe that competition from multi-national companies will decrease. Currently, Hollysys is one of only three
entities granted admission to supply signaling products to China’s 200-250km/h segment of the high-speed rail market. The
other two are the China Rail Signal & Communication Corp. (CRSC) and the China Academy of Railway Science. Hollysys is one
of the only two permitted signaling product providers to China’s 300-350km/h segment of the high-speed rail market. The other
provider is CRSC. In the subway business and the SCADA market, we mainly compete with Nanjing Automation Research Institute (NARI).
In nuclear automation segment, we mainly compete with multi-national corporations such as Siemens, Areva, and Invensys.



32









In the Southeast Asian and Middle Eastern markets,
our principal competitors for industrial automation are the multinational corporations such as ABB, Siemens, Emerson
and Honeywell, and local competitors such as Bintai Kinden Corporation Berhad,PJI
Holding Berhad,LFE Corporation Berhad. The major competitors
in the international rail and subway signaling markets are Bombardier and Alston, and local competitors including Kurihara,
Sanyo, Bintai KDK and Gammon Construction.



When compared to our competitors, apart from satisfying certain
local based criteria, we believe that our key competitive edge is the provision of better value for money to our customers with
the following distinctive attributes:

| | · | Emphasis on Engineering. Engineers are a critical element of effective design of both hardware and software
components of automation equipment and systems. For western companies, they are also a very costly element of the process. Even
the largest western companies face constraints in the size of their engineering staff due to the high salaries and attendant costs. One
of our competitive advantages is the lower cost of engineers in China relative to those in the Western nations. Applying
high levels of engineering effort to each product enables us to provide a solution that is tailored not only to the industry in
which the customer operates, but also to the customer’s specific needs. That custom solution is provided at a cost that is
typically lower than the generic products of our competitors.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Industry Process Knowledge. We devote substantial time and effort to understand our customers and their business.
This knowledge helps to ensure that the systems we design will provide the optimum in benefits for our customers. We
maintain this information in an extensive “library” of industry process information that we utilize to speed
up the system design process and to maximize the quality of the result, while at the same time minimizing costs. As
a result, we were able to take into account the widely varying degrees of sophistication and resources that our customers possess. The
result of this strategy is to broaden our potential customer base and to consistently deliver products that are of value to these
customers.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Integration Services. Western automation system companies are principally system platform suppliers and the
role of integrating the systems into the customer’s overall management information system is generally left to independent
firms. While such firms are widespread in western countries, China and other emerging market countries do not have a
large number of systems integration companies to perform this work, as these companies have been historically unprofitable in China. We
have bridged this gap by providing a vertically integrated solution to our customers that includes the integration of our hardware
into the customers’ overall manufacturing and information systems. This combination of the two aspects of system
design and installation take further advantage of an lower cost of engineering services and provides another benefit, as the design
and integration teams can work together to produce the best result more quickly and efficiently, again lowering costs.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Core Technologies. Although we deliver tailored systems, our systems are based on basic modules of automation technology
that are common across a broad array of industries and applications. Using these modules as a starting point, development
of an industry and customer-specific product is both more efficient and produces a better result than starting from scratch each
time. That means, with our labor cost advantages, we can provide a highly customized automation product at a very favorable
cost.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Use of Engineering Sales Personnel. The use of trained engineers in product and system design is complemented by the
use of engineers in the sales process as well. With engineers included in the sales process, we provide the ability
to understand from the beginning the needs of the customer and how to address their issues and the ability to convey that information
to the team that will ultimately develop the system to be installed.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



33







| | · | Providing service for the Broad Array of Chinese Customers’ Capabilities.  China’s rapid growth and
industrialization distinguish it from other manufacturing nations in some ways. There are many “established”
Chinese companies that operate in facilities that are decades old, many companies that operate in new or recently upgraded facilities,
and the largest number that fall somewhere in between. We understand, to a greater extent than our western competitors,
the full range of needs and capabilities that Chinese customers possess, and we have designed our business to meet them. As
a result, we are able to offer even the most basic control systems solution while also providing the most sophisticated systems
available to applications that meet the rigorous requirement of the highly complex and demanding nuclear power industry.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | · | Pace of Product Development. Another way that we keep ahead of our competitors is by our pace of development. HOLLiAS-K
is the 5th generation of Distributed Control System developed by us and released to the market in the second half of 2012. In 1995,
we developed China’s first proprietary DCS to the market as our first generation system. During the past 15 years, we continuously
moved ahead of the market and developed leading technologies, including China’s first proprietary large scale PLC in 2005,
the earliest and till now the only domestic approved and applied nuclear power automation and control system HOLLiAS-NMS, China’s
earliest subway SCADA and high-speed rail signaling system. We believe we have the capability to identify high-growth markets and
quickly develop and deliver the most advanced technologies, while leveraging our strong R&D and innovative capabilities. We
believe that our competitors are frequently hampered by institutional factors that slow the product development process, and as
a result, their products cannot incorporate the latest advances in electronics.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







Manufacturing



We design and manufacture the hardware of our products in Beijing
and Hangzhou facilities, and in rare cases we outsource the production depending on special circumstances and delivery requirements.
The core part of the hardware of our products is the printed circuit board. We manufacture the printed circuit boards in our SMT
(Surface Mounting Technology) lines and plug-in mounting lines, and assemble them into various types of modules and then form the
modules into the final products. The raw materials which we procure mainly include bare printed circuit boards from vendors based
on our requirements and design considerations, and electronic components, chips, cabinets and cables among other factors. Our products
are subjected to rigorous testing in our facilities prior to shipment.



Several subsidiaries of the Company, including Beijing Hollysys,
Hangzhou Hollysys, Hollysys A&D, and Hollysys Electronics, have passed several or all of the GB/T 19001/ISO 9001 international
quality management system certification, GB/T 24001/ISO 14001 environmental management system certification, and GB/T 28001 occupational
health and safety management system certification.



The GB/T 19001/ISO 9001 international quality management
system certificate is valid for production, and technical service of industrial automatic control system equipment. The other
two certificates are valid for production, technical service and related management activities of industrial automatic
control system equipment.



Seasonality



Like many other companies operating in China and Southeast Asia,
our businesses tends to be slower in the March quarter due to the Chinese New Year and tends to be stronger in the December quarter
because the budgeting practice is based on calendar year adopted by government agencies and most private enterprises.



Regulation



PRC. We operate a significant portion of our
business in China under a legal regime that consists, at the national level, of the State Council, which is the highest
authority of the executive branch of the PRC central government, and several ministries and agencies under its leadership,
including: the Ministry of Agriculture and its local authorities; the Ministry of Commerce and its local authorities; SAFE
and its local authorities; the State Administration of Industry and Commence and its local authorities; and the State
Administration of Taxation, and the Local Taxation Bureau.  The following sets forth a summary of significant
regulations or requirements that affect our business activities in China and our shareholders’ right to receive
dividends and other distributions from us.



34







| | · | Foreign Currency Regulations. We are subject to the PRC’s foreign currency regulations. The PRC government
has control over RMB reserves through, among other things, direct regulation of the conversion of RMB into other foreign currencies. Although
foreign currencies which are required for “current account” transactions can be bought freely at authorized Chinese
banks, the proper procedural requirements prescribed by Chinese law must be met. At the same time, Chinese companies
are also required to sell their foreign exchange earnings to authorized Chinese banks and the purchase of foreign currencies for
capital account transactions still requires prior approval of the Chinese government.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Taxation. The EIT Law, as further clarified by the Implementation Rules of the EIT Law and the Notice on
Implementation of Enterprise Income Tax Transition Preferential Policy under the EIT Law, applies a unified enterprise income tax,
or EIT, rate at 25% to both FIEs and domestic invested enterprises. The EIT rate applicable to the enterprises established before
March 16, 2007 those were eligible for preferential tax rate according to the effective tax laws and regulations will gradually
transition to the uniform 25% EIT rate by January 1, 2013. In addition, certain enterprises may still benefit from a preferential
tax rate of 15% under the EIT Law if they qualify as “High and New Technology Enterprises strongly supported by the state,”
(“HNTE”) subject to certain general factors described therein. “Administrative Measures for Assessment of High-New
Tech Enterprises,” or Measures, and “Catalogue of High/New Tech Domains Strongly Supported by the State,” or
Catalogue (2008), jointly issued by the Ministry of Science and Technology and the Ministry of Finance and State Administration
of Taxation set forth general guidelines regarding criteria as well as application procedures for qualification as a HNTE under
the New EIT Law. Both Beijing Hollysys and Hangzhou Hollysys have met the qualifications for the HNTE designation, effective
from January 1, 2011 to December 31, 2013, and are accordingly subject to a reduced national enterprise income tax of 15% for the
effective period. In 2014, the Company will seek to reapply the qualifications of HNTE for the following 3 years from January 1,
2014 to December 31, 2016.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Dividend Distribution. Under PRC law, FIEs in China, including Hangzhou Hollysys, may pay dividends only
out of their accumulated profits, if any, determined in accordance with PRC accounting principles. In addition, FIEs in China are
required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year for their general reserves
until the accumulative amount of such reserves reaches 50% of registered capital. These reserves are not distributable
as loans, advances or cash dividends. The board of directors of a FIE has the discretion to allocate a portion of its
after-tax profits to staff welfare and bonus funds, and expansion (development) funds, which, once allocated, may not be distributed
to equity owners except in the event of liquidation. In addition, under the new EIT Law, effective as of January 2008,
dividends from our PRC subsidiaries to us are subject to a withholding tax of 10%.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The foregoing summary does not purport to be complete and is
qualified by reference to the relevant provisions of applicable law in the jurisdictions in which we operate. We believe
that we are currently in compliance with all applicable laws and regulations relating to our business.



Southeast Asia. The kinds of currency regulation, taxation
regimes and dividend restrictions imposed in China are not replicated in Singapore, Malaysia, and other Southeast Asian markets
in which we operate. Generally these markets are free-trade based economies, with no direct or indirect currency and similar operational
barriers.



Marketing, Sales and Customer Support



Our marketing and sales activities are focused on the development
of and addressing the growing demand for automation and control products, systems and services in the Chinese domestic market and
the Southeast Asian and Middle Eastern markets. Our basic strategy is to build cooperative relationships with our customers, educating
them about technological developments and reflecting their needs in our products and services.



Our sales teams consist of a complementary group of sales personnel
and hardware and software engineers from a variety of disciplines to tailor products to specific customer needs. Employing a pool
of skilled personnel in the early stage of a project accelerates the design and the subsequent production of a particular customized
solution, typically exceeding that of our competitors. Our sales teams possess significant hands-on, industry-specific experience
which permit them to do on-site process analyses, which in turn, makes the design and implementation of upgrades simpler. The result
is an automation system that is more effective, efficient and reliable, which in turn leads to a truly satisfied customer.



35







Our sales force is organized into three principal groups, (i)
regional sales, to provide business consulting, promote pre-sale activity and serve as customer contacts, (ii) customer service,
to manage relations with contracted customers and improve customer satisfaction by coordinating responses to the client’s
information requests, sale of supplemental parts or components and make customer visits, and (iii) market planning, to facilitate
strategic cooperation with certain specialized manufacturers, to expand the specific fields for our products.



We identify and target market segments and select target sales
opportunities within our markets and conduct sales opportunity studies to ensure that adequate sales resources are available. Sales
quotas are assigned to all sales personnel according to annual sales plans. We classify market segments and target opportunities
on national and regional levels. Segmentation of our markets helps us to determine our primary sales targets and to prepare monthly
and quarterly sales forecasts. The sales team approves target projects, develops detailed sales promotion strategies and prepares
reports on order forecasts, technical evaluation, sales budgeting expense, schedules and competition analysis. After the report
has been approved, a marketing group is appointed, consisting of sales personnel and engineers. We employ marketing personnel to
conduct market research, to analyze user requirements and to organize marketing communications.



Our marketing team engages in a variety of marketing activities,
including:



| | · | publishing internal research reports and customer newsletters;
| | - | --------------------------------------------------------------



| | · | conducting seminars and conferences;
| | - | ------------------------------------



| | · | conducting ongoing public relations programs; and
| | - | -------------------------------------------------



| | · | creating and placing advertisements
| | - | -----------------------------------



We actively participate in technology-related conferences and
demonstrate our products at trade shows or at exhibitions targeted at our existing and potential customers. We also evaluate a
range of joint-marketing strategies and programs with our business partners in order to take advantage of their strategic relationships
and resources. We also support our customers by offering field services such as maintenance and training services, which help customers
to cut their costs and improve their operating efficiency.



As of June 30, 2013, we employed 836 direct sales
personnel through our subsidiaries in China, Southeast Asia, and the Middle East. The sales staffs were assigned to three
business areas: industrial automation, rail transportation and overseas sales. Sales activities for industrial automation are
widely distributed across China in over 60 cities; the rail transportation sales activities are mainly centralized at our
Beijing headquarters; and for overseas regions, sales activities are mainly developed and guided from our offices in
Southeast Asia and the Middle East.



| | C. | Organizational Structure
| | -- | ------------------------



The following diagram illustrates our corporate structure
as of the date of this annual report. We are a holding company with no operations of our own. We conduct
our operations in China mainly through our Chinese operating companies, Beijing Hollysys, Hangzhou Hollysys and Hollysys
A&D, and conduct  our operations in southeast Asia and the Middle East mainly through Concord and Bond.



36











37







Our corporate headquarters are located at No. 2 Disheng Middle
Road, Beijing Economic-Technological Development Area, Beijing, 100176, China. Our telephone number is (+86) 10 58981386. We
maintain a website at http://www.Hollysys.com that contains information about our company, but that information is not a
part of this annual report.



| | D. | Property, Plant and Equipment
| | -- | -----------------------------



Since 2010, our principal executive offices have been located
at No. 2 Disheng Middle Road, Beijing Economic-Technological Development Area, Beijing, 100176, China. At this location in
Beijing, we have ample room for substantial expansion, as our needs require. We own the prepaid land leases to the properties
at the following principal locations, each of which contains principal administrative offices, sales and marketing offices, research
and development facilities, and manufacturing facilities:



|Location  |  | Approximate Sq. Meters
|--------- |  | ----------------------
|Beijing   |  | 120,000               
|Hangzhou  |  | 25,000                
|Singapore |  | 1,200                 
|Malaysia  |  | 3,000                 



The manufacturing facilities at the Beijing and Hangzhou locations
are used for the system integration production, including hardware testing instruments, auxiliary material processing, packaging
and shipping, and for self-made product integration production, including inspection and testing. The Company is constructing phase
II of the Yizhuang facility in Beijing.



| | ITEM 4A. | UNRESOLVED STAFF COMMENTS
| | -------- | -------------------------



There are no unresolved staff comments.



| | ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS
| | ------- | --------------------------------------------



You should read the following discussion and analysis of our
financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included
elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statements based upon current
expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in
these forward-looking statements as a result of various factors, including the risk factors and the discussion of our business
set forth in other parts of this annual report on Form 20-F.



Overview



Through our operating subsidiaries, we are one of the leading
automation systems providers in China, developing a number of core technologies and completing numerous projects utilizing a wide
array of automation products. With our philosophy of sincere concern for customers and our technical innovation capabilities,
we specialize in the research, development, production, sale and distribution of industrial automation for digital railway signals
and information systems, e-government, motor drive transmissions and safety controls for nuclear power reactors.



The main channel through which we obtain our automation system
business is the procurement bidding process. Customers seeking bids propose their requirements and specifications in
legally binding bid documentation, to which the companies interested in obtaining the contract respond with an appropriate bid.



We derive our revenue mainly from three operating segments,
industrial automation, railway transportation and mechanical and electrical solution. Approximately 94% of our total consolidated
revenues derived from integrated contracts we have won through the bid process. An additional source of revenue, although
small in percentage terms, is the sale of spare parts and component products to customers for maintenance and replacement purposes
after the completion of the integrated solution contract. Spare part and component sales are not part of the integrated
solutions contracts.



38







The purpose of an integrated solutions contract is to furnish
an automation system that provides the customer with a total solution for the automation or process control requirement being addressed. The
automation system and total solution we offer, consisting of hardware, software and services, is customized to meet the customer’s
particular needs and technical specifications. None of the hardware, software and services has independent functionality,
and therefore, are not sold separately to customers. The following table sets forth the information regarding the
contracts we won during the last three fiscal years and backlog at the dates indicated:



|                                            |  | Years Ended June 30, |        
|------------------------------------------- |  | -------------------- | -------
|                                            |  | 2011                 |        
|Number of new contracts won during the year |  |                      | 2,401  
|Total amount of new contracts (million)     |  | $                    | 331.0  
|Average price per contract                  |  | $                    | 137,841



|                                                             |  | Years Ended June 30, |      
|------------------------------------------------------------ |  | -------------------- | -----
|Backlog Situation:                                           |  | 2011                 |      
|Contracts newly entered and unfinished (million)             |  | $                    | 146.9
|Contracts entered in the prior year and unfinished (million) |  | $                    | 149.5
|Total amount of backlog (million)                            |  | $                    | 296.4





As indicated above, both the amount of new contracts won and
the amount of backlog have been increasing steadily during the past three years. Generally, the backlog represents increasing sales
and increasing size of contracts which take more time to perform. The significant growth clearly validates our dedicated industry
expert, total solution and sales network expansion strategies. Our established brand recognition, strong track record of customization,
quality and service, efficient R&D and implementation together with customer-orientated flexibility give us a significant competitive
advantage over domestic and international competitors. We made substantial progress in our strategy of international market expansion
through our acquired companies – Concord and Bond. Concord has been actively working on international bids and projects in
the rail and industrial automation sectors. The acquisition of Concord provided a synergy with the rest of the Company, successfully
combining our proprietary technology and Concord’s international resources. The recently completed acquisition of Bond in
April 2013 will be a strong complement to our overseas expansion in the industrial automation field of Southeast Asia. And the
same synergy will be realized combining their established local sales channels and our proprietary technology.



As a growing company, we have achieved significant progress
in the past three years. Our total consolidated revenues for the fiscal year ended June 30, 2013 was approximately $349.1
million, compared to approximately $321.7 million for the prior fiscal year, representing an increase of 8.5%, followed by a growth
of 22.4% from approximately $262.8 million in fiscal 2011.



Recent Developments



In order to enhance our international presence, we acquired
Bond for a total purchase price of approximately US$73 million. On April 1, 2013, Bond became a subsidiary of the Company and its
operation results are included in our consolidated financial statements effective from April 1, 2013. Bond provides complete mechanical
and electrical solutions with end to end capabilities in design, engineering, procurement, project management, construction and
commissioning, and maintenance to a wide array of industries, including factories, data centers, banks, hospitals, airports, power
stations, gas and instrumentation plants, hotels, commercial centers, residential buildings and infrastructure works. We wish to
take advantage of Bond’s strong presence, brand name, and experienced professional team in Southeast Asia to cross sell our
proprietary products through their channels and expand our business internationally.



Rights Plan



On August 27, 2010, our Board of Directors adopted a Rights
Plan, or the 2010 Rights Plan. In connection with the 2010 Rights Plan, the Board of Directors declared a dividend distribution
of one “Right” for each outstanding ordinary share to shareholders of record at the close of business on August 27,
2010, effective as of September 27, 2010. Each Right entitles the shareholder to buy one share of our Class A Preferred
Stock at a price of $160.



39







The Rights will become exercisable if a person or group announces
an acquisition of 20% or more of our outstanding ordinary shares, or announces commencement of a tender offer for 20% or more of
the ordinary shares. In that event, the Rights permit shareholders, other than the acquiring person, to purchase our
ordinary shares having a market value of twice the exercise price of the Rights, in lieu of the Class A Preferred Stock. In
addition, in the event of certain business combinations, the Rights permit the purchase of the ordinary shares of an acquiring
person at a 50% discount. Rights held by the acquiring person become null and void in each case. Unless terminated
earlier by our Board of Directors, the 2010 Rights Plan will expire on September 27, 2020.



Key Factors Affecting Our Growth, Operating
Results and Financial Condition



Our future growth, operating results and financial condition
will be affected by a number of factors including:



| | · | The ability in developing and acquiring new products and systems in order to improve competitiveness, which can increase both
sales revenue and margins. The success of our business depends in great measure on our ability to keep pace with or
even lead changes that occur in our industry.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The success in expanding our business in targeted emerging markets and overseas markets, which may require us to overcome domestic
competition and trade barriers.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Our ability to retain our existing customers and to obtain additional business opportunities. Since we do not have
long-term purchase commitments from customers, our customers can shift to other competitors for future projects. It
is important to maintain our customer base in order to sustain and expand our business.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The success of our business also depends on securing a steady stream of new customers. In order for our business
to continue to succeed and grow, it is vital to secure contracts with new customers on a regular basis.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The ability to secure adequate engineering resources and relatively low cost engineering staff can increase our profitability
and potential business prospects. One of the competitive advantages that we enjoy is the access to lower cost engineering
staff as compared to those of our Western and Japan-based competitors. The plentiful supply of affordable engineering
talent in China is a key element of our overall business strategy.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Further improvement in product design and maintaining high standard of quality control, which can reduce or avoid product defects. Any
product defects will result in additional costs and cause damage to our business reputation.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The ability to secure and protect our intellectual property rights is critical, as our business is based on a number of proprietary
products and systems, and we strive to strengthen and differentiate our product portfolio by developing new and innovative products
and product improvements.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The success in penetrating into the railway, conventional and nuclear power market sectors can develop revenue streams and
improve margins. In addition to the traditional industrial automation business, our plan for future growth includes
an increasing emphasis on rail control systems, power generation control systems and mechanical and electrical solutions both in
China and internationally.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The ability to obtain greater financial resources to match or even exceed our major competitors, in order to compete effectively
with them, and to weather any extended weaknesses in the automation and control market.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The continued growth in the Chinese and Southeast Asia industry in general. This continued growth will create more
business opportunities for us, because industrial companies in Asia are our principal source of revenues.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



40







| | · | The ability to maintain key personnel and senior management, who will have significant impact and contribution to our future
business. The ability to attract and retain additional qualified management, technical, sales and marketing personnel
will be vital.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The continuation of the preferential tax treatment and subsidies currently available to our PRC subsidiaries will be critical
to our future operating results. If governmental subsidies were reduced or eliminated, our after-tax income would be
adversely affected.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The continued appreciation in RMB against US dollars will result in future translation gain as most of our assets are denominated
in RMB. In addition, some of our raw materials, components and major equipment are imported from overseas. In
the event that the RMB appreciate against other foreign currencies, our costs will decrease and it will increase our profitability.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Critical Accounting Policies



Business combinations



The Company accounts for its business combinations using the
purchase method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations
(“ASC 805”). The purchase method accounting requires that the consideration transferred to be allocated to the assets,
including separately identifiable assets and liabilities the Company acquired based on their estimated fair values. The consideration
transferred of an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities
incurred, and equity instruments issued as well as the contingent consideration and all contractual contingencies as of the acquisition
date. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value
as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of (i) the total cost of the
acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest
in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of
acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in
the statements of comprehensive income.





The determination and allocation of fair values to the identifiable
assets acquired, liabilities assumed and noncontrolling interests is based on various assumptions and valuation methodologies requiring
considerable management judgment. The most significant variables in these valuations are discount rates, terminal values, the number
of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows
and outflows. The Company determines discount rates to be used based on the risk inherent in the related activity’s current
business model and industry comparisons. Terminal values are based on the expected life of assets, forecasted life cycle and forecasted
cash flows over that period.



Acquisition-related costs are recognized as general and administrative
expenses in the statements of comprehensive income as incurred.



The acquisition of Bond in the current year is accounted for
in accordance with ASC 805. The acquisition resulted in a new segment namely “Mechanical and Electrical Solution” for
the year ended June 30, 2013.



Revenue recognition



Integrated solutions contracts



Revenues generated from designing, building, and delivering
customized integrated industrial automation systems are recognized over the contractual terms based on the percentage of completion
method. The contracts for designing, building, and delivering customized integrated industrial automation systems are legally enforceable
binding agreements between the Company and customers. The duration of contracts depends on the contract size and ranges from 6
months to 5 years excluding the warranty period. The majority of the contract duration is longer than one year.



41









In accordance with ASC 605-35, Revenue Recognition - Construction-Type
and Production-Type Contracts (“ASC 605-35”) recognition is based on an estimate of the income earned to date,
less income recognized in earlier periods. Revisions in the estimated total costs of integrated contracts are made in the period
in which the circumstances requiring the revision become known. Provisions, if any, are made for anticipated losses on the uncompleted
contracts.



The Company reviews and updates
the estimated total costs of integrated solution contracts at least semi-annually. The Company accounts for revisions to contract
revenue and estimated total costs of integrated solution contracts, including the impact due to approved change orders, in the
period in which the facts that cause the revision become known as changes in estimates. Unapproved change orders are considered
claims. Claims are recognized only when it has been awarded by customers. Excluding the impact of change orders, if the estimated
total costs of integrated solution contracts, which are revised during the year ended June 30, 2013, had been used as a basis of
recognition of contract revenue since the contract commencement, net income, basic net income
per share, and diluted net income per share for the year ended June 30, 2013 would have decreased by $11.3 million, $0.20 and $0.20.
Revisions to estimated total costs for the year ended June 30, 2013 were made in the ordinary course of business.



The Company combines a group of contracts as one project if
they are closely related and are, in substance, parts of a single project with an overall profit margin. Whereas, the Company segments
a contract into several projects, when they are of different business substance, for example, with different business negotiation,
solutions, implementation plans and margins.



Revenue in excess of billings on the contracts is recorded as
costs and estimated earnings in excess of billings. Billings in excess of revenues recognized on the contracts are recorded as
deferred revenue until the above revenue recognition criteria are met.



The Company generally recognizes 100% of the contractual revenue
upon receipt of customer acceptance as the Company estimates that no further major costs will be incurred under a contract, a signed
customer acceptance document has been obtained, and the warranty period commences. Revenues are presented net of taxes collected
on behalf of the government.



Product sales



Revenue generated from sales of products is recognized when
the following four revenue recognition criteria are met (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred,
(iii) the selling price is fixed or determinable, and (iv) collectability is reasonably assured.



Inventories



Inventories are composed of raw materials
work in progress, purchased and manufactured finished goods and low value consumables. Inventories are accounted for on the “first-in,
first-out basis”, and stated at the lower of cost or market.



The Company assesses the lower of cost or market for non-saleable,
excess or obsolete inventories based on its periodic review of inventory quantities on hand and the latest forecasts of product
demand and production requirements from its customers. The Company writes down inventories for non-saleable, excess or obsolete
raw materials, work-in-process and finished goods by charging such write-downs to cost of integrated contracts and/or costs of
products sold.



Costs incurred for a specific anticipated contract are included in inventory when the recoverability is
evaluated to be probable. Costs included in inventory in anticipation of a contract are included in contract costs upon the receipt
of the anticipated contract.



Warranties



Warranties represent a major term under an integrated contract,
which will last, in general, for one to three years or otherwise specified in the terms of the contract. The Company accrues warranty
liabilities under an integrated contract as a percentage of revenue recognized, which is derived from its historical experience,
in order to recognize the warranty cost for an integrated contract throughout contract period. In addition, the Company estimates
whether or not the accrued warranty liabilities are adequate by considering specific conditions that may arise and the number of
contracts under warranty period at each reporting date. The Company adjusts the accrued warranty liabilities in line with the results
of its assessment.



42







Accounts receivable and costs and estimated
earnings in excess of billings



Performance of the integrated contracts often will extend over
long periods and the Company’s right to receive payments depends on its performance in accordance with the contractual agreements.
Billings are rendered based on agreed milestones included in the contracts with customers. There are different milestones amount
the contracts the Company has won. In general, there are four milestones: 1) project commencement, 2) system manufacturing and
delivery, 3) installation, trial-run and customer acceptance, and 4) expiration of the warranty period. The amounts to be billed
when each of the specified milestones is reached are specified in the contracts. All contracts have the first milestone, but not
all contracts have a prepayment. Each interval of two continuous billings under an integrated contract varies depending on the
duration of the contract (under certain contracts, the interval of two continuous billings is longer than one year) and the last
billing to be issued for an integrated solution contract is at the end of a warranty period. For Concord and Bond, billing claims
are rendered subject to the approval and certification by the customers or their designated consultants. Payments are made to Concord
or Bond based on the certified billings accordingly to the payment terms as mutually agreed between the customers and Concord or
Bond. The retained amounts are payable to Concord or Bond upon satisfaction of certain quality criteria or at the end of the warranty
period. The retained amounts for the three years ended June 30, 2011, 2012 and 2013 are nil, $2.1 million and $6.5 million, respectively.
Prepayments received are recorded as deferred revenue. The deferred revenue will be recognized as revenue under the percentage
of completion method along with the progress of a contract. If no prepayment is received by the Company, revenue will be recognized
through cost and estimated earnings in excess of billings.



The Company does not require collateral from its customers.
Based on the prevailing collection practices in China, it is a reasonable expectation for the enterprises in the automation industry
to take over one year to collect the accounts receivable in full.



The Company does not charge interest for late payments by its
customers. The Company periodically reviews the status of contracts and decides how much of an allowance for doubtful accounts
should be made based on factors surrounding the credit risk of customers and its historical experience. The Company sets up a doubtful
account for an individual customer based on the customer’s credit worthiness.





Goodwill



Goodwill represents the excess of the purchase
price over the estimated fair value of net tangible and identifiable intangible assets acquired. The Company’s goodwill outstanding
at June 30, 2013 was related to the acquisition of Concord and Bond. In accordance with ASC 350, Intangibles, Goodwill
and Other(“ASC 350”), goodwill is not amortized, but rather is tested for impairment at least annually or more
frequently if there are indicators of impairment present.



Goodwill is tested for impairment on June
30 in each year. The Company adopted ASU No. 2011- 08, Testing Goodwill for Impairment, pursuant to which the Company
performs a qualitative assessment to determine if it is more likely than not that the fair value of each identified reporting unit
is less than its carrying amount. If this is the case, the Company is not required to calculate the fair value of its reporting
unit(s) and perform the two-step impairment test. However, if the Company concludes otherwise, the first step of the two-step impairment
test is performed by comparing the carrying value of its reporting unit to its fair value. If the carrying value of the reporting
unit is greater than its fair value, the second step is performed, where the implied fair value of goodwill is compared to its
carrying value. The Company recognizes an impairment charge for the amount by which the carrying amount of goodwill exceeds its
implied fair value.



There was no impairment loss for the periods presented.





Impairment of long-lived assets other than
goodwill



The Company evaluates its long-lived assets or asset group including
acquired intangibles with finite lives for impairment whenever events or changes in circumstances (such as a significant adverse
change to market conditions that will impact the future use of the assets) indicate that the carrying amount of a group of long-lived
assets may not be fully recoverable. When these events occur, the Company evaluates the impairment by comparing the carrying amount
of the assets to future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If
the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Company recognizes an impairment
loss based on the excess of the carrying amount of the asset group over its fair value, generally based upon discounted cash flows
or quoted market prices.



43









The impairment loss on long-lived assets for each of the years
ended June 30, 2011, 2012 and 2013 were $23,711, nil, and nil respectively, included in the general and administrative expenses,
which represented impairment loss on property, plant and equipment.



Income taxes



The Company follows the liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting
and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are
expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available
evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on
deferred taxes of a change in tax rate is recognized in tax expense in the period that includes the enactment date of the change
in tax rate.







The Company adopted ASC 740, Income Taxes(“ASC
740”),which clarifies the accounting and disclosure for uncertainty in income taxes. Interests and penalties arising
from underpayment of income taxes shall be computed in accordance with the related tax laws. The amount of interest expense is
computed by applying the applicable statutory rate of interest to the difference between the tax position recognized and the amount
previously taken or expected to be taken in a tax return. Interests and penalties recognized in accordance with ASC 740 are classified
in the financial statements as a component of income tax expense. In accordance with the provisions of ASC 740, the Company recognizes
in its financial statements the impact of a tax position if a tax return position or future tax position is “more likely
than not” to prevail based on the facts and technical merits of the position. Tax positions that meet the “more likely
than not” recognition threshold are measured at the largest amount of tax benefit that has a greater than fifty percent likelihood
of being realized upon settlement. The Company’s estimated liability for unrecognized tax positions which is included in
the accrued liabilities is periodically assessed for adequacy and may be affected by changing interpretations of laws, rulings
by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations. The outcome
for a particular audit cannot be determined with certainty prior to the conclusion of the audit and, in some cases, appeal or litigation
process. The actual benefits ultimately realized may differ from the Company’s estimates. As each audit is concluded, adjustments,
if any, are recorded in the Company’s financial statements. Additionally, in future periods, changes in facts, circumstances,
and new information may require the Company to adjust the recognition and measurement estimates with regard to individual tax positions.
Changes in recognition and measurement estimates are recognized in the period in which the changes occur.



Share-based compensation





The Company accounts for share-based compensation in accordance
with ASC 718, Compensation-Stock Compensation (“ASC 718”). The Company recognizes compensation cost for an award
with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service period for
the entire award. The compensation cost for each vesting tranche in an award subject to performance vesting is recognized ratably
from the service inception date to the vesting date for each tranche. To the extent the required vesting conditions are not met
resulting in the forfeiture of the share-based awards, previously recognized compensation expense relating to those awards are
reversed. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary,
in subsequent period if actual forfeitures differ from initial estimates.



44









Fair value measurements



The Company has adopted ASC 820, Fair
Value Measurements and Disclosures(“ASC 820”), which defines fair value, establishes a framework for measuring
fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements,
but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information.
It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may
be used to measure fair value and include the following:



|Level 1 | - | Quoted prices in active markets for identical assets or liabilities.                                                                                                                                                                                                                                                                   
|------- | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 2 | - | Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
|Level 3 | - | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities.                                                                                                                                                                                        



Classification within the hierarchy is
determined based on the lowest level of input that is significant to the fair value measurement.



ASC 820 describes three main approaches
to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market
approach uses prices and other relevant information generated from market transactions involving identical or comparable assets
or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement
is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount
that would currently be required to replace an asset.



Recent Accounting Pronouncements





In February 2013, the FASB issued ASU 2013-02,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,which adds new disclosure requirements
for items reclassified out of accumulated other comprehensive income (“AOCI”). The standard does not amend any existing
requirement for reporting net income or other comprehensive income (“OCI”) in the financial statements. However, it
requires an entity to provide information about the amounts reclassified out of AOCI by component. The objective of this ASU is
to help entities improve the transparency of changes in OCI and items reclassified out of AOCI in their financial statements. The
standard is effective for annual reporting periods beginning after December 15, 2012 and should be applied prospectively. Early
adoption is permitted. The Company will adopt ASU 2013-02 on July 1, 2013 and does not expect the adoption of this standard to
have a material effect on its consolidated financial statements.



In March 2013, the FASB issued ASU 2013-05,
Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of
Assets within a Foreign Entity or of an Investment in a Foreign Entity, which specifies that the
entire amount of cumulative translation adjustments should be released into earnings when an entity ceases to have a controlling
financial interest in a subsidiary or group of assets within a consolidated foreign entity and when the sale or transfer results
in the complete or substantially complete liquidation of the investment in the foreign entity.The objective of ASU 2013-05
is to resolve the diversity in practice as it relates to the release of the cumulative translation adjustment into net income
upon de recognition of a subsidiary or group of assets within a foreign entity. The standard is effective for annual reporting
periods beginning after December 15, 2013, and interim periods therein. The standard should be applied prospectively to derecognize
events occurring after the effective date. Early adoption is permitted. The Company will adopt ASU 2013-02 on July 1, 2014 and
does not expect the adoption of this standard to have a material effect on its consolidated financial statements.



In July 2013, the FASB issued ASU 2013-11,
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax loss, or a Tax Credit Carryforward
Exists, which specifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented
in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss,
or a tax credit carryforward, with certain exceptions. The objective of this ASU is to eliminate diversity in practice. The standard
is effective for annual reporting periods beginning after December 15, 2013 and interim periods within. The standard should be
applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted.
The Company will adopt ASU 2013-11 on July 1, 2014 and does not expect the adoption of this standard to have a material effect
on its consolidated financial statements.





45







Financial Position



The following are some financial highlights for the fiscal year
ended June 30, 2013:



| | · | Total assets increased by approximately $191.8 million, from approximately $552.8 million as of June 30, 2012, to approximately $744.6 million as of June 30, 2013. The increase was mainly due to an increase of approximately $40.0 million in accounts receivable, $38.2 million in goodwill, and $28.6 million in costs and estimated earnings in excess of billing.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Cash and cash equivalents increased by $15.9 million, from approximately $96.3 million as of June 30, 2012, to approximately $112.2 million as of June 30, 2013. The increase was mainly due to the Company generating $30.7 million in cash from operating activities.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Accounts receivable at June 30, 2013, were approximately $176.6 million, an increase of approximately $40.0 million, or 29.3%, compared to approximately $136.6 million at June 30, 2012. The increase was mainly due to our increased revenues and days sales outstanding.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Cost and estimated earnings in excess of billings as of June 30, 2013, were approximately $143.8 million compared to approximately $115.2 million as of June 30, 2012, representing an increase of approximately $28.6 million, or 24.8%. The increase was mainly attributable to the increase in total revenues and days sales outstanding.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Inventory increased by approximately $7.4 million, from approximately $26.7 million as of June 30, 2012, to approximately $34.1 million as of June 30, 2013.  The increase was mainly due to an increase of approximately $9.1 million in work in progress and a decrease of approximately $2.0 million in raw materials.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Property, plant and equipment and prepaid land leases increased by approximately $21.7 million, from approximately $70.4 million as of June 30, 2012, to approximately $92.1 million as of June 30, 2013. The increase was mainly due to phase II of the Yizhuang facility construction and the acquisition of Bond.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Assets held for sale were residential apartments acquired through the acquisition of Bond.
| | - | ------------------------------------------------------------------------------------------



| | · | Investments in equity investees increased by approximately $3.0 million, from 13.1 million as of June 30, 2012, to approximately $16.1 million as of June 30, 2013. The increase was mainly due to the share of net gains the Company picked up from equity investees.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Goodwill increased by approximately $38.2 million,
from $27.6 million as of June 30, 2012, to approximately $65.8 million as of June 30, 2013. The increase was mainly due to
the newly acquired company Bond Corporation Pte. Ltd. and its subsidiaries (“Bond”). Goodwill is recorded at fair
value and not amortized over estimated useful life, but is reviewed
for impairment at least annually or more frequently if impairment indicators arise.                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | · | Total liabilities at June 30, 2013, were approximately $329.2 million, increasing by approximately $115.7 million, or 54.2%, compared to approximately $213.5 million at June 30, 2012. The increase in liabilities was mainly due to an increase of approximately $41.7 million in acquisition-related payments, an increase of approximately $32.3 million in accounts payable, an increase of approximately $7.8 million in deferred revenue and an increase of approximately $8.3 million in short-term bank loans.



| | · | Short-term bank loans increased by approximately $8.3 million, from approximately nil at June 30, 2012, to $8.3 million at June 30, 2013, mainly due increased financing activities with banks during fiscal 2013.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





46







| | · | Accounts payable increased by approximately $32.3 million, or 41.0% from approximately $78.8 million at June 30, 2012, to $111.1
million at June 30, 2013, mainly due to better payment policies obtained from the suppliers.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Deferred revenue increased by approximately $7.8 million, or 13.1%, from approximately $59.3 million at June 30, 2012, to approximately
$67.1 million at June 30, 2013, mainly due to advances received related to our railway contracts we signed during fiscal 2013.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Based on the Company’s historical operating results and order backlog, the Company believes that
it is more than likelythat the deferred tax assets would be realized.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | A. | Operating Results
| | -- | -----------------



Comparison of Fiscal Years Ended June
30, 2013 and 2012



Revenues: For the fiscal year ended June 30, 2013,
total revenues amounted to approximately $349.1 million, an increase of approximately $27.4 million, compared to approximately
$321.7 million for the prior fiscal year, representing an increase of 8.5%.



Integrated contract revenue accounted for approximately $328.6
million of total revenues, an increase of approximately $23.6 million, or 7.7%, compared to approximately $305.0 million for the
prior fiscal year. The increase in integrated revenues was mainly attributable to an increase of approximately $15.2 million
in industrial automation projects, an increase of approximately $34.2 million in mechanical and electrical solution business, which
was generated by Concord group and the newly acquired Bond group, decrease of $19.0 million and $6.8 million in rail transportation
and miscellaneous.



Approximately $20.5 million of total revenues related to product
revenue, an increase of approximately $3.8 million, or 22.8%, compared to approximately $16.7 million in product revenue for the
prior year. Product revenue depends on overall demand for the Company’s spare parts for customers’ maintenance
and replacement purposes.



The Company’s total revenue by segment was as follows:



|                                   |  | Fiscal year ended June 30, |      
|---------------------------------- |  | -------------------------- | -----
|                                   |  | 2013                       |      
|                                   |  | Amount                     |      
|Industrial Automation              |  | $                          | 211.7
|Rail Transportation                |  |                            | 82.3 
|Mechanical and Electrical Solution |  |                            | 36.2 
|Miscellaneous                      |  |                            | 18.9 
|Total                              |  | $                          | 349.1



Revenue Backlog: An important measure of the stability
and growth of the Company’s business is the size of its backlog, which represents the total amount of unrecognized revenue
associated with existing contracts. Our backlog as of June 30, 2013, amounted to approximately $488.7 million, representing
an increase of approximately $98.9 million, or 25.4%, compared to approximately $389.8 million as of June 30, 2012.



Of the total backlog as of June 30, 2013, the unrecognized revenue
associated with new contracts signed in the fiscal 2013 period was approximately $290.1 million and the amount brought forward
from prior periods was approximately $198.6 million. The total backlog as of June 30, 2012 comprised of approximately $242.4
million from new contracts signed in fiscal year 2012, and approximately $147.5 million from contracts carried forward from prior
year.





47









Cost of revenues: Cost of revenues can be divided
into cost of integrated contracts and cost of products sold, in line with the categories of revenues. For the fiscal year
ended June 30, 2013, the total cost of revenues amounted to approximately $225.4 million, an increase of approximately $30.0 million,
or 15.4%, compared to approximately $195.4 million for the prior fiscal year. The increase was due to an approximate $29.4
million increase in the cost of integrated contracts.



The cost of integrated contract revenue consists primarily of
three components: cost of equipment and materials, labor costs and other manufacturing expenses such as detecting expense, technology service fee and so on incurred from designing, building and delivering customized automation solutions to customers. The total cost
of integrated contracts was approximately $218.6 million for the fiscal year ended June 30, 2013, compared to approximately $189.2
million for the prior fiscal year, representing an increase of approximately $29.4 million, or 15.6%.  The increase was
primarily due to an increase of approximately $17.5 million in labor cost because of the higher labor cost of Concord, an increase
of approximately $8.4 million in cost of equipment and materials, and an increase of approximately $3.5 million in manufacturing
expenses. Of the total cost of integrated contract revenue, labor cost accounted for approximately $43.3 million for the fiscal
2013 period, compared to approximately $25.8 million for the prior fiscal year; cost of equipment and materials accounted for approximately
$143.7 million, compared to approximately $135.3 million for the prior fiscal year; and other manufacturing expenses accounted
for approximately $31.6 million, compared to approximately $28.1 million for the prior fiscal year. Of the total integrated contract
revenue, labor cost accounted for 13.2% for the 2013 period, compared to 8.5% for the prior fiscal year; cost of equipment and
materials accounted for 43.7%, compared to 44.4% for the prior fiscal year; and other manufacturing expenses accounted for 9.6%,
compared to 9.2% for the prior fiscal year. The cost components of integrated contracts were determined and varied according to
requirements of different customers.



Sales of products represent sales of spare parts (either company
manufactured or purchased from outside vendors) to customers for maintenance and replacement purposes. The products purchased
from outside vendors have different functions and capabilities from our self-made products. We decide whether or not to purchase
from outside vendors or make the necessary products ourselves, based on the needs and preferences of different customers and efficiency
considerations. Therefore, as a percentage of the cost of products sold, the self-made products and outsourced products have
varied significantly from time to time. The cost of products sold for the fiscal year ended June 30, 2013 was approximately
$6.8 million, an increase of approximately $0.6 million, compared to approximately $6.2 million for the prior fiscal year.



Gross margin: For the fiscal year ended June 30,
2013, as a percentage of total revenues, the overall gross margin was 35.4%, compared to 39.3% for the prior fiscal year. The
gross margin for integrated contracts was 33.5% for the year ended June 30, 2013, compared to 38.0% for the prior year. The
decrease in gross margin for integrated contracts was due mainly to our different sales mix during the fiscal 2013 period. The
gross margin for products sold was 66.8% for the fiscal year ended June 30, 2013, compared to 62.9% for the prior fiscal year.



Selling expenses: Selling expenses mainly consist
of compensation, traveling and administrative expenses related to marketing and sales and promotion activities of the Company’s
marketing departments. Selling expenses were approximately $26.8 million for the fiscal year ended June 30, 2013, a slight
decrease of 3.1%, or approximately $0.8 million, compared to approximately $27.6 million for the prior fiscal year. As a percentage
of total revenues, selling expenses accounted for 7.7% and 8.6% for the fiscal year ended June 30, 2013 and 2012, respectively. The
Company has established guidelines to monitor and evaluate sales performance for its products to customers in different industries
and regions to control selling expenses.



General and administrative expenses: General and
administrative expenses mainly include compensation, traveling and other administrative expenses of non-sales-related departments,
such as the planning and finance department, information systems department and human resources department. General and administrative
expenses amounted to approximately $29.6 million for the fiscal year ended June 30, 2013, representing an increase of approximately
$3.6 million, or 13.8%, compared to approximately $26.0 million for the prior fiscal year, mainly due to an increase of approximately
$1.4 million contributed by the newly acquired subsidiaries; and an increase of approximately $1.9 million in allowance for doubtful
accounts. As a percentage of total revenues, G&A expenses were 8.5% and 8.1% for the fiscal years ended June 30, 2013 and 2012,
respectively.



48







Research and development expenses: Research and development
expenses comprise mostly employee compensation, materials consumed and experiment expenses for specific new product research and
development, and any expenses incurred for basic research on advanced technologies. For the fiscal year ended June 30, 2013, research
and development expenses were approximately $32.5 million, compared to approximately $25.6 million for the prior fiscal year. The
approximate $6.9 million, or 27.2%, increase was mainly due to increased research and development activities during the 2013 period. As
a percentage of total revenues, research and development expenses were 9.3% and 7.9% for the fiscal years ended June 30, 2013 and
2012, respectively.



VAT refunds and government subsidies: The
state tax bureaus in Beijing and Hangzhou provide financial subsidies out of the value added tax they collect in order to encourage
the research and development efforts of certain enterprises. Some of our Beijing and Hangzhou subsidiaries received
such refunds. All VAT refunds, that have no further conditions to be met, are recognized in the statements of comprehensive
income when cash or approval from the tax bureaus is received. For the fiscal year ended June 30, 2013, VAT refunds were approximately
$18.1 million, compared to approximately $15.0 million for the prior fiscal year, increasing by approximately $3.1 million, or
20.6%. As a percentage of total revenues, VAT refunds were 5.2% and 4.7% for the fiscal years ended June 30, 2013 and
2012, respectively.





The local governments in Beijing, Hangzhou and Xi’an also
provide financial subsidies to encourage development of certain enterprises. Some of our subsidiaries received such subsidies. For
the government subsidies that have no further conditions to be met, the amounts are recognized in the statements of comprehensive
income when received; for the amounts with certain operating conditions, the government subsidies are recorded as liabilities when
received and will be released to income when the conditions are met.Gross subsidy income received from the government
amounted to approximately $4.9 million and $3.3 million for the fiscal years ended June 30, 2013 and 2012, respectively, an increase
of approximately $1.6 million, or 48.1%.



Income from operations: Income from operations decreased
by approximately $7.7 million, from approximately $65.4 million for the fiscal year ended June 30, 2012 to approximately $57.7
million for the fiscal year ended June 30, 2013.  The decrease in income from operations was primarily due to the decrease
in gross profit and margins.



Dividend income from cost investees: Dividend income
increased by approximately $0.8 million for the fiscal year ended June 30, 2013, from nil for the fiscal year ended June 30, 2012.
All of the dividend income was received from Heilongjiang Ruixing Technology Co., Ltd., a cost method investee of the Company.



Interest expenses, net: For the year ended June
30, 2013, net interest expense decreased by approximately $2.3 million, or 167.3%, from approximately $1.4 million for the prior
year, to interest income approximately $0.9 million for the current period. As a percentage of total revenue, net interest
expense accounted for 0.3% and negative 0.4% for the fiscal years ended June 30, 2013 and 2012, respectively. The interest income
earned from time deposits with maturities over three months.



Change in fair value of the contingent consideration related
to the acquisition of Bond: An amount of $854,549 loss was recorded in other expense (income) due the change in fair value
of the contingent consideration related to the acquisition of Bond.



Income tax expenses: For the
year ended June 30, 2013, the Company’s income tax expense was approximately $8.1 million for financial reporting purposes,
a decrease of approximately $2.3 million, as compared to $10.4 million for the prior year. The lower income tax expense was
mainly due to during this year, Beijing Hollysys, one of our subsidiaries, was certified as a Key Software Enterprise for calendar
year 2011 and 2012, and applied to a preferential income tax rate of 10% retroactively from January 2011 to December 2012. The
Company thus recognized an income tax credit of $2.7 million during this year. Excluding this impact, the income tax expense and
the effective tax rate were $10.8 million and 17.8% for the fiscal year 2013. As a percentage of income before income taxes, the
effective tax rate was 13.4% and 15.5% for the years ended June 30, 2013 and 2012, respectively.



Net income attributable to non-controlling interests: For
fiscal 2013, the non-controlling interests are the ownership interests of 49% in Hollycon. The net income attributable to non-controlling
interest for the fiscal year ended June 30, 2013 was $0.5 million, an increase of approximately $0.1 million, from approximately
$0.4 million for the prior year.





49









Net income and earnings per share attributable to Hollysys: For
the fiscal year ended June 30, 2013, net income attributable to Hollysys amounted to approximately $52.0 million, representing
a decrease of approximately $4.2 million, as compared to approximately $56.2 million for the prior year. The basic and diluted
earnings per share were $0.93 and $0.92 for the year ended June 30, 2013, as compared to $1.01 and $1.01 for the prior year, representing
a decrease of $0.08 and $0.09, respectively. Such decrease was primarily due to additional amortization expenses arising from
the acquired intangible assets and consideration fair value adjustments amounting to $4.0 million.



Comparison of Fiscal Years Ended June
30, 2012 and 2011



Revenues: For the fiscal year ended June 30, 2012,
total revenues amounted to approximately $321.7 million, an increase of approximately $58.9 million, compared to approximately
$262.8 million for the prior fiscal year, representing a significant increase of 22.4%.



Integrated contract revenue accounted for approximately $305.0
million of total revenues, an increase of approximately $56.4 million, or 22.7%, compared to approximately $248.6 million for the
prior fiscal year.  The increase in integrated revenues was mainly attributable to an increase of approximately $50.1
million in industrial automation projects, an increase of $24.2 million in overseas sales, which was generated by Concord, and
a decrease of $16.4 million in rail transportation.



Approximately $16.7 million of total revenues related to product
revenue, an increase of approximately $2.4 million, or 17.3%, compared to approximately $14.3 million in product revenue for the
prior year.  Product revenue depends on overall demand for the Company’s spare parts for customers’ maintenance
and replacement purposes.



The Company’s total revenue by segment was as follows:





|                                   |  | Fiscal year ended June 30, |      
|---------------------------------- |  | -------------------------- | -----
|                                   |  | 2012                       |      
|                                   |  | Amount                     |      
|Industrial Automation              |  | $                          | 190.3
|Rail Transportation                |  |                            | 100.9
|Mechanical and Electrical Solution |  |                            | 2.0  
|Miscellaneous                      |  |                            | 28.5 
|Total                              |  | $                          | 321.7





Revenue Backlog: An important measure of the stability
and growth of the Company’s business is the size of its backlog, which represents the total amount of unrecognized revenue
associated with existing contracts. Our backlog as of June 30, 2012, amounted to approximately $389.8 million, representing
an increase of approximately $93.4 million, or 31.5%, compared to approximately $296.4 million as of June 30, 2011.



Of the total backlog as of June 30, 2012, the unrecognized revenue
associated with new contracts signed in the fiscal 2012 period was approximately $242.4 million and the amount brought forward
from prior periods was approximately $147.5 million. The total backlog as of June 30, 2011 comprised of approximately $146.9
million from new contracts signed in fiscal year 2011, and approximately $149.5 million from contracts carried forward from prior
year.



Cost of revenues: Cost of revenues can be divided
into cost of integrated contracts and cost of products sold, in line with the categories of revenues. For the fiscal year
ended June 30, 2012, the total cost of revenues amounted to approximately $195.4 million, an increase of approximately $23.6 million,
or 13.8%, compared to approximately $171.7 million for the prior fiscal year. The increase was due to an approximate $23.8
million increase in the cost of integrated contracts, and an approximate $0.2 million year-over-year decrease in the cost of products
sold.



50











The cost of integrated contract revenue consists primarily of
three components: cost of equipment and materials, labor costs and other manufacturing expenses such as detecting expense, technology service fee and so on incurred from designing, building and delivering customized automation solutions to customers.
The total cost of integrated contracts was approximately $189.2 million for the fiscal year ended June 30, 2012, compared to approximately
$165.4 million for the prior fiscal year, representing an increase of approximately $23.8 million, or 14.4%. The increase
was primarily due to an increase of approximately $17.0 million in labor cost because of the higher labor cost of Concord, and
an increase of approximately $6.3 million in manufacturing expenses. Of the total cost of integrated contract revenue, labor cost
accounted for 13.6% for the fiscal 2012 period, compared to 5.3% for the prior fiscal year; cost of equipment and materials accounted
for 71.5%, compared to 81.5% for the prior fiscal year; and other manufacturing expenses accounted for 14.9%, compared to 13.2%
for the prior fiscal year. Of the total integrated contract revenue, labor cost accounted for 8.5% for the 2012 period, compared
to 3.5% for the prior fiscal year; cost of equipment and materials accounted for 44.4%, compared to 53.8% for the prior fiscal
year; and other manufacturing expenses accounted for 9.2%, compared to 8.7% for the prior fiscal year. The cost components of integrated
contracts were determined and varied according to requirements of different customers.



Sales of products represent sales of spare parts (either company manufactured or purchased from outside
vendors) to customers for maintenance and replacement purposes. The products purchased from outside vendors have different
functions and capabilities from our self-made products. We decide whether or not to purchase from outside vendors or make
the necessary products ourselves, based on the needs and preferences of different customers and efficiency considerations. Therefore,
as a percentage of the cost of products sold, the self-made products and outsourced products have varied significantly from time
to time. As our self-made products generally contribute higher margins than products purchased from outside vendors, sales
of a greater portion of self-made products generally result in lower costs of products sold. The cost of products sold for
the fiscal year ended June 30, 2012 was approximately $6.2 million, a decrease of approximately $0.2 million, compared to approximately
$6.4 million for the prior fiscal year.





Gross margin: For the fiscal year ended June 30,
2012, as a percentage of total revenues, the overall gross margin was 39.3%, compared 34.7% for the prior fiscal year.  The
gross margin for integrated contracts was 38.0% for the year ended June 30, 2012, compared to 33.5% for the prior year.  The
increase in gross margin for integrated contracts was due mainly to our different sales mix during the fiscal 2012 period. The
gross margin for products sold was 62.9% for the fiscal year ended June 30, 2012, compared to 55.4% for the prior fiscal year.



Selling expenses: Selling expenses mainly consist
of compensation, traveling and administrative expenses related to marketing and sales and promotion activities of the Company’s
marketing departments. Selling expenses were approximately $27.6 million for the fiscal year ended June 30, 2012, an increase
of 35.2%, or approximately $7.2 million, compared to approximately $20.4 million for the prior fiscal year, mainly due to the Company’s
expanded sales network and increased sales activities. As a percentage of total revenues, selling expenses accounted for 8.6%
and 7.8% for the fiscal year ended June 30, 2012 and 2011, respectively. The Company has established guidelines to monitor
and evaluate sales performance for its products to customers in different industries and regions to control selling expenses.



General and administrative expenses: General and
administrative expenses mainly include compensation, traveling and other administrative expenses of non-sales-related departments,
such as the planning and finance department, information systems department and human resources department. General and administrative
expenses amounted to approximately $26.0 million for the fiscal year ended June 30, 2012, representing an increase of approximately
$9.3 million, or 56.1%, compared to approximately $16.7 million for the prior fiscal year, mainly due to an increase of $4.9 million
contributed by the newly acquired subsidiaries; and an increase of $1.6 million in allowance for doubtful accounts. As a percentage
of total revenues, G&A expenses were 8.2% and 6.1% for the fiscal years ended June 30, 2012 and 2011, respectively.



Research and development expenses: Research
and development expenses comprise mostly employee compensation, materials consumed and experiment expenses for specific new product
research and development, and any expenses incurred for basic research on advanced technologies. For the fiscal year ended June
30, 2012, research and development expenses were approximately $25.6 million, compared to approximately $20.1 million for the
prior fiscal year. The approximate $5.5 million, or 26.9%, increase was mainly due to increased research and development activities
during the 2012 period.  As a percentage of total revenues, research and development expenses were 7.9% and 7.7% for
the fiscal years ended June 30, 2012 and 2011, respectively.



51









VAT
refunds and government subsidies: The state tax bureaus in Beijing and Hangzhou provide financial subsidies out of the
value added tax they collect in order to encourage the research and development efforts of certain enterprises. Beijing Hollysys
and Hangzhou Hollysys both received such refunds. All VAT refunds, that have no further conditions to be met, are recognized
in the statements of comprehensive income when cash or approval from the tax bureaus is received. For the fiscal year ended
June 30, 2012, VAT refunds were approximately $15.0 million, compared to approximately $9.0 million for the prior fiscal year,
increasing by approximately $6.0 million, or 67.0%, mainly due to the PRC government approving a VAT refund of $5.3 million in
fiscal 2012 related to sales generated during January to June 2011. As a percentage of total revenues, VAT refunds
were 4.7% and 3.4% for the fiscal years ended June 30, 2012 and 2011, respectively.



The local governments in Beijing and Hangzhou also provide financial
subsidies to encourage development of certain enterprises. Beijing Hollysys and Hangzhou Hollysys both received such subsidies. For
the government subsidies that have no further conditions to be met, the amounts are recognized in the statements of comprehensive
income when received; for the amounts with certain operating conditions, the government subsidies are recorded as liabilities when
received and will be released to income when the conditions are met.Gross subsidy income received from the government
amounted to approximately $3.3 million and $1.8 million for the fiscal years ended June 30, 2012 and 2011, respectively, an increase
of approximately $1.5 million, or 80.6%.



Income from operations: Income from operations increased
by approximately $20.7 million, from approximately $44.7 million for the fiscal year ended June 30, 2011 to approximately $65.4
million for the fiscal year ended June 30, 2012.  The increase in income from operations was primarily due to the increase
in revenue and gross margins.



Gains on disposal of shares of equity investees: The
gains on disposal of shares of equity investees amounted to $2.0 million for fiscal year 2012, which was mainly contributed by
the Company disposing of a 10% equity interest in China Techenergy Co., Ltd. for consideration of RMB 27.8 million (approximately
$4.4 million), and recognizing a disposal gain of $2.0 million during this year. After this transaction, the Company continues
to hold a 40% equity interest in China Techenergy.



Interest expenses, net: For the year ended June
30, 2012, net interest expenses decreased by approximately $0.3 million, or 14.7%, from approximately $1.6 million for the prior
year, to approximately $1.3 million for the current period. As a percentage of total revenue, net interest expense accounted
for 0.4% and 0.6% for the fiscal years ended June 30, 2012 and 2011, respectively.



Income tax expenses: For the year ended June 30,
2012, the Company’s income tax expense was approximately $10.4 million, an increase of approximately $4.0 million, as compared
to $6.4 million for the prior year. The large income tax expense for this year was mainly due to an income tax expense of
$4.4 million related to certain expenses incurred during the year that were determined not to be deductible for tax purposes. As
a percentage of income before income taxes, the effective tax rate was 15.5% and 13.5% for the years ended June 30, 2012 and 2011,
respectively.



Net income attributable to non-controlling interests: The
non-controlling interests of the Company include non-controlling shareholders’ interests in each subsidiary. For fiscal
2012 and 2011, the non-controlling interests are the ownership interests of 49% in WoDeWeiYe and Hollycon, respectively. The net
income attributable to non-controlling interest for the fiscal year ended June 30, 2012 was $0.4 million, an increase of $0.4 million,
from a net loss of 4.9 thousand for the prior year, primarily due to the increased net income of WoDeWeiYe and Hollycon for fiscal 2012.



Net income and earnings per share attributable to Hollysys: For
the fiscal year ended June 30, 2012, net income attributable to Hollysys amounted to approximately $56.2 million, representing
an increase of approximately $14.7 million, as compared to approximately $41.5 million for the prior year. The basic and diluted
earnings per share were $1.01 and $1.01 for the year ended June 30, 2012, as compared to $0.76 and $0.75 for the prior year, representing
an increase of $0.25 and $0.26, respectively. Such increase was primarily due to an increase of approximately $35.1 million
in gross profit.



52







| | B. | Liquidity and Capital Resources
| | -- | -------------------------------



We believe our working capital is sufficient to meet our present
requirements. 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 and borrowing capacity 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.



In line with the industry practice, we typically have a long
receivable collection cycle. As a result, our cash provided by our operations in any given year may not be sufficient to fully
meet our operating cash requirements in that year. We will use available financing means, including bank loans, to provide sufficient
cash inflows to balance timing differences in our cash flows.



We estimate our liquidity needs for investing and
financing activities for 2014 will be approximately $21.7 million, which will be primarily related to the repayment of bank
borrowings, capital expenditures that mainly consist of cash payments for phase II of the Yizhuang facility construction, and
cash consideration payment for the acquisition of Bond. Our future working capital requirements will depend on many factors,
including, among others, the rate of our revenue growth, the timing and extent of expansion of our sales and marketing
activities, the timing of introductions of new products and/or enhancements to existing products, and the timing and extent
of expansion of our manufacturing capacity.





Our long-term liquidity needs will relate primarily to
working capital to pay our suppliers, and third-party manufacturers, as well as any increases in manufacturing capacity or
acquisitions of third party businesses that we may seek in the future. We expect to meet these requirements primarily through
our current cash holdings, revolving short-term bank borrowings, as well as our cash flow from operations. For fiscal year
2014, we expect an $8.1 million capital expenditure program, mainly related to the cash payments for phase II of the Yizhuang
facility construction. We currently do not have any plan to incur significant capital expenditures for the foreseeable future
beyond 2014. For fiscal year 2015, we expect a $14.6 million cash consideration payment for the acquisition of Bond. We
currently do not have any plan to incur significant investing expenditures for the foreseeable future beyond 2015.



Cash Flow and Working Capital



As of June 30, 2013, we had total assets of approximately $744.6
million, of which cash and cash equivalents amounted to $112.2 million, time deposits with original maturities over three months
amounted to $20.9 million, accounts receivable amounted to $176.6 million and inventories amounted to $34.1 million. While working
capital was approximately $278.0 million, equity amounted to $415.5 million and our current ratio was approximately 2.04.



See Item 8, Financial Information, A. Consolidated Statements
and Other Financial Information, Dividend Policy, for information on the ability of certain of our subsidiaries in China to make
dividends to their respective parent companies.



The following table shows our cash flows with respect to operating
activities, investing activities and financing activities for the fiscal years ended June 30, 2011, 2012 and 2013:



|Cash Flow Item                                                |  | Fiscal Years Ended June 30 |            
|------------------------------------------------------------- |  | -------------------------- | -----------
|                                                              |  | 2011                       |            
|Net cash (used in)provided by operating activities            |  | $                          | (1,793,491 
|Net cash used in investing activities                         |  | $                          | (29,071,216
|Net cash used in financing activities                         |  | $                          | (2,760,031 
|Effect of exchange rate changes on cash and cash  equivalents |  | $                          | 4,791,852  
|Net (decrease) increase in cash and cash equivalents          |  | $                          | (28,832,886
|Cash and cash equivalents,  beginning of year                 |  | $                          | 119,501,945
|Cash and cash equivalents, end of year                        |  | $                          | 90,669,059 



53







Operating Activities



For the fiscal year ended June 30, 2013, net cash provided by operating activities was approximately
$30.7 million, compared to approximately $57.2 million for prior fiscal
year 2012.  The net cash inflow of operating activities in fiscal year 2013 was primarily due to net income of approximately
$52.5 million, and changes in working capital attributable to an increase in accruals and other payables of approximately $11.0
million, an increase in accounts payable of approximately $22.4 million, all of which were partially offset by an increase in accounts
receivable of approximately $33.4 million, and an increase in cost and estimated earnings in excess of billings of approximately
$20.0 million.



For the fiscal year ended June 30, 2012, net cash inflow of
operating activities was approximately $57.2 million, primarily due to net income of approximately $56.6 million, and changes in
working capital attributable to an increase in deferred revenue of approximately $14.4 million, an increase in accounts payable
of approximately $8.8 million, all of which were partially offset by an increase in accounts receivable of approximately $16.9
million, and an increase in cost and estimated earnings in excess of billings of approximately $24.7 million.



For the fiscal year ended June 30, 2011, net cash used
in operating activities was approximately $1.8 million, primarily due to changes in working capital attributable to an
increase in cost and estimated earnings in excess of billings of approximately $42.6 million, an increase in accounts receivable
of approximately $30.2 million, and an increase of inventories of approximately $3.5 million, all of which were partially offset
by the net income of approximately $41.5 million, an increase in deferred revenue of approximately $8.0 million, an increase in
accruals and other payables of approximately $2.1 million, an increase of accounts payable of approximately $18.5 million.



Investing Activities





For the fiscal years ended June 30, 2013, net cash used in investing
activities was approximately $12.1 million, compared to approximately $27.9 million for prior fiscal year 2012. The net
cash used in investing activities in fiscal year 2013 consisted mainly of a cash outflow of approximately $11.9 million paid for
acquisition of Bond, net of cash acquired, a cash outflow of approximately $9.1 million for capital expenditures, and a cash
inflow of approximately $8.5 million from maturity of time deposits.



The net cash used in investing activities for the fiscal year
2012 was approximately $27.9 million, consisted mainly of a cash outflow of approximately $21.6 million transferred from current
accounts to time deposits in banks with original maturities between six months and one year, a cash outflow of approximately $5.3
million paid for the acquisition of Concord, net of cash acquired, a cash outflow of approximately $5.0 million for capital
expenditures, and a cash inflow of approximately $4.4 million related to disposal of shares of equity investees.



The net cash used in investing activities for the fiscal year
2011 was approximately $29.1 million, consisted mainly of a cash outflow of approximately $16.9 million for prepayment for
the acquisition of Concord and a cash outflow of approximately $16.1 million for capital expenditures.



Financing Activities



For fiscal year ended June 30, 2013, net cash used in financing
activities was approximately $3.7 million, as compared to approximately $25.3 million for the prior year. The net cash
used in financing activities in fiscal year 2013 consisted mainly of a repayment of long-term bank loans of approximately $8.2
million, a repayment of short-term bank loans of approximately $4.6 million, the proceeds from the exercise of options of
approximately $1.0 million, and proceeds of short-term loans of approximately $7.5 million.



The net cash outflow for fiscal year 2012 was $25.3
million, mainly composed of a repayment of short-term bank loans of approximately $12.3 million, a repayment of amount due to the
former shareholders of subsidiaries of approximately $8.2 million, a repayment of long-term bank loans of approximately $6.0
million, the proceeds from the exercise of options of approximately $0.7 million, and proceeds of short-term loans of approximately
$0.6 million.



54









The net cash outflow for fiscal year 2011 was $2.8 million,
mainly composed of a repayment of bonds payable of approximately $12.1 million, a repayment of short-term bank loans of approximately $5.9
million, a repayment of long-term bank loans of approximately $1.51 million, the proceeds of short-term loans of approximately
$15.7 million, and proceeds from the exercise of options of approximately $1.1 million.





| | C. | Research and Development, Patents and Licenses.
| | -- | -----------------------------------------------



Research and Development Efforts



As a high-technology company, our business and long-term development rely highly on our research and development
capabilities. Our research and development process is based on Capability Maturity Model Integration Level 2&3 and can
be classified into the following seven phases:



· Study
phase

· Requirement
phase

· Designing
phase

· Implementation
phase

· Testing
phase

· Inspection
phase

· Maintaining
phase



We use standard project development life cycle models, including
the waterfall model, increment model, iterative model and prototype. As a technology leader we continually develop and patent new
automation technologies.  We also continually review and evaluate technological changes affecting the automation and
integrated system industries and invest substantially in application-based research and development. We currently employ over 940
staff in the research and development department or engaged in research and development work.



Our core technologies achieved from our research and development
efforts include:



· Large
scale software platform architecture design;

· Proprietary
network design and development technologies;

· Safety
computer platform design and manufacturing;

· Efficient
I/O (Input /Output) signal processing design technology; and

· Embedded
system design and manufacturing.



We are committed to incorporating the latest advances in electronics
and information system technology into its products and, whenever possible, developing state-of-the-art proprietary products based
on its extensive internal expertise and research efforts.  We currently spend approximately 8-9% of our annual revenues
on research and development. Our recent major research and development focuses include:



55









· Transportation
Automation;

· Manufacturing
Automation; and

· Process
Automation.



Our research and development efforts have led to the invention
of several proprietary systems in the fields of DCS, PLC and transportation automation systems. In July 2012, we completed
the development of and released our 5th generation DCS (Distributed Control System), which represents higher reliability, stability,
better safety protection and user-friendliness with advanced system architecture, hardware, software designs and industry expert
solutions. In the same month we completed the development and certified our SIS (Safety Instrumented System) –HiaGuard with
SIL3 (Safety Integrity Level 3) in compliance with international standards. HiaGuard is the first domestically developed SIS technology
and breaks the monopoly held by foreign systems in China in this product. Hollysys’ HiaGuard can be applied for ESD (Emergency
Shutdown System), PSD (Process Shutdown System), and FGS (Fire and Gas Systems) used in various industries. We also invented
several series of PLC (Programmable Logic Controller) products, and the most successful applications include the mining safety
protection systems and Traditional Chinese Medicine manufacturing and packaging machine and dispensing machine. Our core technologies
provide a platform that is designed to enable the rapid and efficient development of our technologies for specific applications
that are quickly, efficiently and affordably tailored to particular industries and to the needs of our customers. Our software
development tools enable us to program our systems rapidly, allowing us to apply digital technologies that take advantage of the
tremendous advances in electronics and information technology to improve quality and reliability while reducing cost. The market
for our products includes, not only the large number of factories that are continually under construction in China’s rapidly
expanding industrial base, but also extends to the replacement and upgrading of outdated legacy systems to bring a higher degree
of control and efficiency to the automation of processes, delivering increasing benefits to customers as they meet increased competition.
In the future we expect that the market for our products will extend further into South Asia and the Middle East.



We already have our proprietary high-speed rail signaling system
including ATP (Automatic Train Protection), TCC (Train Control Center), LEU (Line-Side Electronic Unit), BTM (Balise Transmission
Module), TSRS (Temporary Speed Restriction Server), HVC (Hollysys Vital Computer) and Interlocking system been certified according
to international standards and have passed the Safety Integrity Level 4 (SIL4) certification. For the subway signaling system,
the proprietary ATS (Automatic Train Supervision) and CBI (Computer Based Interlocking) have passed SIL2 and SIL4 certification
respectively by the end of 2011. And in March 2013 we finished the development and certified ZC (Zone Controller), LEU (Line-side
Electronic Unit) and Balise according to SIL4 (Safety Integrity Level 4) requirements in compliance of international standards,
the certification of ATO (Automatic Train Operation), ATP (Automatic Train Protection) for subway signaling system will be finished
by the end of this calendar year. For both of the signaling systems, Hollysys is one of the earliest domestic companies in developing
and certifying the signaling systems according to the international standards. Hollysys will be one of the few companies in the
world which command the most leading and safety critical technologies of rail signaling system and we will compete with multinational
companies such as Siemens, Alston and Bombardier in domestic and world arena. We believe our research and development efficiency,
latest technology, strong customization and better value for money proposition will give us an unparalleled advantage in the high-speed
rail and subway signaling markets.



For the fiscal years 2013, 2012, and 2011, aggregate annual
research and development expenses were approximately $32.5 million, $25.6 million, and $20.1 million respectively.



Intellectual Property Rights





We rely on a combination of copyright, patent, trademark and
other intellectual property laws, nondisclosure agreements and other protective measures to protect our proprietary rights. We
also utilize unpatented proprietary know-how and trade secrets and employ various methods to protect our trade secrets and know-how.
As of June 30, 2013, we held 128 software copyrights, 70 authorized patents, 103 patent applications and 26 registered trademarks. Our
earliest software copyrights will expire in 2048. Our invention patents have terms of 20 years (with the first and the next
issued patent expiring in fiscal year 2013 and 2025), and our utility patents and design patents have terms of 10 years (with both
of the first and the next issued utility patent expiring in fiscal year 2015 and the first and the next issued design patent due
to expire in fiscal years 2016 and 2017 respectively.)



56









Although we employ a variety of intellectual property in the development and manufacturing of products,
we believe that only a few of our intellectual property rights are critical to our current operations. However, when taken as a
whole, we believe that our intellectual property rights are significant and that the loss of all or a substantial portion of such
rights could have a material adverse effect on our results of operations. Also, from time to time, we may desire or be required
to renew or to obtain licenses from others in order to further develop and manufacture commercially viable products effectively.



We market our DCS products mainly under the brand name of “HOLLiAS”.  Our
brand name is well-established and is recognized as associated with high quality and reliable products by industry participants
and customers. We have obtained trademark protection for our brand name “HOLLiAS” in the PRC as well as in other countries
in the world. In addition, we have also registered or applied for a series of trademarks including brand names for us and our products.
The trademarks are issued for 10-year periods (and may be renewed prior to expiration).



| | D. | Trend Information
| | -- | -----------------



Other than as disclosed in the foregoing disclosures and elsewhere
in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the fiscal year 2013 that
are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources,
or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.



| | E. | Off-Balance Sheet Arrangements
| | -- | ------------------------------



We do not believe that there are any off-balance sheet arrangements
that have or are reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital resources.



| | F. | Tabular Disclosure of Contractual Obligations
| | -- | ---------------------------------------------



The following table sets forth our contractual obligations,
including long-term and short-term loans and operating leases and capital and operational commitments as of June 30, 2013.





|                               |  | Total |             |  | Less than 1 year |  |             | 1-3 years |  |  | 3-5 years  |  |  | More than 5 years |          
|------------------------------ |  | ----- | ----------- |  | ---------------- |  | ----------- | --------- |  |  | ---------- |  |  | ----------------- | ---------
|Long-term bank loans           |  |       |             |  |                  |  |             |           |  |  |            |  |  |                   |          
|-Principals                    |  |       | 27,775,812  |  |                  |  | 8,671,080   |           |  |  | 18,206,309 |  |  |                   | 839,728  
|- Interests                    |  |       | 7,461,292   |  |                  |  | 2,685,979   |           |  |  | 3,500,544  |  |  |                   | 1,202,942
|Operating lease obligations(1) |  |       | 3,347,001   |  |                  |  | 1,464,599   |           |  |  | 1,491,878  |  |  |                   | 390,524  
|Purchase obligations(2)        |  |       | 185,127,788 |  |                  |  | 185,127,788 |           |  |  | -          |  |  |                   | -        
|Capital obligations(3)         |  |       | 597,353     |  |                  |  | 597,353     |           |  |  | -          |  |  |                   | -        
|Standby letters of credit(4)   |  |       | 1,091,202   |  |                  |  | 1,091,202   |           |  |  | -          |  |  |                   | -        
|Performance guarantees(5)      |  |       | 42,209,859  |  |                  |  | 25,804,382  |           |  |  | 11,380,698 |  |  |                   | 5,024,779
|Total                          |  |       | 267,610,307 |  |                  |  | 225,442,383 |           |  |  | 34,579,429 |  |  |                   | 7,457,973





| | (1) | Operating lease obligations
| | --- | ---------------------------

It represents the future minimum payments under non-cancelable
operating leases.



| | (2) | Purchase obligations
| | --- | --------------------

As of June 30, 2013, the Company had approximately
$185.1 million in purchase obligations for the coming fiscal year, for purchases of equipment, mainly for fulfillment of in-process
or newly entered contracts resulting from the expansion of our operations.



57







| | (3) | Capital obligations
| | --- | -------------------

As of June 30, 2013, the Company had approximately
$0.6 million in capital obligations for the coming fiscal year, mainly for the phase II construction of the Company’s headquarters
in Beijing, PRC.





| | (4) | Standby letters of credit
| | --- | -------------------------

We have issued letters of credit to our suppliers,
to insure our payments upon delivery of the goods by the suppliers. When a letter of credit is issued, a proportion of the total
amount covered by the letter of credit may be required to be deposited in the bank, and is not available until the payment has
been settled or the letter of credit has expired. As of June 30, 2013, we had approximately $1.1 million in standby letters of
credit obligations.



| | (5) | Performance guarantees
| | --- | ----------------------

We have provided performance guarantees to our customers,
to insure our performance of the contractual obligations. When a performance guarantee is issued, a proportion of the total guarantee
amount may be required to be deposited in the bank, and is not available until the guarantee is expired. As of June 30, 2013, we
had approximately $4.0 million restricted cash deposited in banks for performance guarantees.



Other than the contractual obligations and commercial commitments
set forth above, we did not have any other long-term debt obligations, operating lease obligations, capital commitments, purchase
obligations or other long-term liabilities as of June 30, 2013.



| | G. | Safe Harbor
| | -- | -----------



All information included in Item 5.E 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 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 senior management as of the date of this annual report.



|Name         |  | Age |  | Position                            
|------------ |  | --- |  | ------------------------------------
|             |  |     |  |                                     
|Changli Wang |  | 50  |  | Chief Executive Officer and Chairman
|Herriet Qu   |  | 43  |  | Chief Financial Officer             
|Jianfeng He  |  | 51  |  | Chief Operation Officer             
|Baiqing Shao |  | 45  |  | SeniorVice President                
|Colin Sung   |  | 47  |  | Director                            
|Jerry Zhang  |  | 41  |  | Director                            
|Jianyun Chai |  | 51  |  | Director                            
|Qingtai Chen |  | 75  |  | Director                            



Dr. ChangliWang,the main founder of the Company, has served as a member
of the Board of Directors and Chief Executive Officer since Hollysys Automation Technologies Ltd. was established in September
2007 and as Chairman of the Board from May 2010. From 2009 to 2010, Dr. Wang served as Chairman of Beijing Hollysys.
From 1993 to 2009, Dr. Wang served as the Chief Executive Officer and Vice Chairman of Beijing Hollysys. From 1988 to 1993, Dr.
Wang served as an engineer in the 6th Research Institute of China Electronics Corporation. Besides, Dr. Wang has served as
the Vice Chairman of the Chinese Automation Association since 2003.  Dr. Wang received his Bachelor’s degree in Automation
from Tianjin University in 1984 and his PhD in Automation from Lancaster University in UK in 1988.



58







Ms. Herriet Qu,has served as the Company’s Chief
Financial Officer since February 2012. Prior to being appointed to the position of Chief Financial Officer, Ms. Qu served as the
Financial Controller of the Company from October 2007 to January 2012. Prior to Ms. Qu joining the Company, she served as Chief
Financial Officer of Beijing Chum Investment Corporation Ltd. from January 2002 to September 2007. Ms. Qu holds an MBA degree from
Oklahoma City University and a Bachelor’s degree from Tianjin University of Finance & Economics.



Mr. Jianfeng He, has served as our Chief Operating Officer
since February 2012, and he served as Chief Executive Officer of Beijing Hollysys Group, Chairman of Hangzhou Hollysys and Chairman
of Beijing Hollysys from 2010. From 2008 to 2010, he served as Vice President and President of Beijing Hollysys. From 2004 to 2008,
he served as Deputy General Manager and General Manager of Hangzhou Hollysys. From 1999 to 2004, he served as General Manager Assistant
and Vice President of Beijing Hollysys. From 1997 to 1999, he served as the Deputy General Manager of Shenzhen Hollysys. Prior
to joining Hollysys, he served as Deputy Chief Engineer of Shenzhen Dashi Automation Engineering Company from 1995 to 1997. From
1992 to 1995, Mr. He studied and got a PhD Degree from South China University of Technology in automation and control theory and
application. From 1988 to 1992, he served as Lecturer in Hunan Xiangtan University Electromechanical Department. From 1985 to 1988,
he studied and got his Master Degree in Central South University of Technology in automation and control. From 1982 to 1985, he
worked in Hunan Xiangtan Iron and Steel Company as assistant engineer. In 1982, he graduated from Central South University of Technology
with a Bachelor Degree in industrial automation.



Mr. Baiqing Shao, has served as our Senior Vice President,
Business Development of the Company since February 2012. Since 2010, Mr. Shao also served as Vice President of Beijing Hollysys
Group Corporation and Chairman of Beijing Hollysys Automation & Drive Co., Ltd.. From 2002 to 2010, he served as the General
Manager of Beijing Hollysys Information Technology Co., Ltd.( the current “ Shenhua Hollysys Information Technology Co.,
Ltd.”). From 1999 to 2002, he served as Vice President of Beijing Hollysys. From 1993 to 1999, he served as technology development
engineer, Department Manager and Vice General Manager of Beijing Hollysys Automation Co. Ltd consecutively. Mr. Shao has served
the Company for more than eighteen years as one of the founding group of engineers. He holds a Master Degree of Computer Science
from the 6th Research Institute of China Electronics Corporation and an MBA Degree from Peking University.



Mr. Colin Sung,has served as a member of the Board of Directors and Chairman of the Audit Committee of Board of Directors since February 2008.
Mr. Sung is the Chief Financial Officer for eHi Auto Services Limited since April 2013. Mr. Sung also has served as adviser
of NeWorld Education Group, Inc. since August 2012 and served as Chief Financial Officer of NeWorld Education Group since August
2011. Prior to joining NeWorld, he was the CFO of Lighting the Box from March 2011. Mr. Sung served as the deputy Chief Executive
Officer and the Chief Financial Officer of Linktone Ltd., a NASDAQ-listed wireless interactive entertainment service provider
in China, from 2009 to 2011. From 2008 to 2009, he served as the Chief Financial Officer and President of China Cablecom Holdings,
Ltd. From 2005 to 2008, he was the Chief Financial Officer of Linktone Ltd., where he also served as the acting Chief Executive
Officer in 2006 and as its director of board from 2007 to 2008. From 2004 to 2005, Mr. Sung was the Corporate Controller of UTI,
United States, Inc., a subsidiary of International Freight Forwarder (NASDAQ: UTIW), and from 2001 to 2004, was a Vice President
of finance and Corporate Controller of USF Worldwide, Inc., a subsidiary of US Freightways. From 1997 to 2001, Mr. Sung was Vice
President and Corporate Controller for US Operation of Panalpina Welttransport Holding, (PWTN.SW). Mr. Sung received his bachelor’s
degree in accounting from William Paterson University in 1992 and his MBA degree from American InterContinental University in
2004. Mr. Sung is a Certified Public Accountant and Certified Global Management Accountant.



Ms. Jerry Zhang,has served as a member of the Board
of Directors since September 2007. Ms Jerry Zhang is CEO, North China and General Manager, Beijing Branch, Standard Chartered Bank
(China) Limited. Her key focuses are strategic planning, business development and corporate governance of the Bank’s operations
in North China. As the General Manager of Beijing Branch, she is also responsible for overall management of Beijing Branch. Prior
to this role, Jerry has held a variety of senior roles at Standard Chartered China, and she enjoys a strong track record in setting
up good relationship with clients and creating value both for the bank and the clients. In her recent position as Head of Financial
Institutions, Jerry has led to achieve frog leap developments of the Bank’s FI business, which has become the biggest FI
business amongst all foreign banks in China in almost all aspects. Jerry joined Standard Chartered in 1994, and has accumulated
rich implementation and management experiences in wholesale banking business. She has successfully established non-banking financial
institutions business in China for the Bank. In 2009, she has left the Bank for a short duration, and taken the role as Chief Representative
of Fidelity International Asset Management Co. Beijing Representative Office. Jerry received her M.B.A. from Lancaster University.



59







Dr. Jianyun Chai, has served as a member of the
Board of Directors since June 2008.  Dr. Chai is currently a professor and the head of the Institute of Power Electronic and
Electrical Machine System at Tsinghua University in China. Before he joined Tsinghua University as an Associate Professor in 1999,
Dr. Chai spent eight years working in the motor and information industries in Japan. Dr. Chai is also a member of various societies
and organizations, including the China Renewable Energy Society, the Chinese Society for Electrical Engineering, and the Chinese
Wind Energy Association. Dr. Chai received a Bachelor’s degree and a PhD in Electrical Engineering from Tsinghua University
in 1984 and 1989.



Mr. Qingtai Chen, has served as a member of Board
of Director since June 2008.  Mr. Chen has worked for the Dong Feng Motor Group for over 22 years and served as its General
Manager prior to joining the Company. While employed by the Dong Feng Motor Group, Mr. Chen also served in various positions, including
as a member of the First Session of the Monetary Policy Committee of the People’s Bank of China, as a deputy director of
the State Council Economic and Trade Office, as a deputy director of the State Economic and Trade Commission, and as a deputy director
of the Development Research Center of the State Council. Mr. Chen also served as an independent director of Sinopec Corp. from
2000 to 2006.Mr. Chen received his Bachelor of Science degree in power and dynamics engineering from Tsinghua University and has
been recognized as a National Excellent Entrepreneur and National Economic Reform Talent in China. Mr. Chen currently serves as
a standing member of National Committee of the Chinese People’s Political Consultative Conference and as the Dean of the
School of Public Policy and Management at Tsinghua University.  He also serves as an independent director for the Bank of
Communications, which is listed on both Shanghai Stock Exchange and Hong Kong Stock Exchange, and as an independent director of
Mindray Medical International Limited, which is listed on New York Stock Exchange.



10b5-1 Trading Plans/Trading Policy



Our Insider Trading Policy allows directors, officers and other
employees covered under the policy to establish, under limited circumstances contemplated by Rule 10b5-1 under the Securities Exchange
Act of 1934, written programs that permit automatic trading of our stock or trading of our stock by an independent person (such
as an investment bank) who is not aware of material inside information at the time of the trade. From time to time, certain of
our directors, executive officers and employees have adopted Rule 10b5-1 trading plans. Currently, three of our officers and directors
have entered into purchase plans under Rule 10b5-1.



Our trading policy allows the window period to start three days
after the release of financial information and continues until two weeks before the close of the financial quarter. We reserve
the right to close the window earlier if there is other important information that develops in the open window period. But if we
disclose the new important information then the window opens again three days after the release of the new important information
and lasts until the two weeks before the close of the financial quarter. Additionally, the exercise stock options or the vesting
of restricted stock grants may take place during restricted periods. However, the sales of the shares received on option exercises
or vesting of restricted stock grants may only be sold when an open window exists. We also may provide exceptions to this policy
in unique situations.



| | B. | Compensation
| | -- | ------------



Executive Compensation



The aggregate cash compensation paid to our executive officers
as a group was $861,631 for the fiscal year ended June 30, 2013. We granted no stock options to our senior executives in the fiscal
year ended June 30, 2013. The current outstanding awards have vesting periods of up to four years depending on the person’s
position and all of the grants have specific performance milestones. Additionally, the outstanding awards have a provision that
if in certain instances the milestones are exceeded by specified targets, then additional ordinary shares will vest for the related
period. The exercise periods for the options are five years from the date of grant, February 20, 2012. In the fiscal year ended
June 30, 2013, none of the 1,476,000 options granted in 2012 was vested and all of them remain outstanding subject to vesting.



60







Director Compensation





We pay each of our independent directors who are not employees
a monthly fee as compensation for the services to be provided by them as independent directors. We pay $4,000 a month to
Colin Sung, $3,000 to Jerry Zhang and $2,000 to each of other independent directors. We also reimburse our independent directors
for out-of-pocket expenses incurred in attending meetings. As additional consideration, we granted to each of the independent
directors an option to purchase a certain amount of shares of the Company’s ordinary shares, which vest in equal installments
on a quarterly basis over a three-year period beginning on the grant date.  Specifically, we granted a stock option
to Colin Sung for the purchase of 45,000 shares of our ordinary shares, Jerry Zhang for the purchase of 36,000 shares of our ordinary
shares and each of Dr. Jianyun Chai and Mr. Qingtai Chen for the purchase of 30,000 shares of our ordinary shares in 2008. Additionally,
as the compensation for their continuous service on the Board, Hollysys granted to each of the independent directors restricted
shares in 2011, which will vest in equal installments on a quarterly basis over a three-year period beginning on the grant date,
which included 22,500 restricted shares granted to Colin Sung, and 15,000 restricted shares to each of Jerry Zhang, Jianyun Chai
and Qingtai Chen. All the options granted as director compensation have been exercised as of June 30, 2013.





For the fiscal year ended June 30, 2013, the aggregate cash
compensation paid to our directors as a group was $132,000.



2006 Stock Plan



On September 7, 2007, our stockholders approved the 2006 Stock
Plan, or the Plan. The Plan was assumed by us as of the closing of the merger of Chardan with and into us. The Plan provided
for 3,000,000 ordinary shares for issuance in accordance with the Plan’s terms. As of the date of this report, there are
2,309,000 shares available under the Plan, of which 1,533,500 have been allocated to outstanding awards that have not vested or
been exercised. A description of the Plan is set forth in the Proxy Statement/Prospectus of our Registration Statement on
Form S-4 (No. 333-132826), under the heading “2006 Equity Plan”, and is incorporated herein by reference.



2012 Performance options:



The following table sets forth options issued on February 20,
2012 to the named directors and officers in the table of Directors and Senior Management in Item 6, Section A above.



|Name          |  | Number of Ordinary Shares Issuable upon  Exercise of Options |         |  | Number of  Ordinary Shares Vested |  |   | Exercise  Price |  |   | Date of Grant |  | Date of Expiration
|------------- |  | ------------------------------------------------------------ | ------- |  | --------------------------------- |  | - | --------------- |  | - | ------------- |  | ------------------
|Changli Wang1 |  |                                                              | 240,000 |  |                                   |  | - |                 |  | $ | 9.29          |  |                   
|Herriet Qu2   |  |                                                              | 198,000 |  |                                   |  | - |                 |  | $ | 9.29          |  |                   
|Jianfeng He3  |  |                                                              | 198,000 |  |                                   |  | - |                 |  | $ | 9.29          |  |                   
|Baiqing Shao4 |  |                                                              | 165,000 |  |                                   |  | - |                 |  | $ | 9.29          |  |                   



1 160,000 options vest on the 24, 36 and 48 month
anniversaries of the date of grant if the CAGR of the Non-GAAP diluted EPS exceed stated thresholds on those dates, an additional
40,000 vest on the basis of the June 30, 2011 to June 30, 2014 Non-GAAP diluted EPS exceeds certain thresholds and an additional
40,000 vest if the foregoing thresholds are exceeded.



2 132,000 options vest on the 24, 36 and 48 month
anniversaries of the date of grant if the CAGR of the Non-GAAP diluted EPS exceed stated thresholds on those dates, an additional
33,000 vest on the basis of the June 30, 2011 to June 30, 2014 Non-GAAP diluted EPS exceeds certain thresholds and an additional
33,000 vest if the foregoing thresholds are exceeded.



61











3 132,000 options vest on the 24, 36 and 48 month
anniversaries of the date of grant if the CAGR of the Non-GAAP diluted EPS exceed stated thresholds on those dates, an additional
33,000 vest on the basis of the June 30, 2011 to June 30, 2014 Non-GAAP diluted EPS exceeds certain thresholds and an additional
33,000 vest if the foregoing thresholds are exceeded.



4 110,000 options vest on the 24, 36 and 48 month
anniversaries of the date of grant if the CAGR of the Non-GAAP diluted EPS exceed stated thresholds on those dates, an additional
27,500 vest on the basis of the June 30, 2011 to June 30, 2014 Non-GAAP diluted EPS exceeds certain thresholds and an additional
27,500 vest if the foregoing thresholds are exceeded.



These options were part of an aggregate of 1,476,000 ordinary shares underlying options issued to senior
management on February 20, 2012, all with similar vesting provisions.



The above options vest annually over a period of four years
from their grant date, subject to different performance conditions and are exercisable once vested for up to five years from the
date of grant. As of June 30, 2013, none of the performance options have vested.



Restricted shares:



|Name         |  | Number of Restricted  Shares Issued |        |  | Date of Grant
|------------ |  | ----------------------------------- | ------ |  | -------------
|Jerry Zhang  |  |                                     | 15,000 |  |              
|Colin Sung   |  |                                     | 22,500 |  |              
|Jianyun Chai |  |                                     | 15,000 |  |              
|Qingtai Chen |  |                                     | 15,000 |  |              



The restricted shares set forth in the table above vest quarterly
over a period of 3 years from their respective grant date.



Employment Agreements





We entered into a three-year employment agreement with our Chief
Executive Officer, Dr. Changli Wang on June 6, 2013. Dr. Wang is entitled to insurance benefits, five weeks’ vacation,
a car and reimbursement of business expenses and, if necessary, relocation expenses. The agreement is terminable by us for
death, disability and cause. Dr. Wang may terminate the employment agreement for good reason, which includes our breach; the
executive’s not being a member of the board of directors, and change of control. The agreements contain provisions for
the protection of confidential information and a three-year-after employment non-competition period within China.



We entered into a three-year employment agreement with our Chief
Financial Officer, Ms. Herriet Qu on February 1, 2012. Ms. Qu is entitled to insurance benefits, four weeks’ vacation,
and reimbursement of business expenses and, if necessary, relocation expenses. The agreement is terminable by us for death,
disability and cause. Ms. Qu may terminate the employment agreement for any good reason at any time. The agreements contain
provisions for the protection of confidential information and a three-year-after employment non-competition period within China.



We entered into a three-year employment agreement with our Chief
Operating Officer, Mr. Jianfeng He on February 1, 2012. Mr. He is entitled to insurance benefits, four weeks’ vacation,
a car and reimbursement of business expenses and, if necessary, relocation expenses. The agreement is terminable by us for
death, disability and cause. Mr. He may terminate the employment agreement for any good reason at any time. The agreements
contain provisions for the protection of confidential information and a three-year-after employment non-competition period within
China.



We entered into a three-year employment agreement with our Senior Vice
President, business development, Mr. Baiqing Shao on February 1, 2012. Mr. Shao is entitled to insurance benefits, four weeks’
vacation, and reimbursement of business expenses and, if necessary, relocation expenses. The agreement is terminable by us
for death, disability and cause. Mr. Shao may terminate the employment agreement for any good reason at any time. The
agreements contain provisions for the protection of confidential information and a three-year-after employment non-competition
period within China.



62







| | 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.In addition, the service agreement between us and the directors do not provide benefits upon termination of their services.



Our executive officers are appointed by our board.  The
executive 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.



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. Rule 5605(a)(2) of Listing Rules of The
Nasdaq Stock Market, Inc., or the Nasdaq Listing Rules, defines 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. Colin Sung, Jianyun Chai and Qingtai Chen and Ms. Jerry Zhang are our independent directors.



Board Committees



Our board has established an audit committee, a compensation committee and a corporate governance and
nominating committee. Each committee is comprised solely of independent directors within the meaning of Rule 5605(a)(2) of
the Nasdaq Listing Rules, and meet the criteria for independence set forth in Rule 10A-3(b)(1) of the Exchange Act.



Audit Committee



Our audit committee consists of Messrs. Colin Sung, and Qingtai
Chen and Ms. Jerry Zhang, with Mr. Sung serving as the Chair.  Our board has determined that all of our audit committee
members are independent directors within the meaning of applicable NASDAQ listing rules, and meet the criteria for independence
set forth in Rule 10A-3(b)(1) of the Exchange Act.



Our board has determined that each of Messrs. Sung and Chen
and Ms. Zhang 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.



Our board believes that Mr. Sung qualifies as an “audit
committee financial expert” within the meaning of all applicable rules.  Our board believes that Mr. Sung has financial
expertise from his degrees in business, his activities as a chief executive officer and chief financial officer of various companies,
and his consulting activities in the areas of accounting, corporate finance, capital formation and corporate financial analysis.



63







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 the 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:

| | · | selecting our independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by our
independent auditors;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------



| | · | reviewing with our independent auditors any audit problems or difficulties and management’s response;
| | - | -----------------------------------------------------------------------------------------------------



| | · | reviewing and approving all proposed related-party transactions;
| | - | ----------------------------------------------------------------



| | · | discussing the annual audited financial statements with management and our independent auditors;
| | - | ------------------------------------------------------------------------------------------------



| | · | reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of significant
internal control deficiencies;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | annually reviewing and reassessing the adequacy of our audit committee charter;
| | - | -------------------------------------------------------------------------------



| | · | such other matters that are specifically delegated to our audit committee by our board of directors from time to time;
| | - | ----------------------------------------------------------------------------------------------------------------------



| | · | meeting separately and periodically with management and our internal and independent auditors; and
| | - | --------------------------------------------------------------------------------------------------



| | · | reporting regularly to the full board of directors.
| | - | ---------------------------------------------------



Compensation Committee



Our compensation committee consists of Ms. Jerry Zhang
and Mr. Jianyun Chai and Mr. Colin Sung, with Ms. Jerry Zhang serving as its Chair. Our board has determined that all of
our compensation committee members are independent directors within the meaning of applicable NASDAQ listing rules, and meet
the criteria for independence set forth in Rule 10A-3(b)(1) of the Exchange Act.



Our compensation committee assists the board in reviewing and
approving the compensation structure of our executive officers, including all forms of compensation to be provided to our executive
officers.  Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated.
 The Compensation Committee is responsible for, among other things:



| | · | approving and overseeing the compensation package for our chief executive officer and the other senior executive officers;
| | - | --------------------------------------------------------------------------------------------------------------------------



| | · | reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer, evaluating
the performance of our chief executive officer in light of those goals and objectives, and setting the compensation level of our
chief executive officer based on this evaluation;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | reviewing and making recommendations in respect of director compensation;
| | - | -------------------------------------------------------------------------



| | · | engaging and overseeing compensation consultants;
| | - | -------------------------------------------------



64









| | · | reviewing periodically and making recommendations to the Board regarding any long-term incentive compensation or equity plans,
programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans and the administration of those plans;
and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | reviewing and making recommendations to the Board regarding succession plans for the chief executive officer and other senior
officers.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



Corporate Governance and Nominating Committee



Our corporate governance and nominating committee consists of
Ms. Jerry Zhang and Mr. Jianyun Chai and Mr. Colin Sung, each of whom is “independent” as that term is defined under
the NASDAQ listing standards.  The corporate governance and nominating committee assists the board of directors in identifying
individuals qualified to become our directors and in determining the composition of the board and its committees. The
corporate governance and nominating committee is responsible for, among other things:



| | · | identifying and recommending to the Board nominees for election or re-election to the board, or for appointment to fill any
vacancy;
| | - | ------------------------------------------------------------------------------------------------------------------------------------



| | · | reviewing annually with the board the current composition of the board in light of the characteristics of independence, age,
skills, experience and availability of service to us;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | identifying and recommending to the board the directors to serve as members of the board’s committees; and
| | - | ----------------------------------------------------------------------------------------------------------



| | · | monitoring compliance with our Corporate Governance Guidelines
| | - | --------------------------------------------------------------



| | D. | Employees
| | -- | ---------



We had 3,813, 3,527, and 3,106 employees as of
June 30, 2013, 2012, and 2011 respectively. As of June 30, 2013, there were 3,283 employees located in China and 530 employees
outside China.  The following table sets forth our employees as of June 30, 2013 based on their functional area within the
Company:



|                         |  | Number of Employees |      
|------------------------ |  | ------------------- | -----
|Category                 |  | In China            |      
|Sales & Marketing        |  |                     | 822  
|Research and development |  |                     | 937  
|Engineering              |  |                     | 779  
|Production               |  |                     | 326  
|Management               |  |                     | 419  
|Total                    |  |                     | 3,283



We believe that our relationship with our employees is good. The remuneration payable to employees
includes basic salaries and bonuses. We have not experienced any significant problems or disruption to our operations due
to labor disputes, nor have we experienced any difficulties in recruitment and retention of experienced
staff. As required by applicable lawsof China, Singapore, Malaysia, Hong
Kong, Dubai and Saudi Arabia, we have entered into employment contracts with all of our officers, managers and employees.



Our employees in China participate in a state pension scheme
organized by Chinese municipal and provincial governments.  We also contribute to social insurance for our employees each
month, which includes pension, medical insurance, unemployment insurance, occupational injuries insurance and housing providence
fund in accordance with PRC regulations.



65







| | E. | Share Ownership
| | -- | ---------------



The following table sets forth information, as of August 30,
2013, with respect to the beneficial ownership of our ordinary shares (i) by each of our officers and directors; (ii) by each person
who is known by us to beneficially own more than 5% of our ordinary shares; The table does not include any preferred shares
or ordinary shares that may be issued under the Rights Plan of the company. The address of each of the persons set forth below
is in care of Hollysys Automation Technologies Ltd., No. 2 Disheng Middle Road, Beijing Economic-Technological Development Area,
Beijing, P. R. China 100176.



|Name & Address
    of
    Beneficial Owner |  | Office, if Any                                    |  | Title of Class  |  | Amount & Natureof BeneficialOwnership(1) |           |      | Percent ofClass (2) | 
|------------------------------------------ |  | ------------------------------------------------- |  | --------------- |  | ---------------------------------------- | --------- | ---- | ------------------- | 
|Officers and Directors                    
|Changli Wang                               |  | CEO and Chairman                                  |  | Ordinary Shares |  |                                          | 9,422,708 | (3)  |                     | 
|Herriet Qu                                 |  | Chief Financial Officer                           |  | Ordinary Shares |  |                                          | -         | (4)  |                     | 
|Jianfeng He                                |  | Chief Operation Officer                           |  | Ordinary Shares |  |                                          | -         | (5)  |                     | 
|Baiqing Shao                               |  | Senior VP, Vice President of Business Development |  | Ordinary Shares |  |                                          | -         | (6)  |                     | 
|Colin Sung                                 |  | Director                                          |  | Ordinary Shares |  |                                          | 10,625    | (7)  |                     | 
|Jerry Zhang                                |  | Director                                          |  | Ordinary Shares |  |                                          | 13,750    | (8)  |                     | 
|Jianyun Chai                               |  | Director                                          |  | Ordinary Shares |  |                                          | 11,250    | (9)  |                     | 
|Qingtai Chen                               |  | Director                                          |  | Ordinary Shares |  |                                          | 11,250    | (10) |                     | 
|                                           |  |                                                   |  |                 |  |                                          |           |      |                     | 
|5% Securities Holder                      
|Changli Wang                               |  | CEO and Chairman                                  |  | Ordinary Shares |  |                                          | 9,422,708 | (3)  |                     | 
|An Luo                                     |  | Co-founder                                        |  | Ordinary Shares |  |                                          | 6,057,303 | (11) |                     | 
|Wenfu Wang                                 |  |                                                   |  | Ordinary Shares |  |                                          | 4,113,948 | (12) |                     | 
|Prudential PLC                             |  | Institutional Investor                            |  | Ordinary Shares |  |                                          | 4,079,600 |      |                     | 
|Schroder Investment Management             |  | Institutional Investor                            |  | Ordinary Shares |  |                                          | 3,503,300 | (13) |                     | 



*  Less than 1%.



| | (1) | Beneficial Ownership is determined in accordance with
the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.  Except
as otherwise indicated, each of the beneficial owners listed above has direct ownership of and sole voting power and investment
power with respect to our ordinary shares.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | A total of 57,554,824 shares of our ordinary shares as
of June 30, 2013 are outstanding pursuant to SEC Rule 13d-3(d)(1).  For each beneficial owner above, any options exercisable
within 60 days have been included in the denominator.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | The securities reported as held by Dr. Wang include 4,144,223
shares of our ordinary shares held indirectly through Ace Lead Profits Limited, 681,471 shares held indirectly through Billion
Bright International Limited, 1,362,942 shares held indirectly through Excellent Link Enterprises Limited, 681,471 held indirectly
through Golden Result Enterprises Limited, 850,000 held indirectly through Long Result Limited, 1,283,875 held indirectly through
Sure Grow Profits Limited, and 418,726 held directly by Dr. Wang himself.  The foregoing entities are all BVI entities that
are wholly-owned and controlled by Dr. Wang therefore he may be deemed to be the beneficial owner of the ordinary shares held
by them. Does not include 240,000 ordinary shares subject to options granted in 2012 that are not yet vested and do not vest within
60 days.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



66











| | (4) | Does not include 198,000 ordinary shares subject to options
granted in 2012 that are not yet vested and do not vest within 60 days.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------



| | (5) | Does not include 198,000 ordinary shares subject to options
granted in 2012 that are not yet vested and do not vest within 60 days.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------



| | (6) | Does not include 165,000 ordinary shares subject to options
granted in 2012 that are not yet vested and do not vest within 60 days.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------



| | (7) | Includes 10,625 vested shares of restricted stock. Does
not include 1,875 ordinary shares of restricted stock granted in 2011 that are not yet vested and do not vest within 60 days.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (8) | Includes 13,750 vested shares of restricted stock. Does
not include 1,250 ordinary shares of restricted stock granted in 2011 that are not yet vested and do not vest within 60 days.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (9) | Includes 11,250 vested shares of restricted stock. Does
not include 3,750 ordinary shares of restricted stock granted in 2011 that are not yet vested of which 1,250 ordinary shares will
be vest within 60 days.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (10) | Includes 11,250 vested shares of restricted stock. Does
not include 3,750 ordinary shares of restricted stock granted in 2011 that are not yet vested and of which 1,250 ordinary shares
will be vest within 60 days.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (11) | The securities reported as held by An Luo represent 6,057,303
ordinary shares held by Plus View Investments Limited, a BVI company owned and controlled by An Luo; therefore An Luo may be deemed
to be the beneficial owner of the ordinary shares beneficially owned by Plus View Investments Limited.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (12) | Represents shares held by Unionway Resources Limited which
is controlled by Mr. Wenfu Wang and therefore, Mr. Wang may be deemed to be the beneficial owner of the ordinary shares held by
Unionway Resources Limited.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (13) | Represents shares held by Schroder Investment Management Hong Kong Ltd, Schroder Investment Management Singapore Ltd and Schroder
Investment Management North America Inc., as reported on Schedule 13G filed by Schroder Investment Management North America Inc.
on February 13, 2013. The percentage of beneficial ownership was calculated based on the total number of our ordinary shares outstanding
as of June 30, 2013. The address of Schroder Investment Management North America Inc. is 875 Third Avenue, 22nd Floor, New York,
NY 10022.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



None of our major shareholders have different voting rights from other shareholders.  We are
not aware of any arrangement that may, at a subsequent date, result in a change of control of the
Company.



A substantial number of the ordinary shares are held in “street name,” and the Company
believes that a large portion of these shares represent holdings of non-United States shareholders through brokers in non-United
States jurisdictions, including certain shareholders identified above as institutional investors. Because these holdings are in
street name, the Company cannot determine the actual number or jurisdictions in which these shares are held, including the United
States. Based on our stock transfer records, 58% of the ordinary shares held of record, which includes CEDE & CO, have addresses
in the United States.



| | ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
| | ------- | -------------------------------------------------



| | A. | Major Shareholders
| | -- | ------------------



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



| | B. | Related Party Transactions
| | -- | --------------------------



The related party relationships and related party transactions are listed as follows:





67









Related party relationships



|Name of related parties                                                   |  | Relationship with the Company                                                                                                         
|------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|                                                                          |  |                                                                                                                                       
|Shenhua Hollysys Information Technology Co., Ltd. ("Shenhua Information") |  | 20% owned by Beijing Hollysys                                                                                                         
|New Huake Electronic Technology Co., Ltd. ("New Huake")                   |  | 37.5% owned by Beijing Hollysys                                                                                                       
|China Techenergy Co., Ltd. ("China Techenergy")                           |  | 40% owned by Beijing Hollysys                                                                                                         
|Beijing Hollysys Electric Motor Co., Ltd ("Electric Motor")               |  | 40% owned by Beijing Hollysys                                                                                                         
|Zhejiang Sanxin  Engineering Co., Ltd ("Zhejiang Sanxin")                 |  | 6% owned by Hangzhou Hollysys                                                                                                         
|Hollysys Equipment Technology Co., Ltd.  ("Hollysys Equipment")           |  | 20% owned by Beijing Hollysys as of June 30, 2011, and was disposed of during fiscal year 2012                                        
|Beijing Hollysys Machine Automation Co., Ltd. ("Hollysys Machine")        |  | 30% owned by Hollysys Investment                                                                                                      
|Southcon Development Sdn. Bhd. (“Southcon”)                               |  | 30% owned by BMJB                                                                                                                     
|Heilongjiang Ruixing Technology Co., Ltd.("Ruixing")                      |  | 8.31% owned by Beijing Hollysys                                                                                                       
|Swee Yong Chim                                                            |  | Shareholder of Hollysys Automation Technologies Ltd. and former
                                                shareholder of Concord
|Yoon Fah Chim                                                             |  | Shareholder of Hollysys Automation
                                                Technologies Ltd. and former shareholder of Concord



Due from related parties



|                    |  | June 30, |           
|------------------- |  | -------- | ----------
|                    |  | 2012     |           
|                    |  |          |           
|China Techenergy    |  | $        | 14,850,375
|Shenhua Information |  |          | 1,183,660 
|Hollysys Machine    |  |          | 297,622   
|Electric Motor      |  |          | -         
|Zhejiang Sanxin     |  |          | -         
|Hollysys Equipment  |  |          | 4,901     
|Ruixing             |  |          | -         
|Swee Yong Chim      |  |          | -         
|Yoon Fah Chim       |  |          | -         
|                    |  |          |           
|                    |  | $        | 16,336,558



The Company’s management believes
that the collection of amounts due from related parties is reasonably assured and accordingly, no provision had been made for these
balances.



Due to related parties



|                    |  | June 30, |          
|------------------- |  | -------- | ---------
|                    |  | 2012     |          
|                    |  |          |          
|Shenhua Information |  | $        | 1,544,464
|China Techenergy    |  |          | 401,719  
|Electric Motor      |  |          | 16,224   
|Hollysys Equipment  |  |          | 1,821    
|Hollysys Machine    |  |          | 45       
|New Huake           |  |          | 2        
|                    |  |          |          
|                    |  | $        | 1,964,275





68





Transactions with related parties



Purchases of goods and services from:



|                    |  | Year ended June 30, |          
|------------------- |  | ------------------- | ---------
|                    |  | 2011                |          
|                    |  |                     |          
|Electric Motor      |  | $                   | 34,085   
|Shenhua Information |  |                     | 2,151,391
|Hollysys Machine    |  |                     | -        
|New Huake           |  |                     | 879,111  
|                    |  |                     |          
|                    |  | $                   | 3,064,587



Purchase of building from:



|                    |  | Year ended June 30, |          
|------------------- |  | ------------------- | ---------
|                    |  | 2011                |          
|                    |  |                     |          
|Shenhua Information |  | $                   | 3,608,675



Sales of goods and integrated solutions to:



|                    |  | Year ended June 30, |          
|------------------- |  | ------------------- | ---------
|                    |  | 2011                |          
|                    |  |                     |          
|China Techenergy    |  | $                   | 3,557,125
|Shenhua Information |  |                     | 727,460  
|Hollysys Machine    |  |                     | -        
|Electric Motor      |  |                     | 13,478   
|                    |  |                     |          
|                    |  | $                   | 4,298,063



Operating lease income from:



|                 |  | Year ended June 30, |  
|---------------- |  | ------------------- | -
|                 |  | 2011                |  
|                 |  |                     |  
|Hollysys Machine |  | $                   | -



The Company sells automation control systems
to China Techenergy which is used for non-safety operations control in the nuclear power industry. China Techenergy incorporates
the Company’s non-safety automation control systems with their proprietary safety automated control systems to provide an
overall automation and control system for nuclear power stations in China. The Company is not a party to the integrated sales contracts
executed between China Techenergy and their customers. Intercompany profits and losses are eliminated until realized by the Company
or China Techenergy as if the China Techenergy were a consolidated subsidiary.



The Company sells automation control systems
to Shenhua Information which is used for operations control in the information automation industry. Shenhua Information incorporates
the Company’s automation control systems with their proprietary automated remote control systems to provide an overall automation
and control system to its customers. The Company is not a party to the integrated sales contracts executed between Shenhua Information
and their customers.





69







Amounts due from and due to the related
parties relating to the above transactions are unsecured, non-interest bearing and repayable on demand.



Except as set forth in our discussion above, none of our directors,
director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers,
affiliates or associates which are required to be disclosed herein.



| | 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 currently not a party to any material legal or administrative
proceedings, and we are not aware of threatened material legal or administrative proceedings against us.  We may from
time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business.



Dividend Policy



We anticipate that we will retain all of our future earnings,
if any, for use in the expansion and operation of our business and do not anticipate paying cash dividends in the foreseeable future.  Any
future determination relating to our dividend policy will be made at the discretion of our board of directors, based on our financial
condition, results of operations, earnings, contractual restrictions, capital requirements, business prospects and other factors
our board of directors may deem relevant.



Notwithstanding the understanding that earnings will be accumulated,
our ability to pay dividends depends substantially on the receipt of dividends to us by our PRC and overseas subsidiaries. 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. Pursuant to applicable PRC laws and regulations,
10% of after-tax profits of each of our consolidated PRC entities are 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. Allocations from these statutory
surplus reserves may only be used for specific purposes and are not distributable to us in the form of loans, advances, or cash
dividends.



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 the 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. For a more detailed discussion of the New
EIT Law, see Item 10 - Additional Information, Subpart E, Taxation in China of this Form 20-F.



| | B. | Significant Changes
| | -- | -------------------



None.



70









| | ITEM 9. | THE OFFER AND LISTING
| | ------- | ---------------------



| | A. | Offer and Listing Details
| | -- | -------------------------



On August 1, 2008, our ordinary shares were approved to be
listed on the NASDAQ Global Select Market, under the symbol “HOLI”. The following table provides the high and low
trading prices for our ordinary shares and the historical prices for our common stock/ordinary shares, warrants and units
prior to the merger, for the periods indicated below.



|                                            |  | Nasdaq(1)Priceper Share |      
|------------------------------------------- |  | ----------------------- | -----
|                                            |  | High                    |      
|Annual Market
    Prices (2)                |  |                         |      
|Year 2009                                   |  | $                       | 7.3  
|Year 2010                                   |  | $                       | 13.09
|Year 2011                                   |  | $                       | 17.43
|Year 2012                                   |  |                         | 12.2 
|Year 2013                                   |  |                         | 13.96
|                                            |  |                         |      
|Quarterly Market Prices                     |  |                         |      
|First Quarter 2012 ended September 30, 2011 |  | $                       | 11.54
|Second Quarter 2012 ended December 31, 2011 |  | $                       | 9.47 
|Third Quarter 2012 ended March 31, 2012     |  | $                       | 11.35
|Fourth Quarter 2012 ended June 30, 2012     |  | $                       | 11.25
|First Quarter 2013 ended September 30, 2012 |  | $                       | 10.03
|Second Quarter 2013 ended December 31, 2012 |  | $                       | 11.89
|Third Quarter 2013 ended March 31, 2013     |  | $                       | 13.96
|Fourth Quarter 2013 ended June 30, 2013     |  | $                       | 12.48
|                                            |  |                         |      
|Monthly Market Prices                       |  |                         |      
|March 2013                                  |  | $                       | 13.96
|April 2013                                  |  | $                       | 12.36
|May 2013                                    |  | $                       | 12.24
|June 2013                                   |  | $                       | 12.48
|July 2013                                   |  | $                       | 13.66
|August 2013                                 |  | $                       | 14.25
|September 2013 (through September 11, 2013) |  | $                       | 14.62



(1) Since August 1, 2008, our ordinary shares have been traded
on the NASDAQ Global Select Market.  The above table sets forth the range of high and low closing prices per share of
our ordinary shares as reported by www.quotemedia.com for the periods indicated.



(2) All periods end June 30 of the stated year, unless otherwise
noted.



| | B. | Plan of Distribution
| | -- | --------------------



Not applicable



| | C. | Markets
| | -- | -------



See our disclosures under “Item 9. A. Offer and Listing.”



| | D. | Selling Shareholders
| | -- | --------------------



Not Applicable



| | E. | Dilution
| | -- | --------



Not Applicable



| | F. | Expenses of Issue
| | -- | -----------------



Not Applicable



71







| | ITEM 10. | ADDITIONAL INFORMATION
| | -------- | ----------------------



| | A. | Share Capital
| | -- | -------------



Not applicable



| | B. | Memorandum and Articles of Association
| | -- | --------------------------------------



The following represents a summary of certain key provisions
of the Company’s amended and restated memorandum and articles of association. The summary does not purport to
be a summary of all of the provisions of our memorandum and articles of association and of all relevant provisions of BVI law governing
the management and regulation of BVI companies.



Register



The Company was incorporated in the BVI on February 6, 2006
under the BVI Business Companies Act, 2004, or the 2004 Act.  The Company filed a Certificate of Change of Name to change
its name from HLS Systems International, Inc. to Hollysys Automation Technologies Ltd. on July 17, 2009. The Company’s
memorandum of association authorizes the issuance of up to 100,000,000 ordinary shares of $0.001 par value, and (ii) 90,000,000
preferred shares of $0.001 par value.



Objects and Purposes



The Company’s memorandum of association grants the Company
full power and capacity to carry on or undertake any business or activity and do any act or enter into any transaction not prohibited
by the 2004 Act or any other BVI legislation.



Directors



A director must, immediately after becoming aware of the fact
that he is interested in a transaction entered into or to be entered into by us, disclose such interest to the board of directors,
unless (i) the transaction or proposed transaction is between the director and (ii) the transaction or proposed transaction is
or is to be entered into in the ordinary course of our business and on usual terms and conditions. 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.



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 or charge our undertakings and property, issue debentures, denture stock and other securities
whenever money is borrowed or as security for any debt, liability or obligation occurred by us or of any third party.



Each director holds office until his successor takes office
or until his earlier death, resignation or removal by the members or a resolution passed by the majority of the remaining directors.



A director shall not require a share qualification.



Directors may only be removed for cause by the shareholders.



To the fullest extent permitted by the 2004 Act, 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.



72







Rights and Obligations of Shareholders



Dividends



Subject to the 2004 Act, the directors may, by resolution of
directors, declare dividends and distributions by the Company to members and authorize payment on the dividends or distributions
so long as that immediately after the distribution, the value of the Company’s assets exceeds its liabilities and the Company
is able to pay its debts as they fall due.  Any distribution payable in respect of a share which has remained unclaimed
for three years from the date when it became due for payment shall, if the board of the directors so resolves, be forfeited and
cease to remain owing by the Company.  The directors may, before authorizing any distribution, set aside out of the profits
of the Company such sum as they think proper as a reserve fund, and may invest the sum so set apart as a reserve fund upon such
securities as they may select.



The holder of each ordinary share has the right to an equal
share in any distribution paid by the Company.



Voting Rights



Each ordinary share confers on the shareholder the right to
one vote at a meeting of the members or on any resolution of members on all matters before the shareholders of the Company.



Rights in the event of winding up



The holder of each ordinary share is entitled to an equal share
in the distribution of the surplus assets of the Company on a winding up.



Redemption



The Company may purchase, redeem or otherwise acquire and hold
its own shares with the consent of members whose shares are to be purchased, redeemed or otherwise acquired unless the Company
is permitted by the 2004 Act or any provision of the amended and restated memorandum of association or the amended and restated
articles of association to purchase, redeem or otherwise acquire the shares without their consent.



The Company may purchase, deem or otherwise acquire its shares
at a price lower than the fair value if permitted by, and then only in accordance with, the terms of the amended and restated memorandum
of association or the amended and restated articles of association or a written agreement for the subscription for the shares to
be purchased, redeemed or otherwise acquired.



Changes in the rights of shareholders



The directors are authorized to issue new classes or series
of shares and the rights attached thereto.  However, the rights attached to any class or series of shares (unless otherwise
provided by the terms of issue of the shares of that class or series), whether or not the Company is being wound-up, must be varied
with the consent in writing of all the holders of the issued shares of that class or series or with the sanction of a resolution
passed by a majority of the votes cast at a separate meeting of the holders of the shares of the class or series.



Meetings



An annual meeting of members must be held each year at such
date and time as may be determined by the directors and if requested to do so by members holding at least 30% of the voting rights
in respect of the matter for which the meeting is being held.  No less than ten days and not more than sixty days’
notice of meetings is required to be given to members.





73







A meeting of members is properly constituted if at the commencement
of the meeting there are two members present in person or by proxy or (in the case of a member being a corporation) by its duly
authorized representative representing not less than one third 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.



A member shall be deemed to be present at the meeting if he
participates by telephone or other electronic means and all members participating in the meeting are able to hear each other.



An ordinary resolution of members may be approved at a duly
constituted meeting of members by the affirmative vote of a simple majority of the votes of those members entitled to vote and
voting on the resolution.



A special resolution of members may be approved at a duly constituted
meeting of members by a vote of not less than two-thirds of votes of those members entitled to vote.



A meeting of members convened to consider a special resolution (other than an annual general meeting)
may be called on short notice if members holding not less than 90% of the total number of shares entitled to attend the meeting
and vote on all matters to be considered at the meeting waive the required notice for the meeting. Attendance at the meeting
is 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 at which such person proposes to vote.



Limitations on Ownership of Securities



There are no limitations on the right of non-residents or foreign
persons to own the Company’s securities imposed by BVI law or by the Company’s amended and restated memorandum of association
and articles of association.



Change in Control of Company



While directors of the Company may be appointed by the members
or directors for such terms as may be determined at the time of such appointment, and may be removed by resolution of directors
with or without cause, directors may not be removed by the members except for cause.



A special resolution of members is required for the Company to issue shares of the Company or securities
convertible into shares of the Company resulting in a change of control of the Company. Additionally, the board of directors
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 of prevent a change of control of our company.



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 2004 Act, we may, by a resolution of directors or members, amend the
Company’s memorandum and articles of association to increase or decrease the number of shares authorized to be issued. The
directors of the 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.



74







Differences in Corporate Law



The company 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 that 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.



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 ordinary shares are not redeemable at a shareholder’s
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 compulsory redemption, which occurs at the request of
the shareholders holding 90% of the votes of the outstanding ordinary shares entitled to vote, of the remaining issued shares.



Takeover provisions



On August 27, 2010, our Board of Directors adopted the 2010 Rights Plan. In connection with the 2010
Rights Plan, the Board of Directors declared a dividend distribution of one “Right” for each outstanding ordinary share
to shareholders of record at the close of business on August 27, 2010, effective as of September 27, 2010. Each Right entitles
the shareholder to buy one share of our Class A Preferred Stock at a price of $160.  Unless terminated earlier by our
Board of Directors, the 2010 Rights Plan will expire on September 27, 2020.



75









Initially, the Rights will be attached to all certificates representing
ordinary shares then outstanding, and no separate Rights certificates or stock statements will be distributed or provided.  The
Rights will separate from the ordinary shares and become exercisable if a person or group announces an acquisition of 20% or more
of our outstanding ordinary shares, or announces commencement of a tender offer for 20% or more of the ordinary shares.  In
that event, the Rights permit shareholders, other than the acquiring person, to purchase our ordinary shares having a market value
of twice the exercise price of the Rights, in lieu of the Class A Preferred Stock.  In addition, in the event of certain
business combinations, the Rights permit the purchase of the ordinary shares of an acquiring person at a 50% discount. Rights
held by the acquiring person become null and void in each case.



The 2010 Rights Plan is designed to ensure that all of our shareholders receive fair and equal treatment
in the event of any proposed takeover of us and to guard against partial tender offers, open market accumulations and other abusive
or coercive tactics to gain control of us without paying all shareholders a control premium. The Rights will cause substantial
dilution to a person or group that acquires 20% or more of our stock on terms not approved by the our Board of Directors, but the
Rights should not interfere with any merger or other business combination approved by the Board of Directors at any time prior
to the first date that a person or group has become an acquiring person.



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 must 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 what he believes to be 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.



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 2004 Act. 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.



76







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.



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.



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.



77







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
| | -- | ------------------



Except for the following, we have not entered into any material
contracts other than in the ordinary course of business and other than those described in Item 4, “Information on the Company,”
Item 7, “Major Shareholders and Related Party Transactions,” or Item 5. Operating And Financial Review And Prospects
– Contractual Obligations,” or elsewhere in this annual report.



On May 18, 2011, the Company entered into a stock purchase agreement
(the “SPA”) to acquire 100% ownership of Concord which is engaged in the provision of electrical works and infrastructure
engineering services in South East Asia and the Middle East. The total consideration of the acquisition consisted of cash consideration
of SGD$41.5 million (approximately $33,789,285), and 1,006,788 ordinary shares of the Company.



Through the acquisition, the Company seeks to expand the existing
distribution and marketing channels to cross sell the Company’s existing product lines in rail and industrial segments to
fast growing South-East Asia and the Middle East markets. The effective date of the acquisition of Concord was July 1, 2011, at
which time it became a wholly owned subsidiary of the Company, and its operation results are included in our consolidated financial
statements effective from July 1, 2011.



In addition, the Company is obligated to issue an aggregate
of 1,510,181 ordinary shares of the Company (“Incentive Shares”) to the management of the Concord, if Concord’s
net income equals or exceeds $10 million and $11.5 million for the fiscal years ended June 30, 2012 and 2013, respectively (“Targeted
Net Income Threshold”), in accordance with the SPA. The Company will issue 50% of Incentive Shares to the management of the
Concord on an all or none basis per year when the Targeted Net Income Threshold is achieved. The Incentive Shares were granted
with service conditions such that if the recipients terminate their employment agreements within two years after the acquisition,
the Incentive Shares will be forfeited. The Targeted Net Income Thresholds were not achieved for either of the two fiscal years,
thus no Incentive Shares vested.





On March 6, 2013, the Company signed a
stock purchase agreement, referred to as the “Bond SPA”, to acquire 100% ownership of Bond. The total purchase price
for the acquisition is a combination of cash and stock, aggregating an equivalent of approximately $73.0 million, including a two-year
incentive program payable in ordinary shares and additional incentive shares if Bond meets certain performance targets. Pursuant
to the Bond SPA, the Company paid $16.4 million within one month after signing the Bond SPA as a deposit, and an additional $5.5
million after closing, with $14.6 million to be paid within 18 months after signing the Bond SPA, respectively.



After the closing, the Company issued 1,407,907
ordinary shares to the shareholders of Bond on May 30, 2013, which were worth $14.6 million, (40% of total share purchase price).
The Bond shareholders also are entitled to Company ordinary shares worth $11.0 million (30% of total share purchase price) as incentive
shares in each of the next two fiscal years if Bond’s US GAAP audited net income equals or exceeds $8.8 million and $10.6
million for calendar year 2013 ending December 31, 2013, and calendar year 2014 ending December 31, 2014, respectively. Additional
ordinary shares, as a premium on performance, will be issued to the Bond shareholders if Bond outperforms the targets mentioned
above, but the premium will not exceed 15% of the total incentive shares in any case. The Company and Bond have agreed upon the
compensation and incentives to be given to the management team of Bond to maintain the team stability after the acquisition.



78







On April 3, 2013, Beijing Hollysys entered into an operating lease agreement to lease out one of its buildings
located in Beijing. The lease term is 10 years from September 1, 2013 to August 31, 2023.The annual minimum lease payment receivable
after five years are subject to renegotiation in case the Chinese consumer price index published by the government exceeds 5%.



| | D. | Exchange Controls
| | -- | -----------------



BVI Exchange Controls



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 our operations in the BVI, where we were incorporated. There
are no material BVI laws that impose any material exchange controls on us or that affect the payment of dividends, interest or
other payments to nonresident holders of our ordinary or preferred shares. BVI law and our Amended and Restated Memorandum
and Articles of Association do not impose any material limitations on the right of non-residents or foreign owners to hold or vote
our ordinary or preferred shares.



Exchange Controls in China





Under the Foreign Currency Administration Rules promulgated
in 1996 and revised in 1997, and various regulations issued by State Administration of Foreign Exchange, or SAFE, and other relevant
PRC government authorities, RMB is convertible into other currencies without prior approval from SAFE only to the extent of current
account items, such as trade related receipts and payments, interest and dividends and after complying with certain procedural
requirements. The conversion of RMB into other currencies and remittance of the converted foreign currency outside PRC for
the purpose of capital account items, such as direct equity investments, loans and repatriation of investment, requires the prior
approval from SAFE or its local office. Payments for transactions that take place within China must be made in RMB. Unless
otherwise approved, PRC companies must repatriate foreign currency payments received from abroad. Foreign-invested enterprises
may retain foreign exchange in accounts with designated foreign exchange banks subject to a cap set by SAFE or its local office.  Unless
otherwise approved, domestic enterprises must convert all of their foreign currency proceeds into RMB.



On October 21, 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange
in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, which
became effective as of November 1, 2005. According to the notice, a special purpose company, or SPV, refers to an offshore
company established or indirectly controlled by PRC residents for the special purpose of carrying out financing of their assets
or equity interest in PRC domestic enterprises. Prior to establishing or assuming control of an SPV, each PRC resident, whether
a natural or legal person, must complete the overseas investment foreign exchange registration procedures with the relevant local
SAFE branch.  The notice applies retroactively. As a result, PRC residents who have established or acquired control
of these SPVs that previously made onshore investments in China were required to complete the relevant overseas investment foreign
exchange registration procedures by March 31, 2006. These PRC residents must also amend the registration with the relevant
SAFE branch in the following circumstances: (i) the PRC residents have completed the injection of equity investment or assets of
a domestic company into the SPV; (ii) the overseas funding of the SPV has been completed; (iii) there is a material change in the
capital of the SPV. Under the rules, failure to comply with the foreign exchange registration procedures may result in restrictions
being imposed on the foreign exchange activities of the violator, including restrictions on the payment of dividends and other
distributions to its offshore parent company, and may also subject the violators to penalties under the PRC foreign exchange administration
regulations.



| | E. | Taxation
| | -- | --------



The following is a general summary of certain material BVI,
China and U.S. federal income tax considerations.  The discussion is not intended to be, nor should it be construed as,
legal or tax advice to any particular prospective shareholder.  The discussion is based on laws and relevant interpretations
thereof in effect as of the date hereof, all of which are subject to change or different interpretations, possibly
with retroactive effect.



79







BVI Taxation



The BVI does not impose a withholding tax on dividends paid
by us to holders of our ordinary shares, nor does the BVI levy any capital gains or income taxes on us.  Further, a holder
of our ordinary shares who is not a resident of the BVI is exempt from the BVI income tax on dividends paid with respect to the
ordinary shares.  Holders of ordinary shares are not subject to the BVI income tax on gains realized on the sale or disposition
of the ordinary shares.



Our ordinary shares are not subject to transfer taxes, stamp
duties or similar charges in the BVI.  However, as a business company, we are required to pay the BVI government an annual
license fee based on the number of shares we are authorized to issue.



There is no income tax treaty or convention currently in effect
between the United States and the BVI.



Taxation in China



In 2007, the PRC government promulgated the Enterprise Income
Tax Law, or EIT Law, and the relevant implementation rules, which became effective on January 1, 2008. Under the EIT Law and its
implementation rules, all domestic and foreign investment companies will be subject to a uniform enterprise income tax at the rate
of 25% and dividends from PRC subsidiaries to their non-PRC shareholders will be subject to a withholding tax at a rate of 20%,
which is further reduced to 10% by the implementation rules, if the non-PRC shareholder is considered to be a non-PRC tax resident
enterprise without any establishment or place within China or if the dividends payable has no connection with the non-PRC shareholder’s
establishment or place within China, unless any such non-PRC shareholder’s jurisdiction of incorporation has a tax treaty
with China that provides for a different withholding arrangement. In addition, pursuant to the EIT Law, enterprises established
under the laws of non-PRC jurisdictions, but whose “de facto management body” is located in the PRC, should be treated
as resident enterprises for PRC tax purposes. 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 “Risk Factors - Under
the EIT Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable
tax consequences to us and our non-PRC shareholders.”  If we, as a BVI company with substantially all of our management
located in China, were 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 would have an impact on our effective tax rate.



If we are required under the PRC tax law to withhold PRC income
tax on our dividends payable to our non-PRC resident shareholders, or if any gains realized from the transfer of our shares by
our non-PRC resident shareholders are subject to the EIT or the individual income tax, your investment in our shares or ADSs could
be materially and adversely affected.



United States Federal Taxation



The following is a discussion of the material U.S. federal tax
consequences of the ownership of our ordinary shares by U.S. Holders (as described below).  It does not purport to be
a comprehensive description of all of the tax considerations that may be relevant to a particular person’s situation.  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;
| | - | -----------------------------------------------------------------------------------------------------



80







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



| | · | 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.
| | - | -------------------------------------------------------------------------------------------------------------------



PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR TAX ADVISORS
ABOUT THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ORDINARY SHARES.



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, and can change on a retroactive basis. “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, or
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.





If you are a non-corporate U.S. Holder, subject to applicable
limitations, you may be eligible to be taxed at a maximum rate of 20% in respect of dividends received in taxable years beginning
before January 1, 2011. Please consult your tax advisors to determine whether you are subject to any special rules that limit
your 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 income tax
treaty between the United States and the PRC, or 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.  You
are urged to consult your tax advisors regarding the availability of the foreign tax credit in light of your particular circumstances.



81







Taxation of Capital Gains



Upon sale or other disposition of the ordinary 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, if 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 you to consult your tax advisors 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 in light of your particular circumstances.



Passive Foreign Investment Company Rules (PFIC)



We believe that we were not a PFIC for United States federal
income tax purposes for our taxable year ended June 30, 2013. 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, there can be
no assurance that we will not be a PFIC for any taxable year.



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 Expert
| | -- | -------------------



Not applicable



| | H. | Documents on Display
| | -- | --------------------



We have filed this Annual Report on Form 20-F with the SEC under
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.



82







We are subject to the informational requirements of the Exchange
Act as a foreign private issuer and file reports and other information with the SEC. Reports and other information filed
by us 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. | Subsidiary Information
| | -- | ----------------------



For a listing of our subsidiaries, see “Item 4. Information
on the Company – C. Organizational Structure”.



| | ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
| | -------- | ----------------------------------------------------------



Interest Rate Risk



We are exposed to interest rate risk primarily with respect
to our bank loans. A hypothetical 1.0% increase in the annual interest rates for all of our credit facilities under which we had
outstanding borrowings as of June 30, 2013, would decrease income before income taxes by approximately $0.4 million for the fiscal
year ended June 30, 2013. Management monitors the banks’ prime rates in conjunction with our cash requirements
to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any
hedging transactions in an effort to reduce our exposure to interest rate risk.



Foreign Exchange Risk



While our reporting currency is the U.S. dollar, 85.3%
of our consolidated revenues and consolidated costs and expenses are denominated in RMB, and 94.6% of our assets are denominated
in RMB, and the remaining are mainly denominated in SGD.  As a result, we are exposed to foreign exchange risk as our
revenues and results of operations may be affected by fluctuations in the exchange rates of the U.S. dollar, RMB and SGD.  If
the RMB or SGD depreciates against the U.S. dollar, the value of our RMB or SGD revenues, earnings and assets as expressed in our
U.S. dollar financial statements will decline.  Assets and liabilities are translated at exchange rates at the balance
sheet dates and revenue and expenses are translated at the average exchange rates and shareholders’ equity is translated
at historical exchange rates.  Any resulting translation adjustments are not included in determining net income but are
included in determining other comprehensive income, a component of shareholders’ equity.  An average appreciation
(depreciation) of the RMB or SGD against the US dollar of 5% would increase (decrease) our comprehensive income by $1,563,387 or
$1,966, respectively, based on our outstanding revenues, costs and expenses, assets, and liabilities denominated in RMB or SGD
as of June 30, 2013.



Very limited hedging transactions are available in China to
reduce our exposure to exchange rate fluctuations for the RMB. To date, we have not entered into any hedging transactions
in an effort to reduce our exposure to foreign currency exchange risk in any of the currencies in which we operate. While we may
enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and it
may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by
PRC exchange control regulations that restrict its ability to convert RMB into foreign currencies.



Inflation



Inflation in China and the other regions in which we operate
has not materially impacted our results of operations. Although we have not been materially affected by inflation in the past,
we can provide no assurance that we will not be affected in the future by higher rates of inflation. To the extent that we operate
in a more diverse range of countries and regions, the risk of inflation on our operations is minimized. If inflation were a significant
factor in our financial performance, then certain operating costs and expenses, such as employee compensation and office operating
expenses may increase. Additionally, because a substantial portion of our assets from time to time consists of cash and cash equivalents
and time deposits with original maturities over three months, high inflation could significantly reduce the value and purchasing
power of these assets.



83







| | ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
| | -------- | ------------------------------------------------------



Not applicable.



PART II



| | ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
| | -------- | -----------------------------------------------



None.



| | ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITIES HOLDERS
AND USE OF PROCEEDS
| | -------- | ------------------------------------------------------------------------------



In August 2010 our Board of Directors adopted the 2010 Rights
Plan. The 2010 Rights Plan provides for a dividend distribution of one preferred share purchase Right, for each outstanding ordinary
share. Each Right entitles the shareholder to buy 1 share of our Class A Preferred Stock at an exercise price of $160. The
Rights will become exercisable if a person or group announces an acquisition of 20% or more of our outstanding ordinary shares,
or announces commencement of a tender offer for 20% or more of the ordinary shares. In that event, the Rights permit shareholders,
other than the acquiring person, to purchase our ordinary shares having a market value of twice the exercise price of the Rights,
in lieu of the Class A Preferred Stock. In addition, in the event of certain business combinations, the Rights permit the purchase
of the ordinary shares of an acquiring person at a 50% discount. Rights held by the acquiring person become null and
void in each case.  Unless terminated earlier by our Board of Directors, the 2010 Rights Plan will expire on September
27, 2020.



In connection with the adoption of the 2010 Rights Plan, we
amended our Memorandum and Articles of Association to increase our authorized shares of Class A Preferred Stock from 10,000,000
shares to 90,000,000 shares, and to provide that directors may only be removed by shareholders for cause.



| | ITEM 15. | CONTROLS AND PROCEDURES
| | -------- | -----------------------



Disclosure Controls and Procedures



As required by Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act, our management has carried out an evaluation, with the participation and under the supervision of our chief executive
officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures
as of June 30, 2013.



Disclosure controls and procedures refer to controls and other
procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange
Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that
such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer,
as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating our disclosure
controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment
in evaluating and implementing possible controls and procedures.



Management conducted its evaluation of disclosure controls and
procedures under the supervision of our chief executive officer and our chief financial officer.  Based upon, and as
of the date of this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls
and procedures were effective as of June 30, 2013.



84







Management’s Annual Report on Internal Control over
Financial Reporting



Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act for our company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of consolidated financial statements in accordance with generally accepted
accounting principles and 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 a company’s assets, (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally
accepted accounting principles, and that a company’s receipts and expenditures are being made only in accordance with authorizations
of a company’s management and directors and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of a company’s assets that could have a material effect on the consolidated
financial statements.



Because of its inherent limitations, a system of internal control
over financial reporting can provide only reasonable assurance with respect to consolidated financial statement preparation and
presentation and 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 and procedures may deteriorate.



Our management assessed the effectiveness of our internal control over financial reporting as of June
30, 2013. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of
the Tread way Commission (COSO) in Internal Control-Integrated Framework. Our management’s assessment of and conclusion on
the effectiveness of internal control over financial reporting did not include the internal controls of Bond,
which is included in the Company’s 2013 consolidated financial statements, and constituted approximately $102.4 million and
$74.1 million of total and net assets, respectively, as of June 30, 2013, and approximately $22.8 million and $1.8 million of net
revenues and net income, respectively. Based on our assessment, management believes that, as of June 30, 2013, our internal control
over financial reporting was effective based on those criteria.



Our independent registered public accounting firm has audited
our internal control over financial reporting as of June 30, 2013 and has issued an attestation report, which appears on F-3 of
this annual report on Form 20-F.



Changes in Internal Control over Financial Reporting



Except for the controls that are being implemented in Bond
which was acquired effective as of April 1, 2013, there has been no change in our internal control over financial reporting during
the year ended June 30, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting. In respect of Bond, during the fiscal year ended June 30, 2013, management has implemented and is continuing
to implement changes in the controls over financial reporting to enable management to assess their effectiveness in the future
under the criteria of COSO. Additional controls are being implemented at the parent level so as to be able to monitor and assess
the internal controls over financial reporting of Bond.



| | ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT
| | --------- | --------------------------------



Our board of directors has determined that Mr. Colin Sung, one
of our independent directors, meets the criteria for an “audit committee financial expert,” as established by the SEC.
Mr. Sung will not be deemed an “expert” for any other purpose, including, without limitation, for purposes of Section
11 of the Securities Act, as a result of being designated or identified as an audit committee financial expert.  The
designation or identification of Mr. Sung as an audit committee financial expert does not impose on him any duties, obligations
or liability that are greater than the duties, obligations and liability imposed on him as a member of our Audit Committee and
board of directors in the absence of such designation or identification.



| | ITEM 16B. | CODE OF ETHICS
| | --------- | --------------



In March 2006, our board of directors adopted a code of
conduct, or Code of Conduct, which applies to all of our directors, officers and employees, including our principal executive
officer, principal financial officer, and principal accounting officer.  Our Code of Conduct addresses, among other
things, honesty and ethical conduct, conflicts of interest, compliance with laws, regulations and policies, confidentiality,
and reporting of violations of the code.  A copy of the Code of Ethics was filed as Annex G to our registration
statement on Form S-4 filed with the SEC on March 30, 2006 and is incorporated herein by reference.



85







| | ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
| | --------- | --------------------------------------



Audit Fees



The principal accountant for the fiscal years ended June 30, 2013 and 2012 was
Ernst &Young Hua Ming LLP. The aggregate fees billed for each of the fiscal years ended June 30, 2013 and 2012 for professional
services rendered by the principal accountant for the audit of our annual financial statements or services that are normally provided
by the accountant in connection with statutory and regulatory filings or engagements for the fiscal years ended June 30, 2013 and
2012 were $843,868 and $830,000, respectively.



Audit-Related Fees



The fees for procedures of our quarterly financial information for the fiscal year ended June 30, 2013
and 2012 were $100,309 and $100,000, paid to Ernst &Young Hua Ming
LLP and BDO Limited, the principal accountant for the fiscal year ended June 30, 2011, respectively.



Tax Fees



The aggregate fees billed in each of the fiscal years ended
June 30, 2013 and 2012 for professional services rendered by the principal accountant for tax compliance, tax advice and tax planning
were $16,042 and $6,917, respectively.



All Other Fees



The aggregate fees billed in each of the fiscal years
ended June 30, 2013 and 2012 for products and services provided by the principal accountant, other than the services reported
above under other captions of this Item 16C were $359,520 and nil,
respectively. The other fees for fiscal year 2013 consist of: (i) a service fee of $160,494 for financial and tax
due diligence service for acquisition of Bond, (ii) a service fee of $159,220 for review and report on the consolidated
balance sheet of Bond as of April 1, 2013, and (iii) a service fee of $39,805 for XBRL related service for the
Company’s XBRL exhibit for fiscal year 2013.



Audit Committee Pre-Approval Policies and Procedures



Our Audit Committee pre-approves 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 minimums
exceptions for non-audit services described in Section 10A(i)(l)(B) of the Exchange Act that are approved by our Audit Committee
prior to the completion of the audit).



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



We have applied and granted for following our corporate home
country rule of the British Virgin Islands with respect to shareholder meeting’s time and interval with NASDAQ. Under our
home country rule, we are not required to hold annual shareholder meeting unless there are issues requiring approval of general
shareholder meeting.



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



There were no purchases of equity securities by us or by any
of our affiliates during the period covered by this Annual Report.



86







| | ITEM 16F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
| | --------- | --------------------------------------------



Previously reported in Item 16-F of Hollysys Form 20-F for year ended June 30, 2012 filed with
the Securities and Exchange Commission on October 12, 2012.



| | ITEM 16G. | CORPORATE GOVERNANCE
| | --------- | --------------------



Our corporate governance practices have generally followed the
requirements of NASDAQ listing rules with respect to corporate governance.



| | ITEM 16H. | MINE SAFETY DISCLOSURE
| | --------- | ----------------------



Not applicable.



PART III



| | ITEM 17. | FINANCIAL STATEMENTS
| | -------- | --------------------



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



| | ITEM 18. | FINANCIAL STATEMENTS
| | -------- | --------------------



Our Audited Financial Statements for the Years Ended June 30,
2013, 2012 and 2011 are included at the end of this annual report.





| | ITEM 19. | EXHIBITS
| | -------- | --------





|Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                   
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|1.1    |  | Memorandum of Association of Registrant (Incorporated by reference to Annex B of the Proxy Statement/Prospectus contained in Registration Statement S-4 (file no. 333-132826) filed with the Securities and Exchange Commission on March 30, 2006).                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|1.2    |  | Articles of Association of Registrant (Incorporated by reference to Annex C of the Proxy Statement/Prospectus contained in Registration Statement S-4 (file no. 333-132826) filed with the Securities and Exchange Commission on March 30, 2006).                                                                                                                                                             
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|1.3    |  | Certificate of Change of Name (Incorporated by reference to Exhibit 1.3 of the Form 20-F filed with the Securities and Exchange Commission on September 30, 2009).                                                                                                                                                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|1.4    |  | Amendment to Memorandum and Articles of Association of Hollysys Automation Technologies Ltd. (Incorporated by reference to Exhibit 1.1 of the Form 6-K filed with the Securities and Exchange Commission on September 21, 2010).                                                                                                                                                                              
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|2.1    |  | Rights Agreement, dated as of August 27, 2010, between Hollysys Automation Technologies Ltd. and Continental Stock Transfer & Trust Company, which includes the Form of Right Certificate as Exhibit A and the Summary of Rights to Purchase Preferred Shares as Exhibit B (Incorporated by reference to Exhibit 2.1 of the Form 6-K filed with the Securities and Exchange Commission on September 21, 2010).
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|4.1    |  | Chardan North China Acquisition Corporation 2006 Stock Plan (Incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-8 (file no. 333-170811) filed with the Securities and Exchange Commission on November 24, 2010).                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|4.2    |  | Form of Stock Consignment Agreement (Incorporated by reference to Exhibit 10.2 of the Registration Statement S-4/A (file no. 333-132826) filed with the Securities and Exchange Commission on June 28, 2006).                                                                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|4.3    |  | Share Sale and Purchase Agreement, by Unionway Resources Limited and the Company, dated December 23, 2009. ((Incorporated by reference to Exhibit 4.20 of the Report on Form 20-F for the fiscal year ended June 30, 2010 filed with the Securities and Exchange Commission on December 22, 2010).                                                                                                            



87







|4.4      |  | Retrofit Contract between Concord Corporation Pte. Led. and Shaw Brothers Limited (Incorporated by reference to Exhibit 99.1 of the Form 6-K filed with the Securities and Exchange Commission on March 7, 2012)                                
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |  |                                                                                                                                                                                                                                                 
|8.1*     |  | List of subsidiaries                                                                                                                                                                                                                            
|         |  |                                                                                                                                                                                                                                                 
|11.1     |  | Code of Ethics (included as Annex G to the Proxy Statement/Prospectus contained in Registration Statement 333-132826 and incorporated by reference herein)                                                                                      
|         |  |                                                                                                                                                                                                                                                 
|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 2002                                                                                                                                                                     
|         |  |                                                                                                                                                                                                                                                 
|13.2*    |  | CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                     
|         |  |                                                                                                                                                                                                                                                 
|14.1     |  | Code of Conduct for the Company’s Board of Directors, Officers, and Employees (Incorporated by reference to Annex Gof the Registration Statement S-4 (file no. 333-132826) filed with the Securities and Exchange Commission on March 30, 2006).
|         |  |                                                                                                                                                                                                                                                 
|15.1     |  | HLS Systems International, Ltd. Audit Committee Charter, adopted June 20, 2008 (Incorporated by reference to Exhibit 99.1 of the Form 6-K filed with the Securities and Exchange Commission on June 27, 2008).                                  
|         |  |                                                                                                                                                                                                                                                 
|15.2*    |  | HLS Systems International, Ltd. Compensation Committee Charter, adopted on
    August 14, 2013.                                                                                                                                                 
|         |  |                                                                                                                                                                                                                                                 
|15.3     |  | HLS Systems International, Ltd. Governance and Nominating Committee Charter, adopted June 20, 2008 (Incorporated by reference to Exhibit 99.3 of the Form 6-K filed with the Securities and Exchange Commission on June 27, 2008).              
|         |  |                                                                                                                                                                                                                                                 
|15.4*    |  | Consent of BDO Limited, relating to Form S-8 Registration Statement 333-170811.                                                                                                                                                                 
|         |  |                                                                                                                                                                                                                                                 
|15.5*    |  | Consent of Ernst and Young Hua Ming LLP, relating to Form S-8 Registration Statement 333-170811.                                                                                                                                                
|         |  |                                                                                                                                                                                                                                                 
|101.INS* |  | XBRL Instant Document                                                                                                                                                                                                                           
|         |  |                                                                                                                                                                                                                                                 
|101.SCH* |  | XBRL Taxonomy Extension Schema Document                                                                                                                                                                                                         
|         |  |                                                                                                                                                                                                                                                 
|101.CAL* |  | XBLR Taxonomy Extension Calculation Linkbase Document                                                                                                                                                                                           
|         |  |                                                                                                                                                                                                                                                 
|101.DEF* |  | XBRL Taxonomy Extension Definition Linkbase                                                                                                                                                                                                     
|         |  |                                                                                                                                                                                                                                                 
|101.LAB* |  | XBRL Taxonomy Extension Label Linkbase                                                                                                                                                                                                          
|         |  |                                                                                                                                                                                                                                                 
|101.PRE* |  | XBRL Taxonomy Extension Presentation Linkbase                                                                                                                                                                                                   



* Filed with this annual report on Form 20-F



88







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 amended annual report on its behalf.



|                         | HOLLYSYS AUTOMATION TECHNOLOGIES LTD.
|------------------------ | -------------------------------------
|                         |                                      
|                         | /s/ Changli Wang                     
|                         | Changli Wang                         
|                         |                                      
|Date: September 27, 2013 | Chief Executive Officer              



89









HOLLYSYS AUTOMATION TECHNOLOGIES LTD.



Index to Consolidated
Financial Statements



|                                                                                                     | Page
|---------------------------------------------------------------------------------------------------- | ----
|                                                                                                     |     
|Reports of Independent Registered Public Accounting Firms                                            | F-2 
|                                                                                                     |     
|Consolidated Balance Sheets as of June 30, 2012 and 2013                                             | F-5 
|                                                                                                     |     
|Consolidated Statements of Comprehensive Income for the years
    ended June 30, 2011, 2012 and 2013 | F-6 
|                                                                                                     |     
|Consolidated Statements of Cash Flows for the years ended June
    30, 2011, 2012 and 2013           | F-7 
|                                                                                                     |     
|Consolidated Statements of Stockholders’ Equity for the
    years ended June 30, 2011, 2012 and 2013 | F-8 
|                                                                                                     |     
|Notes to Consolidated Financial Statements                                                           | F-9 



F-1







REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM





The Board of Directors and Shareholders
of Hollysys Automation Technologies Ltd.



We have audited the accompanying consolidated
balance sheets of Hollysys Automation Technologies Ltd. (the “Company”) as of June 30, 2013 and 2012, and the related
consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period
ended June 30, 2013. These 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. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements
referred to above present fairly, in all material respects, the consolidated financial position of Hollysys Automation Technologies
Ltd. at June 30, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the two years in
the period ended June 30, 2013, in conformity with U.S. generally accepted accounting principles.



We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), Hollysys Automation Technologies
Ltd.’s internal control over financial reporting as of June 30, 2013, based on criteria established in Internal Control
- Integrated Framework issued by the Committee of Sponsoring Organizations of the Tread way Commission and our report dated
September 27, 2013, expressed an unqualified opinion thereon.



/s/  Ernst & Young Hua Ming LLP



Beijing, the People’s Republic of
China



September 27, 2013



F-2







REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM



The Board of Directors and Shareholders
of Hollysys Automation Technologies Ltd.



We have audited Hollysys Automation Technologies Ltd.’s internal control over financial reporting
as of June 30, 2013, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Tread way Commission (the “COSO criteria”). Hollysys Automation Technologies Ltd.’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, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and 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.



As indicated in the accompanying Management’s Annual Report on Internal Control over Financial Reporting,
management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include
the internal controls of Bond Corporation Pte. Ltd. which is included in the 2013 consolidated financial statements of Hollysys
Automation Technologies Ltd. and constituted US$102.4 million and US$74.1 million of total and net assets, respectively, as of
June 30, 2013, and US$22.8 million and US$1.8 million of net revenues and net income, respectively, for the year then ended. Our
audit of internal control over financial reporting of Hollysys Automation Technologies Ltd. also did not include an evaluation
of the internal control over financial reporting of Bond Corporation Pte. Ltd..



In our opinion, Hollysys Automation Technologies
Ltd. maintained, in all material respects, effective internal control over financial reporting as of June 30, 2013, 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 Hollysys Automation
Technologies Ltd. as of June 30, 2013 and 2012, and the related consolidated statements of comprehensive income, stockholders’
equity, and cash flows for each of the two years in the period ended June 30, 2013 and our report dated September 27, 2013 expressed
an unqualified opinion thereon.



/s/ Ernst & Young Hua Ming LLP



Beijing,
the People’s Republic of China



September 27, 2013



F-3







REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM



To the Board of Directors and Stockholders of Hollysys Automation
Technologies Ltd.



We have audited the accompanying consolidated statements of
comprehensive income, stockholders' equity and cash flows of Hollysys Automation Technologies Ltd. and its subsidiaries (the
“Company”) for the year ended June 30, 2011. These 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 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 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 audit provides a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the results of its operations and cash flows for the year
ended June 30, 2011, in conformity with accounting principles generally accepted in the United States of America.



/s/ BDO Limited

Hong Kong



September 21, 2011



F-4







HOLLYSYS AUTOMATION TECHNOLOGIES LTD.CONSOLIDATED BALANCE SHEETS(In US dollars except for number of shares and per share data)



|                                                                                                                                                                                   |  |       |  | June 30, |            
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- |  | -------- | -----------
|                                                                                                                                                                                   |  | Notes |  | 2012     |            
|ASSETS                                                                                                                                                                             |  |       |  |          |            
|Current assets:                                                                                                                                                                    |  |       |  |          |            
|Cash and cash equivalents                                                                                                                                                          |  |       |  | $        | 96,332,962 
|Time deposits with maturities over
    three months                                                                                                                                |  |       |  |          | 21,586,896 
|Restricted cash                                                                                                                                                                    |  |       |  |          | 5,544,273  
|Accounts receivable, net of allowance
    for doubtful accounts of $14,287,361 and $20,102,808 as of June 30, 2012 and 2013, respectively                                          |  | 5     |  |          | 136,589,994
|Costs and estimated earnings in excess
    of billings, net of allowance for doubtful accounts of $1,890,108 and $2,361,880 as of June 30, 2012 and 2013, respectively             |  | 6     |  |          | 115,161,236
|Other receivables, net of allowance
    for doubtful accounts of $344,978 and $322,218 as of June 30, 2012 and 2013, respectively                                                  |  |       |  |          | 7,287,214  
|Advances to suppliers                                                                                                                                                              |  |       |  |          | 10,300,182 
|Amounts due from related parties                                                                                                                                                   |  | 22    |  |          | 16,336,558 
|Inventories                                                                                                                                                                        |  | 4     |  |          | 26,745,225 
|Prepaid expenses                                                                                                                                                                   |  |       |  |          | 876,363    
|Income tax recoverable                                                                                                                                                             |  |       |  |          | 139,469    
|Deferred tax assets                                                                                                                                                                |  | 20    |  |          | 772,061    
|Assets held for
    sale                                                                                                                                                           |  | 9     |  |          | -          
|Total current assets                                                                                                                                                               |  |       |  | $        | 437,672,433
|                                                                                                                                                                                   |  |       |  |          |            
|Non-current assets:                                                                                                                                                                |  |       |  |          |            
|Restricted cash                                                                                                                                                                    |  |       |  |          | -          
|Prepaid expense                                                                                                                                                                    |  |       |  |          | -          
|Property, plant and equipment, net                                                                                                                                                 |  | 7     |  |          | 63,536,646 
|Prepaid land leases                                                                                                                                                                |  | 8     |  |          | 6,870,076  
|Acquired intangible assets, net                                                                                                                                                    |  | 10    |  |          | 594,971    
|Investments in equity investees                                                                                                                                                    |  | 12    |  |          | 13,080,929 
|Investments in cost investees                                                                                                                                                      |  | 12    |  |          | 2,996,638  
|Goodwill                                                                                                                                                                           |  | 11    |  |          | 27,588,883 
|Deferred tax assets                                                                                                                                                                |  | 20    |  |          | 414,399    
|Total non-current assets                                                                                                                                                           |  |       |  | $        | 115,082,542
|                                                                                                                                                                                   |  |       |  |          |            
|Total assets                                                                                                                                                                       |  |       |  | $        | 552,754,975
|                                                                                                                                                                                   |  |       |  |          |            
|LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                               |  |       |  |          |            
|Current liabilities:                                                                                                                                                               |  |       |  |          |            
|Short-term bank loans                                                                                                                                                              |  | 14    |  |          | -          
|Current portion of long-term bank loans                                                                                                                                            |  | 15    |  |          | 7,914,668  
|Accounts payable                                                                                                                                                                   |  |       |  |          | 78,761,476 
|Construction costs payable                                                                                                                                                         |  |       |  |          | 923,205    
|Deferred revenue                                                                                                                                                                   |  |       |  |          | 59,293,745 
|Accrued payroll and related expenses                                                                                                                                               |  |       |  |          | 6,448,623  
|Income tax payable                                                                                                                                                                 |  |       |  |          | 3,605,030  
|Warranty liabilities                                                                                                                                                               |  | 13    |  |          | 3,575,920  
|Other tax payables                                                                                                                                                                 |  |       |  |          | 18,225,344 
|Accrued liabilities                                                                                                                                                                |  |       |  |          | 7,746,036  
|Amounts due to related parties                                                                                                                                                     |  | 22    |  |          | 1,964,275  
|Deferred tax liabilities                                                                                                                                                           |  | 20    |  |          | 370,300    
|Current portion of acquisition-related
    consideration                                                                                                                           |  | 3     |  |          | -          
|Total current liabilities                                                                                                                                                          |  |       |  | $        | 188,828,622
|                                                                                                                                                                                   |  |       |  |          |            
|Long-term bank loans                                                                                                                                                               |  | 15    |  |          | 24,641,374 
|Deferred tax liabilities                                                                                                                                                           |  |       |  |          | -          
|Warranty liabilities                                                                                                                                                               |  | 13    |  |          | -          
|Non-current portion of acquisition-related
    consideration                                                                                                                       |  | 3     |  |          | -          
|Total non-current liabilities                                                                                                                                                      |  |       |  | $        | 24,641,374 
|                                                                                                                                                                                   |  |       |  |          |            
|Total liabilities                                                                                                                                                                  |  |       |  | $        | 213,469,996
|                                                                                                                                                                                   |  |       |  |          |            
|Commitments and contingencies                                                                                                                                                      |  | 23    |  |          |            
|                                                                                                                                                                                   |  |       |  |          |            
|Stockholders’ equity:                                                                                                                                                              |  |       |  |          |            
|Ordinary shares, par value $0.001 per share, 100,000,000
    shares authorized; 55,998,917 and 57,554,824 shares issued and outstanding as of June 30, 2012 and 2013, respectively |  | 17    |  |          | 55,999     
|Additional paid-in capital                                                                                                                                                         |  |       |  |          | 151,305,146
|Statutory reserves                                                                                                                                                                 |  |       |  |          | 23,091,072 
|Retained earnings                                                                                                                                                                  |  |       |  |          | 130,934,342
|Accumulated other
    comprehensive income                                                                                                                                         |  |       |  |          | 32,714,556 
|Total Hollysys Automation Technologies Ltd.
    stockholder’s equity                                                                                                               |  |       |  | $        | 338,101,115
|Noncontrolling interests                                                                                                                                                           |  |       |  |          | 1,183,864  
|Total equity                                                                                                                                                                       |  |       |  |          | 339,284,979
|                                                                                                                                                                                   |  |       |  |          |            
|Total liabilities
    and equity                                                                                                                                                   |  |       |  | $        | 552,754,975



See accompanying notes to consolidated
financial statements



F-5









HOLLYSYS AUTOMATION TECHNOLOGIES LTD.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In US dollars except for number of shares and per share data)



|                                                                                                                                                                                  |  |       |  | Year ended June
    30, |            
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- |  | ----------------------- | -----------
|                                                                                                                                                                                  |  | Notes |  | 2011                    |            
|Net revenues                                                                                                                                                                      |  |       |  |                         |            
|Integrated contract revenue (including
    revenue from related parties of $3,717,358, $5,256,870 and $18,473,320 for the years ended June 30, 2011, 2012 and 2013, respectively) |  |       |  | $                       | 248,576,098
|Products sales (including
    revenue from related parties of $580,705, $109,917 and $1,083,803 for the years ended June 30, 2011, 2012 and 2013, respectively)                   |  |       |  |                         | 14,265,788 
|Total net revenues                                                                                                                                                                |  |       |  |                         | 262,841,886
|                                                                                                                                                                                  |  |       |  |                         |            
|Costs of integrated contracts (including
    purchases from related parties of $3,064,587, $72,774 and $1,475,149 for the years ended June 30, 2011, 2012 and 2013 respectively)  |  |       |  |                         | 165,354,157
|Costs of products sold                                                                                                                                                            |  |       |  |                         | 6,359,013  
|Gross profit                                                                                                                                                                      |  |       |  |                         | 91,128,716 
|                                                                                                                                                                                  |  |       |  |                         |            
|Operating expenses                                                                                                                                                                |  |       |  |                         |            
|Selling                                                                                                                                                                           |  |       |  |                         | 20,445,846 
|General and administrative                                                                                                                                                        |  |       |  |                         | 16,671,448 
|Research and development                                                                                                                                                          |  |       |  |                         | 20,132,575 
|VAT refunds and government subsidies                                                                                                                                              |  |       |  |                         | (10,811,919
|Total operating expenses                                                                                                                                                          |  |       |  |                         | 46,437,950 
|                                                                                                                                                                                  |  |       |  |                         |            
|Income from operations                                                                                                                                                            |  |       |  |                         | 44,690,766 
|                                                                                                                                                                                  |  |       |  |                         |            
|Other (expense) income, net (including other
    income from related parties of nil ,$45,475 and $65,926 for the years ended June 30, 2011, 2012 and 2013, respectively)          |  |       |  |                         | (208,093   
|Gain on disposal of long term investments                                                                                                                                         |  | 12    |  |                         | 1,400,533  
|Dilution gain on share of an equity investee                                                                                                                                      |  | 12    |  |                         | 756,619    
|Share of net income (loss) of equity investees                                                                                                                                    |  | 12    |  |                         | 2,847,866  
|Interest income                                                                                                                                                                   |  |       |  |                         | 1,101,531  
|Interest expenses                                                                                                                                                                 |  |       |  |                         | (2,680,141 
|Dividend income from cost investees                                                                                                                                               |  | 12    |  |                         | -          
|Income before income taxes                                                                                                                                                        |  |       |  |                         | 47,909,081 
|                                                                                                                                                                                  |  |       |  |                         |            
|Income tax expenses                                                                                                                                                               |  | 20    |  |                         | 6,443,967  
|Net income                                                                                                                                                                        |  |       |  |                         | 41,465,114 
|                                                                                                                                                                                  |  |       |  |                         |            
|Less: net (loss) income
    attributable to noncontrolling interests                                                                                                              |  |       |  |                         | (4,884     
|Net
    income attributable to Hollysys Automation Technologies Ltd.                                                                                                              |  |       |  | $                       | 41,469,998 
|                                                                                                                                                                                  |  |       |  |                         |            
|Other comprehensive income, net of nil tax                                                                                                                                        |  |       |  |                         |            
|Translation adjustments, net of nil tax                                                                                                                                           |  |       |  | $                       | 9,308,905  
|Comprehensive income                                                                                                                                                              |  |       |  |                         | 50,774,019 
|                                                                                                                                                                                  |  |       |  |                         |            
|Less: comprehensive
    income attributable to noncontrolling interests                                                                                                           |  |       |  |                         | 35,753     
|Comprehensive
    income attributable to Hollysys Automation Technologies Ltd.                                                                                                    |  |       |  | $                       | 50,738,266 
|                                                                                                                                                                                  |  |       |  |                         |            
|Net income per share:                                                                                                                                                             |  |       |  |                         |            
|Basic                                                                                                                                                                             |  | 21    |  | $                       | 0.76       
|Diluted                                                                                                                                                                           |  | 21    |  | $                       | 0.75       
|                                                                                                                                                                                  |  |       |  |                         |            
|Shares used in income per share computation:                                                                                                                                      |  |       |  |                         |            
|Weighted average number of ordinary shares                                                                                                                                        |  |       |  |                         | 54,564,842 
|Weighted average number of diluted ordinary shares                                                                                                                                |  |       |  |                         | 54,949,280 



See accompanying notes to consolidated
financial statements



F-6







HOLLYSYS AUTOMATION
TECHNOLOGIES LTD.

CONSOLIDATED STATEMENTS
OF CASH FLOWS

(In US dollars)





|                                                                                                                |  | Year ended June
    30, |            
|--------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -----------
|                                                                                                                |  | 2011                    |            
|Cash flows from operating activities:                                                                           |  |                         |            
|Net income                                                                                                      |  | $                       | 41,465,114 
|Adjustments to reconcile
    net income to net cash (used in) provided by operating activities:                 |  |                         |            
|Depreciation of property, plant and equipment                                                                   |  |                         | 4,334,113  
|Amortization of prepaid land leases                                                                             |  |                         | 134,479    
|Amortization of intangible assets                                                                               |  |                         | -          
|Allowance for doubtful accounts                                                                                 |  |                         | 2,816,320  
|(Gain) loss on disposal of property, plant and equipment                                                        |  |                         | (166,177   
|Impairment loss on property, plant and equipment                                                                |  |                         | 23,711     
|Impairment loss on share of a cost investment                                                                   |  |                         | 165,948    
|Share of net (income) loss from equity investees                                                                |  |                         | (2,847,866 
|Gain on disposal of long term investments                                                                       |  |                         | (1,400,533 
|Gain on disposal of a subsidiary                                                                                |  |                         | -          
|Dilution gain on share of an equity investee                                                                    |  |                         | (756,619   
|Amortization of expenses accrued for bond payable                                                               |  |                         | 31,531     
|Share-based compensation expenses                                                                               |  |                         | 551,966    
|Deferred income tax (benefit) expenses                                                                          |  |                         | (1,297,968 
|Dividends income from cost investees                                                                            |  |                         | -          
|Acquisition-related consideration adjustments                                                                   |  |                         | -          
|Changes in operating assets and liabilities:                                                                    |  |                         |            
|Accounts receivable                                                                                             |  |                         | (30,227,617
|Costs and estimated earnings in excess
    of billings                                                          |  |                         | (42,587,603
|Inventories                                                                                                     |  |                         | (3,256,130 
|Advances to suppliers                                                                                           |  |                         | 3,384,430  
|Other receivables                                                                                               |  |                         | (685,398   
|Deposits and other assets                                                                                       |  |                         | 506,365    
|Due from related parties                                                                                        |  |                         | (336,128   
|Accounts payable                                                                                                |  |                         | 18,481,215 
|Deferred revenue                                                                                                |  |                         | 7,994,334  
|Accruals and other payable                                                                                      |  |                         | 2,113,829  
|Due to related parties                                                                                          |  |                         | (457,800   
|Income tax payable                                                                                              |  |                         | (1,167,314 
|Other tax payables                                                                                              |  |                         | 1,390,307  
|Net cash (used in)
    provided by operating activities                                                         |  | $                       | (1,793,491 
|                                                                                                                |  |                         |            
|Cash flows from investing activities:                                                                           |  |                         |            
|Time deposits placed with banks                                                                                 |  | $                       | -          
|Purchases of property, plant and equipment                                                                      |  |                         | (16,045,183
|Maturity of time deposits                                                                                       |  |                         | -          
|Proceeds from disposal of property, plant and equipment                                                         |  |                         | 12,574     
|Proceeds from disposal of shares of equity investees                                                            |  |                         | 3,726,997  
|Repayments from equity investees                                                                                |  |                         | 27         
|Acquisition of shares of an equity investee                                                                     |  |                         | -          
|Dividends from equity investees                                                                                 |  |                         | 90,517     
|Acquisition of a subsidiary, net of cash acquired                                                               |  |                         | -          
|Cash prepaid for acquisition of a subsidiary                                                                    |  |                         | (16,856,148
|Proceeds from disposal of a subsidiary                                                                          |  |                         | -          
|Net cash used in investing
    activities                                                                       |  |                         | (29,071,216
|                                                                                                                |  |                         |            
|Cash flows from financing activities:                                                                           |  |                         |            
|Repayments of bonds payable                                                                                     |  | $                       | (12,068,913
|Proceeds from short-term bank loans                                                                             |  |                         | 15,671,580 
|Repayments of short-term bank loans                                                                             |  |                         | (5,924,784 
|Proceeds from long-term bank loans                                                                              |  |                         | -          
|Repayments of long-term bank loans                                                                              |  |                         | (1,508,614 
|Proceeds from exercise of options                                                                               |  |                         | 1,070,700  
|Repayment of amounts
    due to the former shareholders of a subsidiary                                         |  |                         | -          
|Net cash used in financing activities                                                                           |  |                         | (2,760,031 
|                                                                                                                |  |                         |            
|Effect of foreign
    exchange rate changes                                                                     |  |                         | 4,791,852  
|Net
    (decrease) increase in cash and cash equivalents                                                        |  | $                       | (28,832,886
|                                                                                                                |  |                         |            
|Cash and cash equivalents, beginning of year                                                                    |  |                         | 119,501,945
|Cash and cash equivalents, end of year                                                                          |  | $                       | 90,669,059 
|                                                                                                                |  |                         |            
|Supplementary disclosures of cash flow information:                                                             |  |                         |            
|Cash paid during the year for:                                                                                  |  |                         |            
|Interest                                                                                                        |  | $                       | 2,680,141  
|Income tax                                                                                                      |  | $                       | 7,109,057  
|                                                                                                                |  |                         |            
|Supplementary disclosures
    of significant non-cash transactions:                                             |  |                         |            
|Acquisition of property, plant and equipment
    included in construction costs payable and accrued liabilities |  | $                       | -          
|Issuance of ordinary shares as purchase
    consideration in connection with the acquisition of Concord         |  | $                       | -          
|Issuance of ordinary shares as purchase
    consideration in connection with the acquisition of Bond            |  | $                       | -          



See accompanying notes to consolidated
financial statements.



F-7







HOLLYSYS AUTOMATION TECHNOLOGIES LTD.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(In US dollars except for number of shares)





|                                                                                                                                                                                                                                                                                                                                                                                         |  | Ordinary shares |            |  | Additionalpaid-incapital |   |        | Statutoryreserves |  |   | Retainedearnings |   |  | Accumulatedothercomprehensiveincome |            |  | Total HollysysAutomationTechnologiesLtd.stockholders’equity |   |             | Noncontrollinginterests |  |   | Totalequity | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ---------- |  | ------------------------ | - | ------ | ----------------- |  | - | ---------------- | - |  | ----------------------------------- | ---------- |  | ----------------------------------------------------------- | - | ----------- | ----------------------- |  | - | ----------- | 
|                                                                                                                                                                                                                                                                                                                                                                                         |  | Shares          |            |  | Amount                   |   |        |                   |  |   |                  |   |  |                                     |            |  |                                                             |   |             |                         |  |   |             | 
|Balance
    at June 30, 2010                                                                                                                                                                                                                                                                                                                                                             |  |                 | 54,449,129 |  |                          | $ | 54,450 |                   |  | $ | 138,751,162      |   |  | $                                   | 17,396,777 |  |                                                             | $ | 38,936,792  |                         |  | $ | 17,557,544  | 
|                                                                                                                                                                                                                                                                                                                                                                                         |  |                 |            |  |                          |   |        |                   |  |   |                  |   |  |                                     |            |  |                                                             |   |             |                         |  |   |             | 
|Share-based
    compensation                                                                                                                                                                                                                                                                                                                                                             |  |                 | -          |  |                          |   | -      |                   |  |   | 551,966          |   |  |                                     | -          |  |                                                             |   | -           |                         |  |   | -           | 
|Issuance of
    ordinary shares upon exercise of options                                                                                                                                                                                                                                                                                                                                 |  |                 | 243,000    |  |                          |   | 243    |                   |  |   | 1,070,457        |   |  |                                     | -          |  |                                                             |   | -           |                         |  |   | -           | 
|Net
    income for the year                                                                                                                                                                                                                                                                                                                                                              |  |                 | -          |  |                          |   | -      |                   |  |   | -                |   |  |                                     | -          |  |                                                             |   | 41,469,998  |                         |  |   | -           | 
|Appropriations
    to statutory reserves                                                                                                                                                                                                                                                                                                                                                 |  |                 | -          |  |                          |   | -      |                   |  |   | -                |   |  |                                     | 5,665,002  |  |                                                             |   | (5,665,002  | )                       |  |   | -           | 
|Translation
    adjustments                                                                                                                                                                                                                                                                                                                                                              |  |                 | -          |  |                          |   | -      |                   |  |   | -                |   |  |                                     | -          |  |                                                             |   | -           |                         |  |   | 9,268,268   | 
|Balance
    at June 30, 2011                                                                                                                                                                                                                                                                                                                                                             |  |                 | 54,692,129 |  |                          | $ | 54,693 |                   |  | $ | 140,373,585      |   |  | $                                   | 23,061,779 |  |                                                             | $ | 74,741,788  |                         |  | $ | 26,825,812  | 
|Share-based
    compensation                                                                                                                                                                                                                                                                                                                                                             |  |                 | -          |  |                          |   | -      |                   |  |   | 1,139,368        |   |  |                                     | -          |  |                                                             |   | -           |                         |  |   | -           | 
|Issuance of
    ordinary shares upon exercise of options                                                                                                                                                                                                                                                                                                                                 |  |                 | 300,000    |  |                          |   | 300    |                   |  |   | 671,700          |   |  |                                     | -          |  |                                                             |   | -           |                         |  |   | -           | 
|Acquisition
    of a subsidiary                                                                                                                                                                                                                                                                                                                                                          |  |                 | 1,006,788  |  |                          |   | 1,006  |                   |  |   | 9,120,493        |   |  |                                     | -          |  |                                                             |   | -           |                         |  |   | -           | 
|Net
    income for the year                                                                                                                                                                                                                                                                                                                                                              |  |                 | -          |  |                          |   | -      |                   |  |   | -                |   |  |                                     | -          |  |                                                             |   | 56,221,847  |                         |  |   | -           | 
|Appropriations
    to statutory reserves                                                                                                                                                                                                                                                                                                                                                 |  |                 | -          |  |                          |   | -      |                   |  |   | -                |   |  |                                     | 29,293     |  |                                                             |   | (29,293     | )                       |  |   | -           | 
|Translation
    adjustments                                                                                                                                                                                                                                                                                                                                                              |  |                 | -          |  |                          |   | -      |                   |  |   | -                |   |  |                                     | -          |  |                                                             |   | -           |                         |  |   | 5,888,744   | 
|Balance
    at June 30, 2012                                                                                                                                                                                                                                                                                                                                                             |  |                 | 55,998,917 |  |                          | $ | 55,999 |                   |  | $ | 151,305,146      |   |  | $                                   | 23,091,072 |  |                                                             | $ | 130,934,342 |                         |  | $ | 32,714,556  | 
|Share-based
    compensation                                                                                                                                                                                                                                                                                                                                                             |  |                 | -          |  |                          |   | -      |                   |  |   | 1,599,496        |   |  |                                     | -          |  |                                                             |   | -           |                         |  |   | -           | 
|Issuance of
    ordinary shares upon exercise of options                                                                                                                                                                                                                                                                                                                                 |  |                 | 138,000    |  |                          |   | 138    |                   |  |   | 967,062          |   |  |                                     | -          |  |                                                             |   | -           |                         |  |   | -           | 
|Issuance
                                                                                                         of ordinary shares upon
                                                                                                         vesting of restricted
                                                                                                         shares |  |                 | 10,000     |  |                          |   | 10     |                   |  |   | (10              | ) |  |                                     | -          |  |                                                             |   | -           |                         |  |   | -           | 
|Acquisition
    of a subsidiary                                                                                                                                                                                                                                                                                                                                                          |  |                 | 1,407,907  |  |                          |   | 1,408  |                   |  |   | 16,907,556       |   |  |                                     | -          |  |                                                             |   | -           |                         |  |   | -           | 
|Net
    income for the year                                                                                                                                                                                                                                                                                                                                                              |  |                 | -          |  |                          |   | -      |                   |  |   | -                |   |  |                                     | -          |  |                                                             |   | 51,994,402  |                         |  |   | -           | 
|Appropriations
    to statutory reserves                                                                                                                                                                                                                                                                                                                                                 |  |                 | -          |  |                          |   | -      |                   |  |   | -                |   |  |                                     | 55,599     |  |                                                             |   | (55,599     | )                       |  |   | -           | 
|Translation
    adjustments                                                                                                                                                                                                                                                                                                                                                              |  |                 | -          |  |                          |   | -      |                   |  |   | -                |   |  |                                     | -          |  |                                                             |   | -           |                         |  |   | 4,157,111   | 
|Balance
    at June 30, 2013                                                                                                                                                                                                                                                                                                                                                             |  |                 | 57,554,824 |  |                          | $ | 57,555 |                   |  | $ | 170,779,250      |   |  | $                                   | 23,146,671 |  |                                                             | $ | 182,873,145 |                         |  | $ | 36,871,667  | 





F-8









| | NOTE 1 - | ORGANIZATION AND BUSINESS BACKGROUND
| | -------- | ------------------------------------



Hollysys Automation Technologies Ltd. (“Hollysys”
or the “Company”), formerly known as HLS Systems International Ltd., was established under the laws of the British
Virgin Islands (“BVI”) on February 6, 2006, for the purpose of merging with Chardan North China Acquisition Corporation
(“Chardan”), a blank check company incorporated in Deleware, United States of America, and to hold 100% interest in
Gifted Time Holdings Limited (“GTH”) upon the completion of a share exchange transaction (the “Share Exchange
Transaction”). GTH was established under the laws of BVI on September 21, 2005 and was the holding company of Beijing Hollysys
Co., Ltd. (“Beijing Hollysys”) and Hangzhou Hollysys Automation Co., Ltd. (“Hangzhou Hollysys”) through
a reorganization arrangement with equity interests of 74.11% and 60%, respectively.



On September 7, 2007, the
shareholders of Chardan approved the Share Exchange Transaction. As a result, Chardan merged with and into Hollysys to
finish the re-domestication merger and Hollysys consummated the Share Exchange Transaction with GTH. Upon completion of
the Share Exchange Transaction, Hollysys owned 100% interest in GTH, which held 74.11% beneficiary interest of Beijing
Hollysys and 60% equity interest of Hangzhou Hollysys. Beijing Hollysys held the remaining 40% equity interest of Hangzhou
Hollysys.



On July 1, 2009, the Company acquired 1.78%
equity interest in Beijing Hollysys from the noncontrolling shareholders for a consideration of RMB18,000,000 (approximately $2,638,793).
Upon completion of the acquisition, the Company held a 75.89% equity interest in Beijing Hollysys.



On December 23, 2009, the Company entered
into a share sale and purchase agreement with Unionway Resources Limited (“Unionway”), a company incorporated in the
BVI, pursuant to which, among other things, the Company acquired 24.11% equity interest of Beijing Hollysys. As the consideration
for the acquisition, the Company paid RMB67,634,366 ($9,917,063) in cash and issued 4,413,948 ordinary shares, with total fair
value of $53,011,515, to Unionway on March 16, 2010. Upon completion of the acquisition, the Company indirectly owns 100% of Beijing
Hollysys.



On July 1, 2011, the Company acquired 100%
equity interest of Concord Corporation Pte. Ltd (including Concord Corporation Pte. Ltd., Dubai branch)
and its subsidiaries, Concord Electrical Pte. Ltd.,and Concord
Electrical Sdn. Bhd. (collectively, “Concord”). Concordis a Singapore headquartered integrated construction
and installation services provider to rail and industrial companies in Southeast Asia and the Middle East.



On May 9, 2012, Concord Solution (HK) Limited
was established to provide integrated automation products and services. It is 100% indirectly owned by the Company with a registered
capital of HKD10,000.



On July 24, 2012, Hangzhou Hollysys System
Engineering Co., Ltd. was established to provide integrated automation products and services. It is 100% indirectly owned by the
Company with a registered capital of RMB50,000,000.



In December 2012, the Company disposed
of its 51% equity interest in Beijing WoDeWeiYe Technology Exploration Co., Ltd. (“WoDeWeiYe”)
for a consideration of $112,674. WoDeWeiYe was insignificant to the Company and thus the results of WoDeWeiYe were not presented
as discontinued operation. The net revenues and net income (loss) of WoDeWeiYe included in the consolidated financial statements
of the Company were as follows:



|                  |  | Year ended June 30, |         
|----------------- |  | ------------------- | --------
|                  |  | 2011                |         
|                  |  |                     |         
|Net revenues      |  | $                   | 881,507 
|Net income (loss) |  | $                   | (169,472



On January 10, 2013, Hollysys International Pte. Ltd. was established under the law
of Singapore for the purpose of holding the 100% equity interest of Bond Corporation Pte. Ltd. to complete the acquisition. It
is 100% owned by the Company with a registered capital of SGD20,000,000.



On February 21, 2013, Concord M Design
and Engineering Company Limited was established to undertake potential projects in Macau. It is 100% indirectly owned by the Company
with a registered capital of 25,000 Macau Pataca.



F-9







On April 1, 2013, the Company acquired
100% equity interest of Bond Corporation Pte. Ltd. and its subsidiaries, Bond
M & E Sdn. Bhd., Bond M & E (KL) Sdn. Bhd. and Bond M & E Pte. Ltd (collectively, “Bond”). Bondis
a Singapore headquartered mechanical and electrical solution service provider for building construction and renovation projects
in Malaysia and Singapore.



As of June 30, 2013, details of the Company’s
subsidiaries are as follows:



|Name of company                                                            |  | Place of incorporation             |  | Date of incorporation |                    |  | Percentage of ownership interest attributable to the Company |  |     | Principal activities
|-------------------------------------------------------------------------- |  | ---------------------------------- |  | --------------------- | ------------------ |  | ------------------------------------------------------------ |  | --- | --------------------
|                                                                           |  |                                    |  |                       |                    |  | Directly                                                     |  |     | Indirectly          
|                                                                           |  |                                    |  |                       |                    |  |                                                              |  |     |                     
|Gifted Time Holdings Limited ("GTH")                                       |  | BVI                                |  |                       | September 21, 2005 |  |                                                              |  | 100 | %                   
|                                                                           |  |                                    |  |                       |                    |  |                                                              |  |     |                     
|Clear Mind Limited ("Clear Mind")                                          |  | BVI                                |  |                       | November 29, 2007  |  |                                                              |  | -   |                     
|                                                                           |  |                                    |  |                       |                    |  |                                                              |  |     |                     
|World Hope Enterprises Limited ("World Hope")                              |  | Hong Kong                          |  |                       | September 17, 2007 |  |                                                              |  | -   |                     
|                                                                           |  |                                    |  |                       |                    |  |                                                              |  |     |                     
|Beijing Helitong Science & Technology Exploration Co., Ltd. ("Helitong")   |  | People’s Republic of China (“PRC”) |  |                       | January 25, 2008   |  |                                                              |  | -   |                     
|                                                                           |  |                                    |  |                       |                    |  |                                                              |  |     |                     
|Hollysys Group Co., Ltd. ("Hollysys Group")                                |  | PRC                                |  |                       | December 17, 2007  |  |                                                              |  | -   |                     
|                                                                           |  |                                    |  |                       |                    |  |                                                              |  |     |                     
|Hollysys (Beijing) Investment Co., Ltd. ("Hollysys Investment")            |  | PRC                                |  |                       | April 15, 2011     |  |                                                              |  | -   |                     
|                                                                           |  |                                    |  |                       |                    |  |                                                              |  |     |                     
|Beijing Hollysys Automation & Drive Co., Ltd. ("Hollysys A&D")             |  | PRC                                |  |                       | May 13, 2008       |  |                                                              |  | -   |                     
|                                                                           |  |                                    |  |                       |                    |  |                                                              |  |     |                     
|Hangzhou Hollysys Automation Co., Ltd. ("Hangzhou Hollysys")               |  | PRC                                |  |                       | September 24, 2003 |  |                                                              |  | -   |                     
|                                                                           |  |                                    |  |                       |                    |  |                                                              |  |     |                     
|Hangzhou Hollysys System Engineering Co., Ltd. (“Hangzhou System”)         |  | PRC                                |  |                       | July 24, 2012      |  |                                                              |  |     |                     
|                                                                           |  |                                    |  |                       |                    |  |                                                              |  |     |                     
|Beijing Hollysys Electronics Technology Co., Ltd. ("Hollysys Electronics") |  | PRC                                |  |                       | June 4, 2010       |  |                                                              |  | -   |                     
|                                                                           |  |                                    |  |                       |                    |  |                                                              |  |     |                     
|Beijing Hollycon Medicine & Technology Co., Ltd.(“Hollycon”)               |  | PRC                                |  |                       | June 4, 2010       |  |                                                              |  | -   |                     
|                                                                           |  |                                    |  |                       |                    |  |                                                              |  |     |                     
|Beijing Hollysys Co., Ltd. ("Beijing Hollysys")                            |  | PRC                                |  |                       | September 25, 1996 |  |                                                              |  | -   |                     
|                                                                           |  |                                    |  |                       |                    |  |                                                              |  |     |                     
|Beijing Haotong Science and Technology Development Co., Ltd. ("Haotong")   |  | PRC                                |  |                       | October 26, 2000   |  |                                                              |  | -   |                     





F-10







|Xi’an Hollysys Co., Ltd. ("Xi'an Hollysys")               |  | PRC       |  |  | March 9, 2011     |  |  |  | -   |   |  |  | 100 | % |  | Research and development                                                  
|--------------------------------------------------------- |  | --------- |  |  | ----------------- |  |  |  | --- | - |  |  | --- | - |  | --------------------------------------------------------------------------
|                                                          |  |           |  |  |                   |  |  |  |     |   |  |  |     |   |  |                                                                           
|Hollsys International Pte. Limited  ("HI")                |  | Singapore |  |  | January 10, 2013  |  |  |  | 100 | % |  |  | -   |   |  | Investment holding                                                        
|                                                          |  |           |  |  |                   |  |  |  |     |   |  |  |     |   |  |                                                                           
|Hollysys (Asia Pacific) Pte. Limited ("HAP")              |  | Singapore |  |  | October 23, 1997  |  |  |  | -   |   |  |  | 100 | % |  | Sale of integrated automation products                                    
|                                                          |  |           |  |  |                   |  |  |  |     |   |  |  |     |   |  |                                                                           
|Concord Corporation Pte. Ltd ("CCPL")                     |  | Singapore |  |  | March 10, 2008    |  |  |  | -   |   |  |  | 100 | % |  | Provision of integrated construction and installation services            
|                                                          |  |           |  |  |                   |  |  |  |     |   |  |  |     |   |  |                                                                           
|Concord Electrical Pte. Ltd. ("CEPL")                     |  | Singapore |  |  | May 25, 1984      |  |  |  | -   |   |  |  | 100 | % |  | Provision of integrated construction and installation services            
|                                                          |  |           |  |  |                   |  |  |  |     |   |  |  |     |   |  |                                                                           
|Concord Electrical Sdn. Bhd. ("CESB")                     |  | Malaysia  |  |  | May 13, 1994      |  |  |  | -   |   |  |  | 100 | % |  | Provision of integrated construction and installation services            
|                                                          |  |           |  |  |                   |  |  |  |     |   |  |  |     |   |  |                                                                           
|Concord Solution (HK) Limited ("CSHK")                    |  | Hong Kong |  |  | May 9, 2012       |  |  |  | -   |   |  |  | 100 | % |  | Provision of integrated automation products and services                  
|                                                          |  |           |  |  |                   |  |  |  |     |   |  |  |     |   |  |                                                                           
|Concord M Design and Engineering Company Limited (“CMDE”) |  | Macau     |  |  | February 21, 2013 |  |  |  | -   |   |  |  | 100 | % |  | Provision of integrated automation products and services                  
|                                                          |  |           |  |  |                   |  |  |  |     |   |  |  |     |   |  |                                                                           
|Bond Corporation Pte Ltd ("BCPL")                         |  | Singapore |  |  | November 1, 2012  |  |  |  | -   |   |  |  | 100 | % |  | Investment holding                                                        
|                                                          |  |           |  |  |                   |  |  |  |     |   |  |  |     |   |  |                                                                           
|Bond M & E Pte. Ltd (“BMSG”)                              |  | Singapore |  |  | March 6, 1981     |  |  |  | -   |   |  |  | 100 | % |  | Provision of mechanical and electrical solutions and installation services
|                                                          |  |           |  |  |                   |  |  |  |     |   |  |  |     |   |  |                                                                           
|Bond M & E Sdn. Bhd. (“BMJB”)                             |  | Malaysia  |  |  | October 25, 1983  |  |  |  | -   |   |  |  | 100 | % |  | Provision of mechanical and electrical solutions and installation services
|                                                          |  |           |  |  |                   |  |  |  |     |   |  |  |     |   |  |                                                                           
|Bond M & E (KL) Sdn. Bhd. (“BMKL”)                        |  | Malaysia  |  |  | October 24, 1989  |  |  |  | -   |   |  |  | 100 | % |  | Provision of mechanical and electrical solutions and installation services



The Company is principally engaged in the
manufacture, sale and provision of integrated automation systems and services, mechanical and electrical solution services and
installation services in the PRC, Hong Kong, Southeast Asia and the Middle East through its operating subsidiaries.



| | NOTE 2 - | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| | -------- | ------------------------------------------



Principles of consolidation and basis of
presentation



The consolidated financial statements include
the financial statements of the Company and its subsidiaries. All significant inter-company transactions and balances are eliminated
upon consolidation. The consolidated financial statements have been prepared in accordance with the accounting principles generally
accepted in the United States of America (“US GAAP”).



F-11







Foreign currency translations and transactions



The Company, GTH, Clear Mind and
World Hope’s functional and reporting currency is the United States dollars (“US dollars” or
“$”); whereas the Company’s subsidiaries use the primary currency of the economic environment in which
their operations are conducted as their functional currency. Renminbi (“RMB”) is determined to be the functional
currency of all PRC subsidiaries; Singapore dollar (“SGD”) is determined to be the functional currency of HI,
HAP, CCPL, CEPL, BCPL and BMSG; Malaysian Ringgit (“MYR”) is determined to be the functional currency of CESB,
BMJB and BMKL; and United Arab Emirates Dirham (“AED”), Hong Kong dollar (“HKD”), and Macau Pataca
(“MOP”) are the functional currencies of CCPL Dubai branch, CSHK, and CMDE respectively.



The Company translates the assets and liabilities
into US dollars using the rate of exchange prevailing at the balance sheet date, and the statements of comprehensive income are
translated at average rates during the reporting period. Adjustments resulting from the translation of financial statements from
the functional currency into US dollars are recorded in stockholders’ equity as part of accumulated other comprehensive income.
Gains or losses resulting from transactions in currencies other than the functional currency are reflected in the consolidated
statements of comprehensive income for the reporting period.



For the years ended June 30, 2011, 2012
and 2013, the Company recorded foreign exchange gain (loss), net of $1,326,011, ($275,341) and $799,609, respectively.



Business combinations



The Company accounts for its business combinations
using the purchase method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business
Combinations (“ASC 805”). The purchase method accounting requires that the consideration transferred to be allocated
to the assets, including separately identifiable assets and liabilities the Company acquired based on their estimated fair values.
The consideration transferred of an acquisition is measured as the aggregate of the fair values at the date of exchange of the
assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual
contingencies as of the acquisition date. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured
separately at their fair value as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess
of (i) the total cost of the acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously
held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill.
If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized
directly in the statements of comprehensive income.



The determination and allocation of fair
values to the identifiable assets acquired, liabilities assumed and non-controlling interests is based on various assumptions and
valuation methodologies requiring considerable management judgment. The most significant variables in these valuations are discount
rates, terminal values, as well as the assumptions and estimates used to determine the cash inflows and outflows. The Company determines
discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons.
Terminal values are based on the expected life of assets and forecasted cash flows over that period.



Acquisition-related costs are recognized
as general and administrative expenses in the statements of comprehensive income as incurred.



Cash and cash equivalents



Cash and cash equivalents consist of cash
on hand and bank deposits, which are unrestricted as to withdrawal and use. All highly liquid investments that are readily convertible
to known amounts of cash with original stated maturities of three months or less are classified as cash equivalents.



Time deposits with original maturities
over three months



Time deposits with original maturities
over three months consist of deposits placed with financial institutions with original maturity terms of six months or one year.
As of June 30, 2013, an amount of $14,016,821 and $6,842,019 time deposit with original maturities over three months were placed
in financial institutions in the PRC and Malaysia, respectively.



Restricted cash



Restricted cash consists of the cash deposited
in banks pledged for performance guarantees and is not available until these guarantees are expired or cancelled.



F-12







Revenue recognition



Integrated solutions contracts



Revenues generated from designing, building,
and delivering customized integrated industrial automation systems are recognized over the contractual terms based on the percentage
of completion method. The contracts for designing, building, and delivering customized integrated industrial automation systems
are legally enforceable binding agreements between the Company and customers. The duration of contracts depends on the contract
size and ranges from 6 months to 5 years excluding the warranty period. The majority of the contract duration is longer than one
year.



Revenue generated from mechanical and electrical
solution contracts for the construction or renovation of buildings, rail or infrastructure facilities are recognized over the contractual
terms based on the percentage of completion method. The contracts for mechanical and electrical solution services are legally enforceable
binding agreements between the Company and customers. The duration of contracts depends on the contract size and the complexity
of the construction work and ranges from 6 months to 3 years excluding the warranty period. The majority of the contract duration
is longer than one year.



In accordance with ASC 605-35, Revenue
Recognition - Construction-Type and Production-Type Contracts(“ASC 605-35”) recognition is based on an estimate
of the income earned to date, less income recognized in earlier periods. Revisions in the estimated total costs of integrated contracts
are made in the period in which the circumstances requiring the revision become known. Provisions, if any, are made in the period
when anticipated losses are expected on uncompleted contracts.



The Company reviews and updates the estimated
total costs of integrated solution contracts at least semi-annually. The Company accounts for revisions to contract revenue and
estimated total costs of integrated solution contracts, including the impact due to approved change orders, in the period in which
the facts that cause the revision become known as changes in estimates. Unapproved change orders are considered claims. Claims
are recognized only when it has been awarded by customers. Excluding the impact of change orders, if the estimated total costs
of integrated solution contracts, which are revised during the year ended June, 30, 2013, had been used as a basis of recognition
of contract revenue since the contract commencement, net income, basic net income per share, and diluted net income per share for
the year ended June 30, 2013, would have decreased by $11,252,708, $0.20, and $0.20, respectively. Revisions to estimated total
costs for the year ended June 30, 2013 were made in the ordinary course of business.



The Company combines a group of contracts
as one project if they are closely related and are, in substance, parts of a single project with an overall profit margin. The
Company segments a contract into several projects, when they are of different business substance, for example, with different business
negotiation, solutions, implementation plans and margins.



Revenue in excess of billings on the contracts
is recorded as costs and estimated earnings in excess of billings. Billings in excess of revenues recognized on the contracts are
recorded as deferred revenue until the above revenue recognition criteria are met.



The Company generally recognizes 100% of
the contractual revenue upon receipt of customer acceptance as the Company estimates that no further major costs will be incurred
under a contract, a signed customer acceptance document has been obtained, and the warranty period commences. Revenues are presented
net of taxes collected on behalf of the government.



Product sales



Revenue generated from sales of products
is recognized when the following four revenue recognition criteria are met (i) persuasive evidence of an arrangement exists, (ii)
delivery has occurred, (iii) the selling price is fixed or determinable, and (iv) collectability is reasonably assured.



F-13







Inventories



Inventories are composed of raw materials,
work in progress, purchased and manufactured finished goods and low value consumables. Inventories are accounted for on the “first-in,
first-out basis”, and stated at the lower of cost or market.



The Company assesses the lower of
cost or market for non-saleable, excess or obsolete inventories based on its periodic review of inventory quantities on hand and
the latest forecasts of product demand and production requirements from its customers. The Company writes down inventories for
non-saleable, excess or obsolete raw materials, work-in-process and finished goods by charging such write-downs to cost of integrated
contracts and/or costs of products sold.



Costs incurred for a specific anticipated
contract are included in inventory when the recoverability is evaluated to be probable. Costs included in inventory in anticipation
of a contract are included in contract costs upon the receipt of the anticipated contract.



Warranties



Warranties represent a major term under
an integrated contract, which will last, in general, for one to three years or otherwise specified in the terms of the contract.
The Company accrues warranty liabilities under an integrated contract as a percentage of revenue recognized, which is derived
from its historical experience, in order to recognize the warranty cost for an integrated contract throughout the contract period.
In addition, the Company estimates whether or not the accrued warranty liabilities are adequate by considering specific conditions
that may arise and the number of contracts under warranty period at each reporting date. The Company adjusts the accrued warranty
liabilities in line with the results of its assessment.



Accounts receivable and costs and estimated earnings in excess of billings



Performance of the integrated contracts
will often extend over long periods and the Company’s right to receive payments depends on its performance in accordance
with the contractual agreements. There are different billing practices in PRC and overseas operating subsidiaries including Concord
and Bond. In the PRC, billings are rendered based on agreed milestones depending on the contracts terms with customers. In general,
there are four milestones: 1) project commencement, 2) system manufacturing and delivery, 3) installation, trial-run and customer
acceptance, and 4) expiration of the warranty period. The amounts to be billed when each of the specified milestones is reached
are specified in the contracts. All contracts have the first milestone, but not all contracts have a prepayment. Each interval
of two continuous billings under an integrated contract varies depending on the duration of the contract (under certain contracts,
the interval of two continuous billings is longer than one year) and the last billing to be issued for an integrated solution
contract is at the end of a warranty period. For Concord and Bond, billing claims are rendered subject to the approval and certification
by the customers or their designated consultants. Payments are made to Concord or Bond based on the certified billings accordingly
to the payment terms as mutually agreed between the customers and Concord or Bond. Certain amounts are retained by the customer
and payable to Concord and Bond upon satisfaction of final quality inspection or at the end of the warranty period. The retained
amounts for the three years ended June 30, 2011, 2012 and 2013 were nil, $2,091,805 and $6,549,418, respectively. Prepayments
received are recorded as deferred revenue. The deferred revenue will be recognized as revenue under the percentage of completion
method along with the progress of a contract. If no prepayment is received by the Company, revenue will be recognized through
cost and estimated earnings in excess of billings.



The Company does not require collateral from its customers. Based on the prevailing
collection practices in China, it is a reasonable expectation for the enterprises in the automation industry to take over one
year to collect the accounts receivable in full.



The Company does not charge interest for
late payments by its customers. The Company periodically reviews the status of contracts and decides how much of an allowance for
doubtful accounts should be made based on factors surrounding the credit risk of customers and its historical experience. The Company
sets up a doubtful account for an individual customer based on the customer’s credit worthiness.



F-14







Property, plant and equipment, net



Property, plant and equipment, other than
construction in progress, are recorded at cost and are stated net of accumulated depreciation and impairment, if any. Depreciation
expense is determined using the straight-line method over the estimated useful lives of the assets as follows:



|Buildings                      | 30 - 50 years
|------------------------------ | -------------
|Machinery                      | 5 - 10 years 
|Software                       | 3 - 5 years  
|Vehicles                       | 5 - 6 years  
|Electronic and other equipment | 3 - 10 years 



Construction in progress represents uncompleted
construction work of certain facilities which, upon completion, management intends to hold for production purposes. In addition
to costs under construction contracts, other costs directly related to the construction of such facilities, including duty and
tariff, equipment installation and shipping costs, and borrowing costs are capitalized. Depreciation commences when the asset is
placed in service.



Maintenance and repairs are charged directly
to expense as incurred, whereas betterment and renewals are capitalized in their respective accounts. When an item is retired or
otherwise disposed of, the cost and applicable accumulated depreciation are removed and the resulting gain or loss is recognized
for the reporting period.



Prepaid land leases, net



Prepaid land lease payments, for the land
use right of three parcels of land in the PRC, three parcels of leasehold land in Malaysia and one parcel of leasehold land in
Singapore, are initially stated at cost and are subsequently amortized on a straight-line basis over the lease terms of 49 to 88
years.



Acquired intangible assets, net



Acquired intangible assets are carried
at cost less accumulated amortization and any impairment. Intangible assets acquired in a business combination are recognized initially
at fair value at the date of acquisition. Intangible assets, except for which are estimated to have an indefinite useful life,
are amortized using a straight-line method. Intangible assets estimated to have an indefinite useful life are not amortized but
tested for impairment annually or more frequently when indicators of impairment exist.



The estimated useful lives for the acquired
intangible assets are as follows:



|Category              |  | Estimated useful life
|--------------------- |  | ---------------------
|Customer relationship |  | 57 - 60 months       
|Order backlog         |  | 21 - 33 months       



Residual values are considered nil.



Goodwill





Goodwill represents the excess of the purchase
price over the estimated fair value of net tangible and identifiable intangible assets acquired. The Company’s goodwill outstanding
at June 30, 2013 was related to the acquisition of Concord and Bond (see note 3). In accordance with ASC 350, Intangibles, Goodwill
and Other(“ASC 350”), goodwill is not amortized, but rather is tested for impairment at least annually or more
frequently if there are indicators of impairment present.



Goodwill is tested for impairment on June
30 in each year. The Company adopted ASU No. 2011- 08, Testing Goodwill for Impairment, pursuant to which the Company
performs a qualitative assessment to determine if it is more likely than not that the fair value of each identified reporting unit
is less than its carrying amount. If this is the case, the Company is not required to calculate the fair value of its reporting
unit(s) and perform the two-step impairment test. However, if the Company concludes otherwise, the first step of the two-step impairment
test is performed by comparing the carrying value of its reporting unit to its fair value. If the carrying value of the reporting
unit is greater than its fair value, the second step is performed, where the implied fair value of goodwill is compared to its
carrying value. The Company recognizes an impairment charge for the amount by which the carrying amount of goodwill exceeds its
implied fair value.



There was no impairment loss for the periods
presented.





F-15







Impairment of long-lived assets other than
goodwill



The Company evaluates its long-lived assets
or asset group including acquired intangibles with finite lives for impairment whenever events or changes in circumstances (such
as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying
amount of a group of long-lived assets may not be fully recoverable. When these events occur, the Company evaluates the impairment
by comparing the carrying amount of the assets to future undiscounted cash flows expected to result from the use of the assets
and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets,
the Company recognizes an impairment loss based on the excess of the carrying amount of the asset group over its fair value, generally
based upon discounted cash flows or quoted market prices.



The impairment loss on long-lived assets
for each of the years ended June 30, 2011, 2012 and 2013 were $23,711, nil and nil respectively, included in the general and administrative
expenses, which represented impairment loss on property, plant and equipment.



Shipping and handling costs



All shipping and handling fees charged
to customers are included in net revenue, and shipping and handling costs for goods shipped by the Company to customers are included
in cost of integrated contracts and/or costs of products sold.



Income taxes



The Company follows the liability method
of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences
between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period
in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based
on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not
be realized. The effect on deferred taxes of a change in tax rate is recognized in tax expense in the period that includes the
enactment date of the change in tax rate.



The Company adopted ASC 740, Income
Taxes (“ASC 740”),which clarifies the accounting and disclosure for uncertainty in income taxes. Interests
and penalties arising from underpayment of income taxes shall be computed in accordance with the related tax laws. The amount of
interest expense is computed by applying the applicable statutory rate of interest to the difference between the tax position recognized
and the amount previously taken or expected to be taken in a tax return. Interests and penalties recognized in accordance with
ASC 740 are classified in the financial statements as a component of income tax expense. In accordance with the provisions of ASC
740, the Company recognizes in its financial statements the impact of a tax position if a tax return position or future tax position
is “more likely than not” to prevail based on the facts and technical merits of the position. Tax positions that meet
the “more likely than not” recognition threshold are measured at the largest amount of tax benefit that has a greater
than fifty percent likelihood of being realized upon settlement. The Company’s estimated liability for unrecognized tax positions
which is included in the accrued liabilities is periodically assessed for adequacy and may be affected by changing interpretations
of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations.
The outcome for a particular audit cannot be determined with certainty prior to the conclusion of the audit and, in some cases,
appeal or litigation process. The actual benefits ultimately realized may differ from the Company’s estimates. As each audit
is concluded, adjustments, if any, are recorded in the Company’s financial statements. Additionally, in future periods, changes
in facts, circumstances, and new information may require the Company to adjust the recognition and measurement estimates with regard
to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the changes
occur.



Research and development costs



Research and development costs consist
primarily of staff costs, which include salaries, bonuses and benefits for research and development personnel. Research and development
costs also include travel expenses of research and development personnel as well as depreciation of hardware equipment and software
tools and other materials used in research and development activities. Research and development costs are expensed as incurred.
Software development costs are also expensed as incurred as the costs qualifying for capitalization have been insignificant.



F-16







VAT refunds and government subsidies



Pursuant to the laws and regulations of
the PRC, the Company remits 17% of its sales as valued added tax (“VAT”), and then is entitled to a refund of the
portion that the Company’s actual VAT burden exceeding 3% levied on all sales containing internally developed software products.
VAT refunds are recognized in the statements of comprehensive income when the necessary approval from the tax authority has been
received. Certain subsidiaries of the Company located in the PRC receive government subsidies from local PRC government agencies.
Government subsidies are recognized in the statement of comprehensive income when the attached conditions have been met. Government
grants received for the years ended June 30, 2011, 2012 and 2013 amounted to $2,374,496 and
$5,408,210and $11,322,147, respectively, of which $1,823,851
and $3,294,511and $4,877,720 were
included as a credit to operating expenses in the statements of comprehensive income for the year ended June 30,
2011, 2012 and 2013, respectively.



Appropriations to statutory reserve



Under the corporate law and relevant regulations
in the PRC, all of the subsidiaries of the Company located in the PRC are required to appropriate a portion of its retained earnings
to statutory reserve. All subsidiaries located in the PRC are required to appropriate 10% of its annual after-tax income each year
to the statutory reserve until the statutory reserve balance reaches 50% of the registered capital. In general, the statutory reserve
shall not be used for dividend distribution purposes.



Use of estimates



The preparation of financial statements
in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Management evaluates estimates, including those related to the expected total
costs of integrated contracts, expected gross margins of integrated solution contracts, allowance for doubtful accounts, fair values
of share options, the purchase price allocation and contingent consideration with respect to business combinations, warranties,
valuation allowance of deferred tax assets and impairment of goodwill and other long-lived assets. Management bases the estimates
on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis
for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from those estimates.



Segment reporting



In accordance with ASC 280, Segment
reporting(“ASC 280”), segment reporting is determined based on how the Company’s chief operating decision
makers review operating results to make decisions about allocating resources and assessing performance of the Company. According
to management’s approach, the Company organizes its internal financial reporting structure based on its main product and
service offerings. To better assess the Company’s performance and allocate resources, the chief operating decision makers
revised their internal financial reporting structure and their management report for the year ended June 30, 2013 and operates
in three principal business segments from 2013, namely industrial automation, rail transportation and mechanical and electrical
solution. The prior year comparative segment disclosures were restated to reflect the Company’s current financial reporting
structure. The Company does not allocate any assets to the three segments as management does not use the information to measure
the performance of the reportable segments.



Comprehensive income



Comprehensive income is defined as the
changes in equity of the Company during a period from transactions and other events and circumstances excluding transactions resulting
from investments by owners and distributions to owners. In accordance with ASC 220, Comprehensive Income (“ASC 220”),
the Company presents components of net income and other comprehensive income in one continuous statement.



F-17







Investments in cost and equity investees



The Company accounts for its equity investments
under either the cost method or the equity method considering if the Company has the right and is able to exercise significant
influences over the investees. Under the cost method, investments are initially carried at cost. The
Company recognizes an impairment charge, equal to the difference between the cost basis and the fair value of the investment, when
a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. A variety of factors
are considered when determining if a decline in fair value below carrying value is other than temporary, including, among others,
the financial condition and prospects of the investee.



The investments in entities over which
the Company has the ability to exercise significant influence are accounted for using the equity method. Significant influence
is generally considered to exist when the Company has an ownership interest in the voting stock of the investee between 20% and
50%. Other factors, such as representation on the investee’s Board of Directors and the impact of commercial arrangements,
are also considered in determining whether the equity method of accounting is appropriate.



Under the equity method, original investments
are recorded at cost and adjusted by the Company's share of undistributed earnings or losses of these entities, by the amortization
of any basis difference between the amount of the Company's investment and its share of the net assets of the investee, and by
dividend distributions or subsequent investments. Unrealized inter-company profits and losses with equity investees are eliminated.
An impairment charge, being the difference between the carrying amount and the fair value of the equity investee, is recognized
in the consolidated statements of comprehensive income when the decline in value is considered other than temporary.



The impairment loss on investment in cost
investees for the years ended June 30, 2011, 2012 and 2013 were $165,948, nil and nil, respectively. There was no impairment loss
on investments in equity investees for the years ended June 30, 2011, 2012 and 2013.



Capitalization of interest



Interest incurred on borrowings for the
Company’s construction of facilities and assembly line projects during the active construction period are capitalized. The
capitalization of interest ceases once a project is substantially complete. The amount to be capitalized is determined by applying
the weighted-average interest rate of the Company’s outstanding borrowings to the average amount of accumulated capital expenditures
for assets under construction during the year and is added to the cost of the underlying assets and amortized over their respective
useful lives.



Income per share



Income per share is computed in accordance
with ASC 260, Earnings Per Share (“ASC 260”). Basic income per ordinary share is computed by dividing income
(loss) attributable to holders of ordinary shares by the weighted average number of ordinary shares outstanding during the period.
Diluted income per ordinary share reflects the potential dilution that could occur if securities or other contracts to issue ordinary
shares were exercised or converted into ordinary shares.



Share-based compensation



The Company accounts for share-based compensation
in accordance with ASC 718, Compensation-Stock Compensation (“ASC 718”). The Company recognizes compensation
cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service
period for the entire award. The compensation cost for each vesting tranche in an award subject to performance vesting is recognized
ratably from the service inception date to the vesting date for each tranche. To the extent the required service and performance
conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expense relating
to those awards are reversed. ASC 718 requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent period if actual forfeitures differ from initial estimates.



F-18







Fair value measurements



The Company has adopted ASC 820, Fair
Value Measurements and Disclosures(“ASC 820”), which defines fair value, establishes a framework for measuring
fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements,
but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information.
It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may
be used to measure fair value and include the following:



| | Level 1     - | Quoted prices in active markets for identical assets
or liabilities.
| | ------------- | --------------------------------------------------------------------

| | Level 2     - | Inputs other than Level 1 that are observable, either
directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active;
or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets
or liabilities.
| | ------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Level 3     - | Unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the assets or liabilities.
| | ------------- | -----------------------------------------------------------------------------------------------------------------------------------------------



Classification within the hierarchy is
determined based on the lowest level of input that is significant to the fair value measurement.



ASC 820 describes three main approaches
to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market
approach uses prices and other relevant information generated from market transactions involving identical or comparable assets
or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement
is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount
that would currently be required to replace an asset.



Leases



Leases have been classified as either capital
or operating leases. Leases that transfer substantially all the benefits and risks incidental to the ownership of assets are accounted
for as if there was an acquisition of an asset and incurrence of an obligation at the inception of the lease. All other leases
are accounted for as operating leases wherein rental payments are expensed as incurred.



Lessor



Minimum contractual rental from leases
are recognized on a straight-line basis over the non-cancelable term of the lease. With respect to a particular lease, actual amounts
billed in accordance with the lease during any given period may be higher or lower than the amount of rental revenue recognized
for the period. Straight-line rental revenue commences when the customer assumes control of the leased premises. Accrued straight-line
rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with
lease agreements. Contingent rental revenue is accrued when the contingency is removed.



Concentration of risks



Concentration of credit risk



Assets that potentially subject the Company
to significant concentration of credit risk primarily consist of cash and cash equivalents, time deposits with original maturities
over three months, restricted cash,accounts receivable, other receivables and amounts
due from related parties. The maximum exposure of such assets to credit risk is their carrying amounts as of the balance
sheet date. As of June 30, 2013, substantially all of the Company’s cash and cash equivalents and time deposits with original
maturities exceeding three months were managed by financial institutions located in the PRC, Singapore, Malaysia and Dubai, which
management believes are of high credit quality. Accounts receivable, other receivables and amounts due
from related parties are typically unsecured and the risk with respect to accounts receivable is mitigated by credit evaluations
the Company performs on its customers and its ongoing monitoring process of outstanding balances.



The Company has no customer that individually
comprised 10% or more of the outstanding balance of accounts receivable as of June 30, 2012 and 2013.



Concentration of business and economic
risk



A majority of the Company’s net revenue
and net income are derived in the PRC. The Company’s operations may be adversely affected by significant political, economic
and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than 20 years,
no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly
altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting
the PRC’s political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of
economic reforms will be consistent or effective.



F-19







Concentration of currency convertibility
risk



A majority of the Company’s businesses
are transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either
through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted
by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory
institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed
contracts.



Concentration of foreign currency exchange rate risk



The Company’s exposure to
foreign currency exchange rate risk primarily relates to monetary assets or liabilities held in foreign currencies. Since
July 21, 2005, the RMB has been permitted to fluctuate within a narrow and managed band against a basket of certain foreign
currencies. On June 19, 2010, the People’s Bank of China announced the end of the RMB’s de facto peg to USD, a
policy which was instituted in late 2008 in the face of the global financial crisis, to further reform the RMB exchange rate
regime and to enhance the RMB’s exchange rate flexibility. The exchange rate floating bands will remain the same as
previously announced in the inter-bank foreign exchange market. The depreciation of the US dollars against RMB was
approximately 4.64%, 2.22% and 2.31% for the years ended June 30, 2011, 2012 and 2013 respectively. Any significant
revaluation of RMB may materially and adversely affect the Company’s cash flows, revenues, earnings and financial
position, and the value of its shares in US dollars. An appreciation of RMB against the US dollar would result in foreign
currency translation losses when translating the net assets of the Company from RMB into US dollar.



For the years ended June 30, 2011, 2012
and 2013, the net foreign currency translation gains resulting from the translation of RMB and SGD functional currencies to the
U.S. dollar reporting currency recorded in other comprehensive income was $9,308,905, $5,910,090 and $4,193,473, respectively.



Recent accounting pronouncements



In February 2013, the FASB issued ASU 2013-02,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,which adds new disclosure requirements
for items reclassified out of accumulated other comprehensive income (“AOCI”). The standard does not amend any existing
requirement for reporting net income or other comprehensive income (“OCI”) in the financial statements. However, it
requires an entity to provide information about the amounts reclassified out of AOCI by component. The objective of this ASU is
to help entities improve the transparency of changes in OCI and items reclassified out of AOCI in their financial statements. The
standard is effective for annual reporting periods beginning after December 15, 2012 and should be applied prospectively. Early
adoption is permitted. The Company will adopt ASU 2013-02 on July 1, 2013 and does not expect the adoption of this standard to
have a material effect on its consolidated financial statements.



In March 2013, the FASB issued ASU 2013-05,
Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of
Assets within a Foreign Entity or of an Investment in a Foreign Entity, which specifies that the
entire amount of cumulative translation adjustments should be released into earnings when an entity ceases to have a controlling
financial interest in a subsidiary or group of assets within a consolidated foreign entity and when the sale or transfer results
in the complete or substantially complete liquidation of the investment in the foreign entity.The objective of ASU 2013-05
is to resolve the diversity in practice as it relates to the release of the cumulative translation adjustment into net income upon
de-recognition of a subsidiary or group of assets within a foreign entity. The standard is effective for annual reporting
periods beginning after December 15, 2013, and interim periods there in. The standard should be applied prospectively to derecognized
events occurring after the effective date. Early adoption is permitted. The Company will adopt ASU 2013-02 on July 1, 2014 and
does not expect the adoption of this standard to have a material effect on its consolidated financial statements.



F-20







In July 2013, the FASB issued ASU 2013-11,
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax loss, or a Tax Credit Carryforward
Exists, which specifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented
in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss,
or a tax credit carryforward, with certain exceptions. The objective of this ASU is to eliminate diversity in practice. The standard
is effective for annual reporting periods beginning after December 15, 2013 and interim periods within. The standard should be
applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted.
The Company will adopt ASU 2013-11 on July 1, 2014 and does not expect the adoption of this standard to have a material effect
on its consolidated financial statements.



| | NOTE 3 - | BUSINESS COMBINATIONS
| | -------- | ---------------------



Acquisition of Bond





On April 1, 2013, the Company acquired
100% equity interest of the Bond Group, a Singapore headquartered mechanical and electrical solution service contractor of residential,
commercial or industrial building construction and renovation projects in Malaysia and Singapore. The nominal purchase price was
$73,000,000, combined of cash and ordinary shares, with a total fair value of approximately $73,804,695 as of the acquisition date,
which consisted of:



| | 1) | Cash consideration of $36,500,000, of which $16,390,000 was paid in April 2013, $5,510,000 was
paid in September 2013, and $14,600,000 is payable in September 2014;as of the acquisition date, the cash consideration installments
to be made in September 2013 and September 2014 had present values of $5,383,270 and $13,286,000, respectively;
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Share consideration consisting of 1,407,907 ordinary shares with a market value of $16,908,964
on April 1, 2013, which were issued and transferred by the Company on May 30, 2013;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | Incentive shares issuable to the selling shareholders (“Incentive Shares for
                                                           Bond”) in two equal installments with fair values of $10,940,893 and $10,895,568, respectively. Issuance of Incentive
                                                           Shares for Bond are subject to Bond achieving pre-determined net income performance targets. The Incentive Shares for
                                                           Bond, if earned, are to be issued within 30 days after the filing of the Company’s annual report on Form 20-F for the
                                                           fiscal years 2014 and 2015, respectively. The net income performance targets for the Incentive Shares for Bond are as
                                                           follows:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





|                                                              |  |   | First installment                                                                                      |  |   | Second installment                                                                                    
|------------------------------------------------------------- |  | - | ------------------------------------------------------------------------------------------------------ |  | - | ------------------------------------------------------------------------------------------------------
|Basis of performance target                                   |  |   | Net income for the year endingDecember 31, 2013                                                        |  |   | Net income for the year endingDecember 31, 2014                                                       
|Target net income                                             |  | $ | 8,806,044                                                                                              |  | $ | 10,567,252                                                                                            
|Nominal value of shares                                       |  | $ | 10,950,000                                                                                             |  | $ | 10,950,000                                                                                            
|Referencing share price to achievethe nominal value of shares |  |   | Average closing price of theCompany’s shares during thetrading days from October 1to December 31, 2013 |  |   | Average closing price of theCompany’s shares during thetrading days from October 1to December 31, 2014





| | 4) | Premium shares issuable to the selling shareholders (“Premium Shares for Bond”) are
capped at 15% of the total Incentive Shares for Bond, or $3.3 million, which are subject to Bond achieving a pre-determined compound
annual growth rate (“CAGR”) performance target of more than 20% for the two-year period from January 1, 2013 to December
31, 2014. The Premium Shares for Bond, if earned, are to be delivered within 30 days after the filing of the Company’s annual
report on Form 20-F for the fiscal year 2015. The CAGR performance targets for the Premium Shares for Bond for the two-year period
are as follows:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|CAGR performance target: |  | Premium shares issuable            
|------------------------ |  | -----------------------------------
|                         |  |                                    
|21%                      |  | 3%
    of Incentive Sharesfor Bond 
|22%                      |  | 6%
    of Incentive Sharesfor Bond 
|23%                      |  | 9%
    of Incentive Sharesfor Bond 
|24%                      |  | 12%
    of Incentive Sharesfor Bond
|25% and above            |  | 15%
    of Incentive Sharesfor Bond
|                         |  |                                    



F-21







As the Incentive Shares for
Bond and Premium Shares for Bond are not subject to any service condition of the selling shareholders, they were determined
to be within the scope of ASC 820 (note 16). In accordance with ASC 815,“Derivatives and Hedging.”
(“ASC 815”), the Incentive Shares for Bond and the Premium shares for Bond are not
considered fixed-for-fixed and therefore, are classified as liabilities as at June 30, 2013. Until the contingency is resolved,
the change in fair value of the Incentive Shares for Bond and Premium Shares for Bond are recognized
in earnings.



The acquisition date fair value of the
considerations as at the acquisition date is summarized in the below table:



|Considerations                          |  |  | Fair value as at April 1, 2013 |           
|--------------------------------------- |  |  | ------------------------------ | ----------
|                                        |  |  |                                |           
|1)   Cash
    consideration (i)         |  |  | $                              | 35,059,270
|2)   Ordinary shares                    |  |  |                                | 16,908,964
|3)   Incentive Shares
    for Bond (ii) |  |  |                                | 21,836,461
|4)   Premium Shares for Bond (iii)      |  |  |                                | -         
|                                        |  |  |                                |           
|Total consideration                     |  |  | $                              | 73,804,695



(i) The cash consideration installments to be made in
September 2013 and September 2014 had present values of $5,435,451 and $13,542,450, and were recorded as current portion of
acquisition-related consideration liabilities, and non-current portion of the acquisition-related consideration liabilities,
respectively, as at June 30, 2013.



(ii) The fair value of the Incentive Shares for Bond was $22,691,010 as at June 30, 2013, and was recorded as non-current portion
of acquisition-related consideration liabilities.



(iii) The probability of achieving the growth rate performance
target set for Premium Shares for Bond was assessed to be not more than likely.



The Company has completed the valuations
necessary to assess the fair value of the tangible and intangible assets acquired and liabilities assumed, resulting from which
the amount of goodwill was determined and recognized as of the acquisition date. The following table summarizes the estimated
fair values of the assets acquired and liabilities assumed as of the date of acquisition:



|                                                         |  | April 1, 2013 |           
|-------------------------------------------------------- |  | ------------- | ----------
|Cash and cash equivalents                                |  | $             | 4,460,439 
|Time deposits with original maturities over three months |  |               | 7,486,463 
|Restricted cash                                          |  |               | 242,088   
|Accounts receivable                                      |  |               | 9,966,206 
|Cost and estimated earnings in excess of billings        |  |               | 6,340,396 
|Other receivables                                        |  |               | 883,441   
|Advances to suppliers                                    |  |               | 110,285   
|Inventories                                              |  |               | 133,450   
|Deferred tax assets                                      |  |               | 104,522   
|Assets held for sale                                     |  |               | 2,951,017 
|Property, plant and equipment                            |  |               | 4,891,482 
|Prepaid land leases                                      |  |               | 5,884,196 
|Intangible assets                                        |  |               | 14,359,346
|Investments in equity investees                          |  |               | 260,611   
|Total identifiable assets acquired                       |  |               | 58,073,942
|                                                         |  |               |           
|Short-term bank loans                                    |  |               | 5,532,205 
|Accounts payable                                         |  |               | 8,654,868 
|Deferred revenue                                         |  |               | 2,315,102 
|Income tax payable                                       |  |               | 1,015,081 
|Other tax payable                                        |  |               | 141,731   
|Accrued liabilities                                      |  |               | 314,071   
|Deferred tax liabilities                                 |  |               | 3,790,788 
|Long-term bank loans                                     |  |               | 2,256,524 
|Total liabilities assumed                                |  |               | 24,020,370
|                                                         |  |               |           
|Net identifiable assets acquired                         |  |               | 34,053,572
|                                                         |  |               |           
|Goodwill                                                 |  |               | 39,751,123
|Net assets acquired                                      |  | $             | 73,804,695



F-22







The fair value of accounts receivable
acquired was $9,966,206. Gross contractual accounts receivable acquired totaled $10,720,334 and the Company’s best estimate
of the contractual cash flows not expected to be collected at acquisition date totaled $754,128.



The identified intangible assets include
acquired customer relationships of $2,900,056, with an estimated useful life of 57 months, and acquired order backlogs of $11,459,290,
with an estimated useful life of 21 to 33 months. Intangible assets were valued using the multi-period excess earnings method.



The goodwill, which is not tax deductible,
is primarily attributable to synergies expected to be achieved from the acquisition, and is assigned to the mechanical and electrical
solution segment.



The Company recognized $547,529 of acquisition-related
cost in general and administrative expenses in the statement of comprehensive income for the year ended June 30, 2013.



For the year ended June 30, 2013, Bond
contributed approximately $22,794,659 to the Company’s total net revenues, and approximately $1,791,123 to the Company’s
net income.



The following unaudited pro forma consolidated
financial information reflects the results of the operations of the Company for the years ended June 30, 2012 and 2013, as if the
acquisition of Bond described above had been completed as of July 1, 2011. The pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of what operating results would have been had the acquisition of Bond actually
taken place on the date indicated and may not be indicative of future operating results. These amounts have been calculated after
applying the Company's accounting policies and the pro forma adjustments are based upon available information and certain assumptions
that management believes are reasonable.



|                                                                 |  | Year ended June 30, |            
|---------------------------------------------------------------- |  | ------------------- | -----------
|                                                                 |  | 2012                |            
|                                                                 |  | (Unaudited)         |            
|Total revenues                                                   |  | $                   | 364,217,246
|Net income attributable to Hollysys Automation Technologies Ltd. |  |                     | 60,108,836 
|Net income per share:                                            |  |                     |            
|Basic                                                            |  |                     | 1.08       
|Diluted                                                          |  | $                   | 1.08       



Acquisition of Concord



On July 1, 2011, the Company acquired 100%
equity interest of Concord, a Singapore headquartered electrification related system and service provider to rail and industrial
companies in Southeast Asia and the Middle East. The consideration was a combination of cash and ordinary shares, with a total
value of approximately $42,910,784, which consisted of:





| | 1) | Cash of SGD41,500,000 (approximately $33,789,285), which was paid in two equal installments of
SGD20,750,000 each in May 2011 and July 2011, respectively;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) | 1,006,788 ordinary shares of the Company, with an acquisition date fair value of approximately
$9,121,499 issued on September 2, 2011.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------



The Company also granted an aggregate of
1,510,181 incentive shares (“Incentive Shares for Concord”) to the two selling shareholders of Concord which were subject
to service conditions and Concord achieving pre-determined net income performance targets. As the Incentive Shares for Concord
are subject to service conditions, they were determined to be within the scope of ASC 718 (see note 18).



F-23







The following table summarizes the fair value of the assets
acquired and liabilities assumed at the date of acquisition on July 1, 2011.



|                                    |  | July 1, 2011 |           
|----------------------------------- |  | ------------ | ----------
|Cash and cash equivalents           |  | $            | 11,597,787
|Accounts receivable                 |  |              | 8,325,504 
|Other receivables                   |  |              | 486,028   
|Advances to suppliers               |  |              | 485,583   
|Inventories                         |  |              | 536,125   
|Prepaid expenses                    |  |              | 48,098    
|Property, plant and equipment       |  |              | 4,009,933 
|Intangible assets                   |  |              | 1,957,253 
|Total identifiable assets acquired  |  |              | 27,446,311
|                                    |  |              |           
|Accounts payable                    |  |              | 4,379,465 
|Deferred revenue                    |  |              | 696,452   
|Accrued payroll and related expense |  |              | 329,946   
|Income tax payable                  |  |              | 2,284,070 
|Accrued liabilities                 |  |              | 3,236,106 
|Deferred tax liabilities            |  |              | 553,432   
|Long-term bank loans                |  |              | 644,939   
|Total liabilities assumed           |  |              | 12,124,410
|                                    |  |              |           
|Net identifiable assets acquired    |  |              | 15,321,901
|                                    |  |              |           
|Goodwill                            |  |              | 27,588,883
|Net assets acquired                 |  | $            | 42,910,784



The fair value of accounts receivable
acquired was $8,325,504, the same as the gross contractual accounts receivable acquired.



The identified intangible assets include
acquired customer relationships of $529,162, with an estimated useful life of 5 years, and acquired order backlogs of $1,428,091,
with an estimated useful life of 2 years. Intangible assets were valued using the multi-period excess earnings method.



The goodwill, which is not tax deductible,
is primarily attributable to synergies expected to be achieved from the acquisition, and is assigned to the rail transportation
and miscellaneous segments.



The Company recognized $351,836 of acquisition-related
cost in general and administrative expenses in the statement of comprehensive income for the year ended June 30, 2012.



For the year ended June 30, 2012, Concord
contributed approximately $24,237,402 to the Company’s total net revenues, and approximately $1,936,780 to the Company’s
net income.



The following unaudited pro forma consolidated
financial information reflects the results of the operations of the Company for the years ended June 30, 2010 and 2011, as if the
acquisition of Concord described above had been completed as of July 1, 2009. The pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of what operating results would have been had the acquisition of Concord actually
taken place on the date indicated and may not be indicative of future operating results. These amounts have been calculated after
applying the Company’s accounting policies and the pro forma adjustments are based upon available information and certain assumptions
that management believes are reasonable.



|                                                                 |  | Year ended June 30, |            
|---------------------------------------------------------------- |  | ------------------- | -----------
|                                                                 |  | 2010                |            
|                                                                 |  | (Unaudited)         |            
|                                                                 |  |                     |            
|Total revenues                                                   |  | $                   | 199,341,604
|Net income attributable to Hollysys Automation Technologies Ltd. |  |                     | 33,225,194 
|                                                                 |  |                     |            
|Net income per share:                                            |  |                     |            
|Basic                                                            |  |                     | 0.65       
|Diluted                                                          |  | $                   | 0.64       



F-24







| | NOTE 4 - | INVENTORIES
| | -------- | -----------



Components of inventories are as follows:



|                      |  | June 30, |           
|--------------------- |  | -------- | ----------
|                      |  | 2012     |           
|                      |  |          |           
|Raw materials         |  | $        | 7,630,420 
|Work in progress      |  |          | 5,242,369 
|Finished goods        |  |          | 13,869,692
|Low value consumables |  |          | 2,744     
|                      |  |          |           
|                      |  | $        | 26,745,225



As of June 30, 2012 and 2013, balances of $1,094,650 and $8,492,604, respectively, were costs incurred
for specific anticipated contracts for which the recoverability were evaluated to be probable.



| | NOTE 5 - | ACCOUNTS RECEIVABLE
| | -------- | -------------------



|                                |  | June 30, |            
|------------------------------- |  | -------- | -----------
|                                |  | 2012     |            
|                                |  |          |            
|Accounts receivable             |  | $        | 150,877,355
|Allowance for doubtful accounts |  |          | (14,287,361
|                                |  |          |            
|                                |  | $        | 136,589,994



The movements in allowance for doubtful
accounts are as follows:



|                             |  | June 30, |           
|---------------------------- |  | -------- | ----------
|                             |  | 2011     |           
|                             |  |          |           
|Balance at beginning of year |  | $        | 8,408,318 
|Additions                    |  |          | 2,731,820 
|Written off                  |  |          | (903,768  
|Exchange difference          |  |          | 455,440   
|                             |  |          |           
|Balance at end of year       |  | $        | 10,691,810



| | NOTE 6 - | COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS
| | -------- | --------------------------------------------------



|                                                     |  | June 30, |             
|---------------------------------------------------- |  | -------- | ------------
|                                                     |  | 2012     |             
|                                                     |  |          |             
|Contract costs incurred plus estimated earnings, net |  | $        | 573,517,664 
|Less: progress billings                              |  |          | (458,356,428
|                                                     |  |          |             
|                                                     |  | $        | 115,161,236 



As of June 30, 2012 and 2013, balances
of $16,762,243 and $16,548,951, respectively, were related to contracts which are completed but are still within the warranty period,
of which an amount of $676,318 and $694,786, respectively, was expected to be collected after one year.



F-25









| | NOTE 7 - | PROPERTY, PLANT AND EQUIPMENT
| | -------- | -----------------------------



A summary of property, plant and equipment
is as follows:



|                               |  | June 30, |            
|------------------------------ |  | -------- | -----------
|                               |  | 2012     |            
|                               |  |          |            
|Buildings                      |  | $        | 53,018,610 
|Machinery                      |  |          | 4,758,477  
|Software                       |  |          | 3,573,146  
|Vehicles                       |  |          | 1,607,261  
|Electronic and other equipment |  |          | 16,991,624 
|Construction in progress       |  |          | 3,648,878  
|                               |  |          | 83,597,996 
|                               |  |          |            
|Less: Accumulated depreciation |  |          | (20,061,350
|                               |  |          |            
|                               |  | $        | 63,536,646 



Total property, plant and equipment with
carrying values of nil and $1,125,846 were pledged to secure short-term bank loans (note 14) as of June 30, 2012 and 2013, respectively.



Buildings with a total carrying value of
 $35,250,574 and $35,101,837 were pledged to secure long-term bank loans as of June 30, 2012 and 2013, respectively. Mortgages
of buildings and vehicles with carrying values of $569,171 and $4,549,424 secure long-term bank loans as of June 30, 2012 and 2013,
respectively (note 15).



Construction in progress consists of capital
expenditures and capitalized interest charges relating to the construction of facilities and assembly lines projects. Interest
of $310,551, $102,577 and $418,715 during the period of construction for the years ended June 30, 2011, 2012 and 2013, respectively,
have been capitalized.



The depreciation for the years ended June
30, 2011, 2012 and 2013 were $4,334,113, $6,054,199 and $6,223,644, respectively.



Assets leased to others under operating leases



|                                              |  | June 30, |  
|--------------------------------------------- |  | -------- | -
|                                              |  | 2012     |  
|                                              |  |          |  
|Buildings leased to others – at original cost |  | $        | -
|Less: accumulated depreciation                |  |          | -
|Buildings leased to others - net              |  |          | -



The buildings leased to others are included under buildings
in the property tabled above. At June 30, 2013, scheduled minimum rental payments to be received for buildings leased to
others were:



|Year ending June 30, |  |   |          
|-------------------- |  | - | ---------
|2014                 |  | $ | 1,163,636
|2015                 |  |   | 1,438,254
|2016                 |  |   | 1,481,402
|2017                 |  |   | 1,525,844
|2018                 |  |   | 1,571,619





F-26







| | NOTE 8 - | PREPAID LAND LEASES
| | -------- | -------------------



A summary of prepaid land leases is as follows:



|                               |  | June 30, |          
|------------------------------ |  | -------- | ---------
|                               |  | 2012     |          
|                               |  |          |          
|Prepaid land leases            |  | $        | 7,818,674
|Less: Accumulated amortization |  |          | (948,598 
|                               |  |          |          
|                               |  | $        | 6,870,076



The amortization for the years ended June 30, 2011, 2012 and
2013 were $134,479, $171,204 and $157,504, respectively.



Of the total prepaid land leases, nil and
$2,118,147 are pledged to secure the short-term bank loans (note 14); $5,291,525 and $5,297,220 as of June 30, 2012 and 2013, respectively,
are pledged to secure the long-term bank loans, nil and $5,506,517 as of June 30, 2012 and 2013, respectively, are mortgaged to
secure the long-term bank loans (note 15).



The annual amortization of prepaid land
leases for each of the five succeeding years is:



|Year ending June 30, |  |   |        
|-------------------- |  | - | -------
|2014                 |  | $ | 286,604
|2015                 |  |   | 286,604
|2016                 |  |   | 286,604
|2017                 |  |   | 286,604
|2018                 |  |   | 286,604



| | NOTE 9 - | ASSETS HELD FOR SALE
| | -------- | --------------------



As at June 30, 2013, assets held for sale
of $2,876,054, represented residential apartments located in Malaysia acquired through the acquisition of Bond. The Company plans
to dispose these residential apartments after the acquisition.



| | NOTE 10 - | ACQUIRED INTANGIBLE ASSETS, NET
| | --------- | -------------------------------



|                       |  | June 30,             |          
|---------------------- |  | -------------------- | ---------
|                       |  | 2012                 |          
|                       |  | Gross carrying value |          
|                       |  |                      |          
|Customer relationships |  | $                    | 529,162  
|Order backlog          |  |                      | 1,428,091
|                       |  | $                    | 1,957,253



The intangible assets were related to Concord
and Bond, which was acquired on July 1, 2011 and April 1, 2013, respectively. The amortization for the years ended June 30, 2011,
2012 and 2013 were nil, $1,362,282 and $2,847,773, respectively. Estimated amortization expense relating to the existing intangible
assets for each of next five years is as follows:



|Year ending June 30, |  |   |           
|-------------------- |  | - | ----------
|2014                 |  | $ | 6,656,092 
|2015                 |  |   | 3,210,629 
|2016                 |  |   | 1,052,077 
|2017                 |  |   | 599,198   
|2018                 |  |   | 299,600   
|                     |  | $ | 11,817,596



F-27







| | NOTE 11 - | GOODWILL
| | --------- | --------



The changes in the carrying amount of goodwill are as follows:



|                             |  | June 30, |           
|---------------------------- |  | -------- | ----------
|                             |  | 2012     |           
|                             |  |          |           
|Balance at beginning of year |  | $        | -         
|Goodwill acquired (note 3)   |  |          | 27,588,883
|Translation adjustments      |  |          | -         
|                             |  |          |           
|Balance at end of year       |  | $        | 27,588,883



| | NOTE 12 - | INVESTMENTS IN EQUITY AND COST INVESTEES
| | --------- | ----------------------------------------



The following long-term investments were accounted for under
either the equity method or the cost method as indicated:



|June 30, 2013                                     |  | Interest held |       |   | Long-term investment, at cost, less impairment |   |           | Share of undistributed profits  (losses) |  |   | Advance to investee company |   |  | Total |       
|------------------------------------------------- |  | ------------- | ----- | - | ---------------------------------------------- | - | --------- | ---------------------------------------- |  | - | --------------------------- | - |  | ----- | ------
|                                                  |  |               |       |   |                                                |   |           |                                          |  |   |                             |   |  |       |       
|Equity method                                     |  |               |       |   |                                                |   |           |                                          |  |   |                             |   |  |       |       
|China Techenergy Co., Ltd.                        |  |               | 40.00 | % |                                                | $ | 5,826,468 |                                          |  | $ | 2,917,828                   |   |  | $     | 47,713
|Beijing Hollysys Electric Motor Co., Ltd.         |  |               | 40.00 | % |                                                |   | 857,161   |                                          |  |   | 2,863,374                   |   |  |       | -     
|Beijing IPE Biotechnology Co., Ltd. (“IPE”)       |  |               | 23.39 | % |                                                |   | 1,596,186 |                                          |  |   | 1,666,155                   |   |  |       | -     
|New Huake Electronic Technology Co., Ltd.         |  |               | 37.50 | % |                                                |   | 242,770   |                                          |  |   | (242,770                    | ) |  |       | -     
|Beijing Hollysys Machine Automation Co., Ltd.     |  |               | 30.00 | % |                                                |   | 485,539   |                                          |  |   | (450,675                    | ) |  |       | -     
|Southcon Development Sdn. Bhd.                    |  |               | 30.00 | % |                                                |   | 283,117   |                                          |  |   | (29,135                     | ) |  |       | -     
|                                                  |  |               |       |   |                                                | $ | 9,291,241 |                                          |  | $ | 6,724,777                   |   |  | $     | 47,713
|                                                  |  |               |       |   |                                                |   |           |                                          |  |   |                             |   |  |       |       
|Cost method                                       |  |               |       |   |                                                |   |           |                                          |  |   |                             |   |  |       |       
|Shenhua Hollysys Information Technology Co., Ltd. |  |               | 20.00 | % |                                                | $ | 1,541,005 |                                          |  | $ | -                           |   |  | $     | -     
|Zhongjijing Investment Consulting Co., Ltd.       |  |               | 5.00  | % |                                                |   | 323,693   |                                          |  |   | -                           |   |  |       | -     
|Heilongjiang Ruixing Technology Co., Ltd.         |  |               | 8.31  | % |                                                |   | 1,754,003 |                                          |  |   | -                           |   |  |       | -     
|Zhejiang Sanxin Engineering Co., Ltd.             |  |               | 6.00  | % |                                                |   | 97,107    |                                          |  |   | -                           |   |  |       | -     
|                                                  |  |               |       |   |                                                | $ | 3,715,808 |                                          |  | $ | -                           |   |  | $     | -     



F-28







|June 30, 2012                                     |  | Interest 
held |       |   | Long-term 
investment, at 
cost, less 
impairment |   |           | Share of 
undistributed 
profits (losses) |  |   | Advance 
to investee 
company |   |  | Total |       
|------------------------------------------------- |  | -------------- | ----- | - | ------------------------------------------------- | - | --------- | ----------------------------------------- |  | - | ----------------------------- | - |  | ----- | ------
|                                                  |  |                |       |   |                                                   |   |           |                                           |  |   |                               |   |  |       |       
|Equity method                                     |  |                |       |   |                                                   |   |           |                                           |  |   |                               |   |  |       |       
|China Techenergy Co., Ltd.                        |  |                | 40.00 | % |                                                   | $ | 5,691,790 |                                           |  | $ | 943,733                       |   |  | $     | 46,610
|Beijing Hollysys Electric Motor Co., Ltd.         |  |                | 40.00 | % |                                                   |   | 837,348   |                                           |  |   | 2,421,214                     |   |  |       | -     
|Beijing IPE Biotechnology Co., Ltd.               |  |                | 23.39 | % |                                                   |   | 1,559,290 |                                           |  |   | 1,354,973                     |   |  |       | -     
|New Huake Electronic Technology Co., Ltd.         |  |                | 37.50 | % |                                                   |   | 237,158   |                                           |  |   | (237,158                      | ) |  |       | -     
|Beijing Hollysys Machine Automation Co., Ltd.     |  |                | 30.00 | % |                                                   |   | 474,316   |                                           |  |   | (248,345                      | ) |  |       | -     
|                                                  |  |                |       |   |                                                   | $ | 8,799,902 |                                           |  | $ | 4,234,417                     |   |  | $     | 46,610
|                                                  |  |                |       |   |                                                   |   |           |                                           |  |   |                               |   |  |       |       
|Cost method                                       |  |                |       |   |                                                   |   |           |                                           |  |   |                               |   |  |       |       
|Shenhua Hollysys Information Technology Co., Ltd. |  |                | 20.00 | % |                                                   | $ | 1,505,385 |                                           |  | $ | -                             |   |  | $     | -     
|Zhongjijing Investment Consulting Co., Ltd.       |  |                | 5.00  | % |                                                   |   | 316,211   |                                           |  |   | -                             |   |  |       | -     
|Heilongjiang Ruixing Technology Co., Ltd.         |  |                | 8.31  | % |                                                   |   | 1,080,179 |                                           |  |   | -                             |   |  |       | -     
|Zhejiang Sanxin Engineering Co., Ltd.             |  |                | 6.00  | % |                                                   |   | 94,863    |                                           |  |   | -                             |   |  |       | -     
|                                                  |  |                |       |   |                                                   | $ | 2,996,638 |                                           |  | $ | -                             |   |  | $     | -     



In April 2011, a third party invested RMB30,000,000 (equivalent to $4,525,843) into IPE. As a result, the Company’s equity interest in IPE was diluted from 28.035%
to 23.39%, while the share of net assets from IPE increased by $756,619. This increase in share of net assets from IPE was recognized
as gain in earnings for the issuance of shares by an equity investee in the consolidated statements of comprehensive income during
the year ended June 30, 2011.



In August 2011, the Company entered into
an agreement to dispose all of its 20% interest in Hollysys Equipment Technology Co., Ltd., for cash consideration of RMB280,700
(equivalent to $44,381), and a loss of $3,039 was recognized in gain on disposal of investments in equity investees in the consolidated
statements of comprehensive income for the year ended June 30, 2012.



In November 2011, the Company entered into
an agreement to dispose of 10% of its existing 50% equity interest in China Techenergy Co., Ltd. to the other equity interest owner,
for cash consideration of RMB27,800,000 (equivalent to $4,395,326), and a gain of $2,047,016 was recognized in gain on disposal
of investments in equity investees in the consolidated statements of comprehensive income for the year ended June 30, 2012. Upon
the disposal, the Company held a 40% equity interest of China Techenergy Co., Ltd.



In February 2012, Beijing Hollysys Machine
Automation Co., Ltd. was established with a registered capital of RMB10,000,000 (equivalent to $1,588,310), of which RMB3,000,000
(equivalent to $476,493) was injected by the Company. The Company held 30% interests in Hollysys Machine, and accounted for it
under the equity method. Beijing Hollysys Machine Automation Co., Ltd. mainly engages in sales of programmable logic controller
products.



F-29







In April 2013, the Company newly held a
30% equity interest of Southcon Development Sdn. Bhd., which was brought forward from the acquisition of Bond.



For the year
ended June 30, 2013, the Company received dividend income of $833,567 from Heilongjiang Ruixing Technology Co., Ltd., an
investee which is accounted for by the Company under the cost method.



The Company holds a 20% equity interest
of Shenhua Hollysys Information Technology Co. Ltd. (“Shenhua Hollysys”), but uses the cost method to account for the
investment because:

1) Only one out of the five board representatives
is elected by the Company and the remaining 80% equity interest is held by a large state-owned company which, in the view of the
management, operates Shenhua Hollysys without regards to the views of the Company;

2) Key management of Shenhua Hollysys including
the chief executive officer, chief financial officer, chief operating officer and head of accounting are all appointed by the other
shareholder.

3) Based on the articles of association,
there are no matter that requires unanimous approval of all shareholders and there are no participating rights for minority shareholders.



The impairment loss on investment in cost
investees for the years ended June 30, 2011, 2012 and 2013 were $165,948, nil and nil, respectively. There was no impairment loss
on investments in equity investees for the years ended June 30, 2011, 2012 and 2013.



| | NOTE 13 - | WARRANTY LIABILITIES
| | --------- | --------------------



|                                              |  | June 30, |           
|--------------------------------------------- |  | -------- | ----------
|                                              |  | 2012     |           
|                                              |  |          |           
|Beginning balance                             |  | $        | 2,798,800 
|Expense accrued                               |  |          | 3,031,835 
|Expense incurred                              |  |          | (2,319,630
|Exchange difference                           |  |          | 64,915    
|                                              |  |          |           
|Closing balance                               |  | $        | 3,575,920 
|Less: current portion of warranty liabilities |  |          | 3,575,920 
|Long-term warranty liabilities                |  | $        | -         



| | NOTE 14 - | SHORT-TERM BANK LOANS
| | --------- | ---------------------



On June 30, 2013, the Company’s short-term
bank borrowings consisted of revolving bank loans of $8,329,263 from several banks, which were subject to annual interest rates
ranging from 2.84% to 5.97%, with a weighted average interest rate of 4.07%, of which $4,645,907 was collateralized by a pledge
of guarantee amounting to $4,855,390 with a restricted cash of the same amount deposited in the bank. The remaining borrowings
are secured by the pledge of guarantee amounting to $1,334,025 with restricted cash, building and prepaid land leases with carrying
values of $1,125,846 and $2,118,147 as of June 30, 2013, respectively. For the years ended June 30, 2011, 2012, and 2013, interest
expenses on short-term bank loans amounted to $117,507, $557,333 and $391,785, respectively.



| | NOTE 15 - | LONG-TERM BANK LOANS
| | --------- | --------------------



|                      |  |  |       |  | June 30, |  
|--------------------- |  |  | ----- |  | -------- | -
|                      |  |  |       |  | 2012     |  
|                      |  |  |       |  |          |  
|RMB-denominated loan  |  |  | (i)   |  |          | $
|SGD-denominated loan  |  |  | (ii)  |  |          |  
|MYR-denominated loan  |  |  | (iii) |  |          |  
|                      |  |  |       |  |          |  
|                      |  |  |       |  |          |  
|Less: current portion |  |  |       |  |          |  
|                      |  |  |       |  |          |  
|                      |  |  |       |  |          | $



| | i. | The RMB denominated loan is repayable in 11 installments by March 29, 2016. It carries an annual
interest rate of 5.94% subject to yearly adjustments by reference to the benchmark rate over the same period announced by the People’s
Bank of China with nil premiums. The loan is secured by a pledge of the headquarters facility in Beijing, comprising a prepaid
land lease and buildings with an aggregate carrying value of $41,111,270 and $40,399,057 as of June 30, 2012 and 2013, respectively.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-30







| | ii. | The SGD denominated loans, assumed in the acquisition of Bond, are repayable in 22 to 68 installments
by February 8, 2019. For the year ended June 30, 2013, the effective interest rates ranged from 4.18% to 5.0% per annum. The borrowing
is secured by a mortgage of BMSG’s building, vehicles, and prepaid land leases in Singapore, with a total carrying value
of $5,305,234 as of June 30, 2013.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | iii. | The MYR denominated loans represent $134,748 and $1,992,236 of loans assumed in the acquisitions
of Concord and Bond, respectively. They are repayable in 12 to 116 installments by February 28, 2023. For the year ended June 30,
2013, the effective interest rates ranged from 4.06% to 8.6% per annum. The borrowings are secured by the mortgages of buildings,
vehicles, and prepaid land leases in Malaysia, with a total carrying value of $4,750,707 as of June 30, 2013.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Scheduled principal payments for all outstanding
long-term borrowings as of June 30, 2013 are as follows:



|Year ending June 30, |  |   |           
|-------------------- |  | - | ----------
|2014                 |  | $ | 8,671,080 
|2015                 |  |   | 8,824,411 
|2016                 |  |   | 9,381,898 
|2017                 |  |   | 425,257   
|2018                 |  |   | 414,471   
|2019 and onwards     |  |   | 58,696    
|                     |  | $ | 27,775,813



For the years ended June 30, 2011, 2012,
and 2013, interest of $2,396,133, $2,642,998 and $2,196,597 was incurred, of which $2,085,582, $2,540,421 and $1,777,882 was charged
to interest expenses, and $310,551, $102,577 and $418,715 was capitalized as construction in progress, respectively.



| | NOTE 16 - | FAIR VALUE MEASUREMENT
| | --------- | ----------------------



Financial instruments include cash and
cash equivalents, time deposits with maturities over three months, accounts receivable, other receivables, amounts due to or from
related parties, accounts payable, short-term bank loans and long-term bank loans. The carrying values of these financial instruments,
other than long-term bank loans approximate their fair values due to their short-term maturities. The carrying value of the Company’s
long-term bank loan approximates its fair value as the long-term bank loans are subject to floating interest rates. These assets
and liabilities, excluding cash and cash equivalents (which fall into level 1 of the fair value hierarchy), fall into level 2
of the fair value hierarchy.



Liabilities measured or disclosed at fair
value as of June 30, 2013 are stated below:



|                                                                                                               |  | June 30, 2013                                        |  
|-------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------- | -
|                                                                                                               |  | Quoted prices in active markets for identical assets |  
|                                                                                                               |  | (Level 1)                                            |  
|                                                                                                               |  |                                                      |  
|Liabilities:                                                                                                   |  |                                                      |  
|                                                                                                               |  |                                                      |  
|Acquisition-related
                                                                         consideration (i) |  | $                                                    | -



F-31







| | (i) | Acquisition-related consideration represents the
fair value of Incentive Shares for Bond (note 3). The fair value
of thecontingent consideration in connection with the acquisitionwas estimated using probability-weighted discounted cash flow models. Key assumptions include discount rate, a percent weighted-probability
of Bond achieving net income performance targets and a percent weighted-probability of Bond achieving CAGR performance targets.
The significant unobservable inputs used in the fair value measurement of the acquisition-relatedconsideration includethe probability weighting of forecasted future
net income performance and forecasted future CAGR performance of Bond, which are based on assumptions developed by management.
Significant changes in forecasted net income and forecasted CAGR of Bond would result in a significantly higher or lower fair value
measurement. As of April 1, 2013 and June 30, 2013, the fair
value of theacquisition-related consideration in connection with Bondtotaled $21,836,461 and $22,691,010, respectively. The changes
in fair value ofacquisition-related consideration in connection with the Bond acquisition is
shown in the following table:
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                |  | Fair value measurements as of June 30,
    2013 using significant unobservable inputs  (Level 3) |                                                                                                                        
|--------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------
|                                                                |  |                                                                                                  | Contingent
                                                          consideration in connection with 
Bond acquisition
|                                                                |  |                                                                                                  |                                                                                                                        
|Initial recognition as at acquisition date of
    April 1, 2013 |  | $                                                                                                | 21,836,461                                                                                                             
|Change in fair-value
    (included within other expenses, net)  |  |                                                                                                  | 854,549                                                                                                                
|Balance as at June 30, 2013                                     |  | $                                                                                                | 22,691,010                                                                                                             



| | NOTE 17 - | STOCKHOLDERS’
                                                                                          EQUITY
| | --------- | --------------------------------------------------------------------------------------------------------------



In
August 2010, the Board of Directors adopted the 2010 Rights Plan. The 2010 Rights Plan provides for a dividend distribution of
one preferred share purchase (the “Right”), for eachoutstanding ordinary share. Each
Right entitles the shareholder to buy one share of the Class A Preferred Stock at an exercise price of $160. The Right will
become exercisable if a person or group announces an acquisition of 20% or more of the outstanding ordinary shares of the Company,
or announces commencement of a tender offer for 20% or more of the ordinary
shares. In that event, the Right permits shareholders, other than the acquiring person,to purchase the Company’s
ordinary shares having a market value of twice the exercise
price of the Right, in lieu of the Class A Preferred Stock. In addition, in the event of certain business combinations,
the Right permits the purchase of the ordinary shares of an acquiring person at a 50% discount. Right held by the acquiring
person becomes null and void in each case. Unless terminated earlier by the Board of Directors, the 2010 Rights Plan will
expire on September 27, 2020. There is no accounting impact related to the Right.



On May 30, 2013, pursuant to the terms
of the acquisition of Bond, the Company issued 1,407,907 ordinary shares as partial consideration during the year ended June 30,
2013 (note 3).



| | NOTE 18 - | SHARE-BASED
                                                                                          COMPENSATION EXPENSES
| | --------- | ---------------------------------------------------------------------------------------------------------------------------



On September 20, 2007, the Company adopted
the “2006 Stock Plan” (the “Plan”) which allows the Company to offer a variety of incentive awards to
employees, officers, directors and consultants. Options to purchase 3,000,000 ordinary shares are authorized under the Plan. The
Company issues new shares to employees, officers, directors and consultants upon share option exercise or share unit conversion.



F-32







Share options



A summary of the share option activity
under the Plan for the year ended June 30, 2013, is as follows:



|Share options                                     |  | Number of
    shares |         |  | Weighted average
    exercise price |   |      | Weighted average
    remaining contractual life (years) |  |   | Aggregate
    intrinsic value | 
|------------------------------------------------- |  | -------------------- | ------- |  | ----------------------------------- | - | ---- | ------------------------------------------------------- |  | - | ----------------------------- | 
|                                                  |  |                      |         |  |                                     |   |      |                                                         |  |   |                               | 
|Outstanding at June 30, 2012                      |  |                      | 138,000 |  |                                     | $ | 7.01 |                                                         |  | $ | 0.73                          | 
|Exercised during the year ended June 30,
    2013 |  |                      | 138,000 |  |                                     |   | 7.01 |                                                         |  |   | -                             | 
|Outstanding at June 30, 2013                      |  |                      | -       |  |                                     | $ | -    |                                                         |  | $ | -                             | 
|Vested and expected
    to vest at June 30, 2013  |  |                      | -       |  |                                     | $ | -    |                                                         |  | $ | -                             | 
|Exercisable at June 30, 2013                      |  |                      | -       |  |                                     | $ | -    |                                                         |  | $ | -                             | 



The total intrinsic value of share
options exercised during the years ended June 30, 2011, 2012 and 2013 was $2,640,820, $1,860,782 and $663,330, respectively. The
fair value of share options vested during the years ended June 30, 2011, 2012 and 2013 was $2,036,420, $2,496,360 and nil, respectively.
There were 138,000 share options exercised during the year ended June 30, 2013.



The Company recorded share-based compensation
expense relating to share options of $456,628, $202,125 and nil, which is included in general and administrative expenses,
for the years ended June 30, 2011, 2012 and 2013, respectively. As of June 30, 2013, there was no unrecognized share-based compensation
expense to be recognized for the above share options.



Performance options



On February 20, 2012, performance share
options to purchase 1,476,000 ordinary shares were granted under the terms of the Plan. They were granted with an exercise price
of $9.29 per share, had an expiry period of five years from the date of grant, and would vest subject to the service and performance
conditions shown below:



| | · | For
                                                                                                            60,000 options, if
                                                                                                            the Company’s
                                                                                                            Price/Earnings Ratio
                                                                                                            (“P/E”)
                                                                                                            achieves certain levels
                                                                                                            and the related investor
                                                                                                            relations performance
                                                                                                            targets are achieved
                                                                                                            during the 36 months
                                                                                                            after the grant date,
                                                                                                            30,000 share options
                                                                                                            or 60,000 share options
                                                                                                            will vest depending on
                                                                                                            related manager’s
                                                                                                            performance; The 60,000
                                                                                                            options will cliff
                                                                                                            vest on the 36 month
                                                                                                            anniversary of the
                                                                                                            grant date, and will
                                                                                                            remain exercisable
                                                                                                            from the vesting date
                                                                                                            until the 60 month
                                                                                                            anniversary of the
                                                                                                            grant date. The Company
                                                                                                            estimates that it
                                                                                                            is not probable that
                                                                                                            the performance conditions
                                                                                                            of this award can
                                                                                                            be met and thus the
                                                                                                            related grant is not
                                                                                                            expected to vest.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | For
                                                                                                            1,416,000 options,
                                                                                                            if the compound average
                                                                                                            growth rate of the
                                                                                                            Company’s Non-GAAP
                                                                                                            diluted earnings per
                                                                                                            share as defined in the Plan from the year
                                                                                                            ended June 30, 2011
                                                                                                            to the year ended
                                                                                                            June 30, 2014 (the
                                                                                                            “EPS Threshold”)
                                                                                                            equals or exceeds
                                                                                                            15%, but less than
                                                                                                            20%, 944,000 options
                                                                                                            will vest; if the
                                                                                                            EPS Threshold equals
                                                                                                            or exceeds 20%, but
                                                                                                            is less than 25%, an additional
                                                                                                            236,000 options will
                                                                                                            vest; if the EPS Threshold
                                                                                                            equals or exceeds
                                                                                                            25%, an additional 236,000
                                                                                                            options will vest.
                                                                                                            Of the total 1,416,000
                                                                                                            options, 283,200,
                                                                                                            283,200 and 849,600
                                                                                                            options will vest
                                                                                                            on the 24 month, 36
                                                                                                            month, and 48 month
                                                                                                            anniversary of the
                                                                                                            grant date, respectively.
                                                                                                            The vesting schedule
                                                                                                            for such performance
                                                                                                            share options is as
                                                                                                            below:
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|EPS Threshold                   |  | Number of vested options       |  | Months after the grant date |        
|------------------------------- |  | ------------------------------ |  | --------------------------- | -------
|                                |  |                                |  | 24 months                   |        
|Over 15% but below 20%          |  | 944,000                        |  |                             | 283,200
|Equal or over 20% but below 25% |  | Additional 236,000             |  |                             | -      
|25% or above                    |  | Additional 236,000             |  |                             | -      
|                                |  |                                |  |                             |        
|                                |  | Total number of vested options |  |                             | 283,200



The options will remain exercisable from
the vesting date until the 60 month anniversary of the grant date. The Company estimates that 472,000 options (related to the
EPS threshold at or above 20%) are not expected to vest.



F-33







A summary of the performance share option
activity under the Plan for the year ended June 30, 2013 is as follows:



|Performance options                              |  | Number of
    shares |           |  | Weighted
    average exercise price |   |      | Weighted
    average remaining contractual life  (years) |  |  | Aggregate
    intrinsic value | 
|------------------------------------------------ |  | -------------------- | --------- |  | ----------------------------------- | - | ---- | -------------------------------------------------------- |  |  | ----------------------------- | 
|Outstanding at June 30, 2012                     |  |                      | 1,476,000 |  |                                     | $ | 9.29 |                                                          |  |  | 4.64                          | 
|                                                 |  |                      |           |  |                                     |   |      |                                                          |  |  |                               | 
|Granted                                          |  |                      | -         |  |                                     |   | -    |                                                          |  |  | -                             | 
|Exercised                                        |  |                      | -         |  |                                     |   | -    |                                                          |  |  | -                             | 
|Forfeited or expired                             |  |                      | -         |  |                                     |   | -    |                                                          |  |  | -                             | 
|Outstanding at June 30, 2013                     |  |                      | 1,476,000 |  |                                     | $ | 9.29 |                                                          |  |  | 3.64                          | 
|Vested and expected
    to vest at June 30, 2013 |  |                      | 944,000   |  |                                     | $ | 9.29 |                                                          |  |  | 3.64                          | 
|Exercisable at June 30, 2013                     |  |                      | -         |  |                                     | $ | -    |                                                          |  |  | -                             | 



The weighted average grant-date fair value
of performance share options was nil, $9.15 and $9.15 for the years ended June 30, 2011, 2012 and 2013, respectively.



The Company recorded share-based compensation
expense relating to performance share options of nil, $654,318 and $1,316,572, which is included in general and administrative
expenses, for the years ended June 30, 2011, 2012 and 2013, respectively. As of June 30, 2013, total unrecognized share-based compensation
expense of $2,173,269 related to performance share options is expected to be recognized over a weighted average vesting period
of 2.6 years.



The fair value of each performance share
option granted is estimated on the date of grant using the Black-Scholes Option Pricing Model. The following table presents the
assumptions used to estimate the fair values of the share options granted in the periods presented:



|                                     |  | For options
    granted on
    February 20, 2012 |      
|------------------------------------ |  | ------------------------------------------------ | -----
|                                     |  |                                                  |      
|Risk-free rate of return             |  |                                                  | 0.71 
|Expected life (in years)             |  |                                                  | 4.17 
|Weighted average expected volatility |  |                                                  | 62.64
|Expected dividends                   |  |                                                  | -    



Weighted average risk-free rate of return
for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
Expected option life is estimated based on historical options exercise pattern in accordance with ASC 718 Share-based Compensation(“ASC 718”).Expected volatility is estimated based on historical volatility of the Company’s stock.
Dividend yield is estimated by the Company at zero for the expected option life.



F-34







Restricted shares



During the year ended June 30, 2011, the
Company granted 67,500 restricted ordinary shares to certain directors under the Plan, of which 15,000 shares were granted on
January 1, 2011, 22,500 shares were granted on February 1, 2011, and the remaining 30,000 were granted on June 2, 2011. These
restricted shares vest over a three year period starting from the grant date. Fair value of the restricted shares was determined
with reference to the market closing price at grant date.



A summary of the restricted share activity
for the year ended June 30, 2013 is as follows:



|                           |  | Number of restricted
    shares |        |  | Weighted average grant
    date fair value |  
|-------------------------- |  | ------------------------------- | ------ |  | ------------------------------------------ | -
|                           |  |                                 |        |  |                                            |  
|Un-vested at June 30, 2012 |  |                                 | 40,625 |  |                                            | $
|                           |  |                                 |        |  |                                            |  
|Vested                     |  |                                 | 22,500 |  |                                            |  
|Un-vested at June 30, 2013 |  |                                 | 18,125 |  |                                            | $



The total fair value of restricted shares
vested during the years ended June 30, 2011, 2012 and 2013 were $95,335, $255,621 and $282,925, respectively. The Company recorded
restricted share compensation expense of $95,338, $282,924 and $282,924, included in general and administrative expenses, for the
years ended June 30, 2011, 2012 and 2013, respectively. As of June 30, 2013, total unrecognized compensation expense of $187,591
related to the restricted shares is expected to be recognized over a weighted-average vesting period of 0.7 year.



Incentive shares



The Company granted 1,510,181 Incentive
Shares for Concord which were subject to a service period of two years commencing from July 1, 2011, and Concord achieving the
net income performance targets of $10,000,000 and $11,500,000 for the years ended June 30, 2012 and 2013, respectively (the “Targeted
Net Income Thresholds”). Upon achieving the Targeted Net Income Thresholds for the years ended June 30, 2012 and 2013, 755,091
and 755,090 ordinary shares will be issued, respectively.



The weighted average grant date fair value
of the Incentive Shares for Concord was $9.06 per share based on the closing price of the Company’s ordinary shares on the
grant date.



For the years ended June 30, 2012 and 2013,
no share-based compensation expenses relating to the Incentive Shares for Concord were recorded because the Targeted Net Income
Threshold for the years ended June 30, 2012 and 2013 were not met.



| | NOTE 19 - | EMPLOYEE
BENEFITS
| | --------- | -----------------



The Company contributes to a state pension
scheme run by the Chinese government in respect of its employees in China, a central provision fund run by the Singapore government
in respect of its employees in Singapore, and an employment provident fund in respect of its employees in Malaysia. The expenses
related to these plans were $8,661,442, $11,980,634 and $15,031,361 for the years ended June 30, 2011, 2012 and 2013, respectively.
These schemes were accounted for as defined contribution plans.



F-35







| | NOTE 20 - | INCOME
                                                                                          TAX
| | --------- | ----------------------------------------------------------------------------------------------------



BVI



Hollysys, and its subsidiaries, GTH and
Clear Mind, are incorporated in the BVI and are not subject to income tax under the relevant jurisdiction.



Singapore



HAP, CCPL, CEPL, HIPL, BCPL and BMSG,
the Company’s wholly owned subsidiaries incorporated in Singapore, are subject to Singapore corporate tax rate of 17% on
the assessable profits arising from Singapore.



Malaysia



CESB, BMJB, and BMKL, the Company’s
wholly owned subsidiaries incorporated in Malaysia, are subject to Malaysia corporate income tax rate of 25% on the assessable
profits arising from Malaysia.



Dubai



CCPL Dubai, the branch of the Company's
wholly owned subsidiary, is a tax exempt company incorporated in Dubai, and no tax provision has been made for the years ended
June 30, 2011, 2012 and 2013.



Hong Kong



World Hope and CSHK, the Company’s
wholly owned subsidiaries incorporated in Hong Kong, are subject to Hong Kong profits tax at a rate of 16.5% on the assessable
profits arising from Hong Kong. No provision for Hong Kong profits tax has been made in the statements of comprehensive income
as there were no assessable profits arising from Hong Kong for the years ended June 30, 2011, 2012 and 2013.



Macau



CMDE, the Company’s wholly owned
subsidiary incorporated in Macau, is subject to the Macau corporate income tax rate of 0% because the net income for the fiscal
year 2013 is lower than MOP144,000.



PRC



The Company’s subsidiaries incorporated
in PRC are subject to PRC enterprise income tax (“EIT”) on the taxable income as adjusted in accordance with relevant
PRC income tax laws. The standard statutory tax rate of PRC EIT is 25% effective from calendar year ended December 31, 2008. All
PRC subsidiaries apply the standard statutory tax rate except the following subsidiaries:



Beijing Hollysys



Beijing Hollysys was certified as a High
and New Technology Enterprise (“HNTE”) for the three years commencing January 1, 2008, and for another three years
commencing January 1, 2011. Pursuant to PRC EIT law, an enterprise certified as a HNTE enjoys a preferential EIT rate of 15%.
Therefore, the EIT tax rate applicable to Beijing Hollysys is 15% for the calendar years ended December 31, 2008 to December 31,
2013.



In February 2013, Beijing Hollysys received
the “Qualified Software Development Enterprise” certificate which entitles Beijing Hollysys an EIT rate of 10% for
the calendar years ended December 31, 2011 and 2012. An income tax recoverable of $1,634,171 was recorded in Beijing Hollysys
since it paid its EIT based on a 15% tax rate for the calendar years ended December 31, 2011 and 2012.



Hangzhou Hollysys



Hangzhou Hollysys was certified as a “Qualified
Software Development Enterprise” for the calendar years ended December 31, 2009 and 2010, and was entitled to a concessionary
EIT rate of 10% which was granted by relevant authorities discretionarily on an annual basis. In 2011, Hangzhou Hollysys was certified
as a HNTE for the three years commencing January 1, 2011. Pursuant to PRC EIT law, an enterprise certified as a HNTE enjoys a preferential
EIT rate of 15%. Therefore, the EIT tax rate applicable to Hangzhou Hollysys was 10% for the calendar years ended December 31,
2008, 2009 and 2010, and 15% for the calendar years ended December 31, 2011, 2012 and 2013.



F-36







The Company’s income before income
taxes consists of:



|        |  | Year ended
    June 30, |           
|------- |  | ----------------------- | ----------
|        |  | 2011                    |           
|        |  |                         |           
|PRC     |  | $                       | 49,016,069
|Non-PRC |  |                         | (1,106,988
|        |  |                         |           
|        |  | $                       | 47,909,081



Income tax expense, most of which is incurred
in the PRC, consists of:



|                                      |  | Year ended
    June 30, |           
|------------------------------------- |  | ----------------------- | ----------
|                                      |  | 2011                    |           
|                                      |  |                         |           
|Current income tax expense            |  | $                       | 7,634,494 
|Deferred income tax (benefit) expense |  |                         | (1,190,527
|                                      |  |                         |           
|                                      |  | $                       | 6,443,967 



The reconciliation of tax computed by
applying the statutory tax rate in PRC of 25% to the income before income taxes is as follows:



|                                                                         |  | Year ended
    June 30, |           
|------------------------------------------------------------------------ |  | ----------------------- | ----------
|                                                                         |  | 2011                    |           
|                                                                         |  |                         |           
|Income before income taxes                                               |  | $                       | 47,909,081
|                                                                         |  |                         |           
|Expected income tax expense at statutory
    tax rate in PRC             |  |                         | 11,977,270
|Effect of different tax rates in various
    jurisdictions               |  |                         | 15,070    
|Effect of preferential tax treatment                                     |  |                         | (5,768,020
|Effect of non-taxable income                                             |  |                         | (1,792,868
|Effect of additional deductible research
    and development expenses    |  |                         | (860,736  
|Effect of non-deductible expenses                                        |  |                         | 882,370   
|Under/(over) provision of income tax
    in previous years               |  |                         | 792,662   
|Change in valuation allowance                                            |  |                         | 149,420   
|Utilization of tax loss previously not
    recognized                    |  |                         | (40,019   
|Tax rate differential on deferred tax
    items                          |  |                         | -         
|Withholding tax on dividend paid by subsidiary                           |  |                         | 1,077,377 
|Recognition of temporary difference not
    recognized in previous years |  |                         | -         
|Others                                                                   |  |                         | 11,441    
|                                                                         |  |                         |           
|Income tax expenses                                                      |  | $                       | 6,443,967 



F-37







Had all the above tax holidays and concessions
not been available, the tax charge would have been higher by $5,768,020, $6,551,269 and $5,993,792 and the basic net income per
share would have been lower by $0.11, $0.12 and $0.11 for the years ended June 30, 2011, 2012 and 2013, respectively, and diluted
net income per share for the years ended June 30, 2011, 2012 and 2013 would have been lower by $0.10, $0.12 and $0.11, respectively.



In January 2011, the Company determined
to carry out a group re-structuring, where Hollysys Group transferred the equity interest of 60% equity interest of Hangzhou Hollysys
to Beijing Hollysys. Before the execution of the equity transfer, the board of directors of Hangzhou Hollysys approved a resolution
to declare a dividend of RMB178,537,603 (equivalent to $26,934,436), on an one-time basis, of which RMB107,122,562 (equivalent
to $16,160,662) was distributable to Hollysys Group, and RMB71,415,041 (equivalent to $10,773,774) was distributable to GTH. As
a result, Hangzhou Hollysys withheld RMB7,141,504 (equivalent to $1,077,377) in income tax for the dividends distributable to
GTH based on the withholding tax rate of 10% in accordance with the PRC EIT law for the year ended June 30, 2011.



In fiscal year 2013, Hangzhou
Hollysys approved two resolutions to declare a dividend of RMB195,000,000 (equivalent to $31,208,875), of which RMB78,000,000
(equivalent to $12,483,550) was distributable to GTH, and RMB117,000,000 (equivalent to $18,725,325) was distributable to
Beijing Hollysys. As a result, Hangzhou Hollysys withheld RMB7,800,000 (equivalent to $1,248,355) in income tax for the
dividends distributable to GTH based on the tax rate of 10% in accordance with the PRC EIT law for the year ended June 30,
2013.



The temporary differences that have given
rise to the deferred tax assets consist of the following:



|                                                  |  | June 30, |           
|------------------------------------------------- |  | -------- | ----------
|                                                  |  | 2012     |           
|Deferred tax assets-current                       |  |          |           
|Allowance for doubtful accounts                   |  | $        | 2,477,942 
|Inventory provision                               |  |          | 404,846   
|Provision for contract loss                       |  |          | -         
|Long-term assets                                  |  |          | 74,169    
|Deferred revenue                                  |  |          | 2,653,707 
|Deferred subsidies                                |  |          | 661,981   
|Warranty liabilities                              |  |          | 539,189   
|Recognition of intangible assets                  |  |          | 326,552   
|Accrued payroll                                   |  |          | 511,593   
|Net operating loss carry forward                  |  |          | 700,979   
|Less: valuation allowance                         |  |          | -         
|Total deferred tax assets-current                 |  | $        | 8,350,958 
|                                                  |  |          |           
|Deferred tax liabilities-current                  |  |          |           
|Cost and estimated earnings in excess of billings |  |          | (7,590,901
|Others                                            |  |          | (358,296  
|                                                  |  |          |           
|Total deferred tax liabilities-current            |  |          | (7,949,197
|                                                  |  |          |           
|Net deferred tax assets-current                   |  |          | 772,061   
|Net deferred tax liabilities-current              |  | $        | (370,300  
|                                                  |  |          |           
|Deferred tax assets, non-current                  |  |          |           
|Long-term assets                                  |  |          | 495,865   
|Deferred subsidies                                |  |          | 381,596   
|Recognition of intangible assets                  |  |          | 573,710   
|Warranty liabilities                              |  |          | -         
|Total deferred tax assets-non-current             |  | $        | 1,451,171 
|                                                  |  |          |           
|Deferred tax liabilities, non-current             |  |          |           
|Share of net gains of equity investees            |  |          | (1,036,772
|Property, plant and equipment                     |  |          | -         
|Intangible assets                                 |  |          | -         
|Total deferred tax liabilities-non-current        |  | $        | (1,036,772
|                                                  |  |          |           
|Net deferred tax assets-non-current               |  | $        | 414,399   
|Net deferred tax liabilities-non-current          |  | $        | -         



F-38







As of June 30, 2013, the Company had net
operating losses of approximately $12,922,377 which can be carried forward to offset future net profit for income tax purposes.
The remaining net operating losses will begin to expire in 2018 if not utilized.



The Company
operates mainly through the PRC subsidiaries and the valuation allowance is considered on anindividual entity basis.



Under the EIT Law and the implementation
rules, profits of the Company’s PRC subsidiaries earned on or after January 1, 2008 and distributed by the PRC subsidiaries
to a foreign holding company are subject to a withholding tax at a rate of 10% unless reduced by tax treaty. At June 30, 2012 and
2013, aggregate undistributed earnings of the Company’s subsidiaries located in the PRC that are available for distribution
to the Company of approximately RMB1,186,002,455 (equivalent to $187,513,234) and RMB1,351,472,614 (equivalent to $197,739,789)
are intended to be permanently reinvested, and accordingly, no deferred taxes have been provided for the PRC dividend withholding
taxes that would be payable upon the distribution of those amounts to the Company. Distributions made out of pre-January 1, 2008
retained earnings will not be subject to withholding taxes.



The Company’s tax returns for the
tax years ended December 31, 2008 through 2012 are subject to review by taxing authorities.



Determining income tax provisions involves
judgment on the future tax treatment of certain transactions. The Company performed a self-assessment and concluded that there
was no significant uncertain tax position requiring recognition in its financial statements. The tax treatment of such transactions
is reconsidered periodically to take into account all changes in tax legislations. Where the final tax outcome of these transactions
is different from the amounts that were initially recorded, such difference will impact the income tax and deferred tax provisions
in the year in which such determination is made.



There were no material interest or penalties incurred for the
years ended June 30, 2011, 2012 and 2013.



F-39









| | NOTE 21 - | INCOME
                                                                                          PER SHARE
| | --------- | ----------------------------------------------------------------------------------------------------------



The following table sets forth the computation
of basic and diluted net income per share attributable to Hollysys for the years indicated:



|                                                                                            |  | Year ended
    June 30, |           
|------------------------------------------------------------------------------------------- |  | ----------------------- | ----------
|                                                                                            |  | 2011                    |           
|                                                                                            |  |                         |           
|Numerator:                                                                                  |  |                         |           
|Net
    income attributable to Hollysys Automation Technologies Ltd.                        |  | $                       | 41,469,998
|                                                                                            |  |                         |           
|Denominator:                                                                                |  |                         |           
|Weighted average ordinary shares outstanding
    used in computing basic income per share   |  |                         | 54,564,842
|Effect of dilutive securities Share
    options                                             |  |                         | 382,070   
|Restricted shares                                                                           |  |                         | 2,368     
|Weighted average
    ordinary shares outstanding used in computing diluted income per share |  |                         | 54,949,280
|                                                                                            |  |                         |           
|Income per share – basic                                                                    |  | $                       | 0.76      
|                                                                                            |  |                         |           
|Income per share – diluted                                                                  |  | $                       | 0.75      



The effects of the performance share options
have been excluded from the computation of diluted income per share for the year ended June 30, 2011, 2012 and 2013 as the effect
would be anti-dilutive. The impact of the Incentive Shares for Concord, the Incentive Shares for Bond and Premium Shares for Bond
have also been excluded from the computation of diluted income per share for the year ended June 30, 2013 because the contingently
issuable common shares would not be issued under the terms of the arrangement if the end of the reporting period were the end of
the contingency period.



NOTE 22 - 	         RELATED PARTY TRANSACTIONS



The related party relationships and related
party transactions are listed as follows:



Related party relationships



|Name
    of related parties                                                   |  | Relationship
    with the Company                                                                 
|----------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------
|                                                                              |  |                                                                                                   
|Shenhua Hollysys Information
    Technology Co., Ltd. ("Shenhua Information") |  | 20% owned by Beijing Hollysys                                                                     
|New Huake Electronic Technology
    Co., Ltd. ("New Huake")                   |  | 37.5% owned by Beijing Hollysys                                                                   
|China Techenergy Co., Ltd.
    ("China Techenergy")                           |  | 40% owned by Beijing Hollysys                                                                     
|Beijing Hollysys Electric
    Motor Co., Ltd. ("Electric Motor")              |  | 40% owned by Beijing Hollysys                                                                     
|Zhejiang Sanxin  Engineering
    Co., Ltd. ("Zhejiang Sanxin")                |  | 6% owned by Hangzhou Hollysys                                                                     
|Hollysys Equipment Technology Co., Ltd. ("Hollysys Equipment")                |  | 20% owned by Beijing Hollysys
    as of June 30, 2011, and was disposed of during fiscal year 2012
|Beijing
    Hollysys Machine Automation Co., Ltd. ("Hollysys Machine")        |  | 30% owned by Hollysys Investment                                                                  
|Southcon
    Development Sdn. Bhd. (“Southcon”)                               |  | 30% owned by BMJB                                                                                 
|Heilongjiang Ruixing Technology Co., Ltd. ("Ruixing")                         |  | 8.31% owned by Beijing
    Hollysys                                                               
|Swee Yong Chim                                                                |  | Shareholder of Hollysys Automation Technologies Ltd. and former shareholder of Concord            
|Yoon Fah Chim                                                                 |  | Shareholder of Hollysys Automation Technologies Ltd. and former shareholder of Concord            



F-40







Due from related parties



|                    |  | June 30, |           
|------------------- |  | -------- | ----------
|                    |  | 2012     |           
|                    |  |          |           
|China Techenergy    |  | $        | 14,850,375
|Shenhua Information |  |          | 1,183,660 
|Hollysys Machine    |  |          | 297,622   
|Electric Motor      |  |          | -         
|Zhejiang Sanxin     |  |          | -         
|Hollysys Equipment  |  |          | 4,901     
|Ruixing             |  |          | -         
|Swee Yong Chim      |  |          | -         
|Yoon Fah Chim       |  |          | -         
|                    |  |          |           
|                    |  | $        | 16,336,558



The Company’s management believes
that the collection of amounts due from related parties is reasonably assured and accordingly, no provision had been made for
these balances.



Due to related parties



|                    |  | June 30, |          
|------------------- |  | -------- | ---------
|                    |  | 2012     |          
|                    |  |          |          
|Shenhua Information |  | $        | 1,544,464
|China Techenergy    |  |          | 401,719  
|Electric Motor      |  |          | 16,224   
|Hollysys Equipment  |  |          | 1,821    
|Hollysys Machine    |  |          | 45       
|New Huake           |  |          | 2        
|                    |  |          |          
|                    |  | $        | 1,964,275



F-41







Transactions with related parties



Purchases of goods and services from:



|                    |  | Year ended
    June 30, |          
|------------------- |  | ----------------------- | ---------
|                    |  | 2011                    |          
|                    |  |                         |          
|Electric Motor      |  | $                       | 34,085   
|Shenhua Information |  |                         | 2,151,391
|Hollysys Machine    |  |                         | -        
|New Huake           |  |                         | 879,111  
|                    |  |                         |          
|                    |  | $                       | 3,064,587



Purchase of building from:



|                    |  | Year ended
    June 30, |          
|------------------- |  | ----------------------- | ---------
|                    |  | 2011                    |          
|                    |  |                         |          
|Shenhua Information |  | $                       | 3,608,675



F-42







Sales of goods and integrated solutions to:



|                    |  | Year ended
    June 30, |          
|------------------- |  | ----------------------- | ---------
|                    |  | 2011                    |          
|                    |  |                         |          
|China Techenergy    |  | $                       | 3,557,125
|Shenhua Information |  |                         | 727,460  
|Hollysys Machine    |  |                         | -        
|Electric Motor      |  |                         | 13,478   
|                    |  |                         |          
|                    |  | $                       | 4,298,063



Operating lease income from:



|                 |  | Year ended
    June 30, |  
|---------------- |  | ----------------------- | -
|                 |  | 2011                    |  
|                 |  |                         |  
|Hollysys Machine |  | $                       | -



The Company sells automation control systems
to China Techenergy which is used for non-safety operations control in the nuclear power industry. China Techenergy incorporates
the Company’s non-safety automation control systems with their proprietary safety automated control systems to provide an
overall automation and control system for nuclear power stations in China. The Company is not a party to the integrated sales
contracts executed between China Techenergy and their customers. Intercompany profits and losses are eliminated until realized
by the Company or China Techenergy as if the China Techenergy were a consolidated subsidiary.



The Company sells automation control systems
to Shenhua Information which is used for operations control in the information automation industry. Shenhua Information incorporates
the Company’s automation control systems with their proprietary automated remote control systems to provide an overall automation
and control system to its customers. The Company is not a party to the integrated sales contracts executed between Shenhua Information
and their customers.



Amounts due from and due to the related
parties relating to the above transactions are unsecured, non-interest bearing and repayable on demand.



| | NOTE 23 - | COMMITMENTS
                                                                                          AND CONTINGENCIES
| | --------- | -----------------------------------------------------------------------------------------------------------------------



The Company leases premises under various
operating leases. Rental expenses under operating leases included in the consolidated statements of comprehensive income were
$1,053,907, $1,570,900 and $1,908,921 for the years ended June 30, 2011, 2012 and 2013, respectively.



Future minimum lease payments under non-cancelable
operating leases with initial terms of one year or more consist of the following:



|Year ended June 30, |  | Minimum
    lease payments |          
|------------------- |  | -------------------------- | ---------
|                    |  |                            |          
|2014                |  | $                          | 1,464,599
|2015                |  |                            | 884,833  
|2016                |  |                            | 607,045  
|2017                |  |                            | 390,524  



There was a capital commitment of $597,353
as of June 30, 2013, related to phase II construction of the Company’s headquarters in Beijing, PRC.



The Company had stand-by letters of credit
of $1,091,202 as of June 30, 2013.



The Company had outstanding performance
guarantees of $42,209,859 as of June 30, 2013, with restricted cash of $3,954,845 pledged to banks.



F-43







| | NOTE 24 - | OPERATING
                                                                                          LEASES AS LESSOR
| | --------- | --------------------------------------------------------------------------------------------------------------------



On April 3, 2013, Beijing Hollysys entered
into an operating lease agreement to lease out one of its buildings located in Beijing. The lease term is 10 years from September
1, 2013 to August 31, 2023. The minimum lease payments to be received in the next five years consist of the following:



|Year ended June 30, |  | Minimum
    lease payments |          
|------------------- |  | -------------------------- | ---------
|                    |  |                            |          
|2014                |  | $                          | 1,163,636
|2015                |  |                            | 1,438,254
|2016                |  |                            | 1,481,402
|2017                |  |                            | 1,525,844
|2018                |  |                            | 1,571,619



The annual minimum lease payment receivable
after five years are subject to renegotiation in case the Chinese consumer price index published by the government exceeds 5%.



| | NOTE 25 - | SEGMENT
                                                                                                    REPORTING
| | --------- | ---------------------------------------------------------------------------------------------------------------------



The chief operating decision makers have
been identified as the Chief Executive Officer, Chief Financial Officer and Chief Operating Officer of the Company. The Company
organizes its internal financial reporting structure based on its main product and service offerings. To better assess the Company’s
performance and allocate resources, the chief operating decision makers revised their internal financial reporting structure and
their management report for the year ended June 30, 2013. The prior year comparative segment disclosures were restated to reflect
the Company’s current financial reporting structure.



Based on the criteria established by ASC
280, Segment Reporting (“ASC 280”), the Company has determined that the reportable segments of the Company
consist of (1) industrial automation, (2) rail transportation, (3) mechanical and electrical solution (“M&E”)
and (4) miscellaneous, in accordance with the Company’s organization and internal financial reporting structure. The chief
operating decision makers assess the performance of the operating segments based on the measures of revenues, costs and gross
profit. Other than the information provided below, the chief operating decision makers do not use any other measures by segments.



Summarized information by segments for
the years ended June 30, 2013 is as follows:



|                                 |  | Year ended June 30, 2013 |            
|-------------------------------- |  | ------------------------ | -----------
|                                 |  | Industry
    Automation  |            
|                                 |  |                          |            
|Revenues from external customers |  | $                        | 211,713,204
|Costs of revenue                 |  |                          | 131,443,757
|                                 |  |                          |            
|Gross profit                     |  | $                        | 80,269,447 



|                                 |  | Year ended June 30, 2012 |            
|-------------------------------- |  | ------------------------ | -----------
|                                 |  | Industry
    Automation  |            
|                                 |  |                          |            
|Revenues from external customers |  | $                        | 190,251,683
|Costs of revenue                 |  |                          | 120,646,668
|                                 |  |                          |            
|Gross profit                     |  | $                        | 69,605,015 



F-44







|                                 |  | Year ended June 30, 2011 |            
|-------------------------------- |  | ------------------------ | -----------
|                                 |  | Industry
    Automation  |            
|                                 |  |                          |            
|Revenues from external customers |  | $                        | 142,323,167
|Costs of revenue                 |  |                          | 92,080,943 
|                                 |  |                          |            
|Gross profit                     |  | $                        | 50,242,224 



The majority of the Company’s revenues
and long-lived assets other than goodwill and acquired intangible assets are derived from and located in PRC. The following table
sets forth the revenues by geographical area:



|                              |  | Year ended
    June 30, |            
|----------------------------- |  | ----------------------- | -----------
|                              |  | 2011                    |            
|                              |  |                         |            
|Revenues:                     |  |                         |            
|PRC                           |  | $                       | 262,212,528
|Non-PRC (including Hong Kong) |  |                         | 629,358    
|                              |  |                         |            
|                              |  | $                       | 262,841,886



The following table sets forth the long-lived
assets other than goodwill and acquired intangible assets by geographical area:



|                                                                      |  | June 30, |           
|--------------------------------------------------------------------- |  | -------- | ----------
|                                                                      |  | 2012     |           
|                                                                      |  |          |           
|Long-lived assets other than goodwill and acquired intangible assets: |  |          |           
|PRC                                                                   |  | $        | 85,990,556
|Non-PRC (including Hong Kong)                                         |  |          | 1,088,704 
|                                                                      |  |          |           
|                                                                      |  | $        | 87,079,260



| | NOTE 26 - | CONDENSED
                                                                                          FINANCIAL INFORMATION OF THE PARENT
                                                                                          COMPANY
| | --------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under PRC laws and regulations, the Company’s
PRC subsidiaries are restricted in their ability to transfer certain of their net assets to the Company in the form of dividend
payments, loans, or advances. The amount restricted was RMB1,292,655,096 (equivalent to $204,375,578) and RMB1,341,242,319 (equivalent
to $217,075,165) as of June 30, 2012, and 2013, respectively.



F-45







The following represents condensed unconsolidated financial
information of the parent company only:



CONDENSED BALANCE SHEETS

(In US dollars)



|                                                                                                                                                                                   |  | June 30, |            
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | -----------
|                                                                                                                                                                                   |  | 2012     |            
|ASSETS                                                                                                                                                                             |  |          |            
|Current assets:                                                                                                                                                                    |  |          |            
|Amounts due from subsidiaries                                                                                                                                                      |  | $        | 109,290,207
|Prepaid expenses                                                                                                                                                                   |  |          | 71,150     
|Total current assets                                                                                                                                                               |  |          | 109,361,357
|                                                                                                                                                                                   |  |          |            
|Investments in subsidiaries                                                                                                                                                        |  |          | 229,258,171
|Total assets                                                                                                                                                                       |  | $        | 338,619,528
|                                                                                                                                                                                   |  |          |            
|LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                               |  |          |            
|Current liabilities:                                                                                                                                                               |  |          |            
|Accrued payroll and related expense                                                                                                                                                |  | $        | 39,000     
|Accrued liabilities                                                                                                                                                                |  |          | 479,413    
|Total current liabilities                                                                                                                                                          |  |          | 518,413    
|                                                                                                                                                                                   |  |          |            
|Equity:                                                                                                                                                                            |  |          |            
|Ordinary shares, par value $0.001 per share, 100,000,000
    shares authorized, 55,998,917 and 57,554,824 shares issued and outstanding as of June 30, 2012 and 2013, respectively |  |          | 55,999     
|Additional paid-in capital                                                                                                                                                         |  |          | 178,060,482
|Retained earnings                                                                                                                                                                  |  |          | 127,270,078
|Accumulated other comprehensive income                                                                                                                                             |  |          | 32,714,556 
|Total equity                                                                                                                                                                       |  |          | 338,101,115
|                                                                                                                                                                                   |  |          |            
|Total liabilities and equity                                                                                                                                                       |  | $        | 338,619,528



CONDENSED STATEMENTS OF COMPREHENSIVE
INCOME

(In US dollars)



|                                        |  | Year ended
    June 30, |           
|--------------------------------------- |  | ----------------------- | ----------
|                                        |  | 2011                    |           
|                                        |  |                         |           
|General and administrative expenses     |  |                         | 1,962,495 
|Loss from operations                    |  |                         | (1,962,495
|                                        |  |                         |           
|Other income, net                       |  |                         | -         
|Equity in profit of subsidiaries        |  | $                       | 43,432,493
|Income before income taxes              |  |                         | 41,469,998
|Income tax expenses                     |  |                         | -         
|Net income                              |  |                         | 41,469,998
|                                        |  |                         |           
|Other comprehensive income, net of tax  |  |                         |           
|Translation adjustments, net of nil tax |  |                         | 9,273,152 
|Comprehensive income                    |  | $                       | 50,743,150



There were no cash flows related to operating, investing or
financing activities for fiscal years ended June 30, 2011, 2012 or 2013.



Basis of presentation



For the presentation of the parent company
only condensed financial information, the Company records its investment in subsidiaries under the equity method of accounting
as prescribed in ASC 323, Investments—Equity Method and Joint Ventures(“ASC 323”). Such investment is
presented on the balance sheets as “Investment in subsidiaries” and the subsidiaries’ profit as “Equity
in profit of subsidiaries” on the statements of comprehensive income. The parent company only financial statements should
be read in conjunction with the Company’s consolidated financial statements.



F-46