UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
20-F


(Mark
One)




o
            REGISTRATION
      STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
      OF 1934ORx
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 for the fiscal
              year ended December
      31, 2007ORo
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 for the
              transition
      period from ________________ to ________________ORo
            SHELL
      COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934Date
      of event requiring this shell company report
    ________________




Commission
file number: 001-33134




Yucheng
Technologies Limited


(Exact
name of Registrant as specified in its charter)




Not
Applicable


(Translation
of Registrant’s name into English)




British
Virgin Islands


(Jurisdiction
of incorporation or organization)




3F
Tower B, Beijing Financial Trust Building, 5 Anding Road, Chao Yang District,
Beijing 100029, P.R. China


(Address
of principal executive offices)




Remington
Hu, Chief Financial Officer, Tel: (86 10) 6442-1088, Fax: (86 10)
6442-1210


3F
Tower B, Beijing Financial Trust Building, 5 Anding Road, Chao Yang District,
Beijing 100029, P.R. China


(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 registeredOrdinary
      shares
            The
      NASDAQ Stock Market LLC




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


None




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


None




Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report.


16,610,853
ordinary shares




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


o  Yes     x  No




If this
report is an annual or transaction report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.


o  Yes     x No


Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


x  Yes      o  No




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


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




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


o  Item
17      x  Item 18




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




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




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




o  Item
17      o  Item 18




If this is
an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).




o  Yes     x  No




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


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


o  Yes     o  No












YUCHENG
TECHNOLOGIES LIMITED





TABLE
OF CONTENTS







Page






ITEM
      1.
              
              IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
              5ITEM
      2.
              
              OFFER
      STATISTICS AND EXPECTED TIMETABLE
              5ITEM
      3.
              
              KEY
      INFORMATION
              5ITEM
      4.
              
              INFORMATION
      ON THE COMPANY
              28ITEM
      4A.
              
              UNRESOLVED
      STAFF COMMENTS
              52ITEM
      5.
              
              OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS
              53ITEM
      6.
              
              DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES
              78ITEM
      7.
              
              MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
              85ITEM
      8.
              
              FINANCIAL
      INFORMATION
              87ITEM
      9.
              
              THE
      OFFER AND LISTING
              88ITEM
      10.
              
              ADDITIONAL
      INFORMATION
              90ITEM
      11.
              
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              99ITEM
      12.
              
              DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES
              99ITEM
      13.
              
              DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES
              100ITEM
      14.
              
              MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS
              100ITEM
      15.
              
              CONTROLS
      AND PROCEDURES
              100ITEM
      16A.
              
              AUDIT
      COMMITTEE FINANCIAL EXPERT
              101ITEM
      16B.
              
              CODE
      OF ETHICS.
              101ITEM
      16C.
              
              PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
              101ITEM
      16D.
              
              EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
              102ITEM
      16E.
              
              PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
    PURCHASERS
              102ITEM
      17.
              
              FINANCIAL
      STATEMENTS
              103ITEM
      18.
              
              FINANCIAL
      STATEMENTS
              103ITEM
      19.
              
              EXHIBITS
              103
  i




Introduction




Unless
otherwise indicated, references in this annual report to:




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




·
            “NASDAQ”
      refers to the NASDAQ Global Market.




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




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




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




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




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




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




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




·
            “Easycon”
      refers to Beijing Easycon Electronics
Limited.




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




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




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




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




·
            “Recency”
      refers to Chengdu Recency Technologies
Limited.




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




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




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




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




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




2




Forward-Looking
Information




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




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




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




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




·
            our
      future contracting and pricing strategies or
  policies;




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




·
            expected
      changes in our revenues and margins from particular
    sources;




·
            competition
      from other providers of IT services and
  products;




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




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




·
            other
      “forward-looking” information.




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




·
            changing
      interpretations of generally accepted accounting
    principles;




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




·
            continued
      compliance with government
regulations;




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




·
            geopolitical
      events and regulatory changes.




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




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




3




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 financial
data.






SELECTED
CONSOLIDATED FINANCIAL DATA




The
following summary consolidated financial data for the three years ended December
31, 2007 are derived from our audited consolidated financial statements, which
have been prepared in accordance with United States generally accepted
accounting principles, or US GAAP, and have been audited by BDO McCabe Lo
Limited, an independent registered public accounting firm.  The report
of BDO McCabe Lo Limited on those consolidated financial statements is included
elsewhere in this annual report.  This information is only a summary
and should be read together with the consolidated financial statements, the
related notes and other financial information included in this annual
report.  Our selected consolidated financial data for the two years
ended December 31, 2003 and 2004 have been derived from our audited consolidated
financial statements, which are not included in this annual report.




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




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




Year
      Ended December 31,2003
            
            
            2004
            
            
            2005
            
            
            2006
            
            
            2007RMB
            
            
            RMB
            
            
            RMB
            
            
            RMB
            
            
            RMB
            
            
            US$(in
      thousands, except earnings per share and share numbers)Revenues:IT
      solutions and services
            
            
            23,223
            
            
            
            45,050
            
            
            
            61,107
            
            
            
            99,435
            
            
            
            230,633
            
            
            
            31,573System
      integration
            
            
            166,797
            
            
            
            199,832
            
            
            
            116,220
            
            
            
            190,215
            
            
            
            204,886
            
            
            
            28,049Total
      revenues
            
            
            190,020
            
            
            
            244,882
            
            
            
            177,327
            
            
            
            289,650
            
            
            
            435,519
            
            
            
            59,622Cost
      of revenues:IT
      solutions and services
            
            
            (12,216
            )
            
            
            (15,443
            )
            
            
            (25,758
            )
            
            
            (43,406
            )
            
            
            (96,149
            )
            
            
            (13,163
            )System
      integration
            
            
            (142,622
            )
            
            
            (176,817
            )
            
            
            (107,327
            )
            
            
            (171,926
            )
            
            
            (181,677
            )
            
            
            (24,871
            )Total
      cost of revenues
            
            
            (154,838
            )
            
            
            (192,260
            )
            
            
            (133,085
            )
            
            
            (215,332
            )
            
            
            (277,826
            )
            
            
            (38,034
            )Gross
      profit
            
            
            35,182
            
            
            
            52,622
            
            
            
            44,242
            
            
            
            74,318
            
            
            
            157,693
            
            
            
            21,588Operating
      expenses:Research
      and development
            
            
            (234
            )
            
            
            (695
            )
            
            
            (352
            )
            
            
            (902
            )
            
            
            (8,370
            )
            
            
            (1,146
            )Selling
      and marketing
            
            
            (12,025
            )
            
            
            (14,453
            )
            
            
            (11,181
            )
            
            
            (13,990
            )
            
            
            (29,053
            )
            
            
            (3,977
            )General
      and administrative
            
            
            (11,798
            )
            
            
            (14,423
            )
            
            
            (13,913
            )
            
            
            (14,170
            )
            
            
            (50,668
            )
            
            
            (6,936
            )Total
      operating expenses
            
            
            (24,057
            )
            
            
            (29,571
            )
            
            
            (25,446
            )
            
            
            (29,062
            )
            
            
            (88,091
            )
            
            
            (12,059
            )Income
      from operations
            
            
            11,125
            
            
            
            23,051
            
            
            
            18,796
            
            
            
            45,256
            
            
            
            69,602
            
            
            
            9,529Other
      income (expenses):Interest
      income
            
            
            201
            
            
            
            157
            
            
            
            142
            
            
            
            117
            
            
            
            1,818
            
            
            
            249Interest
      expense
            
            
            (125
            )
            
            
            (224
            )
            
            
            (617
            )
            
            
            (1,263
            )
            
            
            (1,937
            )
            
            
            (265
            )




5




Income
      from short-term investment
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            3,494
            
            
            
            478Equity
      in net losses of affiliates
            
            
            (1,276
            )
            
            
            (445
            )
            
            
            (759
            )
            
            
            (135
            )
            
            
            −
            
            
            
            −Other
      income, net
            
            
            65
            
            
            
            112
            
            
            
            431
            
            
            
            27
            
            
            
            1,078
            
            
            
            147Total
      other income (expenses)
            
            
            (1,135
            )
            
            
            (400
            )
            
            
            (803
            )
            
            
            (1,254
            )
            
            
            4,453
            
            
            
            609Income
      before minority interests and income taxes
            
            
            9,990
            
            
            
            22,651
            
            
            
            17,993
            
            
            
            44,002
            
            
            
            74,055
            
            
            
            10,138Income
      tax expenses
            
            
            (1,351
            )
            
            
            (1,810
            )
            
            
            (3,462
            )
            
            
            (3,271
            )
            
            
            (5,528
            )
            
            
            (757
            )Income
      before minority interests
            
            
            8,639
            
            
            
            20,841
            
            
            
            14,531
            
            
            
            40,731
            
            
            
            68,527
            
            
            
            9,381Minority
      interests
            
            
            (244
            )
            
            
            (260
            )
            
            
            −
            
            
            
            −
            
            
            
            (1,813
            )
            
            
            (248
            )Net
      income
            
            
            8,395
            
            
            
            20,581
            
            
            
            14,531
            
            
            
            40,731
            
            
            
            66,714
            
            
            
            9,133Earnings
      per share (basic)
            
            
            2.24
            
            
            
            5.48
            
            
            
            3.87
            
            
            
            5.02
            
            
            
            5.08
            
            
            
            0.69Earnings
      per share (fully diluted)
            
            
            2.24
            
            
            
            5.48
            
            
            
            3.87
            
            
            
            3.96
            
            
            
            4.34
            
            
            
            0.59Weighted
      average ordinary shares outstanding (basic)
            
            
            3,754,484
            
            
            
            3,754,484
            
            
            
            3,754,484
            
            
            
            8,118,335
            
            
            
            13,144,681
            
            
            
            13,144,681Weighted
      average ordinary shares outstanding (fully diluted)
            
            
            3,754,484
            
            
            
            3,754,484
            
            
            
            3,754,484
            
            
            
            10,292,308
            
            
            
            15,370,197
            
            
            
            15,370,197





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




As
      of December 31,2003
            
            
            2004
            
            
            2005
            
            
            2006
            
            
            2007RMB
            
            
            RMB
            
            
            RMB
            
            
            RMB
            
            
            RMB
            
            
            US$(in
      thousands)Cash
            
            
            32,866
            
            
            
            39,831
            
            
            
            42,716
            
            
            
            98,358
            
            
            
            222,494
            
            
            
            30,459Trade
      accounts receivable
            
            
            18,980
            
            
            
            49,283
            
            
            
            55,209
            
            
            
            116,606
            
            
            
            203,451
            
            
            
            27,852Total
      current assets
            
            
            72,253
            
            
            
            104,400
            
            
            
            144,104
            
            
            
            305,848
            
            
            
            572,304
            
            
            
            78,348Goodwill
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            37,274
            
            
            
            169,362
            
            
            
            23,186Total
      assets
            
            
            83,907
            
            
            
            118,277
            
            
            
            159,137
            
            
            
            389,141
            
            
            
            821,747
            
            
            
            112,497Total
      current liabilities
            
            
            48,194
            
            
            
            73,836
            
            
            
            101,547
            
            
            
            141,218
            
            
            
            315,727
            
            
            
            43,223Total
      liabilities
            
            
            48,230
            
            
            
            74,107
            
            
            
            105,539
            
            
            
            146,511
            
            
            
            323,450
            
            
            
            44,280Stockholders’
      equity
            
            
            32,587
            
            
            
            41,168
            
            
            
            53,599
            
            
            
            242,629
            
            
            
            493,098
            
            
            
            67,505Total
      liabilities and stockholders’ equity
            
            
            83,907
            
            
            
            118,277
            
            
            
            159,137
            
            
            
            389,141
            
            
            
            821,747
            
            
            
            112,497







EXCHANGE
RATE INFORMATION




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







Noon
      Buying RatePeriod
      End
            
            
            Average(1)
            
            
            High
            
            
            Low(Renminbi
      per US$1.00)2003
            
            
            8.2767
            
            
            
            8.2771
            
            
            
            8.2800
            
            
            
            8.27652004
            
            
            8.2765
            
            
            
            8.2768
            
            
            
            8.2774
            
            
            
            8.27642005
            
            
            8.0702
            
            
            
            8.1936
            
            
            
            8.2765
            
            
            
            8.07022006
            
            
            7.8041
            
            
            
            7.9723
            
            
            
            8.0702
            
            
            
            7.80412007
            
            
            7.2949
            
            
            
            7.6058
            
            
            
            7.8127
            
            
            
            7.2946November
            
            
            7.3850
            
            
            
            7.4210
            
            
            
            7.4582
            
            
            
            7.3800December
            
            
            7.2946
            
            
            
            7.3682
            
            
            
            7.4120
            
            
            
            7.29462008January
            
            
            7.1818
            
            
            
            7.2405
            
            
            
            7.2946
            
            
            
            7.1818


6
 Noon
      Buying RatePeriod
      End
                
                
                Average(1)
                
                
                High
                
                
                Low(Renminbi
      per US$1.00)February
                
                
                7.1115
                
                
                
                7.1644
                
                
                
                7.1973
                
                
                
                7.1100March
                
                
                7.0120
                
                
                
                7.0722
                
                
                
                7.1110
                
                
                
                7.0105April
                
                
                6.9870
                
                
                
                6.9997
                
                
                
                7.0185
                
                
                
                6.9840


Source:  Federal
Reserve Bank of New York


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





This
annual report contains translations of certain Renminbi amounts into U.S. dollar
amounts at specified rates.  Translations from Renminbi to U.S.
dollars at certain specified date refers to the noon buying rate on that
particular date in The City of New York for cable transfers of Renminbi as
certified for customs purpose by the Federal Reserve Bank of New
York.  Unless otherwise stated, the translations of Renminbi into U.S.
dollars have been made based on the noon buying rate on December 31, 2007, which
was RMB7.3046 to US$1.00.  We make no representation that the Renminbi
or U.S. dollar amounts referred to in this annual report could have been or
could be converted into U.S. dollars or Renminbi, as the case may be, at any
particular rate or at all.  See “Item 3. Key Information — Risk
factors — Risks related to doing business in China — Any fluctuations in
exchange rates could result in foreign currency exchange losses” and “—
Restrictions on currency exchange may limit our ability to receive and use our
revenues or financing effectively” for discussions on the effects of fluctuating
exchange rates and currency control on the value of our ordinary
shares.  On April 30, 2008, the noon buying rate was RMB6.9870 to
US$1.00.




The
People’s Bank of China, or the PBOC, issued a public notice on July 21, 2005
increasing the exchange rate of the Renminbi against the U.S. dollar by
approximately 2.0% to RMB 8.11 per US$1.00.  Further to this notice,
the PRC government has reformed its exchange rate regime by adopting a managed
floating exchange rate regime based on market supply and demand with reference
to a portfolio of currencies.  Under this new regime, the Renminbi is
no longer pegged to the U.S. dollar.  This change in policy has
resulted in an approximately 16% appreciation of the Renminbi against the U.S.
dollar between July 21, 2005 and April 30, 2008.  The PRC government
may decide to adopt an even more flexible currency policy in the future, which
could result in a further and more significant appreciation of the Renminbi
against the U.S. dollar.




B.   
Capitalization and
indebtedness.




Not
applicable.




C.    Reasons for the offer and
use of proceeds.




Not
applicable.




D.    Risk
factors.




RISKS
RELATING TO OUR BUSINESS




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




Our
current business was formed upon the consummation of a three-party merger on
November 24, 2006 among China Unistone, a special acquisition company
established in May 2004, Sihitech BVI, parent of Beijing Sihitech, a company
established in June 1999 that focused on providing system integration and other
IT solutions and services, and e-Channels BVI, parent of e-Channels, a company
established in February 2001 that focused on providing multi-channel software
solutions and IT consulting services.  Our combined company has a
limited operating history, which makes it difficult to evaluate our historical
financial results and business prospects.  In addition, we acquired
five companies in 2007.  See “Item 4. Information on the Company — A.
History and development of the Company.”  Our future success depends
on a successful integration of all these companies and the capturing of
opportunities presented by these acquisitions.  If we experience
difficulties in the integration




7




process or
are not able to take advantage of the perceived synergies between us and these
companies, we may not be able to expand our operations and revenues as
expected.




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




·
            respond
      to increasing competitions in the
industry;




·
            adapt
      to changing technologies;




·
            retain
      and expand our client base;




·
            expand
      our solution and service offerings;




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




·
            manage
      risks associated with intellectual
property;




·
            maintain
      effective control of our costs and expenses;
and




·
            attract,
      retain and motivate qualified
personnel.




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




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




Our
revenue has grown significantly in recent years.  Our revenue
increased 63.3% from RMB177.3 million in 2005 to RMB289.7 million in 2006, and
50.4% from 2006 to RMB435.5 million in 2007.  In addition to our
organic growth, our revenue growth, in particular the growth from 2006 to 2007,
was significantly enhanced by our merger with e-Channels BVI on November 24,
2006 and our acquisitions of five companies in 2007.  In addition to
revenues generated by these acquired companies, we were also able to achieve
synergies between our existing business and the acquired
businesses.  Without the impact of these acquisitions, our growth rate
during this period would have been much lower.  We may not be able to
make acquisitions with a similar scale, or at all, in future periods, or assure
you that our future acquisitions, if any, will be able to provide the same level
of synergy as our past acquisitions.  In addition, our past growth
reflected our success in achieving market acceptance of our IT solutions and
servicesand
establishing market leadership in certain segments of China’s financial IT
services industry. As we become
a larger and more mature company, we may not be able to sustain our recent rate
of revenue growth in future periods.




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




China
Construction Bank is one of the largest banks in China and our largest client,
accounting for 61.2%, 54.0% and 59.2% of our revenues in 2005, 2006 and 2007,
respectively.  We provide solutions and services to different
provincial branch offices of China Construction Bank as well as its head
office.  Although the engagements with the branches and the head
office are under separate and independent contracts, certain individual accounts
still historically account for a significant amount of revenue.  For
example, our largest account within China Construction Bank was with its head
office, which accounted for 29.3%, 30.0% and 29.1% of our revenues in 2005, 2006
and 2007, respectively.  Notwithstanding the separate legal treatment
of the engagements, a substantial failure to provide the contracted solutions
and services under one of our agreements may result in a disruption to our
overall relationship with China Construction Bank.  Also, if China
Construction Bank’s general IT spending pattern and budgeting changes or
decreases, it could adversely affect our ability to offer services and win
contracts from different entities within the bank.  We have no
long-term contracts with China Construction Bank or any of our




8




major
clients.  There can be no assurance that we will be able to continue
to retain these clients, and that we will maintain or increase our current level
of business with them in the future.  If we lose any of these
significant clients, or if any of them significantly reduces their use of our
solutions and services, we may not be able to find replacement revenue, and our
results of operations and financial condition could be materially and adversely
affected.  In addition, our current clients are primarily large
national commercial banks that possess significant negotiating and pricing
power, and if they exert pricing pressure on us, we cannot assure you that we
will be able to resist this pressure or find other replacement
clients.  If we have to lower prices to maintain our business with
these clients, our profitability may be materially and adversely
affected.




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




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




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




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




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




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




·
            any
      delays in the completion of our projects;
and




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




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




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




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




Substantially
all of our revenues have been derived, and are expected to continue to be
derived from, solutions and services which we provide to banks in
China.  Our revenue growth in recent years has been driven in part by
the growth in China’s banking industry due to China’s rapid economic development
and recent industry-wide reforms,




9




which
greatly increased spending in IT by China’s banks.  This growth may
not continue at the same rate or at all.  Unfavorable economic
conditions, such as a slow-down in the global economic development lead by a
potential recession in the United States, potential losses suffered by banks due
to the recent subprime crisis in the credit market and high inflation rate in
China, could adversely impact China’s economy and the growth of banks operating
in China, which may in turn impact their IT expenditures.  Any
decreases in, or reallocation of, capital expenditures by our current and
potential clients could have a material adverse effect on our business,
financial conditions and results of operations.  In addition, to
prevent potential overheating of the national economy, the PRC central
government has adopted, and is expected to continue adopt, various macroeconomic
measures that may limit the ability of China’s banks to lend to certain
industries or customers.  It may also impose monetary policies or
interest rates that may reduce the profitability of China’s
banks.  Any reduction in profitability of China’s banks may reduce
their spending on IT, which may materially and adversely affect our business,
financial condition and results of operations.




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




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




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




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




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




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




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




10




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




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




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




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




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




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




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




The
markets for our IT solutions and services change rapidly because of
technological innovation, new product introductions, declining prices and
evolving industry standards, among other factors.  New solutions and
technology often render existing solutions and services obsolete, excessively
costly or otherwise unmarketable.  As a result, our success depends on
our ability to keep up with the latest technological progress and anticipate
technological advances and to develop or acquire and integrate new technologies
into our solutions and services.  We cannot assure you that we will be
able to keep our solutions and services competitive in the evolving
market.  In addition, rapid advances in technology also require us to
commit substantial resources to researching, developing or acquiring new
technologies and deploying them into our operations, as well as to continuously
train personnel in new




11




technologies
and in how to integrate existing hardware and software systems with these new
technologies.  Such research, development and training place
significant burden to our financial resources.  If we are not able to
devote adequate resources to keep our technologies competitive, our ability to
effectively compete in the market may suffer as a result, which may materially
and adversely affect our business, financial condition and results of
operations.




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




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




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




We
are expanding into other business areas, such as the POS merchant acquisition
business, for which we have limited experience.  If we fail to manage
and grow our new businesses, our financial condition and results of operations
may be materially and adversely affected.




We
established a wholly-owned subsidiary, Beijing Yuxingyicheng Information
Technology Company Ltd., or Yuxinyicheng Information, to focus on the Point of
Sale, or POS, merchant acquiring business for credit and debit cards in a
nationwide collaboration with China Merchants’ Bank, currently the largest
credit card issuer in China.  As of December 31, 2007, we had deployed
over 8,900 POS terminals with merchants under our collaboration with China
Merchants Bank.  In February 2008 we signed an agreement with the
Guangdong branch of China Construction Bank to deploy POS terminals in
the Guangdong province (excluding Shenzhen) and an agreement with the Beijing
branch of Bank of Communications to deploy POS terminals in
Beijing.  For each POS terminal that we deploy, we share with the
collaborating bank a certain percentage of the processing fee for transactions
occurred on the POS terminal.  However, because we bear the cost of
POS terminals and the related consumables, and also due to sales and marketing
costs and other maintenance costs, we still suffered a loss for that business in
2007.  We cannot assure you that we will be successful in our
management of this business.  Many factors, some of them are beyond
our control, could materially and adversely affect our ability to turn this
business into a profitable business, including:




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




·
            our
      ability to manage our relationships with our
  collaborators;




·
            the
      low entry barrier and increasing
competition;




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




12




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




·
            our
      ability to deploy additional POS
terminals.




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




We
recently began providing Application Service Provider, or ASP, services to
small- and mid-sized banks, and we cannot assure you that we will be successful
in implementing this new revenue model.





We
typically provide our IT solutions and services on a project-by-project basis,
through which we charge our clients based on the entire cost and expected profit
on a project.  Recently, we launched a new revenue model whereby we
set up a complete IT architecture and software platform for our client, such as
the entire IT platform for online banking and charge fees to our client for the
use of such IT platform on a per-user or per-transaction basis.  For
example, in January 2008 we entered into a collaboration agreement with China
Financial Certification Authority, or CFCA, to provide online banking ASP
platform to serve small- and mid-sized banks.  CFCA will host and
maintain the online banking platform, and we will provide the necessary hardware
and online banking solutions.  In exchange of using the ASP services,
clients will pay a fixed annual fee for hosting and maintenance and share with
CFCA and us revenues generated through transactions on the ASP
platform.  Unlike our project-based revenue model, the initial charge
to the client is small, and we expect to recover our costs and make a profit by
generating recurring revenues tied to the use of the ASP
platform.  However, we cannot guarantee that we will be profitable
with this service.  Whether we can succeed in this business depends on
how many small- and mid-sized banks are willing to use this service instead of
creating their own online banking platform in-house, and also to the extent
their end customers use the online banking platform.  As we will bear
significant initial costs in the set-up of the platform, if we fail to generate
enough interest among the small- and mid-sized banks for the use of this
service, or if their end customers do not use the online banking platform we
provide, we may not be able to recover our costs and our business, financial
condition and results of operations may be materially and adversely
affected.




We
are expanding our client base to include an increasing number of small- and
mid-sized banks, which subject us to additional risks, such as uncertainties of
future businesses and credit risks.




As part of
our effort to diversify our business and reduce our dependence on a limited
number of banking clients, we have expanded our business to small- and mid-sized
banks.  However, we have limited experience doing business with these
banks and we cannot assure you that our sales strategies will be successful in
obtaining repeat business, such as later phase improvement or expansion of the
initial projects we undertake, from these clients as we are typically able to do
with our larger clients such as Tier I and Tier II banks.  In
addition, as compared to Tier I and Tier II banks, we have less understanding of
the budgeting process of the small- and mid-sized banks and their project
awarding practices, which makes it more difficult for us to predict future
projects and allocate and plan our resources.  Furthermore, small- and
mid-sized banks may not be as reliable as Tier I and Tier II banks in making
timely payments, which would subject us to additional credit
risks.  If we cannot successfully manage these risks, our business,
financial condition and results of operations may be materially and adversely
affected.




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




We rely on
a combination of patent, copyright and trademark laws, licensing agreements,
confidentiality agreements, internal confidentiality policies and other
contractual provisions, as well as technical measures to protect our
intellectual property rights.  We cannot assure you PRC laws and our
measures will be adequate to protect our intellectual property.  PRC
laws are still developing in this area and the enforcement of such rights at the
judicial level is highly uncertain and may not be as effective as in the United
States or other countries.  We may not be able to deter competitors
from copying our technology, reverse-engineering our solutions, or otherwise
infringing on our intellectual property rights.  To protect our trade
secrets and other proprietary information, our employees, consultants, advisors
and collaborators are required to enter into confidentiality
agreements.  There can be no




13




assurance
that these agreements will provide meaningful protection for the trade secrets,
know-how or other proprietary information in the event of any unauthorized use,
misappropriation or disclosure of such trade secrets, know-how or other
proprietary information.  We hold registered rights covering certain
aspects of our technology, in particular software solutions, but it is uncertain
how much protection such registrations provide us.  We have filed two
patent applications in China, but a patent filing may not result in an issued
patent, and even if an application results in an issued patent, it may not have
the scope we seek and may not sufficiently protect our intellectual property
rights.  In addition, because we currently do not have patents, we are
unable to rely on patent law to protect our intellectual property.  If
we fail to protect our intellectual property and technology, or if our
competitors independently develop technologies that are substantially equivalent
or superior to our technology, our competitiveness may be adversely affected,
which may materially and adversely affect our business and
prospects.




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




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




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




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




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




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




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




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




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




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




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




As a
result of these contract provisions, we may be subject to intellectual property
infringement claims by our clients.  It may be difficult to
distinguish which part of the software that we developed for our clients
represents




14




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




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




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




We
rely on selected third-party technologies and third-party suppliers for hardware
equipment and software applications for our system integration
services.  If we are not able to obtain the needed items, our business
could be materially and adversely effected.




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




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




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




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




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




15




·
            difficulties
      in the integration of acquired businesses and retention of personnel
      necessary to run such businesses;




·
            entry
      into unfamiliar markets;




·
            unforeseen
      or hidden liabilities;




·
            need
      for financial resources beyond our planned
  levels;




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




·
            failures
      in realizing anticipated synergies;
and




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




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




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




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




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




Historically,
wages for comparably skilled technical personnel in China’s IT services industry
have been lower than in developed countries, such as in the U.S. or
Europe.  However, in recent years, due to rapid economic development,
intense competition for qualified IT professional and general inflation, wages
in China’s IT services industry have increased and may continue to increase at
even faster rates.  Personnel cost accounted for 53.4%, 46.3% and
57.4% of our cost of revenues in 2005, 2006 and 2007,
respectively.  If we experience significant increases in wages for IT
professionals, our cost of revenues will increase significantly, which could
materially and adversely affect our gross margin and results of
operations.




16




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




With our
system integration services, we assist clients with the procurement and
installation of third-party hardware and software which best meets their system
requirements.  For the individual components, we typically provide
warranties similar in scope to the warrants covered by the
manufacturers.  However, we are generally responsible for the
maintenance and service of the entire system, and will act for our clients to
obtain manufacturer warranted services.  Most of our contracts do not
have disclaimers or limitations on liability for special, consequential and
incidental damages, nor do we cap the amounts recoverable for
damages.  If our clients file a significant number of warranty claims
against us for such third-party hardware or software, we cannot assure you that
we will be able to receive sufficient warranty coverage from the
manufacturers.  The warranties obtained from such manufacturers may
not cover the entire warranty claims, or the manufacturers may refuse to honor
their contract warranties.  As a result, we may be liable for damages,
which could materially and adversely affect our financial condition and results
of operations.




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




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




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




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




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




17




Our
solutions use internally developed software and systems as well as third-party
products, any of which may contain errors and bugs, which may require us to
spend additional time and incur additional expenses to correct, and these errors
and bugs may cause a breach of our service agreements and require us to pay
damages to our clients.




Our
solutions may contain undetected errors, defects or bugs that may or may not be
correctable.  Our solutions involve integration with products and
systems developed by third parties.  Complex software programs of
third parties may contain undetected errors or bugs when they are first
introduced or as new versions are released.  Because we cannot test
our existing or future solutions or third-party products upon which our
solutions are dependent for all possible scenarios, our solutions may contain
errors which are not discovered until after they have been installed and we may
not be able to correct these problems on a timely basis.  We may be
required to devote resources and incur significant amount of expenses to detect
and correct such errors and bugs, and we cannot assure you all of these error or
bugs can be corrected.  These errors and bugs may also result in
delays or loss of market share of our solutions, injury to our reputation and
damage our relationship with our clients.  Furthermore, these errors
or bugs may significantly impair their intended use and subject us to
liabilities to our clients, which may require us to pay damages.




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




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




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




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




We have had a significant deficiency inour internal control over our financial
reportingand there remain
areas of our internalcontrol over financial reportingthat require improvement.If we fail to establish or maintain an
effective system of internal controls, we may beunable to accurately report our
financial resultsor detect
fraud, and investor
confidence and the market price of our shares may be adversely
impacted.




We are subject to reporting obligations
under the U.S. securities laws, which require us toprovide management’s assessment on the effectiveness of our
internal controlsonthisannual report on Form
20-F.Our
management identified, and our independent registered public accounting
firmalso identified andcommunicated to




18




us in connection withtheir audit of
our financial statements for the year ended December 31, 2007, one significant
deficiency in our internal control over financial reporting.  The
significant deficiency relates to an inappropriate accrual of inventories
purchased.  This significant deficiency in our internal controls could
lead to our potential failure in detecting on a timely basis a material
misstatement in our annual or interim financial statements.  We have
started to formulate a program which we believe will remedy the significant
deficiency described above.  We expect to review and, as appropriate,
revise our accounting and management information systems software.  We
also expect to increase the areas to be reviewed and discussed with our board of
directors.  We will continue these efforts until we are satisfied that
the significant deficiency has been eliminated.  However, we cannot
assure you that we will be successful in our efforts.  If we cannot
eliminate our significant deficiency and improve our internal controls, we may
not be able to accurately report our financial results or detect
fraud.  As a result, our results of operations and your ability to
judge our financial performance may be materially and adversely affected, which
may in turn adversely affect investor confidence and the market price of our
shares.




Furthermore, beginning with our annual report on Form
20-F for the fiscal year ending December 31, 2008,in addition to the filing ofourmanagement’s report on its assessment on the
effectiveness of our internal controlover financial reporting, our
independent registered public accounting firmwillalsoberequired to attest to and report on our
management’s assessment of the effectiveness of our
internal control over financial reporting.  Our management may
conclude that our internal
control over financial reporting is not effective.Moreover, even if our management
concludes that our internal control over financial reporting is effective, our
independent registered public accounting firm may still decline to attest toour management’s assessment or may issue a report that
is qualified if it is not satisfied with our internal controls or the level at
which our controls are documented, designed, operated or reviewed, or if it
interprets the relevant requirements differently from us.Any conclusion of ineffectiveness in our
internal control over financial reporting, either by our management or by our
independent registered public accounting firm, may result in loss of investor
confidence and a decrease inthe market priceofour shares.




We
may grant stock options under our share incentive plan, resulting in increased
share-based compensation expenses and, therefore, reduced net
income.




In 2005,
China Unistone adopted its 2006 Performance Equity Plan, which we assumed
following the three-way merger in November 2006.  To date we have not
granted any options under the plan.  However, we may in the future
grant options to our senior management and key employees under that plan to
provide further incentives.




Under the
Statement of Financial Accounting Standards No. 123R, “Share-Based Payment”, we
are required to recognize share-based compensation as compensation expense in
our statement of income based on the fair value of equity awards on the date of
the grant, with such compensation expense recognized over the period in which
the recipient is required to provide service in exchange for the equity
award.  If we grant stock options, the additional expenses associated
with share-based compensation may adversely affect our results of
operations.  However, if we do not grant stock options, we may not be
able to attract and retain key personnel.




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




The PRC
government has provided various incentives to domestic companies in the software
industry in China in order to encourage development of this
industry.  Many of our PRC subsidiaries have historically received
technology subsidies, business tax exemptions, value-added tax, or VAT, refunds
and preferential income tax treatments.  For example, many of our PRC
subsidiaries enjoyed reduced enterprise income tax at the applicable rate of 15%
on taxable profits in China as compared to the statutory rate of 33% and/or tax
holidays due to their status as a foreign-invested enterprises, software
enterprises or high-tech enterprises located in certain
locations.  Our tax savings from these preferential income tax
treatments amounted to RMB3.2 million, RMB11.9 million and RMB18.1 million, in
2005, 2006 and 2007, respectively.  See “Item 5. Operating and
Financial Review and Prospects — A. Operating results — Income
taxes.”  In addition, due to our status as software company in the
high-tech industry, we received technology subsidies, VAT refunds, business tax
refunds and other benefits in the amount of RMB1.0 million, RMB3.2 million and
RMB7.3 million, respectively, in 2005, 2006 and 2007.  See “Item 5.
Operating and Financial Review and Prospects — A. Operating results — Operating
expenses — General and administrative expenses.”  The PRC government
may reduce or eliminate these incentives at any time in the
future.




19




Additionally,
in order to continue to qualify for some of these incentives, we are required to
meet stringent requirements on research and development activities and on our
gross revenues.




On March
16, 2007, the PRC National People’s Congress passed the PRC Enterprise Income
Tax Law, or the New EIT Law, and in March 2007 the PRC State Council issued
implementation rules under the New EIT Law, both of which became effective on
January 1, 2008.  Under the New EIT Law and its implementation rules,
a unified enterprise income tax rate of 25% and unified tax deduction standards
will be applied equally to both domestic-invested enterprises and
foreign-invested enterprises, but it repealed most of the existing preferential
tax treatments, including the preferential tax rates and the tax
holidays.  The New EIT Law provides a five-year transition period that
allows enterprises that enjoyed certain preferential tax treatment under the old
enterprise income tax regime to gradually transition to the 25% statutory rate
in a prescribed fashion.  According to a notice issued by the PRC
State Council, for enterprises that enjoyed preferential income tax rate of 15%
pursuant to certain prior tax rules or regulations specified in the notice, the
applicable enterprise income tax rate will increase to 18% for 2008, 20% for
2009, 22% for 2010, 24% for 2011 and 25% for 2012 and thereafter.  For
tax holidays specified in the notice, enterprises already enjoying such holidays
prior to January 1, 2008 can generally continue to enjoy such tax holidays until
their expiration, upon which time the 25% tax rate will apply.  All
other preferential tax treatments have generally terminated on December 31,
2007.  Although the New EIT Law provides that the State Council can
grant tax waivers or preferential tax rates for “qualified high-tech or new-tech
companies in need of special state support,” but the qualification criteria for
such high-tech or new-tech companies are not yet clear, and we cannot assure you
that any of our PRC subsidiaries will qualify.  Due to the application
of the New EIT Law and its implementation rules, certain of our subsidiaries may
no longer be able to enjoy any preferential income tax treatment, and certain
others may need to pay higher transitional income tax rates starting January 1,
2008.  As a result, we expect our effective income tax rate to
gradually increase from our 2007 level, which may materially and adversely
affect our financial condition and results of operations.




Furthermore,
under the New EIT Law and the implementation rules, all of the dividends paid by
our PRC subsidiaries to us are subject to a withholding tax at a rate of 10%,
unless we will be deemed as a resident enterprise for tax
purposes.  If we are deemed as a resident enterprise for tax purposes,
our global income will be subject to PRC income tax in accordance with the New
EIT Law and the implementation rules.  See “— Risks related to doing
business in China — We may be treated as a resident enterprise for PRC tax
purposes under the New EIT Law and we may therefore be subject to PRC income tax
for any dividends we receive from our subsidiaries, which may materially and
adversely affect the amount of dividends we must pay to our
shareholders.”




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




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




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




Our
business could be materially and adversely affected by the outbreak of avian
influenza, severe acute respiratory syndrome, or SARS, or another health
epidemic.  In recent years, there have been reports on the occurrences
of avian influenza in various parts of China, including a few confirmed human
cases and deaths.  Any prolonged recurrence of avian influenza, SARS
or other adverse public health developments in China could require the temporary
closure of our offices or prevent our staff from traveling to our clients’
offices to provide on-site services.  Such closures could severely
disrupt our business operations and materially and adversely affect our
business, financial condition and results of operations.




20




RISKS
RELATED TO DOING BUSINESS IN CHINA




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




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




The
economy of China has been experiencing unprecedented growth, leading to
increased inflation.  Monetary policies adopted by the PRC government
to combat inflation may result in a decrease in China’s economic development and
profitability of China’s banks, which could adversely affect our
business.




The rapid
growth of China’s economy has resulted in higher levels of
inflation.  China’s consumer price index increased 4.8% in the full
year of 2007, and the government has initiated a number of monetary policies to
control the potential overheating of the economy and high
inflation.  As part of such measures, the People’s Bank of China, or
PBOC, China’s central bank, has increased statutory deposit reserve ratio ten
times in 2007 and another two times in January and March 2008, respectively,
increasing the statutory reserve ratio from 9.0% at the end of 2006 to its
current level of 15.5%, which greatly reduced the amount of funds available for
China’s banks to extend loans.  In addition, PBOC increased interest
rates six times in 2007, which could result in slowdown of capital investment,
consumption and overall economic activity.  All these and other
measures could lead to reduced profit for China’s banks and reduce their desire
to upgrade or expand their IT systems.  Any reduced IT spending in
China’s banking industry will materially and adversely affect our sales, which
could materially and adversely affect our business, financial condition and
results of operations.  In addition, higher inflation may increase our
costs, and there can be no assurance that we would be able to increase our
prices to the extent necessary to offset the increase in our expenses, and our
gross margin and net margin could be materially and adversely
affected.




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




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




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




21




behalf in
the future, the instruments governing the debt may also restrict their ability
to pay dividends or make other payments to us.  Any limitation on our
subsidiaries’ ability to distribute dividends to us may adversely affect our
ability to pay dividends to our shareholders.




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




Our
operating subsidiaries are all located in China and our functional currency is
Renminbi, and we are subject to fluctuations of the exchange rate between
Renminbi and U.S. dollars.  PBOC sets and publishes daily a base
exchange rate between Renminbi and U.S. dollars.  Beginning on July
21, 2005, PBOC has set this rate with reference primarily to the supply and
demand of Renminbi against a basket of currencies in the market during the prior
day, taking into account other factors such as the general conditions existing
in the international foreign exchange markets, as compared to an exchange rate
pegged to the U.S. dollar before such date.  As a result, from July
21, 2005 to April 30, 2008, the Renminbi appreciated approximately 16% against
the U.S. dollar.  There is increasing international pressure for the
PRC government to further loosen its control of the foreign exchange rate to
allow a faster appreciation of the Renminbi.




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




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




Substantially
all our revenues and expenses are denominated in Renminbi.  We may
need to convert a portion of our revenues into other currencies to meet our
foreign currency obligations, including, among others, payment of dividends
declared, if any, in respect of our ordinary shares.  Under China’s
existing foreign exchange regulations, our PRC subsidiaries are able to pay
dividends in foreign currencies, without prior approval from SAFE, by complying
with certain procedural requirements.  However, we cannot assure you
that the PRC government will not take measures in the future to restrict access
to foreign currencies for current account transactions.




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




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




SAFE
promulgated regulations that require registration with local SAFE offices in
connection with direct or indirect offshore investment and cross-border
investment through the special purpose vehicles by PRC residents, including PRC
individual residents and PRC corporate entities.  These regulations
apply to our shareholders who are PRC residents and also apply to our prior and
future offshore acquisitions.  In particular, the SAFE regulations
require PRC residents to file with competent SAFE offices information about
offshore companies in which they have directly or indirectly invested or through
which the cross-border investment is conducted and to make follow-up filings in
connection with certain material transactions involving such offshore companies,
such as increases or




22




decreases
in investment amount, transfers or exchanges of shares, mergers or divisions,
long-term equity or debt investments, external guarantees or other material
events that do not involve return investment.




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




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




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




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




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




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




23




in
China.  If we declare dividends from such income to our shareholders,
it is unclear whether such dividends, or the gain our non-PRC shareholders may
realize from the transfer of our ordinary shares, would be treated as
PRC-sourced income and be subject to PRC tax.  If we are required
under the New EIT Law to withhold PRC income tax on our dividends payable to our
non-PRC shareholders, or if non-PRC shareholders are required to pay PRC income
tax on the transfer of their ordinary shares, the value of your investment may
be materially and adversely affected.




Uncertainties
with respect to the PRC legal system could limit the protections available to
you and us.




The PRC
legal system is a civil law system based on written statutes.  Unlike
in the common law system, prior court decisions may be cited for reference but
have limited precedential value.  Since 1979, PRC legislation and
regulations have significantly enhanced the protections afforded to various
forms of foreign investments in China.  We conduct all of our business
through our consolidated entities established in China.  These
entities are generally subject to laws and regulations applicable to foreign
investment in China and, in particular, laws applicable to wholly foreign-owned
enterprises.  However, since many laws, rules and regulations are
relatively new and the PRC legal system continues to rapidly evolve, the
interpretations of many laws, regulations and rules are not always uniform and
enforcement of these laws, regulations and rules involves uncertainties, which
may limit legal protections available to us.  For example, we may have
to resort to administrative and court proceedings to enforce the legal
protection that we enjoy either by law or contract.  However, since
PRC administrative and court authorities have significant discretion in
interpreting and implementing statutory and contractual terms, it may be more
difficult to predict the outcome of Chinese administrative and court proceedings
as well as assess the level of legal protection we enjoy in China versus in more
developed legal systems.  These uncertainties may impede our ability
to enforce the contracts we have entered into with our business partners,
clients and suppliers.  In general, these uncertainties, including the
inability to enforce our contracts, could materially and adversely affect our
business and operations.  Furthermore, intellectual property rights
and confidentiality protections in China may not be as effective as in the
United States or other countries.  Accordingly, we cannot predict the
effect of future developments in the PRC’s legal system, particularly with
regard to China’s IT industry and banking industry, including the promulgation
of new laws, changes to existing laws or the interpretation or enforcement
thereof, or the preemption of local regulations by national
laws.  These uncertainties could limit the legal protections available
to us and other foreign investors, including you.  In addition, any
litigation in China may be protracted and result in substantial costs and
diversion of our resources and management attention.




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




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




RISKS
RELATING TO OUR SHARES




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




We issued
5,328,320 ordinary shares as part of the initial purchase price for the
acquisitions of Sihitech BVI and e-Channels BVI.  These shares were
not registered, and therefore are restricted securities subject to resale




24




restrictions.  All
of these shares are currently held by our management and
employees.  As of March 31, 2008, all of such shares are tradable
subject to restrictions under Rule 144 and insider trading rules.




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




In
addition, certain of our shareholders and their transferees and assignees have
certain registration rights with respect to 750,000 shares.  See “Item
7. Major Shareholders and Related Party Transaction — Registration rights
agreement.”  Registration of these shares under the Securities Act
would result in these shares becoming freely tradable without restriction under
the Securities Act immediately upon the effectiveness of the
registration.  Sales of these registered shares in the public market
could cause the price of our ordinary shares to decline.




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




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




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




Certain
of our principal shareholders have entered into a voting
agreement.  In addition, a large portion or our shares are owned by a
few of our directors and executive officers.  These shareholders will
have a significant control over our corporate transactions and other matters
that require shareholder approval.




Eight of
our principal shareholders, including our Chairman, Mr. Chih Cheung, Chief
Executive Officer, Mr. Weidong Hong, and Chief Operating Officer, Mr. Shuo Zeng,
who in the aggregate control 34.3% of our total issued and outstanding shares as
of December 31, 2007, have entered into a voting agreement whereby they agree to
vote, for a period of three years ending November 24, 2009 or until the voting
agreement is terminated by the unanimous written agreement of all parties to the
voting agreement, all of their respective shares held during the term of the
agreement for six directors nominated by the selling shareholders of Sihitech
BVI and e-Channels BVI and three directors nominated by our Chairman Mr. Cheung
and Mr. James Li, one of the eight shareholders.  The parties to the
voting agreement have also agreed not to take any action that would change the
number of directors or the process of nomination, selection and removal of
directors as set forth in our Articles of Association and Memorandum of
Association, unless they agree unanimously on such action.  Therefore,
they will have control of our board of directors and be able to influence the
decisions of our board and the direction of our company.  Such
agreement may also cause the current management to remain in place without
opportunity for the other shareholders to effectuate change.




In
addition, even after the expiration of the voting agreement, our executive
officers and directors, including Messrs. Chih T. Cheung, Chairman of our board,
Weidong Hong, our Chief Executive Officer and director and Shuo Zeng, our Chief
Operating Officer and director, will in aggregate control the voting of about
19.8% of our issued and outstanding ordinary shares, assuming they do not sell
any of their shares and our total number of issued and outstanding shares do not
change.  These three major shareholders will continue to maintain a
significant control over the outcome of corporate transactions or other matters
submitted to our shareholders for approval, including the election of directors
and the approval of other business transactions.




25




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




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




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




The
market price for our shares may be volatile.




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




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




·
            changes
      in financial estimates by securities research
  analysts;




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




·
            addition
      or departure of key personnel;




·
            addition
      or loss of key clients;




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




·
            intellectual
      property litigation;




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




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




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




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




Although
our ordinary shares are traded on NASDAQ under the symbol “YTEC”, the trading
market in our ordinary shares has been substantially less liquid than the
average trading market for companies quoted on NASDAQ.  Reported
average daily trading volume in our ordinary shares for the three-month period
ended March 31, 2008 was approximately 239,000 shares.  Limited
trading volume will subject our shares to greater price volatility and may make
it difficult for you to sell our shares at a price that is attractive to
you.




26




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




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




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




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




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




27




ITEM
4.                      INFORMATION
ON THE COMPANY




A.           History and development of
the Company.




CORPORATE
INFORMATION




Our legal
name is Yucheng Technologies Limited, which was incorporated in the BVI on
November 17, 2005.  Our principal executive offices are located at 3/F
Tower B, Beijing Financial Trust Building, 5 Anding Road, Chaoyang District,
Beijing 100029, People’s Republic of China, and our telephone number is (86)
10-6442-1088.  Our registered office in the BVI is at P.O. Box 957,
Offshore Incorporations Centre, Road Town, Tortola.  We maintain an
Internet website at www.yuchengtech.com.  Our agent for service of
process in the United States is National Corporate Research at 10 E. 40th Street,
10th
Floor, New York, New York 10016.




CORPORATE
HISTORY




The
three-party merger




Our
current business was formed on November 24, 2006 upon the consummation of a
three-party merger among China Unistone, Sihitech BVI and e-Channels
BVI.  China Unistone was incorporated in the State of Delaware on May
7, 2004 to serve as a special acquisition company.  In November 2004,
China Unistone became listed on the OTCBB.




Beijing
Sihitech was founded in June 1999 by Mr. Weidong Hong, our Chief Executive
Officer, which provided IT services and system integration to the banking
industry in China.  Beijing Sihitech is organized and operates under
PRC law.  Prior to the merger, it was owned by Mr. Hong and other PRC
citizens through a holding company incorporated in the BVI, Sihitech
BVI.




e-Channels
was founded in February 2001 by Mr. Shuo Zeng, our Chief Operating Officer,
which provided online banking and electronic multi-channel software and
solutions to the banking industry in China.  Similar to Beijing
Sihitech, it is organized and operates under PRC law, and was owned prior to the
merger by Mr. Zeng and other PRC citizens through a holding company incorporated
in the BVI, e-Channels BVI.




On
November 17, 2005, Yucheng Technologies Limited was incorporated in the BVI as a
wholly-owned subsidiary of China Unistone.  China Unistone first
merged with and into Yucheng for the purpose of redomestication of the surviving
company to the BVI.  Yucheng, the surviving entity of the
redomestication merger, then acquired both Sihitech BVI and e-Channels BVI on
the same day, and became the holding company of the operating entities, Beijing
Sihitech and e-Channels and their respective subsidiaries.




As a
result of the merger, Beijing Sihitech and its subsidiaries and e-Channels
became our principal subsidiaries.  Since the consummation of the
merger, we have established additional subsidiaries to carry out various
business operations, and have also acquired several companies in
China.  The consideration for the acquisition of Sihitech BVI and
e-Channels BVI consisted of cash and stock.  Sihitech BVI was acquired
for an initial price consisting of US$2,731,884 cash and 3,754,484 ordinary
shares of Yucheng.  e-Channels BVI was acquired for an initial price
of US$1,268,116 cash and 1,573,836 ordinary shares of Yucheng.  The
aggregate initial consideration paid at the closing was US$4,000,000 cash and
5,328,320 ordinary shares of Yucheng.




Of the
US$4,000,000 cash consideration, US$250,000 was held back by Yucheng for 12
months as security for the indemnification obligations of the selling
shareholders of Sihitech BVI and e-Channels BVI.  Of the 3,754,484
ordinary shares of Yucheng issued to the selling shareholders of Sihitech BVI as
consideration, 773,045 shares were tied to performance, subject to return if its
net profit as shown in the audited consolidated financial statements of Yucheng
(prepared in accordance with US GAAP) for the year ended December 31, 2006, plus
all the compliance expenses of being public, was less than
US$6,073,941.  Of the 1,573,836 ordinary shares of Yucheng issued to
the selling shareholders of e-Channels BVI, 670,339 shares were similarly
subject to return and cancellation if its net profit as shown in the audited
financial statements of e-Channels and its subsidiaries prepared in accordance
with US GAAP for the year ended December 31, 2005 was less than
RMB9,000,000.  As both financial milestones were achieved, none of the
shares were returned for cancellation.




28




In
addition, pursuant to the merger agreement and its amendment, the selling
shareholders of Sihitech BVI and e-Channels BVI are entitled to additional cash
and equity consideration upon satisfaction of certain
conditions.  Specifically, with respect to additional cash
consideration, they are entitled to:




·
            US$4,960,000,
      if we receive an aggregate of US$34,250,000 in gross proceeds from an
      additional financing, including, but not limited to, (a) exercise of our
      warrants, (b) our successful completion of a secondary offering, or (c)
      the private investment into us by a strategic
  investor;




·
            US$1,000,000,
      if the average closing price of our stock in any 60 consecutive trading
      days of the year, or the Average Share Price, is above US$10.00 in
      2006;




·
            US$2,000,000,
      if the Average Share Price is above US$12.00 in 2007;
  and




·
            US$3,000,000,
      if the Average Share Price is above US$14.40 in
  2008;




provided, however, that in the event
that all of the above events occur, the maximum aggregate amount to be paid by
us to the selling shareholders will be no more than US$10,000,000.  As
of March 31, 2008, conditions (1) and (3) have been met.  We have paid
US$4,960,000 to the selling shareholders in 2007 with respect to condition (1)
and the US$2,000,000 with respect to condition (3) has been
accrued.




With
respect to additional equity consideration, the selling shareholders are
entitled to receive 952,832 shares each year for four years starting from 2008,
if we achieve a net profit of the following amounts according to the financial
statements audited in accordance with US GAAP:




Year
      Ending December 31,
            Net
      Profit2007
            US$8.5
      million2008
            US$11.9
      million2009
            US$16.7
      million2010
            US$23.3
      million




As of
March 31, 2008, the net profit target for the year ended December 31, 2007 had
been met.  Accordingly, we are required to issue 952,832 shares to the
selling shareholders.




Additional
acquisitions following the three-party merger




We made
four additional acquisitions in 2007 following the three-party
merger.




On January
18, 2007, we acquired 100% interest of Sunrisk, a provider of risk management
solutions and services to China’s banks.  The consideration for the
acquisition was RMB45 million, provided that Sunrisk achieves a net profit of
RMB5 million for 2006 and RMB9 million for 2007.  Otherwise, the
consideration will be adjusted.  Both performance targets were
achieved and the consideration of RMB34.5 million has been paid, the remaining
RMB10.5 million has been accrued.




On May 14,
2007, we acquired 75% interest of Easycon, a provider of IT solutions and
service to small- and mid-sized banks in China.  The consideration for
the acquisition was RMB22.25 million, of which RMB5 million was held back by us
as security to cover any indemnification obligations of the selling
shareholders.  This amount will be released to the selling
shareholders of Easycon on July 1, 2008, less any deductions of valid
indemnification claims that we have before June 30, 2008.




On June
26, 2007, we acquired 100% interest of Recency, a provider of business
intelligence solutions and consulting services to China’s banks.  The
consideration for the acquisition was RMB25 million, subject to adjustment if
the revenue of Recency in 2007 was lower than RMB30 million.  The
performance target was achieved and the consideration of RMB14.75 million has
been paid, the remaining RMB10.25 million has been accrued.




29




On October
29, 2007, we acquired 100% interest of Fujie and Fuyi, two related companies
focused on ERP management consulting and project
implementation.  Consideration for the acquisitions is linked to the
performance of Fujie for both 2007 and 2008.  Based on its estimated
net income of RMB4 million for 2007 and RMB5.2 million for 2008, the total
consideration was expected to be RMB20.7 million.  The actual
consideration is to be adjusted based on the actual results.  As of
March 31, 2008, we have paid RMB8.28 million to the selling shareholders of
these two companies and an additional RMB6.22 million has been
accrued.






30




B.   Business
overview.
  OVERVIEW
OF OUR BUSINESS
  We are a
leading provider of information technology, or IT, solutions and services to
China’s banking sector.  Our IT solutions and services enable our
clients to establish and maintain IT platforms to better manage their operations
and serve their customers’ needs.  We develop and deliver an extensive
suite of IT solutions and services, which we believe are best in class in the
China market, and are tailored toward specific functional needs of our
clients.  Our IT solutions and services enable critical functionality
required in China’s banking industry, including channel-related solutions,
management-related solutions and business-related solutions.
  ·
              Channel-related
      solutions.  Our channel-related solutions enable banks to
      more effectively interact with their customers and execute customer
      transactions through various channels, such as online banking, call
      centers and bank cards, in an efficient and cost-effective manner, and
      assist banks in integrating these various channels.  According
      to a June 2007 report issued by IDC, a third-party research organization,
      we ranked first among all of the banking IT solution providers in China
      for both online banking solutions and call center solutions as measured by
      combined 2006 revenues of Beijing Sihitech and
  e-Channels.
  ·
              Management-related
      solutions.  Our management-related solutions help banks
      to collect and analyze data, as well as manage risk during the course of
      regular business activity.  These solutions improve operational
      transparency and efficiency in many aspects of our clients’ business
      processes, improve risk management capabilities, and enable management to
      make sound business decisions.
  ·
              Business-related
      solutions.  Our business-related solutions help banks
      better manage various aspects of their operations, including core banking
      and foreign exchange, treasury and other intermediary
      businesses.  These solutions help our clients execute
      transactions in these and other areas more efficiently, providing benefits
      to themselves as well as meeting the increasingly complex needs of their
      customers.
  We
generally provide our IT solutions and services to our clients on a
project-by-project basis, whereby our clients agree to enter into one or several
fixed-price, all-inclusive contracts, as opposed to purchasing separate
individual service components from us on a time-and-materials or per-segment
basis.
  In
addition to IT solutions and services, we also provide system integration
services for our clients, which involves selecting, procuring and reselling
third-party hardware equipment and software applications to our
clients.  This also involves monitoring and assisting in the
installation of such equipment and software at clients’ sites, as well as
assisting in the integration of the installed equipment with clients’ existing
IT systems.  We typically only provide system integration services as
part of a larger client engagement that includes IT solutions and services, or
if we anticipate that the system integration component will lead to future IT
solutions and services revenue from the same client.
  Beginning
in early 2007, we launched our POS merchant acquiring business, which includes
deploying to merchants Point-of-Sale terminals, or POS terminals, and processing
credit and debit card payments through these POS terminals in collaboration with
banks.  Our POS merchant acquiring business enables banks to increase
their number of installed terminals in a more rapid and efficient manner, and
creates a new, recurring revenue stream for us under the revenue sharing
arrangements in which we enter into with our collaborating banks.
  Since
becoming a public company in November 2006, we have grown both organically and
by acquiring other IT solutions and service providers in China’s banking
industry.  In 2007, we acquired:
  ·
              a
      100% interest of Sunrisk, a provider of risk management solutions and
      services to China’s banks;
  ·
              a
      75% interest of Easycon, a provider of IT solutions and service to small-
      and mid-sized banks in China;
  ·
              a
      100% interest of Recency, a provider of business intelligence solutions
      and consulting services to China’s banks;
and
   31
 ·
              a
      100% interest of both Fujie and Fuyi, two related companies focused on ERP
      management consulting and project
  implementation.
  These
acquisitions have enabled us to offer a broader range of solutions and services,
provided us with access to a broader client base, and helped us to strengthen
our management team and employee base.
  We conduct
our business through various subsidiaries in the PRC.  Together with
our head offices in Beijing, we have subsidiaries or branch offices in 15 other
cities.  As of December 31, 2007, we had 1,674 employees.
  As a
result of both organic growth and acquisitions, our revenue grew from RMB177.3
million in 2005 to RMB435.5 million (US$59.6 million) in 2007, representing a
compound annual growth rate, or CAGR, of 56.7%, and our net income grew from
RMB14.5 million in 2005 to RMB66.7 million (US$9.1 million) in 2007,
representing a CAGR of 114.3%.
  OUR
INDUSTRY
  According
to IDC, the market for banking industry IT solution spending in China is
expected to grow from RMB7.3 billion (US$1.0 billion) in 2007 to RMB14.8 billion
(US$2.0 billion) in 2011, representing a CAGR of 19.6%.  This rapid
growth in IT solution spending is driven primarily by the rapid development in
China’s economy and the ongoing regulatory reform catalyzed by China’s accession
into the WTO, and the resulting increase in competition in China’s banking
industry.  To meet increasingly complex customer demands and to stay
competitive in the market place, China’s banks are increasingly relying on IT
systems for the management of their operations, such as processing transactions,
analyzing operational data and managing risks, thereby creating growth
opportunities for IT solution and service providers such as us.
  The
following table sets forth China’s banking industry IT solution spending by
solution types from 2006 to 2011.
  
  Source:
      IDC, June 2007
  
 China’s
banking and financial institutions and their IT needs
  China’s
banking industry continues to be the primary provider of capital to China’s
growing economy and bank deposits remain a primary choice for domestic
savings.  According to IDC, there are more than 19,000 banking
institutions operating in China today.  Most of these institutions are
either wholly state-owned or state-controlled, directly or through state-owned
enterprises.  In recent years, there have been a growing number of
privately-owned as well as foreign-owned banks, although they are still
relatively small in number to date.
   32
 China’s
banking industry can be classified into four groups, including:
  ·
              Tier I state-controlled
      commercial banks.  This group comprises the Industrial
      and Commercial Bank of China, Bank of China, China Construction Bank and
      the Agricultural Bank of China, which are commonly known as the “Big
      Four.”  These four banks are the largest among China’s domestic
      banks in terms of assets, deposit base, loan portfolio and nationwide
      branch network.  According to the 2007 IDC Report, the Big Four
      together account for over 50% of bank assets in China.  In
      recent years, three members of the Big Four, i.e., the Industrial and
      Commercial Bank of China, Bank of China and China Construction Bank, have
      completed an initial public offering and listing of their shares on the
      Hong Kong Stock Exchange.  Although the Big Four have
      substantial in-house IT capabilities, we believe that, given their status
      as overseas listed companies on foreign exchanges and their needs to
      achieve global best practices, they will continually need to use
      third-party IT solution and service
providers.
  ·
              Tier II national commercial
      banks.  This group comprises of 13 other national
      commercial banks, which are owned by a combination of government entities,
      state-owned enterprises and other investors.  Many members of
      this group, such as Bank of Communications, China Merchants Bank, China
      Minsheng Banking Corporation, Huaxia Bank, Shanghai Pudong Development
      Bank and Shenzhen Development Bank, are listed domestically and/or in Hong
      Kong.  Tier II national commercial banks generally have the
      financial resources necessary to maintain sufficient in-house IT
      capabilities to meet their needs.  However, we believe that they
      are in substantial need of third-party expertise to enable them to sustain
      the growth rates that they have achieved in recent
  years.
  ·
              Tier III banking
      institutions.  According to a report issued by China
      Banking Regulatory Commission, or CBRC, for 2006, this group includes 113
      city commercial banks, over 19,000 credit cooperatives (including rural
      commercial banks and rural cooperative banks) and 14 foreign banking
      institutions.  We believe that most of the Tier III domestic
      banks lack both the financial resources and in-house IT expertise needed
      to either scale up operations or to meet increasingly stringent regulatory
      requirements.  As such, we believe they are most likely to
      allocate a majority of their IT spending to third-party providers such as
      us.  Although foreign banks possess the financial resources,
      they are not familiar with local market practices and the regulatory
      requirements and often require the assistance of China’s domestic IT
      solution and service providers.
  ·
              Central bank and policy
      banks.  The People’s Bank of China, or PBOC, is PRC’s
      central bank, which formulates China’s monetary policies and implements
      such policies through a number of means, such as setting deposit reserves,
      interest rates and foreign exchange rates.  In addition, there
      are three policy banks in China, the Agricultural Development Bank of
      China, China Development Bank and the Export-Import Bank of
      China.  These policy banks were established in the mid-1990s as
      a result of banking reforms to assume the government driven policy lending
      functions from the Big Four.  China Development Bank is in the
      process of transforming from a policy bank to a national commercial
      bank.
  In
addition to banks, there are numerous non-banking financial institutions in
China, including insurance companies, securities brokerages, investment
companies, asset management companies, finance companies and investment
banks.  This industry segment is still in the early stages of
development in China, and most of these financial institutions are still
relatively small.  As this industry segment matures, we expect it to
undergo significant consolidation.  The IT systems and applications
used in these non-banking financial institutions have similarities to those used
in banking institutions.  We believe as these financial institutions
become larger, they will need more complex and sophisticated IT solutions to
manage their business and service their customers.  These non-banking
financial institutions present potential new business opportunities for
providers such as ourselves.
  Furthermore,
we believe that in order to continue to access new channels for growth, banks
may use their strong government support and access to capital to expand into new
financial services adjacent to the banking sector, such as insurance, asset
management, securities brokerage and investment banking, if such diversification
becomes allowed under PRC laws and regulations.  We believe such
expansion and the need to integrate these new businesses with their existing
banking businesses will require them to place an even greater emphasis on IT
systems.  As their IT systems become increasingly complex, their needs
for third-party IT solutions and services will continue to
   33
  increase,
in particular from those providers with experience in both the banking industry
and the non-banking financial service industry.
  Driving
forces behind IT spending among China’s banking institutions
  China’s
rapidly growing economy and the ongoing regulatory reforms are two major driving
forces of change to China’s banking industry.  China has experienced
rapid economic growth over the past three decades, largely as a result of the
PRC government’s extensive economic reforms.  China’s nominal gross
domestic product, or GDP, grew at a CAGR of 12.1% from 1997 to 2006, according
to the National Bureau of Statistics of China.China’s economic growth,
combined with increasing fixed capital formation, high household savings rates,
and a closed capital account, have driven the growth of China’s banks in the
past decade.  Such a rapidly developing economy places strong demand
on the efficiency and integrity of the country’s banking system.  In
recent years, China’s banking system has undergone significant changes and
evolved to become an increasingly market-driven system.
  In
addition, China’s entry into the WTO in December 2001 and its accession
commitments have served as a catalyst for regulatory reforms in China’s banking
sector.  In addition to PBOC, the most important government entity
overseeing China’s banks is the CBRC.  CBRC was formed in April 2003
to assume the principal bank regulatory functions from PBOC, in part in response
to the WTO entry and the need to improve banking regulations.  Since
its establishment, CBRC has pushed for improved disclosure, management
accountability, more prudent regulatory standards and more efficient
operations.  It has also played a key role in carving out bad debt,
recapitalizing leading banks, regulating bank operations and driving reform
throughout the banking system as a whole.  CBRC’s actions have led to
significant improvements in corporate governance, risk management, internal
controls and financial and operational transparency of China’s
banks.  While China’s banking industry is still evolving from a level
well below the Organization for Economic Co-operation and Development’s
standards, or the OECD standards, supervision and regulation of China’s banks
have improved dramatically in recent years, and is expected to continue to
improve.
  As
required by the WTO accession agreement, China has been gradually phasing out
limits on foreign financial institutions.  The removal of such
restrictions should gradually eliminate two key advantages that Chinese banks
previously enjoyed: 1) the ability to take Renminbi deposits; and 2) their broad
geographic network.  We believe that the liberalization of the banking
and financial services industry in China will force domestic banks and other
financial institutions to improve their operations, increase the breadth of
their product offerings and enhance their quality of services so that they can
more effectively compete with increasingly prevalent international
competitors.
  As such,
we expect China’s banking institutions to more aggressively seek technology and
outsourced solutions to resolve inefficiencies and lower costs so that they can
compete more effectively in the marketplace.  According to IDC, as of
the end of 2006, total assets of China’s domestic banks were estimated to be
RMB44.0 trillion (US$6.0 trillion), which is approximately 41% of those of their
U.S. counterparts (US$14.7 trillion).  However, collective IT spending
of the same group in China is estimated to be less than 9% of their US
counterparts (US$5.1 billion versus US$56.5 billion).  As the
foregoing estimates illustrate, China’s banks are spending a much smaller amount
on IT spending than their U.S. counterparts, both on an absolute basis and as a
percentage of total assets.  We believe that, as part of a broad-based
effort to accelerate compliance with requirements of the WTO and Basel II (the
international standards for better risk management for banks), China’s domestic
banks will increasingly benchmark themselves to their foreign counterparts, and
seek to achieve operational efficiencies through long-term increases in IT
spending.
  These
developments in China’s banking industry indicate strong demand for IT solutions
and services, a significant portion of which we expect will be outsourced to
third-party IT solution and service providers.  In addition, due to
their limited business scale and resources as compared to large Tier I and Tier
II banks, we believe those small- to mid-sized banks will rely even more heavily
on third party IT solution and service providers to meet their increasingly
complex IT needs.  We believe that all of these developments present
significant growth opportunities for IT service providers in China.
   34
 Requirements
for a successful third-party IT solution and service provider to China’s banking
institutions
  As the
market for our services continues to evolve, the needs of our clients continue
to become increasingly complex.  Based on our experience, we believe
the following factors are of increasing importance to our existing and new
clients as they select a third-party provider for their outsourced IT solutions
and services:
  ·
              extensive
      experience in providing the specific services required of a subject
      engagement;
  ·
              ability
      to proactively identify and address additional issues encountered with a
      given client’s IT operations following the beginning of a project
      initially undertaken for different
objectives;
  ·
              ability
      to complete an overall project and meet interim project milestones on
      timely basis;
  ·
              ability
      to deliver solutions and services to meet agreed upon requirements for
      total project cost;
  ·
              best-in-class
      solutions which can be implemented quickly and cost effectively and which
      leverage prior experience in developing similar solutions for other
      clients;
  ·
              flexibility
      of project staffing and resource allocation to best conform to required
      project scope, scale and length;
and
  ·
              ability
      to provide clients with access to the deepest and most valuable technical
      and industry-specific expertise, such as highly experienced senior
      management resources.
  We believe
that as our clients’ needs become increasingly complex, so will the requirements
for success in our industry.  Our ability to remain competitive will
depend, in part, on ongoing investment in our technology capabilities and our
human capital resource base, which we believe differentiates us from our
competitors.  We also expect our industry to continue to undergo rapid
consolidation, as China’s domestic banks seek vendors with a comprehensive
service offering and the scale necessary to provide solutions and services in a
seamless fashion to numerous client locations across China.  We
believe that in order to succeed, we will need to continue to seek attractive
acquisition candidates.
  OUR
SOLUTIONS AND SERVICES
  We provide
a broad range of IT related solutions and services to China’s banking
institutions.  Based on the nature of our solutions and services, we
categorize them as either IT solutions and services or system
integration.  System integration relates to the procurement, re-sale,
installation and integration of third-party hardware and software for our
clients, IT solutions and services includes all of our other solutions and
services, including developing and sale of our software solutions, IT consulting
and implementation, custom software development, IT maintenance and services, as
well as our POS merchant acquiring business.
  IT
solutions and services
  Software-related
solutions and services
  We
primarily provide the software-related solutions and services to our banking
clients, including sales of software-related solutions and related customization
and custom software development as well as consulting services.  Our
software-related solutions include:
  ·
              Channel-related
      solutions.  Channel-related solutions are designed to
      help facilitate banks’ interactions with their customers and to improve
      communication and transaction efficiency and the overall banking
      experience of the end customers.  Our channel-related solutions
      include online banking solutions, call center solutions and bank card
      solutions that allow our clients to better serve their customers through
      various channels, such as online banking transactions, telephone banking
      transactions and customer service interactions.  Our solutions
      automate our clients’ operations and allow them to better track
      performance of these functions.  In 2005, 2006 and 2007, our
      revenues from channel-related solutions were
  RMB5.5
   35
 
  million,
RMB19.4 million and RMB53.0 million, respectively, representing a CAGR of
209.6%, and accounted for 3.1%, 6.7% and 12.2% of our total revenues,
respectively.
 ·
              Management-related
      solutions.  Our management-related solutions include
      solutions for the monitoring and management of risks and performance as
      well as business intelligence.  These solutions enable our
      clients to perform intelligent analyses of their data to support more
      effective management reporting and sound decision making.  We
      provide a suite of consulting and implementation services in risk and
      performance management, such as asset and liability management, funds
      transfer pricing and profitability analysis.  In 2005, 2006 and
      2007, our revenues from management-related solutions were RMB39.7 million,
      RMB50.4 million and RMB97.5 million, respectively, representing a CAGR of
      56.7% and accounted for 22.4%, 17.4% and 22.4% of our total revenues,
      respectively.
  ·
              Business-related
      solutions.  Our business-related solutions include a wide
      scope of transaction-related solutions, such as core-banking, foreign
      exchange and treasury.  We provide our core banking solutions,
      which manages all operations relevant to deposit and loan accounts,
      principally to small- to mid-sized banks, as they usually lack the
      internal IT capabilities needed to develop and maintain their own
      systems.  In 2005, 2006 and 2007, our revenues from
      business-related solutions were RMB0.9 million, RMB 10.7 million and
      RMB45.5 million, respectively, representing a CAGR of 604.2%, and
      accounted for 0.5%, 3.7% and 10.5% of our total revenues,
      respectively.
  We
typically develop function-specific customized applications according to the
needs of our clients and integrate those into our clients’ existing IT
systems.  Increasingly, we develop solutions for our clients that we
are able to leverage in meeting similar needs of clients, and given that much of
the initial development work has already been completed in our work with
previous clients, we are able to offer these solutions at more competitive
pricing structures to additional clients when the need for a comparable solution
becomes apparent.  We believe that this method for providing
“repeatable” solutions will become increasingly important as we target new
segments of the market, such as small- and mid-sized banks, whose IT budgets
oftentimes do not allow for large-scale, highly customized work.
  IT
services
  We also
provide IT maintenance and support services to our clients as well as limited
agency services when we procure third-party IT equipment for other system
integrators and charge a commission.  We record these revenues as IT
services revenue.  In 2005, 2006 and 2007, our IT services revenue
amounted to RMB15.0 million, RMB18.9 million and RMB34.6 million, respectively,
representing a CAGR of 52.1%, and accounted for 8.4%, 6.5% and 7.9% of our total
revenues, respectively.
  POS
merchant acquiring services
  Beginning
in early 2007, we initiated our POS merchant acquiring services, facilitated by
the growing use of credit and debit cards in China.  The provision of
these services allows us to diversify our revenues, increase revenue
predictability through processing of electronic payments made via our POS
terminals, and capitalize on new business opportunities presented by shifting
consumer payment trends in China.  It also allows our banking clients
to focus on their core competencies, while outsourcing non-core functions to
third-party providers such as ourselves.
  Our
business model for POS merchant acquiring involves executing a multi-year
contract with banks to deploy POS terminals with new merchants.  We
typically bear the up-front sales and marketing costs, supply and install the
POS terminals, install software to connect the POS terminals with the bank’s
payment processing network, supply consumables, provide the training and ongoing
maintenance, as well as other related services.  Subscribing merchants
are typically not required to pay any fees for the service.  They
generally enter into contracts that typically renew on an annual basis unless
terminated by either the bank or the merchant.  Under these
agreements, we are entitled to revenue sharing with the bank for a portion of
the transaction fees received through the processing of bank card transactions
initiated on the POS terminals we deployed.  The POS terminals we
deploy are able to accept both PRC domestic and foreign credit cards, debit
cards.
   36
 We
initiated our POS merchant acquiring services in early 2007 to deploy POS
terminals nationwide in collaboration with China Merchants Bank, which according
to its data, is currently the largest credit card issuer in China.  As
of December 31, 2007, we had deployed over 8,900 POS terminals under that
arrangement.  In February 2008 we won an award from China Merchants
Bank as its top provider of POS merchant acquiring services for
2007.  In February 2008 we signed an agreement with the Guangdong
branch of China Construction Bank to deploy POS terminals in Guangdong province
(excluding the city of Shenzhen) an agreement with the Beijing branch of Bank of
Communications to deploy POS terminals in Beijing.
  System
integration
  We assist
our clients in selecting appropriate third-party hardware or software, dealing
with the manufacturers, obtaining bids and proposals on behalf of our clients,
negotiating terms and, where required, monitoring and assisting in the
installation and testing of the hardware and software, which is normally
provided by third-party manufacturers.  We also assist in the
integration of the installed equipment and software with our clients’ existing
IT systems.
  Historically,
system integration represented a substantial majority of our
revenue.  Beginning in 2006, we gradually shifted our focus to
providing IT solutions and services to both existing and new
clients.  Currently, we only provide system integration services as
part of a larger client engagement that includes IT solutions and services, or
if we anticipate that the system integration component will lead to future IT
solutions and services revenue from the same client.
  In 2005,
2006 and 2007, our revenues from system integration were RMB116.2 million,
RMB190.2 million and RMB204.9 million, respectively, representing a CAGR of
32.8%, and accounted for 65.5%, 65.7% and 47.0% of our total revenues,
respectively.
  Nature
of our client engagements
  Our
objective is to maximize our share of wallet with existing and new clients by
cross-selling additional services once we have developed an initial service
relationship.  Large, multi-year projects are usually separated into
different phases, and each phase is covered by separate
contracts.  For our software-related solutions and services and our
system integration services, we typically enter into one contract with our
clients for each project we undertake.  Our contracts for
software-related solutions and services typically last between two and twelve
months (averaging six to seven months) and our contracts for system integration
services are generally shorter.  Because each project typically
involves multiple components, each combined to meet the needs of a project or a
particular project phase, for our software-related solutions and services, we
typically price our solutions and services relating to a project or a project
phase based on an all-inclusive, fixed-price basis, rather than on an a-la-carte
basis for each individual component or segment.  To the extent we are
successful in managing projects, fixed-price contracts have historically allowed
us to employ various process methodologies designed to improve the profitability
of an overall project, while maintaining high levels of quality, timely
completion and adherence to client cost requirements.  Our system
integration projects are generally priced based on our material and service cost
plus an applicable margin.  Our clients are generally required to pay
us in installments, with a portion of payment made at contracts signing, upon
achievement of certain interim milestones, and upon pass of client inspection
after completion.  For software-related solutions and services
contracts, 5% to 10% of the total payment is typically withheld by the client
until the expiration of product warranty, typically one year following the start
of implementation.  For system integration contracts, 10% to 20% of
the total payment is typically withheld by the client until three months after
we complete the installation and system integration.
  Recently,
in instances where the functionality of our solutions is per-user or
per-transaction based, we have initiated a new revenue model whereby we set up
the entire IT architecture and software platform, such as the entire IT platform
for online banking, and charge fees to our clients for the use of such IT
platform on a per-user or per-transaction basis.  For example, in
January 2008 we entered into a collaboration agreement with China Financial
Certification Authority, or CFCA, to provide online banking Application Service
Provider, or ASP, platform to serve small- and mid-sized banks.  CFCA
is China’s regulatory agency for secured online transactions, which will host
and maintain the online banking platform to ensure the highest level of
transaction security and service availability, and we will provide the necessary
hardware and online banking solutions.  In exchange for using the ASP
services, clients are expected to pay a fixed annual fee for hosting and
maintenance, as well as to share with
   37
 CFCA and
us revenues generated through transactions occurred on the ASP
platform.  As part of the agreement, we will also provide
customization to the ASP platform per client request, and is expected to receive
fees in relation to such customization.  Compared to our traditional
project-based revenue model, the initial charge to the client is relatively
small, but it will generate recurring revenues tied to the usage of the ASP
platform.  We believe this revenue model is appealing to the small-
and mid-sized banks, which may not have the financial resources and internal IT
capabilities to maintain their own online banking platform.  We
believe that the recurring revenues generated from this business will also
improve the predictability and sustainability of our revenues.
  OUR
COMPETITIVE STRENGTHS
  We believe
the following competitive strengths enable us to compete more effectively in
providing IT solutions and services to China’s banking
institutions.
  Broad
client base and extensive China domestic banking industry
experience.
  Our client
base includes all of China’s most prominent Tier I banks as well as many of the
Tier II and Tier III banks.  We have achieved a leading position in
the Tier I segment, and count 15 of China’s 17 largest banks as our
clients.  As the Tier I and Tier II banks tend to set typical norms
for the IT standards in China’s banking industry, our close client relationships
in those segments enable us to develop and maintain deep expertise required to
maintain our leadership position.  Through the acquisition of Easycon
and also organic growth, we have also expanded our client base to include
numerous small- and mid-sized banking clients.  We believe our broad
client base and extensive industry expertise will help us grow revenue from
existing clients and also win new clients as we further penetrate new
segments.
  Deep
relationships with existing clients and effective new client development
strategy.
  In the
course of serving our existing clients, we typically develop a detailed and
proprietary understanding of our clients’ internal IT operations, as well as
their existing and future service needs.  As our clients typically
prefer to maintain continuity in their third-party IT outsourcing relationships,
we believe we are well-positioned to best-serve our clients’ needs on future
projects, in particular where we have had significant prior input into the
client’s IT systems.  Through the undertaking of one client project
with a new client, we are often able to gain knowledge of the client’s adjacent
IT needs and are able to cross-sell or up-sell our additional solutions and
services to the client, which in turn strengthens our relationships and benefits
our competitive position.
  Extensive
suite of solution and service offerings.
  To date,
we have developed a broad range of solutions, which we deliver using our suite
of proprietary applications, together with services such as consulting, custom
application development, integration with legacy systems, implementation of
third-party packaged software applications, application testing, and system
integration services, which are oftentimes provided as a packaged large-scope
project.  Our broad range of service capabilities allows us to tailor
our solutions to each of our clients’ particular business needs, and provides
our clients with a “one-stop shopping” experience.  Our approach has
enabled us to become increasingly important to our clients’ overall IT
strategies, allowing us to more effectively cross-sell and up-sell additional
solutions and services to help better meet their long-term needs.
  Highly
leveragable product suite.
  The
substantial experience, both industry-specific and technology-related, that we
have gained in providing a broad range of solutions to numerous clients
historically has allowed us to develop deep insight into how best to serve both
existing and new clients.  This has also enabled us to engineer
applications during the course of a specific client engagement in a way to allow
them to be leveraged in subsequent client engagements.  We believe
that this capability provides us with a significant competitive advantage as we
target new clients, such as small- and mid-sized banks.
   38
 Strong
management team and highly experienced IT employees.
  We believe
that our management team and employees are our most important assets and provide
us with a substantial competitive advantage during our day-to-day business
operations.  Our executive management team, on average, possesses 15
or more years of directly relevant industry experience.  These
individuals have been instrumental in growing our businesses organically, as
well as in identifying, acquiring and integrating acquisition targets to
date.  We believe that they have demonstrated a superior understanding
of and ability to effect consolidation in our rapidly changing
industry.  With significant industry experience and strong track
record, we believe that our management team, our founders in particular, has
established a favorable reputation within our industry and in the broader
marketplace, which can help us win additional clients as well as business
partners and future acquisition targets.  In addition, we believe that
our employee base, which has come together both organically and via acquisition,
is a highly experienced and capable group, allowing us to target, assess and
deliver client engagements more effectively and efficiently.
  Broad
geographic presence.
  In
addition to our head office in Beijing, we maintain subsidiaries and branch
offices in 15 other cities across China.  As many of our clients, in
particular the larger Tier I and Tier II clients, have a nationwide or
multi-province presence, our broad geographic presence allows us to be close to
our clients in multiple locations, which further helps us to maintain close
relationships with them.  In addition, as we expand our client base to
include more small- and mid-sized banks, our broad geographic coverage makes it
easier for us to connect with them and provide our solutions and services in a
client-facing fashion, which we believe is critical for effective cross-selling
and up-selling of additional services and solutions.
  Strong
brand in the marketplace.
  We have an
established reputation with our clients and among China’s banking IT service
provider community, and are a leading provider of IT services to China’s premier
banking institutions, such as China Construction Bank.  We began
providing IT solutions and services to China Construction Bank in 1999, and have
been providing IT solutions and services to China Construction Bank every year
since then.  We have also enjoyed close business relationships with
many other Tier I and Tier II banks in China.  Our service to these
premier banking institutions has earned us credibility and prestige in the
industry.  For example, we were named as one of the ten best IT
solution providers for China’s financial industry for 2007 by Computer Partner
World, a leading IT focused magazine in China. We believe that our
established reputation and credibility provide us advantages in our competition
for new businesses opportunities.
  OUR
STRATEGIES
  Our
objective is to become the leading provider of IT solutions and services to
China’s domestic banking industry as well as gain a significant market share of
China’s emerging POS merchant acquiring market.  While we believe that
we have already established an attractive market position, we intend to further
grow our business and enhance our overall market standing by implementing the
following strategies:
  Continue
to drive organic growth through cross-selling and up-selling of new services to
our existing clients in the Tier I and Tier II banking segments.
  We have
established close relationships with most of the Tier I and Tier II banks in
China, and have undertaken multiple projects for the vast majority of these
banks.  We intend to further leverage such relationships and
cross-sell more solutions and services to these banks.  For example,
we have provided numerous services, such as online banking, call center, risk
management, business intelligence, foreign exchange, performance management
solutions, to China Construction Bank, which has been our largest client by
revenue in each of the past three years.  In comparison, we have
provided much more limited IT solutions and services to many other Tier I and
Tier II banks.  We intend to leverage our experience with China
Construction Bank to actively promote our other IT solutions and services to
those banks.
   39
 Continue
to expand into new client segments, such as small- and mid-sized commercial
banks.
  We intend
to broaden our client base to include more small- and mid-sized commercial
banks.  As compared to large Tier I and Tier II banks, these small-
and mid-sized banks do not have the business scale, financial resources or
internal IT capabilities for highly sophisticated IT systems and
solutions.  As such, they generally require less customization of IT
solutions, providing us opportunities to sell our solutions in a more
standardized manner with minimal incremental cost per sale.  In
addition, due to their smaller size and increasing needs, oftentimes we are in a
more beneficial position in negotiating contract terms with small- to mid-sized
banks as compared to large banks.  Our acquisition in July 2007 of
Easycon, an IT service provider to small- and mid-sized banks, greatly increased
our number of clients in this segment and we expect to continue placing
considerable emphasis on penetrating this segment.
  Transition
to transaction-based revenue model in certain of our segments.
  Our
traditional business model involves executing projects specified by our clients
with fixed-price contracts, based on the complexity and duration of the
project.  Such projects generate onetime revenues and generally must
be renegotiated should the client decide to expand the project or make
improvements, either in the current year or in subsequent years.  We
intend to explore alternative revenue model by delivering certain of our
offerings, such as online banking solutions, to our clients by a combination of
initial implementation fee plus subsequent per-transaction or per-user
fee.  We believe that such a delivery method is more economical for
certain of our clients, in particular those small- and mid-sized bank clients,
as they do not need to pay a large up-front fee in order to benefit from
solutions.  As an initial effort, we entered into a collaboration
agreement with CFCA in January 2008 to provide online banking ASP services to
small- and mid-sized banks, for which the banks are expected to pay CFCA and us
fees based on usage of the online banking platform.
  Expand
our solutions and service offerings to address new growth
opportunities.
  As part of
our ongoing effort to broaden our service offerings and increase our relevance
and share of wallet with our clients, we have launched POS merchant acquiring
services targeting China’s growing consumer credit and debit card payment
processing market.  In early 2007, we entered into collaboration with
China Merchants Bank, currently the largest credit card issuer in China, to
deploy POS terminals with new merchants nationwide to enable them to start
accepting payments by credit and debit cards.  Payment transactions
conducted through these POS terminals are processed by China Merchants Bank and
we share with the bank a portion of the processing fee.  As the
penetration ratio of POS terminals in China is still very low as compared to
more developed countries, and as more consumers in China recognize the benefit
of making electronic payments instead of carrying cash, we believe this new
business has tremendous growth potential.  In additional to generating
additional recurring revenue for us, we believe this new business can also add
significant value to our existing and new client relationships.
  Pursue
selective acquisitions, joint ventures and strategic alliances.
  Historically,
in order to supplement our organic growth strategy and increase our solutions
and service offerings and overall market share, we have made selective
acquisitions and entered into strategic alliances.  As such, we
acquired five companies during 2007.  We have also entered into
cooperation agreements with banks for POS merchant acquiring business, and
entered into an agreement with CFCA with respect to the provision of ASP
services.  These acquisitions and strategic alliances have expanded
our source of revenue, increased our solution and service offerings, enhanced
our research and development capabilities, diversified our client base,
augmented our management resources and employee base, and enhanced our long-term
competitive position.
  Expand
our client base and service offerings to include the adjacent financial services
industries.
  In
addition to banking institutions, there are a large number of non-bank financial
institutions in China, such as insurance companies, securities brokerages, asset
management companies and investment banks.  These financial service
industries are still in their early development stages and we believe they have
tremendous growth potential.  As these industries develop, we believe
there will be a substantial need for third party IT solution and service
providers.  As the IT systems required in these adjacent industries
are similar in many respects to the IT systems used in banks, we intend to
leverage our expertise and experience generated from the banking industry to
provide IT
   40
  solutions
and services to the non-banking financial institutions.  In addition,
we believe that many of our larger existing bank clients will over time expand
their service offerings to capture new revenue opportunities from China’s
increasing consumption of financial services, such as those listed
above.  We believe that with our existing banking IT expertise and our
early-mover approach into adjacent financial services industries, we will be
able to enhance our long-term growth potential.
  PROJECT
DEVELOPMENT AND MANAGEMENT
  The
following chart illustrates our typical project development and management
processes.
  
  Project
management
  We manage
our projects principally through the following steps:
  ·
              Project
      set-up.  We conduct feasibility and margin analysis
      before the set-up of each project, which requires approval of the sales
      division, business division and technology management
      division.
  ·
              Project
      planning.  Following approval of the project setup, our
      project manager designs the overall project plan and estimates project
      workload and cost to enable us to allocate necessary resources to the
      project.
  ·
              Project
      monitoring.  Our project manager then tracks and monitors
      project progress and presents the progress of the project both internally
      and to the client through various project progress reports.  Any
      changes to the project need to have approval from our sales division,
      business division and technology management
  division.
  ·
              Risk
      management.  We estimate potential risks upon project
      setup, and establish relevant strategies and measures to respond to any
      such risks to minimize their
impact.
  ·
              Quality
      assurance.  We conduct frequent tests and examinations to
      ensure the quality of our solutions and
  services.
   41
 ·
              Client satisfaction
      survey.  We regularly distribute a client satisfaction
      questionnaire to our principal clients during project implementation, and
      adopt appropriate measures to address issues raised by our
      clients.
  ·
              Project
      closing.  Our sales, business and technology management
      divisions need to approve the closing of each project, and we conduct an
      overall assessment of the project at closing, including project
      achievements and financial return.
  Project
development
  Our
project development activities include the following:
  ·
              Needs
      analysis.  The first step of our project development is
      to understand our client’s business needs for the project.  We
      carry out frequent communications with our client and conduct extensive
      analyses of their needs based on their business and current IT
      system.
  ·
              System
      design.  Based on our understanding of our client’s
      business needs, we design a system to best address such needs, including
      overall architecture of the system, database, customer interface and
      modules.
  ·
              Coding and module
      testing.  We start coding individual functional modules
      once we have a system design or part of the system design to meet our
      client’s requirements.  Each of our functional modules is tested
      and debugged individually to ensure quality and
    functionality.
  We work
closely with our clients during the above steps, and these steps may be repeated
or conducted in parallel to ensure that we have a system with functionalities
that can best meet our client’s business requirements.
  ·
              System
      testing.  After we finish coding and testing the
      individual modules, we start connecting the modules and performing testing
      on the system level.
  ·
              System test run and client
      examination.  After the system passes system testing, we
      then install it on our client’s site and conduct real data test run with
      our client.  We work closely with our client to address and
      resolve any issues that may come up during the test run and client
      examination.
  ·
              System delivery and
      maintenance.  After passing client examination, the
      system is delivered to our client and the project development cycle is
      closed.  Generally, we provide one year of maintenance and
      support for most of our IT solutions, and we assign an employee as the
      principal contact person to receive client feedback, evaluate severity of
      any problem arising from the use of the IT solution, resolve the problem,
      and maintain an issue log.
  QUALITY
ASSURANCE
  We have
built quality assurance measures into our project management
process.  We conduct frequent tests, both in the module level and
system level, to ensure our solutions meet our high quality standards and
required functionality.  We frequently interact with our clients
throughout the entire project development process, soliciting their feedback and
take measures to improve our solutions and services.
  We conduct
various technical appraisals and management appraisals before and during the
course of project implementation.  Technical appraisals include demand
appraisal, design appraisal, code spot tests, internal check and acceptance, and
client check and acceptance; and management appraisals include project set-up
appraisal, plan appraisal and settlement appraisal.  These appraisals
are designed to ensure the smooth progress of our projects and quality of our
implementation.
  We have
established a set of quality control procedures and follow standard software
development protocols in our development processes.  Beijing Sihitech
received an ISO 9001:2000 certification in March 2005 and e-Channels received an
ISO 9001-2000 certification in July 2006.  We are in the process of
obtaining level 3 certification of Capability Maturity Model Integration, or
CMMI, for our software development operations.  CMMI is a framework
for business process improvement that is widely accepted in the software
industry.
   42
 SALES
AND MARKETING
  We employ
a direct sales model to market and sell our solutions and
services.  As of December 31, 2007, we had a 344-person sales and
marketing staff in 16 cities across China.  Our non-POS related sales
personnel are organized into four divisions based on client types and geographic
locations.  In Beijing, we have a Tier I and Tier II bank sales
division and a small- and mid-sized bank sales division, and we have two
regional sales divisions for each of the eastern China and southern China
regions.  Our Tier I and Tier II bank sales division is primarily
responsible for sales and marketing for our Tier I and Tier II bank clients, and
we have dedicated sales teams for our key clients such as China Construction
Bank, Agricultural Bank of China and CITIC Bank.  Our regional offices
assist in the sales and marketing process by maintaining active relationships
with to the local branch offices of the Tier I and Tier II banks.  Our
small- and mid-sized bank sales division in Beijing and our two regional sales
offices are primarily responsible for sales and marketing activities in their
respective regions.  Our sales personnel for the POS merchant
acquiring business are separately managed by our subsidiary, Yuxingyicheng
Information, and as of December 31, 2007 were located in 11 cities across
China.
  Our sales
strategy also differs depending on the type of clients.  For Tier I
and Tier II banks, we establish and maintain long-term partnerships, providing
these leading banks with a comprehensive set of IT consulting and implementation
services and a focus on growing with the IT needs of each client.  We
also strive to provide our solutions and services to these clients in follow-on
projects by cross-selling our other solutions and services.  For
small- to mid-sized banks, we aim to secure a foothold with our leading IT
solutions such as online banking or through the acquisition of companies
specializing in that banking segment, such as Easycon.  Due to their
limited experience with third-party IT solution and service providers, in many
cases, these clients are unaware initially of the broad range of solutions and
services that may be obtained from a third-party provider, and are therefore
unaware of the benefits in leveraging the experience and capabilities of a
provider such as ourselves.  The initial client engagement enables us
to understand clients’ IT needs, quickly build relationships internally, and
provide us opportunities to demonstrate to them our capabilities and value
proposition so that we can cross-sell or up-sell our additional solutions and
services to best meet their long-term business needs.
  Many banks
select their IT solution and service providers through a competitive bidding
process.  Before submitting a bid, we usually conduct a detailed due
diligence study of the bank, our competitors, the technical advantages we have
regarding the project, duration of the project, our estimated cost and
profitability and potential for a long-term relationship with the
client.  We selectively submit bids on projects where we believe we
have a competitive advantage.  In addition to price, we believe
clients usually select the winning bidder based on a number of other factors,
including reputation and track record of the IT service provider, its technical
capabilities, historical relationship with the client and the functionality of
the proposed solutions.
  Many of
our client projects are separated into different phases, often spanning more
than one year.  For the latter phases of the projects that we
initially undertake, banks usually do not engage in any additional bidding
processes.  Instead, we typically conduct new negotiations to
determine the scope and cost of the new phase.
  As for the
POS merchant acquiring business, our sales are conducted largely through direct
selling efforts to the merchants made on behalf of our partner
banks.  We also conduct various joint-promotion activities with
collaborating banks to help increase our brand awareness in the marketplace,
such as a restaurant promotion month and a promotional bonus point
program.
  Our sales
and marketing expenses were RMB11.2 million, RMB14.0 million and RMB29.1 million
(US$4.0 million) for 2005, 2006 and 2007, respectively, mainly comprised of
compensation expenses.  In addition to salaries, our sales staff
receives a significant portion of their compensation from sales
commissions.
  OUR
CLIENTS
  Our
current clients consist primarily of Tier I and Tier II banks that look for
customized IT solutions to meet specific business and operations
requirements.  Of the 17 Tier I and Tier II banks, 15 are our clients
and some have been so for more than five years.  We have also been
adding Tier III banks to expand our client base, which are predominantly small-
and mid-sized banks.
   43
 China
Construction Bank, one of the largest banks in China and a client of ours since
1999, has been our largest client in each of 2005, 2006 and 2007, accounting for
61.2%, 54.0% and 59.2% of our total revenues, respectively, in those three
years.  However, our contracts with China Construction Bank were
signed separately with different departments, branches and provincial offices
and the head office and we consider each of them effectively separate clients
since the decision makers and budgets are unrelated.  If we treat
different decision making bodies within China Construction Bank as separate
clients, China Construction Bank head office was our largest client in each of
the past three years, accounting for 29.3%, 30.0% and 29.1% of our total
revenues in 2005, 2006 and 2007, respectively.  Revenues from each of
other branches of China Construction Bank accounted for less than seven percent
of our total revenues in each of 2005, 2006 and 2007.  In addition to
China Construction Bank, Agriculture Bank of China accounted for 12.6% of our
total revenues in 2006.  No other client accounted for over ten
percent of our revenues in each of 2005, 2006 and 2007.
  We realize
the risks involved with overdependence on one or a few clients, and have taken
measures to expand our client base, in particular to small- to mid-sized
banks.  Our number of clients from non-Tier I banks increased from
seven in 2005 to 23 in 2006 and 106 in 2007, including one, 12 and 95 Tier III
banks, respectively.  Our percentage of revenues from non-Tier I banks
increased from 9.0% in 2005 to 9.4% in 2006 and 27.7% in 2007, among which 0.1%,
0.8% and 15.4%, respectively, were from Tier III banks.  We believe
over time, small- to mid-sized banks are likely to significantly increase their
IT investments due to competitive pressures, and we are working to position
ourselves to take advantage of this opportunity.
  In
addition to China’s domestic banks, we have also begun marketing our services to
the Chinese operations of foreign banks, which have seen significant expansion
in recent years due to China’s WTO commitments.  For example, we
entered into contracts with the PRC subsidiary of Hana Bank of Korea in late
2007 to develop their bank card processing system and online banking platform,
and with the PRC subsidiary of Bank of East Asia of Hong Kong in early 2008 to
develop their online banking platform.
  SUPPLIERS
  We work
with third-party suppliers for hardware equipment and certain software
components that we incorporate into our solutions.  Our hardware
suppliers include HP, IBM, Intel and Sun for servers and Cisco, Huawei and
Nortel for network equipment.  Our software suppliers include BEA
Systems, Microsoft and Oracle.  We do not depend on any single
supplier for either hardware or software.  In addition, we have
gradually reduced our reliance on third-party software through internal
development.  In 2005, 2006 and 2007, no single supplier accounted for
over 10% of our cost of revenues.
  Our POS
terminal suppliers include Ingenico, Hypercom, Sagem, Pax and
Spectra.  We have not experienced any difficulty in the procurement of
POS terminals.  Generally, these suppliers provide a three-year
service warranty on the POS terminals free of charge.  After the
expiration of this period, we assume all costs associated with the maintenance
of these POS terminals.
  RESEARCH
AND DEVELOPMENT
  The market
for our solutions and services is characterized by rapid technological
change.  As China’s banks upgrade their technology to meet
requirements under international accords, we must enhance our current solutions
and services on a timely basis, develop and introduce new solutions that keep
pace with technological developments, client demands and emerging industry
standards and address the increasingly complex and sophisticated environment in
which our solutions have to work.
  Our
research and development at company level focuses on developing new fundamental
platforms and applications that can be used in a variety of our IT
solutions.  Currently, we conduct our company level research and
development activities primarily in our Financial Information Technology
Institute, or the Tsinghua Institute, which we formally established in April
2006 pursuant to a research collaboration arrangement with Tsinghua
University.  Under the collaboration arrangement, we provide research
funding and personnel, and Tsinghua University provides research facilities as
well as their own personnel.  Currently, the Tsinghua Institute has 15
members, ten of which are our employees.  The Tsinghua Institute has
already been successful in developing a number of new technologies for some of
our clients.  We jointly own the intellectual property from the
collaboration with Tsinghua University,
   44
 and each
party can commercialize such intellectual property without the consent of the
other party.  We are also in the process of establishing a company
level research and development center in Guangzhou, Guangdong province, focusing
on information management technology.
  We also
carry on research and development activities at the business division level in
our various subsidiaries, focusing on developing applications that are more
closely client-related as our business divisions are more familiar with our
clients’ specific IT needs.
  We are in
the process of integrating our two separate research and development operations
under a unified research and development system.  As of December 31,
2007, we had 35 employees carrying on research and development
activities.
  Our strong
research and development capabilities have earned us many awards.  For
example, in July 2006, we won the “Prize of Ten Best Finance Technology
Enterprises in Innovation” at the Global Financial Development Forum, which was
organized by the International Financial Association, China Computer Users
Association, City Finance Magazine and International Media Co. Ltd.; and in
November 2006, our e-Channels Online Banking Transactions Platform Liana
Software, v.3.0 was recognized as one of the significant new products at the
national level.
  Including
the amount we capitalized, our internal software development costs amounted to
RMB 2.5 million, RMB 2.3 million and RMB 10.7 million (US$ 1.5 million) in 2005,
2006 and 2007, respectively.  In addition, as we conduct a substantial
amount of research and development activities in connection with our client
projects, a significant amount of research and development related expenses are
recorded as cost of revenues for the client project rather than research and
development expenses.
  INTELLECTUAL
PROPERTY
  We rely on
a combination of patent, copyright and trademark laws, licensing agreements,
confidentiality agreements, internal confidentiality policies and other
contractual provisions, as well as technical measures to protect our
intellectual property rights.  We have filed two patent applications
with the PRC State Intellectual Property Office, one related to a dynamic
password method and system with encryption and the other related to a dynamic
password method and system based on mobile communication
terminals.  We routinely register our proprietary software to the
National Copyright Administration of the PRC pursuant to the Regulations for the
Protection of Computer Software (2002) to ensure protection under the PRC
copyright laws.  As of December 31, 2007, we had 31 software products
registered with the National Copyright Administration of the PRC, including
primarily system architecture and platforms and various software
applications.  Our employees are required to enter into agreements
assigning us the intellectual property developed within the scope of their
employment.
  We have
also established internal confidentiality procedures to safeguard our
intellectual property.  We enter into confidentiality agreements with
all of our employees, collaborators, clients and suppliers, and prohibit our
employees from designing into our solutions intellectual property that belongs
to any third party.  As intellectual property laws in China are still
being developed and offer limited protection, we rely heavily on our
confidentiality procedures, confidentiality agreements as well as technical
measures to protect our proprietary technology and intellectual
property.
  Pursuant
to the majority of our client contracts relating to our software-related
solutions and services, our clients own the intellectual property developed in
connection with the projects, while we retain our proprietary rights to the
methodologies, algorithms or patents that we used in the development of
custom-designed software solutions.  However, it is often difficult to
distinguish which part of the software that we developed for our clients
represents our proprietary rights.  As a result, there is a risk that
our client may claim that we infringed their intellectual property
rights.  See “Item 3. Key information — Risk factors — Risks relating
to our businesses — We may be subject to intellectual property infringement
claims from our clients, which may force us to incur substantial legal expenses
and, if determined adversely against us, may materially and adversely affect our
business, financial condition and results of operations.”  In
addition, we typically agree to defend our clients on our own costs for any
third party intellectual property claims filed against them arising from the
solutions and services we provided them, and indemnify them for any damages of
intellectual property infringement, which may subject us to
significant
   45
  intellectual
property indemnity claims.  See “Item 3. Key information — Risk
factors — Risks relating to our businesses – Our intellectual property
indemnification practices may materially and adversely impact our
business.”
  We have
registered one trademark, “Sihitech,” in the Trademark Office of the State
Administration of Industry and Commerce of the PRC.  We also own a
number of domain names, including the domain name of our main website, www.yuchengtech.com.
  COMPETITION
  The market
for IT solutions and services in China’s banking industry is intensely
competitive and characterized by rapid technological
change.  Competition in our industry is based to a great extent on
industry experience, quality of solutions, breadth of services offered,
reputation, price and relationship.  Past track records with a
particular banking client are also of particular importance.  As a
result, our success rate is usually higher with banks that we have provided
solutions and services to in the past, and we are generally engaged by our
existing clients to work on projects that are the expansion of or improvements
on the original projects that we undertook.
  Our major
competitors can be categorized into two groups, global IT vendors and China’s
domestic IT solutions and service providers.  Our major competitors in
the global IT vendor category include Accenture, BearingPoint Inc., IBM Global
Services and TCS/FNS.  These competitors are strong in high-level,
enterprise-wide IT strategy consulting.  Our major domestic
competitors include Client Server International Inc., Digital China Holdings
Limited, Huayuchang International Scientific & Educational Development Ltd.,
Hi Sun Technology Holdings Ltd. and Longtop Financial Technologies
Limited.  Each of these competitors has their focus and strength in
different types of IT solutions and services, and we compete with different
companies depending on the types of solutions we intend to provide to a given
client.
  We also
compete with the internal IT departments of our existing and potential clients,
which may be capable of creating in-house solutions, thereby reducing the need
for outside service providers.  For example, a banking client for
which we designed an initial online banking platform decided later to conduct
further development in-house.
  In
addition to the competitors listed above, there are many other smaller providers
of IT solutions and services to China’s banks.  Most of these
providers are small- to mid-sized companies focusing on narrowly specified niche
markets within the broader IT solutions and services market.
  In the POS
merchant acquiring business, we primarily compete with China UnionPay, the
predominant POS provider on whose network credit and debit card transactions are
processed.
  INSURANCE
  We own a
property in Xiamen which we use as office space, and lease all of our other
offices, and we do not maintain any property insurance for such
offices.  In addition, consistent with industry practice in China, we
do not maintain business disruption insurance or key person
insurance.
  REGULATION
  The
following summarizes major PRC laws, rules and regulations applicable to our
business.
  Regulation
of the software and systems integration industries
  China’s
State Council and a number of ministries and agencies have issued a series of
rules and regulations aimed at stimulating and regulating the growth of the
software and systems integration industries in China.  The principal
regulations governing the software and systems integration industries
include:
  ·
              The
      Interim Administration Measures for Qualification of Systems Integration
      of Computer Information (1999);
  ·
              The
      Certification Standards and Administration Measures of Software
      Enterprises (2000);
   46
 ·
              The
      Appraisal Condition for Qualification Grade of Systems Integration of
      Computer Information (Revised Version)
(2003);
  ·
              Certain
      Policies for Encouraging Development of the Software Industry and
      Integrated Circuits Industry
(2000);
  ·
              The
      Software Products Administration Measures
  (2000);
  ·
              The
      Interim Administration Measures for Qualification of Systems Integration
      of Computer Information Concerning State Secrets
  (2001);
  ·
              The
      Administrative Measures on Verification of Key Software Enterprises within
      the State Plan (2005);
  ·
              The
      Administrative Regulation for Commercial Cryptogram (1999);
      and
  ·
              The
      Administrative Measures on Examination and Sales Licensing of Security
      Products for Computer Information Systems
  (1997).
  Under
these regulations, except for software developed for self-use, software products
developed in China are subject to a registration system administered by the PRC
Ministry of Information Industry, or MII, and its local branches or agencies
empowered by it.  This registration system requires software
developers to obtain registration certificates for their software
products.  A software product cannot be sold in China without such
registration.  The valid term of each registration is for five years,
and it may be renewed upon expiry.
  Companies
in China engaged in systems integration are required to obtain qualification
certificates from MII.  Companies planning to set up computer
information systems are required to engage systems integration companies with
appropriate qualification certificates.  This qualification
certificate is subject to biannual review and is renewable every four
years.
  The
Qualification Certificate for Integration of Computer Information Systems
Concerning State Secrets granted by the PRC State Secrecy Bureau is required for
a company to engage in computer systems integration activities involving state
secrets.  The valid term of such certificate is for three years, and
it may be renewed upon expiry, subject to the satisfaction of all the
requirements.  The State Secrecy Bureau will only issue this special
qualification certificate to China’s domestic companies.  Foreign
invested companies, including Sino-foreign joint ventures and wholly
foreign-owned enterprises, are not allowed to engage in any computer systems
integration activities that involve state secrets.
  Encryption
software is an essential component of internet banking systems.  The
development, production and sale of commercial encryption products in China is
regulated by the PRC National Encryption Administrative Bureau, or the
Encryption Bureau, and its authorized local branches.  A company
engaging in the encryption-related business is subject to certain licensing
requirements, such as obtaining a production license, sale and distribution
license, and a license for research and development from the Encryption
Bureau.  In addition, both importing and exporting products and
equipment containing encryption technology are subject to the prior approval of
the Encryption Bureau.
  Companies
in China engaged in providing security products for computer information systems
are required to obtain a sales license after official examination from the PRC
Ministry of Public Security, or MPS, or its authorized local
branches.  The valid term of each license is for two years which can
be renewed upon expiry
  We
generally register our software and have obtained, or are in the process of
obtaining, from MII or other regulatory agencies all the certificates, permits
or licenses necessary for conducting our business.
  Regulation
on foreign investment
  According
to The Guidelines on Foreign Investment issued by State Council on February 11,
2002, and The Catalogue on Foreign Invested Industries (2007 Revision) issued by
National Development and Reform
   47
 Commission
and the Ministry of Commerce on October 31, 2007, IT solutions and services fall
into the category of industries in which foreign investment is
encouraged.
  Regulations
on foreign exchange
  The
principal regulations governing foreign exchange in China are the PRC Foreign
Exchange Administration Regulations (1996), as amended in 1997.  Under
these regulations, current account income denominated in foreign currencies
shall be sold to designated banks or deposited into foreign exchange bank
accounts.  The Renminbi is convertible for current account items
including the distribution of dividends, interest payments and trade and
service-related foreign exchange transactions.  For conversion of the
Renminbi for capital account items, such as making inbound and outbound direct
investments, borrowing foreign loans, repatriating investments and investing in
securities outside China, prior approval of or registration with SAFE is
required.
  Pursuant
to the Administration Rules on the Settlement, Sale and Payment of Foreign
Exchange (1996), foreign-invested enterprises may only buy, sell and/or remit
foreign currencies at those banks authorized to conduct foreign exchange
business after providing valid commercial documents and, in the case of capital
account item transactions, obtaining approval from SAFE or its local
branches.  Foreign investment enterprises are permitted to remit their
profits or dividends in foreign currencies out of their foreign exchange
accounts or exchange Renminbi for foreign currencies through banks authorized to
conduct foreign exchange business.  Capital investments by
foreign-invested enterprises outside of China are also subject to limitations,
which include approvals by SAFE, the Ministry of Commerce of the PRC and the PRC
National Development and Reform Commission or their local
counterparts.
  Pursuant
to SAFE’s Notice on Relevant Issues Concerning Foreign Exchange Administration
for PRC Residents to Engage in Financing and Return Investments via Overseas
Special Purpose Vehicles, generally known in China as SAFE Circular 75, which
became effective November 1, 2005, (i) a legal person entity incorporated in
China, a PRC citizen, or an individual with habitual residence in China due to
certain economic benefits, who is referred to as an onshore resident under SAFE
Circular 75, shall register with the local branch of SAFE before it establishes
or controls an overseas special purpose vehicle, or SPV, for the purpose of
overseas equity financing (including convertible debts financing); (ii) when a
PRC resident contributes the assets or equity interests it holds in a domestic
enterprise into an SPV, or engages in overseas financing after contributing
assets or equity interests into an SPV, such PRC resident shall modify its SAFE
registration in light of its interest in the SPV and any change thereof; and
(iii) where an SPV undergoes material events relating to increases or decreases
in investment amount, transfers or exchanges of shares, mergers or divisions,
long-term equity or debt investments, or external guarantees, or other material
events that do not involve return investments, such PRC resident shall, within
30 days from the occurrence of such material event, apply to the local branch of
SAFE to amend or file the registration of foreign exchange of overseas
investment.  Onshore residents who have established or controlled SPVs
and completed return investments before November 1, 2005, the effective date of
SAFE Circular 75, were also required to register with the local SAFE branch
before March 31, 2006.
  To further
clarify the implementation of SAFE Circular 75, SAFE issued The Notice of the
State Administration of Foreign Exchange on Operating Procedures concerning
Foreign Exchange Administration for Domestic Residents to Engage in Financing
and in Return Investment via Overseas Special Purpose Companies on May 29, 2007,
or Circular 106.  Under Circular 106, if the investment in the
overseas SPV fails to be registered with SAFE by the onshore residents, (1) the
overseas SPV is not qualified to conduct overseas financing or return
investment; and (2) the PRC subsidiaries of the SPV are prohibited from
distributing their profits and proceeds from any reduction in capital, share
transfer or liquidation to the overseas SPV.  Moreover, failure to
comply with the above SAFE registration requirements could result in liabilities
under PRC laws for evasion of foreign exchange restrictions.  All our
PRC resident beneficial owners have registered with local SAFE branch as
required under the SAFE regulations in respect to return
investment.
  Regulations
on offshore parent holding companies’ direct investment in and loans to their
PRC subsidiaries
  An
offshore company may make an equity investment in a PRC company, which will
become the PRC subsidiary of the offshore holding company after the
investment.  Such equity investment is subject to a series of laws and
regulations generally applicable to any foreign-invested enterprise in China,
which include the Wholly
   48
 Foreign-Owned
Enterprise Law, the Sino-foreign Equity Joint Venture Enterprise Law, the
Sino-foreign Contractual Joint Venture Enterprise Law, all as amended from time
to time, and their respective implementation rules.  Under these laws
and regulations, the contribution and increase of the registered capital of a
foreign-invested enterprise is subject to prior approval by the approval
authorities.
  Shareholder
loans made by offshore parent holding companies to their PRC subsidiaries are
regarded as foreign debts in China for regulatory purposes, and are subject to a
number of PRC laws and regulations, including the PRC Foreign Exchange
Administration Regulations, the Interim Measures on Administration on Foreign
Debts, the Tentative Provisions on the Statistics Monitoring of Foreign Debts
and its implementation rules, and the Administration Rules on the Settlement,
Sale and Payment of Foreign Exchange.  Under these regulations,
shareholder loans made by offshore parent holding companies to their PRC
subsidiaries shall be registered with SAFE.  Furthermore, the total
amount of foreign debt that can be borrowed by such PRC subsidiaries, including
any shareholder loans, shall not exceed the difference between the total
investment amount and the registered capital amount of the PRC subsidiaries,
both of which are subject to governmental approval.
  Regulations
on dividend distribution
  Under the
relevant PRC laws and regulations, foreign-invested enterprises in China may
distribute dividends only out of their accumulated profits determined in
accordance with Chinese accounting standards and regulations.  In
addition, wholly foreign-owned enterprises in China are required to contribute
at least 10% of their after-tax profits based on PRC accounting standards each
year to their general reserves fund until the accumulative amount of the reserve
fund reaches 50% of the registered capital of such wholly foreign-owned
enterprise.  Wholly foreign-owned enterprises are also required to
allocate a portion, as determined at their discretion, of their after-tax
profits to their staff welfare and bonus fund.  Sino-foreign joint
ventures are required to contribute a portion of their after-tax profits, based
on PRC accounting standards each year, as determined by our board, to their
general reserves fund,staff welfare and bonus
fund and joint venture expansion funds.  Contributions to these funds
may not be distributed as dividends.
   49
 C.   Organizational
structure.
  The
following diagram illustrates our organizational structure as of December 31,
2007:
  
 
 
 50
 The
following summarizes relevant information concerning our
subsidiaries:
  Beijing Yuxinyicheng Technology
Limited, or Yuxinyicheng.Yuxinyicheng was established as a
wholly foreign-owned enterprise in China on October 19, 2006.  It is
68.25% owned by Sihitech BVI and 31.75% owned by e-Channels BVI.  It
is a holding company in China without its own business operations.
  Beijing Sihitech Technology Co.,
Ltd., or Beijing Sihitech. Beijing Sihitech, along
with its subsidiaries Shanghai Software, Beijing Software, Shanghai Sihitech,
Guangzhou Sihitech and Xiamen Yucheng, engages in the provision of system
integration, software development, information technology consulting,
maintenance and support services.  Beijing Sihitech and its
subsidiaries mentioned above were the principal operating entities of Sihitech
BVI prior to the three-party merger.
  Beijing Easycon Electronics Limited,
or Easycon.  We acquired 75% interest of Easycon in June
2007.  Easycon specialized in providing IT services to smaller and
regional commercial banks in China.  Its banking integrative service
management system and credit management system both hold a significant market
share and are very well received among small- and mid-sized banks.
  Beijing e-Channels Century
Technology Co., Ltd., or
e-Channels.  e-Channels engages in the provision of technology
development, technology transfer, consulting and training services, in
particular relating to online booking-related solutions.  e-Channels
was the principal operating entity of e-Channels BVI prior to the three-party
merger.
  Beijing Sunrisk Information
Technology Limited, or Sunrisk.We acquired 100% interest of
Sunrisk in March 2007.  Sunrisk was a risk management total solutions
provider for the Chinese banking industry, focusing on consulting, product
implementation and system integration in the area of enterprise risk management
for financial institutions.
  Beijing Yuxinyicheng Information
Technology Limited, or Yuxinyicheng Information.  We
established Beijing Yuxinyicheng IT in January 2007, focusing on providing our
POS merchant acquiring business in collaboration with banks.
  Shanghai Yuxinhongzhi Information
Technology Limited, or Hongzhi.We established Hongzhi in July 2007 with
other investors, focusing on the provision of IT solutions and
services.  We hold a 60% equity interest in Hongzhi.
  Chengdu Recency Technologies
Limited, or Recency.  We acquired 100% interest of Recency in
June 2007.  Recency is a business intelligence solution and consulting
service provider for the Chinese banking industry, focusing on software
development, information technology consulting, maintenance and
support.
  Shanghai Fujie Business Consulting
Limited, or Fujieand Shanghai Fuyi Business Consulting
Limited, or
Fuyi.  We acquired 100% interest of Fujie and Fuyi in October
2007.  Fujie and Fuyi are related companies focusing on Enterprise
Resource Planning, or ERP, management consulting, software development,
maintenance and support.
  D.           Property, plant and
equipment.
  Our
principal executive offices are located at Tower B, Beijing Financial Trust
Building, 5 Anding Road, Chao Yang District, Beijing, where we lease
approximately 3,923 square meters of office space.  We have 15 other
office locations in China, including Shanghai, Guangzhou, Xian, Xiamen,
Zhengzhou, Chengdu, Zhuhai, Shenyang, Nanjing, Dalian, Haerbin, Wuxi, Wuhan,
Changsha and Shenzhen.  We own a property in Xiamen with a gross floor
area of 1,258 square meters, and we lease properties in all other cities with an
aggregate gross floor area of 5,322 square meters.  We uses all these
properties as office space for our employees.  The aggregate rent for
all our offices is RMB792,890 (US$108,547) per month.
  We are in
the process of searching for a new location for our principal executive offices
as the Beijing Financial Trust Building will be demolished as part of the city
planning to host the 2008 Beijing Olympics.  We are
expected
   51
 to move
out by June 2008.  We do not expect the relocation to have any
material impact on our business.  We lease all of our office space at
commercial rates, and believe other facilities are available at competitive
rates.
  ITEM
4A.   UNRESOLVED STAFF COMMENTS
  Not
applicable.
   52
 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 the section titled “Selected consolidated financial data” and
our consolidated financial statements and related notes included elsewhere in
this annual report.  This discussion contains forward-looking
statements that involve risks, uncertainties and assumptions.  Our
actual results and timing of selected events may differ materially from those
anticipated in these forward-looking statements.  In evaluating our
business, you should carefully consider the information provided in “Item 3. Key
Information—Risk
factors”.
  OVERVIEW
  We are a
leading provider of information technology, or IT, solutions and services to
China’s domestic banking sector.  Our solutions and services enable
our clients to establish and maintain IT platforms and operational capabilities
to better manage their operations and serve their customers’ needs.
  Historically,
we derived a majority of our revenues from providing system integration
services, which included selecting, procuring and reselling third-party hardware
equipment and software applications to our clients, monitoring and assisting in
the installation of such equipment and software at our clients’ sites and
assisting in the integration of the installed equipment and software with our
clients’ existing IT systems.  Due to the lower gross margin and
growth potential of system integration services as compares to software-related
solutions and services, in 2006 we began to shift our focus away from providing
system integration services.  System integration revenue represented
less than 50% of our total revenues in 2007, and we expect that its percentage
of our total revenues will continue to decrease.
  Our
current business focus is to develop and deliver an extensive suite of
software-related solutions and services tailored toward specific functional
needs of our clients.  Our software-related solutions and services
encompass all major categories of IT solutions used in China’s banking industry,
namely channel-related solutions, management-related solutions and
business-related solutions.  Our revenues derived from providing
software-related solutions and services have grown at a much faster pace than
our revenues derived from system integration in recent years, in part due to our
shifted business focus, and in part due to our acquisitions of companies
focusing on providing software-related solutions and services,
including:
  ·
              our
      merger with e-Channels on November 24, 2006, a company focusing on
      providing channel related solutions and services to China’s
      banks;
  ·
              our
      acquisition of a 100% interest of Sunrisk on February 28, 2007, a provider
      of risk management solutions and services to China’s
  banks;
  ·
              our
      acquisition of a 75% interest of Easycon on June 30, 2007, a provider of
      IT solutions and service to small- and mid-sized banks in
      China;
  ·
              our
      acquisition  of a 100% interest of Recency on July 31, 2007, a
      provider of business intelligence solutions and consulting services to
      China’s banks; and
  ·
              our
      acquisitions of a 100% interest of both Fujie and Fuyi on October 31,
      2007, two related companies focused on ERP management consulting and
      project implementation.
  We
currently provide our software-related solutions and services to our clients on
a project-by-project basis, and charge all inclusive fees for each
project.  We charge system integration services based on material and
service cost plus certain margin.
  We also
provide IT maintenance and support services to our clients as well as limited
agency services when we procure third party IT equipment for other system
integrators and charge a commission.  We record these revenues as IT
services revenue.
  Beginning
in early 2007, we launched our POS merchant-acquiring business, which includes
deploying POS terminals in collaboration with banks enabling merchants to
process debit card and credit card payments through the
   53
  deployed
POS terminals.  We receive a percentage of the processing fees of
transactions which occur through the POS terminals we deploy.  Revenue
from our POS merchant acquiring business currently accounts for a relatively
small portion of our revenues and we include such revenues in revenues from
channel-related solutions.  Revenues from our software-related
solutions (including POS) and IT services comprise our IT solutions and services
revenue, while revenues from our system integration services are recorded as
system integration revenue.
  Our
clients are primarily banking institutions in China.  We count 15 of
the 17 Tier I and Tier II national banks in China as our clients.  We
have also been adding numerous small- to mid-sized banks to our client
base.
  Our
revenues grew from RMB177.3 million in 2005 to RMB289.7 million in 2006 and to
RMB435.5 million (US$59.6 million) in 2007, representing a CAGR of
56.7%.
  ·
              Our
      IT solutions and services revenue grew from RMB61.1 million in 2005 to RMB
      99.4 million in 2006 and to RMB230.6 million (US$31.6 million) in 2007,
      representing a CAGR of 94.3%.
  ·
              Our
      system integration revenue grew from RMB116.2 million in 2005 to RMB190.2
      million in 2006 and to RMB204.9 million (US$28.0 million) in 2007,
      representing a CAGR of 32.8%.
  ·
              As a
      result of the difference in growth rate, system integration revenue as a
      percentage of our total revenues decreased from 65.5% in 2005 and 65.7% in
      2006 to 47.0% in 2007, and our gross margin increased from 24.9% in 2005
      and 25.7% in 2006 to 36.2% in 2007.
  Our net
income increased from RMB14.5 million in 2005 to RMB40.7 million in 2006 and to
RMB66.7 million (US$9.1 million) in 2007, representing a CAGR of
114.3%.
  Our growth
has been and will continue to be driven in large part by the sales of our
software-related solutions and services to our banking clients.  We
expect our sales of software-related solutions and services to Tier II national
banks and other small- and mid-sized banks to continue to increase at a faster
pace than our sales to the largest Tier I banks.  In addition, we
expect our POS merchant acquiring business to also provide a source of revenue
growth in the future.  Our past growth has been partly attributable to
the acquisitions we made in 2007 as well as the merger with e-Channels in
November 2006.  We expect to continue to grow both organically and
through acquisitions.
  BASIS
OF PRESENTATION
  Yucheng
was incorporated on November 17, 2005 as a subsidiary of China
Unistone.  After completion of a  redomestication merger and
a three-party merger among China Unistone, Sihitech BVI and e-Channels BVI on
November 24, 2006, Yucheng became the holding company of our
business.  Sihitech BVI was our predecessor from an accounting
perspective, and the purchase method of accounting was used in consolidating
e-Channels BVI and China Unistone into Sihitech BVI.  Therefore, our
operating results for 2005 reflected those of Sihitech BVI; our operating
results for 2006 reflected those of Sihitech BVI and the operating results of
e-Channels BVI from November 25, 2006 to the end of 2006; and our operating
results for 2007 reflected those of both Sihitech BVI and e-Channels BVI as well
as our 2007 acquisitions from their respective acquisition date to the end of
2007.
  FACTORS
AFFECTING OUR RESULTS OF OPERATIONS
  Our
results of operations in any period are affected by a number of factors,
including factors affecting our industry and factors related to the management
and operations of our businesses.
  Factors
affecting our industry
  Growth
of the banking industry in China and its need for third-party providers of IT
solutions and services
  Our growth
has been attributable to the rapid development of China’s banking
industry.  China’s banking industry has undergone significant reforms
and modernization in recent years in order to prepare for the challenges
associated with a rapid developing economy and China’s entry into the
WTO.  As part of such reform efforts, since 2005, a number of China’s
banks have listed their shares on the Hong Kong Stock Exchange.  In
connection with
   54
  such
reforms and overseas listings, such banks have greatly increased their IT
spending in order to upgrade their IT systems.  As most of China’s
banks do not have strong in-house IT development capabilities, these banks
largely rely on third-party IT service suppliers, such as us, to meet their IT
needs.  We expect that as competition in China’s banking industry
intensifies, and as China’s banks strive to meet the Basel II requirements, they
will rely more heavily on third-party IT solution and service providers for
their IT needs.  Any factors that adversely affect the growth of
China’s banking industry, such as a general slow-down in China’s economy,
adverse consequences of the global subprime mortgage and credit crisis, and
measures adopted by the PRC central government to manage China’s growing economy
and control the inflation rate, may reduce the profitability of China’s banks
and result in a decrease in their IT spending, which could in turn adversely
affect our business.  Furthermore, our results of operations are also
affected by the extent China’s banks continue to outsource their IT
services.  Any increase or decrease in the extent of outsourcing IT
solutions and services by China’s banks will positively or negatively affect
business opportunities available to us.
  Changes
in decision making over IT spending among our clients
  We derive
a substantial majority of our revenues from providing IT related solutions and
services to China’s banks on a project-by-project basis, and need to compete for
projects outsourced by China’s banks.  We have observed a recent shift
in the way IT spending is decided in China’s banks, with more decisions being
made at banks’ head offices instead of provincial level
branches.  Such centralization generally favors large IT service
providers with premium brands, broad product offerings and deep client
relationships, in particular relationships with the bank’s head
offices.
  Competition
in China’s banking IT service industry
  Our
results of operations have been, and will continually be affected by, the
competitive landscape in China’s banking IT service industry.  Due to
the competitive pressure, we have observed that the small- and mid-sized banks
in China are focusing more on the reputation of the IT solution and service
providers and the quality of services as compared to price when they award their
IT projects, which benefit us in our competition for such
business.  On the other hand, as more competitors are competing for
the businesses from the big banks, they may exert increasing price pressure on
the IT solution providers.  In addition, as China’s banking IT service
industry develops, more and more global IT solution and service providers are
entering the market, which may further intensify the competition we
face.
  Factors
related to the management and operation of our businesses.
  Revenue
mix
  We derive
our revenues primarily from two sources, IT solutions and services and system
integration.  System integration has a much lower gross margin as
compared to IT solutions and services.  Our consolidated gross profit
and gross margin are greatly affected by our revenue mix.  Our merger
with e-Channels in November 2006 and our acquisitions of five companies in 2007
significantly increased our percentage of revenues derived from IT solutions and
services, as these acquired companies only generated revenues from IT solutions
and services.  Furthermore, we began to shift our business focus to IT
solutions and services in 2006.  We currently typically only provide
system integration services as part of a larger client engagement that includes
IT solutions and services, or if we anticipate that the system integration
component will lead to future IT solutions and services revenue from the same
client.  As a result of these factors, our revenues from system
integration as a percentage of total revenues has declined from 65.5% in 2005
and 65.7% in 2006 to 47.0% in 2007, which has been a major factor contributing
to our improved gross margin from 24.9% in 2005 and 25.7% in 2006 to 36.2% in
2007.  We intend to continue to focus on providing IT solutions and
services, and expect the percentage of our revenues from system integration to
continue to decrease.  Furthermore, as we generate more revenue from
our POS merchant acquiring business, it will also have a stronger impact on our
revenue mix and our gross margin.
  Timing
of Chinese banks’ outsourced IT projects
  Substantially
all of our revenues are derived from IT projects that outsourced from our
banking clients in China.  As a result, the amount of our revenues for
any period is affected by the timing of our clients’ IT projects, which
in
   55
 turn
depends on their internal budgeting and planning process.  The
internal budgeting and planning process may differ, depending on the client and
type of project.  For example, the head offices of our Tier I and Tier
II bank clients generally determine the major IT solutions and services projects
according to an annual budget and plan, which is usually finalized in the first
calendar quarter of each year, while branches of the big banks and our small-
and mid-sized bank clients may decide smaller projects on a quarterly
basis.  Historically, our banking clients have been awarding more
projects in the third and fourth quarters as compared to the first and second
quarters.  As a result, we generally record stronger revenues in the
third and forth quarters of each year.  In addition, our revenue is
generally the lowest in the first quarter of each year due to the Chinese New
Year holidays.  Furthermore, the project mix of any given period also
significantly affects our gross margin and results of operations.  For
example, if we record a higher percentage of system integration revenue as
compared to IT solutions and services revenue in a given quarter, our gross
margin will be negatively affected.  We may not be able to control the
timing and types of projects we undertake and the revenue we can record in a
given quarter, and our results of operations are therefore subject to
significant quarter to quarter fluctuation.
  Client
composition
  In 2005
and 2006, our clients were primarily China’s Tier I banks.  Beginning
in 2007, we have been gradually expanding our client base to include more Tier
II banks as well as Tier III banks, which are predominantly small- and mid-sized
banks.  The percentage of our revenues derived from Tier II banks
increased from 5.5% in 2005 and 6.1% in 2006 to 11.4% in 2007, and the
percentage of our revenues from Tier III  banks increased from 0.1% in
2005 and 0.8% in 2006 to 15.4% in 2007.  Tier I banks, because of
their size, generally have a strong bargaining power in their negotiations with
us, and generally require extensive customization of our
solutions.  On the other hand, because of the complexity of their
projects and their financial resources, they have not been as price sensitive in
the past, although this trend may be changing due to increasing competition in
the banking IT service industry.  Tier II banks are in many respects
similar to the Tier I banks.  In contrast, the small- and mid-sized
banks generally have fewer requirements for customization, enabling us to sell
repeatable solutions with minimal customization, and we are more in an equal
footing in contract negotiations with them.  Furthermore, the small-
and mid-sized banks, although traditionally very price sensitive, have gradually
realized the benefit that premium products afford them, and are less focused on
price competition.  Our changing client composition and changes in
their behavior are expected to affect our future results of
operations.
  Success
of our new business initiatives
  We
launched the POS merchant-acquiring business in early 2007 in collaboration with
China Merchants Bank, and deployed over 8,900 POS terminals in 2007 under that
partnership.  We have entered into collaboration with two additional
banks to deploy POS terminals in Guangdong Province and Beijing, respectively,
in 2008.  We plan to continue to actively expand this business in the
near future.  We share with our collaborating banks a certain
percentage of the processing fees from each transaction processed on the POS
terminals we deploy.  As we bear the initial sales and marketing costs
as well as the capital expenditure relating to the deployed POS terminals, while
revenues from this business, which directly relate to the value transacted
through each deployed POS terminal, takes time to ramp up, this business
negatively affected our results of operations for 2007.  In addition,
we have recently started to provide our online banking solutions and services in
a per-transaction or per-user based revenue model rather than our traditional
project-based revenue model, which, similar to our POS merchant acquiring
business, requires significant initial capital expenses while revenues will take
time to ramp up.  We expect that these new business initiatives will
bring us revenue predictability and stability in the long-run.  After
these new business initiatives become more important in our overall business,
our future results of operations will be significantly affect by their success
or failure.  Furthermore, as part of our expansion strategy, we intend
to expand our IT solutions and services to non-banking financial institutions,
and whether we can succeed in that expansion will also affect our future results
of operations.
  Success
in our acquisition and integration of acquired businesses
  In
addition to organic growth, we intend to grow by continue to acquire or invest
in businesses complementary to our existing business.  Our merger with
e-Channels in November 2006 and our acquisitions of five companies in 2007
broadened our solution and service offerings, increased our client base,
strengthened our management talent and employee base and created numerous
cross-selling and up-selling opportunities, which greatly contributed to
our
   56
 past
growth, in particular our revenue growth from IT solutions and services and the
improvement of our overall gross margin.  Our future growth will
continue to be affected by our ability to identify appropriate acquisition
targets, acquire such targets at appropriate costs, integrate the acquired
businesses with our existing businesses and realize synergies from such
acquisitions.  In addition, as China’s banks are becoming more
sophisticated in their IT requirements, they are increasingly favoring large
solution and service providers with solid financial background and broad product
offerings.  As a result, our industry will be increasingly under
consolidation, which we believe will present larger players in the industry,
such as us, more opportunities to grow by acquisition.
  CRITICAL
ACCOUNTING POLICIES
  Our
discussion and analysis of our financial condition and results of operations are
based on our consolidated financial statements which have been prepared in
accordance with US GAAP.  The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses.  We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of our assets and
liabilities that are not readily available from other sources.  Actual
results may differ from these estimates under different assumptions or
conditions.
  An
accounting policy is considered critical if it requires an accounting estimate
to be made based on assumptions about matters that are highly uncertain at the
time such estimate is made, and if different accounting estimates that
reasonably could have been used, or if changes in the accounting estimates that
are reasonably likely to occur periodically, could materially impact the
consolidated financial statements.  We believe that the following
accounting policies involve a higher degree of judgment and complexity in their
application and require us to make significant accounting
estimates.  The following descriptions of critical accounting
policies, judgments and estimates should be read in conjunction with our
consolidated financial statements and other disclosures included in this annual
report.
  Revenue
recognition
  We
generate revenues primarily from solution services, consulting and
implementation, custom software development, IT service, business process
outsourcing and system integration.  Revenue is recognized as
follows:
  IT solutions and
services
  IT
solution and services mainly consist of implementation, customization,
post-contract customer support, training and consulting.  Revenue from
IT solutions and services is generated primarily from customer orders in which
customers purchased bundled solutions that included our software and third
party’s hardware.  If the bundled solution includes services that
requires significant production, modifications, or customization, the revenue is
recognized over the installation and customization period based on the
percentage of completion method in accordance with SOP No. 81-1, “Accounting for
Performance of Construction-Type and Certain Product-Type Contracts” (“SOP
81-1”).  Labor costs and direct project expenses are used to determine
the stage of completion.  Revisions in estimated contract profits are
made in the period in which the circumstances requiring the revision become
known.  Provisions, if any, are made currently for anticipated losses
on uncompleted contracts.
  In terms
of the nature of deliverables, contract terms, and the rights and obligations of
us and the customer, there are no differences between consulting and
implementation services and software development services.  Consulting
and implementation services encompasses consulting and customized solutions
services for banks and financial institutions to help banking clients develop IT
capabilities to meet the challenges of future business
requirements.  The consulting service mainly consists of: (1) IT
strategy review, which entails understanding the clients' operating IT
environment and the assessment of its suitability in providing the client with
the level of IT support necessary for achieving their business objectives; (2)
IT strategy formation, which means assisting clients in formulating their future
strategies, which required an in-dept understanding of their business priorities
and a thorough appreciation of a wide range of available IT capabilities and
solutions; and (3) IT infrastructure architecture, which means assisting clients
in designing their IT infrastructures including hardware, system software,
application software and the selection of the appropriate
solutions.  Revenue from consulting and implementation
   57
 services
are also recognized using contract accounting on the percentage of completion
method based on the relationship of actual costs incurred to total costs
estimated to be incurred over the duration of the contract.
  Costs and
estimated earnings in excess of billings on uncompleted contracts consist of
recognized recoverable costs and accrued profits on contracts for which billings
had not been presented to customers as of the balance sheet
date.  Billings in excess of revenue recognized for which payments
have been received are deferred until the applicable revenue recognition
criteria have been met.
  Fees for
maintenance and technical support services are recognized under the
straight-line method over the periods covered by the term.
  Revenue
from sales of IT equipment to the end users, which are limited to passing the IT
equipment to other system integrators, is treated as agency sales and records
the net difference between the amount it bills to system integrators and the
fees charged by third-party IT manufacturers as revenue.  We
considered the criteria set out in EITF 99-19 in determining whether we should
recognize such revenues at gross or net of revenue.  We believe that
based on our arrangement with the system integrators, end users (banks) and the
third party IT manufacturers, the net approach is appropriate as we are not the
primary obligor to the end users, do not take general inventory risk, do not
have latitude in establishing price and do not have discretion in supplier
selection with respect to the IT equipment or software delivered to end
users.
  System
integration
  System
integration services mainly consist of value added services of planning,
designing, installing, integrating and testing of hardware sold to
customers.  Revenue from system integration services is recognized in
accordance with SAB Topic 13, Revenue Recognition, when the following conditions
are all met:  persuasive evidence of an arrangement exists, system
integration services have been rendered and products have been delivered and
accepted, the price is fixed or determinable and, collectibility is reasonably
assured.  Customers’ sign-off on a Testing and Acceptance Form
evidences their acceptance of the system integration work being completed at
which time revenue is recognized.  The contract revenue and related
costs are deferred if the Testing and Acceptance Form is not duly signed by both
parties.  We do not recognize system integration services revenue on a
percentage of completion basis.  Our system integration services
revenue recognition policy does not differ between its integration services
involving servers, network equipment or storage.
  Trade
accounts receivable and its collectibility
  Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest.  The allowance for bad debt losses is estimated by
management based on individual accounts receivable which show signs of
uncollectibility and an aging analysis.  Account balances are charged
off against the allowance after all means of collection have been exhausted and
the potential for recovery is considered remote.  We do not have any
off-balance-sheet credit exposure related to our clients.
  Intangible
assets
  Cost
of intangible assets
  Intangible
assets consist primarily of capitalized costs for computer software, client
relationships and other technology.  Intangible assets are stated at
cost or fair value less accumulated amortization and any impairment
write-downs.  Fair value of identifiable intangible assets is
estimated based upon discounted future cash flow projections.
  We
capitalize development costs for marketable software incurred from the time of
technological feasibility until the software is ready for use in accordance with
SFAS No. 86, Accounting for
the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed.  All costs to establish technological feasibility of
a computer product to be sold, leased or otherwise marketed are charged to
research and development expense as incurred.  Technological
feasibility is established through completeness of the working model and its
consistency with the product design.  Costs incurred for modification,
components of large products, and enhancements are expensed.  As the
working
   58
 model is
normally built during the process of project implementation for clients, there
are no high-risk development issues.
  Under the
provisions of SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, we capitalize costs
associated with software developed or obtained for internal use when both the
preliminary project stage is completed and management has authorized further
funding for the project which it deems probable of completion and use for the
function intended.  Technological feasibility is established upon
completeness of the product design and planning phases indicating that product
can be built by existing technology and tools.  Capitalized
internal-use software costs include only (1) external direct costs of materials
and services consumed in developing or obtaining the software, (2) payroll and
payroll-related costs for employees who are directly associated with and who
devote time to the project, and (3) interest costs incurred, when material,
while developing the software.  Capitalization of these costs ceases
no later than the point at which the project is substantially complete and ready
for its intended purpose.
  Research
and development costs and other computer software maintenance costs related to
software development are expensed as incurred.
  The
consolidated financial statements include intangibles obtained through the
acquisitions of subsidiaries at RMB32.2 million and RMB37.1 million as of
December 31, 2006 and 2007, respectively, whose values have been estimated by
the management in the absence of ready ascertainable market
values.  However, because of the inherent uncertainty of the
valuation, it is reasonably possible that those estimated values may differ
significantly from the values that would have been used had a ready market for
these intangible assets existed, and the differences could be material to the
consolidated financial statements.
  Amortization
  We
amortize capitalized software development costs for marketable software on a
product-by-product basis.  The annual amortization is the greater of
the amount computed using (a) the ratio that current gross revenues for a
product bear to the total of current and anticipated revenues for that product
or (b) the straight-line method over the remaining estimated economic life of
the product including the period being reported upon.
  Purchased
computer software and capitalized computer software costs for internal use are
amortized on a straight-line basis over their estimated useful lives, and are
monitored on a regular basis to assess that the amortization method is still
appropriate and the remaining estimated life of the asset is
reasonable.
  Customer
relationships and other technology are amortized on a straight-line basis over
their estimated economic useful lives.
  The
estimated useful lives are as follows:
  Estimated
      useful lifeSoftware
      development costs-
      Internal-use software
              3
      years-
      Marketable software
              3
      yearsCustomer
      relationships
              3-5
      yearsOther
      technology
              3-5
      yearsPurchased
      software
              5-10 years
 
 The
straight-line method of amortization reflects an appropriate allocation of the
cost of the intangible assets to earnings in proportion to the amount of
economic benefits obtained by us in each reporting period.
  Impairment
of long-lived assets
  We
evaluate impairment for our long-lived assets to be held and used, including
office equipment and motor vehicles, intangible assets and other non-current
assets, when events or changes in circumstances indicate, in management’s
judgment, that the carrying value of such assets may not be recoverable in
accordance with FASB
   59
  Statement
No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets.”  Recoverability
of assets to be held and used is measured by a comparison of the carrying amount
of an asset to estimate undiscounted future cash flows expected to be generated
by the asset.  If the carrying value of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount that the
carrying value exceeds the estimated fair value.
  Assets to
be disposed of would be separately presented in the balance sheet and reported
at the lower of carrying amount or estimated fair value less the cost to sell,
and are no longer depreciated.
  Judgments
and assumptions are inherent in management’s estimate of undiscounted future
cash flows used to determine recoverability of an asset and the estimate of an
asset’s fair value used to calculate the amount of impairment to
recognize.  The use of alternate judgments and/or assumptions could
result in the recognition of different levels of impairment charges in the
consolidated financial statements.
  Capitalization
of internal software development costs
  Internal
development of software products is accounted for in accordance with SFAS No.
86, “Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise
Marketed”.  SFAS No. 86 requires that the cost of developing
software be expensed prior to establishing technological feasibility and those
costs be capitalized once technological feasibility has been
established.  Capitalization ceases upon general release of the
software.  The determination of whether internal software development
costs are subject to capitalization is, by its nature, highly subjective and
involves significant judgments.  This decision could significantly
affect earnings during the development period.  Further, once
capitalized, the software costs are generally amortized on a straight-line basis
over the estimated economic life of the product.  The determination of
the expected useful life of a product is highly judgmental.  Finally,
capitalized software costs must be assessed for realizability at the end of each
reporting period.
  Internal
software development costs include payroll, employee benefits, and other
headcount-related costs associated with product development.  We
record expenditure incurred before technological feasibility is established into
research and development cost and capitalizes expenditures incurred after that
point into the cost of intangible assets.  In 2005, 2006 and 2007,
internal software development costs were RMB2.5 million, RMB2.3 million and
RMB10.7 million, among which RMB2.1 million, RMB1.4 million and RMB2.3 million
were capitalized, respectively.
  Precontract
costs
  Due to the
business environment in which we operate, it is common practice that we commence
the software development or IT consulting project for its banking clients
without commercial contracts being signed.  If the contracts are not
obtained during the reporting period where implementation costs have been
incurred, we defer revenue recognition for the related contracts until contracts
are obtained.  In accordance with SOP 81-1, as modified by SOP 98-5,
costs that are incurred for a specific anticipated contract and that will result
in no future benefits unless the contract is obtained, including cost of
equipment, direct labor costs, and other ancillary costs, are deferred until
receipt of the signed contract, and are then included in contract costs or
inventory.  Such deferred costs, subject to their not being related to
costs of start-up activities, are evaluated periodically for probability of
recoverability.  If deemed unrecoverable, deferred costs are expensed
to operating expenses.
  Costs of
start-up activities, including organization costs, are expensed as
incurred.
  Costs
incurred for assets, such as costs for the purchase of materials, production
equipment, or supplies that are expected to be used in connection with
anticipated contracts are deferred outside the contract cost or inventory
classification if their recovery from future contract revenue or from other
dispositions of the assets is considered probable.
  Goodwill
  Goodwill
represents the excess of the purchase price and related costs over the valued
assigned to net tangible and identifiable intangible assets of business acquired
and accounted for under the purchase method.
   60
 We
accounted for the acquisition of e-Channels BVI and other subsidiaries in
accordance with SFAS No. 141 Business Combinations, which resulted in the
recognition of goodwill.  Goodwill represents the excess of
acquisition cost over the estimated fair value of the net assets acquired as of
the acquisition date.  The portion of the purchase price allocated to
goodwill was RMB37.3 million as of December 31, 2006 and RMB169.4 million as of
December 31, 2007.
  In
accordance with SFAS No. 142, “Goodwill and Other Tangible
Assets,” the impairment evaluation of goodwill is conducted annually, or
more frequently, if events or changes in circumstances indicate that an asset
might be impaired.  The evaluation is performed by using a two-step
process.  In the first step, the fair value of each reporting unit is
compared with the carrying amount of the reporting unit, including
goodwill.  The estimated fair value of the reporting unit is generally
determined on the basis of discounted future cash flows.  If the
estimated fair value of the reporting unit is less than the carrying amount of
the reporting unit, then a second step must be completed in order to determine
the amount of the goodwill impairment that should be recorded.  In the
step, the implied fair value of the reporting unit’s goodwill is determined by
allocating the reporting unit’s fair value to all of its assets and liabilities
other than goodwill (including any unrecognized intangible assets) in a manner
similar to a purchase price allocation.  The resulting implied fair
value of the goodwill that results from the application of the second step is
then compared to the carrying amount of the goodwill and an impairment charge is
recorded for the difference.
  The
assumptions used in the estimate of fair value are generally consistent with the
past performance of each reporting unit and are consistent with the projections
and assumptions that are used in current operating plans.  Such
assumptions are subject to change as a result of changing economic and
competitive conditions.
  RECENTLY
ISSUED ACCOUNTING STANDARDS
  In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”).  SFAS 157 defines fair value, establishes a framework
for measuring fair value, and expands disclosure requirements regarding fair
value measurement.  This statement simplifies and codifies fair value
related guidance previously issued and is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years.  We are still considering that impact of
SFAS 157 to our financial statements.
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of SFAS No. 115,”
which permits companies to measure many financial instruments and certain other
assets and liabilities at fair value on an instrument-by-instrument basis (the
fair value option).  Adoption of FASB 159 is optional and it may be
adopted beginning in the first quarter of 2007.  We are currently
evaluating the possible impact of adopting FASB No. 159 on our consolidated
financial statements.
  In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements” (SFAS 160).  SFAS 160
requires all entities to report non-controlling (minority) interests in
subsidiaries as equity in the consolidated financial statements.  SFAS
160 requires that transactions between an entity and non-controlling interests
are treated as equity transactions.  SFAS 160 is effective for fiscal
years beginning after December 15, 2008.  We are currently evaluating
the effect of SFAS 160 on our consolidated financial statements and results of
operation and are currently not yet in a position to determine such
effects.
  In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,”
(“SFAS 141R”) to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects.  This
Statement applies to all transactions or other events in which an entity obtains
control of one or more businesses, and combinations achieved without the
transfer of consideration.  SFAS No. 141 (revised 2007) is effective
for prospectively to business combinations for which the acquisition date is in
on or after December 15, 2008.  An earlier adoption is not
permitted.  We are still considering any impact of SFAS 141R on our
consolidated financial statements, which will depend on the nature and size or
business combinations we consummate after the effective date.
   61




A. 
 Operating
Results.
  REVENUES
  We
generate revenues by providing IT-related solutions and services to our clients,
which are primarily China’s banking institutions.  In 2005, 2006 and
2007, our revenues amounted to RMB177.3 million, RMB289.7 million and RMB435.5
million (US$59.6 million), respectively, representing a CAGR of
56.7%.
  We
categorize our revenues by revenue sources into IT solutions and services
revenue and system integration revenue.
  IT
solutions and services
  IT
solutions and services revenue includes revenues we generated from
software-related solutions and services, such as sale of software solutions,
custom software development, IT consulting services and implementation, as well
as various IT maintenance and other services.  We currently also
include revenues from our POS merchant acquiring business as IT solutions and
services revenue.
  We
generally provide software-related solutions and services to our clients on a
project-by-project basis, and record revenues based on the percentage of
completion of our client projects.  Our POS merchant acquiring
business generate revenues as consumers make payment transactions using credit
card, debit card or prepaid store card on the POS terminals we
deployed.  As we are entitled to a percentage of the payment
processing fees paid to our collaborating banks, we record revenues as such
consumer payment transaction takes place.  Our revenues from POS
merchant acquiring business currently represent only a relatively small portion
of our IT solutions and services revenue.  However, as we increase the
number of our collaborating banks and the number of POS terminals deployed, we
expect our revenues from POS acquiring business to increase significantly in the
near future.
  We
initiated collaboration with China Certification Authority in March 2008 to
provide an online banking Application Service Provider, or ASP, platform to
serve small- and mid-sized banks.  Unlike our traditional project
based revenue model, we intend to charge a low initial set up fee for this
service, but generate recurring revenues tied to the usage of the ASP
platform.  We expect to start generating revenues from this service in
2008.
  IT
solutions and services are currently our core business focus.  IT
solutions and services revenue as a percentage of our revenues increased from
34.5% in 2005 and 34.3% in 2006 to 53.0% in 2007.  We expect that IT
solutions and services revenue will be our primary area of revenue growth in the
near future, and its percentage of our revenues will continue to increase over
time.
  System
integration
  System
integration revenue consists of revenues we generated from the procurement and
resale of third-party hardware and software to our clients and the related
installation and integration services.  Similar to our
software-related solutions and services, we also provide system integration
services on a project-by-project basis, and record revenues based on the
delivery of the service.
  System
integration was historically a major part of our business.  However,
as it generally has a lower gross margin and growth potential as compared to IT
solutions and services, starting in 2006 we gradually shifted our business focus
away from system integration services.  We currently provide system
integration services generally only as a component of a larger client engagement
that includes IT solutions and services projects, or if we anticipate that the
system integration project will lead to future IT solutions and services
projects from the client.  System integration revenue as a percentage
of our revenues decreased from 65.5% in 2005 and 65.7% in 2006 to 47.0% in
2007.  We expect that system integration revenue will continue to grow
at a much slower pace than our IT solutions and services revenue, and its
percentage of our revenues will continue to decline.
  Revenues
by sources
  The
following table sets forth our revenue sources and their relative percentage of
our total revenues for the periods indicated.
  62
  For
      the Year Ended December 31,2005
                  
                  2006
                  
                  2007Revenues
      by sources
                  
                  Amount
                  
                  %
      of total
                  
                  Amount
                  
                  %
      of
                      total
                  
                  %
      change from 2005
                  
                  Amount
                  
                  %
      of
                      total
                  
                  %
      change from 2006RMB
                  
                  %
                  
                  RMB
                  
                  %
                  
                  %
                  
                  RMB
                  
                  US$
                  
                  %
                  
                  %(in
      thousands, except percentages)IT
      solutions and services
                  
                  
                  61,107
                  
                  
                  34.5
                  
                  
                  99,435
                  
                  
                  34.3
                  
                  
                  62.7
                  
                  
                  230,633
                  
                  
                  31,573
                  
                  
                  53.0
                  
                  
                  131.9System
      integration
                  
                  
                  116,220
                  
                  
                  65.5
                  
                  
                  190,215
                  
                  
                  65.7
                  
                  
                  63.7
                  
                  
                  204,886
                  
                  
                  28,049
                  
                  
                  47.0
                  
                  
                  7.7Total
                  
                  
                  177,327
                  
                  
                  100.0
                  
                  
                  289,650
                  
                  
                  100.0
                  
                  
                  63.3
                  
                  
                  435,519
                  
                  
                  59,622
                  
                  
                  100.0
                  
                  
                  50.4
 
 Our
revenues grew at a CAGR of 56.7% from 2005 to 2007.  Our revenue
growth is contributed by both organic growth and acquisitions.  Our
merger with e-Channels on November 24, 2006 resulted in the inclusion of
approximately one month of its 2006 revenues and full year of its 2007 revenues
to our revenues in the corresponding years.  In addition, our
acquisitions of Sunrisk, Easycon, Recency, Fujie and Fuyi in 2007 also
contributed to our revenue growth in 2007.  As we strive to fully
integrate the acquired businesses into our existing businesses and achieve
synergies among them as soon as possible right after the acquisition, the
significant contributions of our acquired businesses came not only from their
original businesses, but also from the synergies provided by our existing
businesses, such as the additional sales that they can achieve due to our client
relationships and our complementary solutions and services.
  Our
revenue growth is primarily from the growth of IT solutions and services
revenue, which grew at a CAGR of 94.3% from 2005 to 2007.  In
comparison, our system integration revenue grew at a much slower CAGR of 32.8%
during the same period.  This difference in CAGR was primarily due to
a much faster growth rate of IT solutions and services revenue from 2006 to
2007, at 131.9%, as compared to that of system integration revenue, at
7.7%.  Growth rate for IT solutions and services revenue and system
integration revenue were similar from 2005 to 2006, at 62.7% and 63.7%,
respectively.  The significantly faster growth rate of IT solutions
and services revenue from 2006 to 2007 as compared to that of system integration
revenue was due to both acquisitions and our shifting of business
focus.  Since e-Channels and the additional companies we acquired in
2007 generate exclusively IT solutions and services revenue, the inclusion of
these revenues in 2007 significantly increased the growth rate of IT solutions
and services revenue from 2006 to 2007.  In addition, starting in 2006
we shifted our business focus to the provision of IT solutions and services due
to its higher gross margin and better growth potential.
  IT
solutions and services revenue by solution or service types
  We provide
different types of software-related solutions, including channel-related
solutions, management-related solutions and business-related
solutions.  In addition, we provide maintenance services for our
clients and provide agency services to procure third party hardware equipment
for other system integrators, and record these revenues as IT services
revenue.  We experienced rapid growth in all types of our solutions
from 2005 to 2007.  The following table sets forth our IT solutions
and services revenue by solution or service types.
  
 63
  For
      the Year Ended December 31,2005
                
                
                2006
                
                
                2007IT
      solution and services revenue by type
                
                Amount
                
                
                %
      of total
                
                
                Amount
                
                
                %
      of total
                
                
                %
      change from 2005
                
                
                Amount
                
                
                %
      of total
                
                
                %
      change from 2006RMB
                
                
                %
                
                
                RMB
                
                
                %
                
                
                %
                
                
                RMB
                
                
                US$
                
                
                %
                
                
                %(in
      thousands, except percentages)Channel-related
      solutions(1)
                
                
                5,529
                
                
                
                9.0
                
                
                
                19,432
                
                
                
                19.5
                
                
                
                251.5
                
                
                
                53,009
                
                
                
                7,257
                
                
                
                23.0
                
                
                
                172.8Management-related
      solutions
                
                
                39,709
                
                
                
                65.0
                
                
                
                50,361
                
                
                
                50.6
                
                
                
                26.8
                
                
                
                97,494
                
                
                
                13,347
                
                
                
                42.3
                
                
                
                93.6Business-related
      solutions
                
                
                918
                
                
                
                1.5
                
                
                
                10,693
                
                
                
                10.8
                
                
                
                1064.8
                
                
                
                45,524
                
                
                
                6,232
                
                
                
                19.7
                
                
                
                325.7IT
      services
                
                
                14,951
                
                
                
                24.5
                
                
                
                18,949
                
                
                
                19.1
                
                
                
                26.7
                
                
                
                34,606
                
                
                
                4,737
                
                
                
                15.0
                
                
                
                82.6Total
                
                
                61,107
                
                
                
                100.0
                
                
                
                99,435
                
                
                
                100.0
                
                
                
                62.7
                
                
                
                230,633
                
                
                
                31,573
                
                
                
                100.0
                
                
                
                131.9
 
 (1)
                Includes
      revenues from our POS merchant acquiring
  business.
  Revenues
by client types
  Our
clients are primarily China’s banks, which are our core clients.  We
also provide IT-related solutions and services to certain non-banking clients,
such as government agencies and other corporations when such market demand
arises.  However, we generally do not actively market our solutions
and services to these clients and we do not consider them as our core
clients.
  The
following table sets forth our revenues by client types.
  For
      the Year Ended December 31,2005
                
                
                2006
                
                
                2007Revenues
      by client type
                
                Amount
                
                
                %
      of total
                
                
                Amount
                
                
                %
      of total
                
                
                %
      change from 2005
                
                
                Amount
                
                
                %
      of total
                
                
                %
      change from 2006RMB
                
                
                %
                
                
                RMB
                
                
                %
                
                
                %
                
                
                RMB
                
                
                US$
                
                
                %
                
                
                %(in
      thousands, except percentages)Tier
      I banks
                
                
                143,376
                
                
                
                80.9
                
                
                
                224,228
                
                
                
                77.4
                
                
                
                56.4
                
                
                
                266,127
                
                
                
                36,432
                
                
                
                61.1
                
                
                
                18.7Tier
      II banks
                
                
                9,684
                
                
                
                5.5
                
                
                
                17,656
                
                
                
                6.1
                
                
                
                82.3
                
                
                
                49,757
                
                
                
                6,812
                
                
                
                11.4
                
                
                
                181.8Other
      banks(1)
                
                
                6,119
                
                
                
                3.5
                
                
                
                9,472
                
                
                
                3.3
                
                
                
                54.8
                
                
                
                70,883
                
                
                
                9,704
                
                
                
                16.3
                
                
                
                648.3Others
                
                
                18,148
                
                
                
                10.1
                
                
                
                38,294
                
                
                
                13.2
                
                
                
                111.0
                
                
                
                48,752
                
                
                
                6,674
                
                
                
                11.2
                
                
                
                27.3Total
                
                
                177,327
                
                
                
                100.0
                
                
                
                289,650
                
                
                
                100.0
                
                
                
                63.3
                
                
                
                435,519
                
                
                
                59,622
                
                
                
                100.0
                
                
                
                50.4
 
 (1)
                  Other
      banks include Tier III banks (i.e., small- and medium-sized banks and
      foreign banks), PBOC and policy
banks.
 
 We provide
IT solutions and services primarily to Tier I banks, in particular China
Construction Bank.  In 2005, 2006 and 2007, our revenues from China
Construction Bank, our largest client, amounted to RMB108.5 million, RMB156.4
million and RMB257.8 million, respectively, and accounted for 61.2%, 54.0% and
59.2%, respectively, of our total revenues.  However, our contracts
with China Construction Bank were signed separately with different departments,
branches and provincial offices and the head office and we consider each of them
effectively separate clients since the decision makers and budgets are
unrelated.  China Construction Bank has been our client since 1999,
and we have maintained a good relationship with various organizations within the
bank.
  Starting
in 2007, we have been actively expanding our client base to include more Tier II
banks and other small- and mid-sized banks, both through organic growth and
through acquisitions of companies with clients in those segments.  As
a result, revenues from our Tier II bank clients increased 181.8%, from RMB 17.7
million in 2006 to 49.8 million in 2007, and their percentage of our total
revenues increased from 6.1% in 2006 to 11.4% in 2007.  Furthermore,
our revenues from other banks, which are primarily small- to mid-sized banks,
increased 648.3%, from
  64
  RMB9.5
million in 2006 to RMB70.9 million in 2007, and their percentage of our total
revenues increased from 3.3% in 2006 to 16.3% in 2007.
  The
following table sets forth our IT solutions and services revenue by client type
for the periods indicated.
  For
      the Year Ended December 31,2005
                
                
                2006
                
                
                2007IT
      solutions and services revenue by client type
                
                Amount
                
                
                %
      of total
                
                
                Amount
                
                
                %
      of total
                
                
                %
                    change
      from 2005
                
                
                Amount
                
                
                %
      of total
                
                
                %
                    change
      from 2006RMB
                
                
                %
                
                
                RMB
                
                
                %
                
                
                %
                
                
                RMB
                
                
                US$
                
                
                %
                
                
                %(in
      thousands, except percentages)Tier
      I banks
                
                
                47,208
                
                
                
                77.3
                
                
                
                62,529
                
                
                
                62.9
                
                
                
                32.5
                
                
                
                124,736
                
                
                
                17,076
                
                
                
                54.1
                
                
                
                99.5Tier
      II banks
                
                
                2,792
                
                
                
                4.6
                
                
                
                4,974
                
                
                
                5.0
                
                
                
                78.2
                
                
                
                30,381
                
                
                
                4,159
                
                
                
                13.2
                
                
                
                510.8Other
      banks(1)
                
                
                1,283
                
                
                
                2.1
                
                
                
                2,939
                
                
                
                3.0
                
                
                
                129.1
                
                
                
                49,449
                
                
                
                6,769
                
                
                
                21.4
                
                
                
                1,582.5Others
                
                
                9,824
                
                
                
                16.0
                
                
                
                28,993
                
                
                
                29.1
                
                
                
                195.1
                
                
                
                26,067
                
                
                
                3,569
                
                
                
                11.3
                
                
                
                (10.1
                )Total
                
                
                61,107
                
                
                
                100.0
                
                
                
                99,435
                
                
                
                100.0
                
                
                
                62.7
                
                
                
                230,633
                
                
                
                31,573
                
                
                
                100.0
                
                
                
                131.9
 
 (1)
                  Other
      banks include Tier III banks (i.e., small- and medium-sized banks and
      foreign banks), PBOC and policy
banks.
 
 From 2006
to 2007, our IT solutions and services revenue from Tier II banks and other
banks grew at 510.8% and 1,582.5%, respectively, which are much faster than
those of our total revenues, as we focused on providing IT solutions and
services to these bank clients.  As a result, our IT solutions and
services revenue from Tier II and other banks represented a higher percentage of
our total IT solutions and services revenue in 2007, at 13.2% and 21.4%,
respectively, as compared to 11.4% and 16.3%, respectively, for such percentages
of total revenues.
  As we
further penetrate into Tier II banks and small- to mid-sized banks, we expect
our revenue contributions from these clients to continue to increase, in
particular revenues from IT solutions and services, resulting in further
optimization of our revenue mix.  Meanwhile, we expect our revenue
concentration on Tier I banks and China Construction Bank to continue to
decline.
  COST
OF REVENUES
  Our cost
of revenues includes costs directly attributable to revenues.
  IT
solutions and services
  Our cost
of revenues for software-related solutions and services primarily relates to
costs associated with the design, implementation, delivery and maintenance of
our solutions and related services, which includes primarily staff costs, travel
expenses and outsourcing costs in connection with the development and
implementation of IT solutions and service projects for our clients, and to a
lesser extent, amortization of intangible assets related to our solutions that
we provide to our clients and allocated overhead costs relating to our project
development and implementation staff.  The allocated overhead costs
include primarily communication costs, depreciation and other general
office-related costs.
  Cost of
revenues for our POS merchant acquiring services comprises primarily of
depreciation of POS terminals we deployed and the consumables, which is
generally in proportion to the number of POS terminals we deploy.
  System
integration
  Our cost
of revenues for system integration primarily consists of costs for purchase of
third-party hardware and software that we resell to our clients.  It
also includes related transportation and insurance costs as well as staff costs
for the procurement and installation of such hardware and
software.  We expect cost of revenues relating to system integration
to increase generally in line with the increase in revenues from such
service.
  65
  The
following table sets forth our cost of revenues by revenue source for the
periods indicated.
  For
      the Year Ended December 31,2005
                
                
                2006
                
                
                2007Amount
                
                
                %
      of total
                
                
                Amount
                
                
                %
      of total
                
                
                Amount
                
                
                %
      of totalRMB
                
                
                %
                
                
                RMB
                
                
                %
                
                
                RMB
                
                
                US$
                
                
                %Cost
      of revenues
                
                (in
      thousands, except percentages)IT
      solutions and services
                
                
                (25,758
                )
                
                
                (19.4
                )
                
                
                (43,406
                )
                
                
                (20.2
                )
                
                
                (96,149
                )
                
                
                (13,163
                )
                
                
                (34.6
                )System
      integration
                
                
                (107,327
                )
                
                
                (80.6
                )
                
                
                (171,926
                )
                
                
                (79.8
                )
                
                
                (181,677
                )
                
                
                (24,871
                )
                
                
                (65.4
                )Total
                
                
                (133,085
                )
                
                
                (100.0
                )
                
                
                (215,332
                )
                
                
                (100.0
                )
                
                
                (277,826
                )
                
                
                (38,034
                )
                
                
                (100.0
                )
 
 Our cost
of revenues grew from RMB133.1 million in 2005 to RMB215.3 million in 2006 and
to RMB277.8 million in 2007, representing a CAGR of 44.5%.  Our cost
of revenues grew at a much slower pace than our revenue growth primarily due to
the shift of our revenue mix, as the majority of our revenue growth was from IT
solutions and services rather than system integration, and cost of revenues
accounted for a much smaller percentage of IT solutions and services revenue as
compared to system integration revenue.  Our cost of revenues relating
to IT solutions and services grew at a CAGR of 93.2% from 2005 to 2007, in line
with our growth in IT solutions and services revenue, while our cost of revenues
relating to system integration grew at a CAGR of 30.1% during the same period,
slower than the growth in our system integration revenue.
  Gross
profit and gross margin
  The
following table sets forth our gross profit and gross margin for the periods
indicated.
  For
      the Year Ended December 31,2005
                    
                    
                    2006
                    
                    
                    2007Gross
      profit
                    
                    
                    Gross
      margin
                    
                    
                    Gross
      profit
                    
                    
                    Gross
      margin
                    
                    
                    Gross
      profit
                    
                    
                    Gross
      marginRMB
                    
                    
                    %
                    
                    
                    RMB
                    
                    
                    %
                    
                    
                    RMB
                    
                    
                    US$
                    
                    
                    %(in
      thousands, except percentages)IT
      solutions and services
                    
                    
                    35,349
                    
                    
                    
                    57.8
                    
                    
                    
                    56,029
                    
                    
                    
                    56.3
                    
                    
                    
                    134,484
                    
                    
                    
                    18,410
                    
                    
                    
                    58.3System
      integration
                    
                    
                    8,893
                    
                    
                    
                    7.7
                    
                    
                    
                    18,289
                    
                    
                    
                    9.6
                    
                    
                    
                    23,209
                    
                    
                    
                    3,178
                    
                    
                    
                    11.3Total
                    
                    
                    44,242
                    
                    
                    
                    24.9
                    
                    
                    
                    74,318
                    
                    
                    
                    25.7
                    
                    
                    
                    157,693
                    
                    
                    
                    21,588
                    
                    
                    
                    36.2
  We expect
our gross margin for IT solutions and services and for system integration to
remain stable in the near future, but our overall gross margin to improve due to
further shifting to IT solutions and services.
  OPERATING
EXPENSES
  Our
operating expenses primarily consist of research and development expenses,
selling and marketing expenses and general and administrative
expenses.  The following table sets forth our operating expenses for
the periods indicated.
  For
      the Year Ended December 31,2005
                
                
                2006
                
                
                2007RMB
                
                
                RMB
                
                
                RMB
                
                
                US$(in
      thousands)Research
      and development expenses
                
                
                (352
                )
                
                
                (902
                )
                
                
                (8,370
                )
                
                
                (1,146
                )Selling
      and marketing expenses
                
                
                (11,181
                )
                
                
                (13,990
                )
                
                
                (29,053
                )
                
                
                (3,977
                )General
      and administrative expenses
                
                
                (13,913
                )
                
                
                (14,170
                )
                
                
                (50,668
                )
                
                
                (6,936
                )Total
                
                
                (25,446
                )
                
                
                (29,062
                )
                
                
                (88,091
                )
                
                
                (12,059
                )
  
 66
  Research
and development expenses
  Research
and development expenses consist primarily of staff cost, which includes
salaries, bonuses and benefits for research and development
personnel.  Research and development expenses also include travel
expenses of our research and development personnel as well as depreciation of
hardware equipment and software tools and other materials used in our research
and development activities.  We capitalize certain internal software
development expenses after technological feasibility is established, which are
amortized according to its estimated useful life.  Our internal
software development expenses amounted to RMB2.5 million, RMB2.3 million and
RMB10.7 million (US$1.5 million), of which RMB2.1 million, RMB1.4 million and
RMB2.3 million (US$0.3 million) were capitalized in 2005, 2006 and 2007,
respectively.  The capitalized amounts will be amortized according to
its useful life.  We also incur significant research and development
related costs in connection with our client projects, which re record as cost of
revenues for the client projects rather than research and development
expenses.
  Our
research and development expenses increased significantly in 2007, primarily due
to the increase in staff costs resulting from the increase in the number of
research and development personnel from the acquisition of e-Channels in
November 2006 and the additional acquisitions in 2007.  The number of
our research and development personnel increased from 21 at the end of 2006 to
35 at the end of 2007.  Our travel expenses, depreciation as well as
amortization costs also increased significantly in 2007 due to increased
research and development activities in 2007.  We expect our research
and development expenses to continue increase as we further expand our solution
and service offerings.
  Selling
and marketing expenses
  Selling
and marketing expenses consist primarily of salaries, bonuses, sales
commissions, and benefits for sales and marketing personnel.  Selling
and marketing expenses also include expenses associated with business
development activities with our clients, travel expenses of our sales and
marketing personnel, as well as overhead costs allocated to our sales and
marketing personnel, such as office rent, furniture cost, communication cost and
depreciation.  We generally do not advertise to promote our
businesses.  Instead, we conduct targeted business development
activities with our clients.
  Our
selling and marketing expenses increased significantly in 2007, primarily due to
the significant increase in personnel cost associated with POS merchant
acquiring business that we initiated in 2007 as well as the acquisition of
e-Channels in November 2006 and the additional acquisitions in
2007.  The number of our sales and marketing personnel increased from
46 at the end of 2006 to 344 at the end of 2007, the majority of which were
sales staff for our POS merchant acquiring business. Other selling and
marketing expenses, such as those associated with business development
activities, travel expenses and overhead costs also increased due to our
increase in selling and marketing personnel and activities.  We expect
our selling and marketing expenses to continue increase as we expand our product
offerings and broaden our client basis, and in particular as we continue to
expand our POS merchant acquiring business.  However, we expect that
our selling and marketing expenses as a percentage of revenues will decrease
from our 2007 level as we expect our revenues to increase at a faster
pace.
  General
and administrative expenses
  General
and administrative expenses consist primarily of salaries, bonuses and benefits
for administrative personnel, such as personnel in our management, finance and
accounting, legal and human resource functions, their travel expenses and other
expenses for general administrative functions, costs for professional services,
including legal, tax and accounting services, and allocation of overhead costs
to general and administrative functions, such as rent, communication and
depreciation.  Our general and administrative expenses also include
amortization of intangible assets relating to our acquisition of e-Channels,
which amounted to RMB9.2 million in 2007.
  Our
general and administrative expenses are shown net of technology subsidies,
value-added tax refunds and business tax and surcharges refunds and other
government credits we receive from the relevant PRC government
authorities.  Technology subsidies are granted by the relevant local
PRC government to encourage development of high-tech
enterprises.  Value-added tax is charged at a rate of 17% of the gross
sales proceeds received.  Pursuant to relevant PRC laws and
regulations, we are entitled to a refund of 14% of the value-added tax for
certain self-
  67
  developed
software products.  Business tax and surcharges are levied based on
5.5% of revenues.  We received refund for business tax and surcharges
for revenues generated from contracts relating to technology
development.  Others include refund of certain loan interest from
local governments and income tax refund in relating to a
subsidiary.  The table below sets forth the amount of technology
subsidies and other refunds that we received in the periods
indicated.
  For
      the Year Ended December 31,2005
                
                
                2006
                
                
                2007RMB
                
                
                RMB
                
                
                RMB
                
                
                US$(in
      thousands)Technology
      subsidy
                
                
                372
                
                
                
                1,041
                
                
                
                3,303
                
                
                
                452Value-added
      tax refund for software products sold
                
                
                179
                
                
                
                1,281
                
                
                
                2,554
                
                
                
                350Business
      tax and surcharges refund
                
                
                76
                
                
                
                -
                
                
                
                1,460
                
                
                
                200Others
                
                
                381
                
                
                
                838
                
                
                
                -
                
                
                
                -Total
                
                
                1,008
                
                
                
                3,160
                
                
                
                7,317
                
                
                
                1,002
 
 Our
general and administrative expenses in 2007 increased significantly in 2007 from
2006, primarily due to increase in personnel costs and amortization of
e-Channels intangible assets  The increase in personnel cost was
primarily due to the increases in the number of administrative personnel from
the acquisitions of e-Channels in November 2006 and the additional acquisitions
in 2007.  Travel and other expenses for general and administrative
functions also contributed to the increase.  Our increase in general
and administrative expenses is partially offset by an increase of government
credits we received in 2007.  We expect that our general and
administrative expenses will continue to increase as we hire additional general
and administrative personnel and incur related costs as we anticipate further
growth of our businesses and incur costs related to compliance under the
Sarbanes-Oxley Act.
  INCOME
TAXES
  Our PRC
subsidiaries are subject to PRC enterprise income tax, which is calculated based
on taxable income determined under PRC accounting principles.  In
March 2007, the PRC National People’s Congress passed the People’s Republic of
China Enterprise Income Tax Law, or the New EIT Law, and in December 2007 the
PRC State Council issued the implementations rules under the New EIT Law, both
of which became effective on January 1, 2008.  The New EIT Law and its
implementation rules superseded the old enterprise income tax regime starting
January 1, 2008.
  In 2005,
2006 and 2007, our PRC subsidiaries were taxed according to the old enterprise
income tax regime, which prescribed a statutory enterprise income tax rate of
33%.  However, the old enterprise income tax regime provided for
preferential tax treatments to various enterprises, such as for foreign invested
enterprises, software enterprises or high-tech enterprises, in the forms of
preferential income tax rates or fixed-period tax
holidays.  Enterprises entitled to tax holidays are either exempted
from paying income taxes or pay income taxes at a beneficial rate during the
holiday period.  The preferential tax rate and the tax holidays can be
applied at the same time to the same enterprise.  A number of our PRC
subsidiaries had enjoyed preferential income tax rates and/or the various tax
holidays under the old enterprise income tax regime.  As a result, our
income tax expenses were RMB3.5 million, RMB3.3 million and RMB5.5 million
(US$0.8 million), respectively, and our effective tax rate was 19.2%, 7.4% and
7.5% in 2005, 2006 and 2007, respectively.  The significant decrease
in our effective tax rate from 2005 to 2006 was primarily due to tax holiday
benefit we received from Shanghai Software, whose income tax was waived for 2006
and 2007 as compared to 15% for 2005.  Without the preferential income
tax rate and the tax holiday, our income tax would have been RMB6.7 million,
RMB15.2 million and RMB23.6 million (US$3.2 million) in 2005, 2006 and 2007,
respectively.
  The New
EIT Law reduced the statutory tax rate to 25%, but repealed most of the
preferential tax treatments, including the preferential tax rates and the tax
holidays.  However, the New EIT Law provides a five-year transition
period that allows enterprises which enjoyed certain preferential tax treatment
under the old enterprise income tax regime to gradually transition to the 25%
statutory rate in a prescribed fashion.  According to a notice issued
by the PRC State Council, for enterprises which enjoyed preferential income tax
rate of 15% pursuant to certain prior tax rules or regulations specified in the
notice, the applicable enterprise income tax rate will
  68
  increase
to 18% for 2008, 20% for 2009, 22% for 2010, 24% for 2011 and 25% for 2012 and
thereafter.  For tax holidays specified in the notice, enterprises
already enjoying the holidays prior to January 1, 2008 can generally continue to
enjoy such tax holidays until their expiration, upon which time the 25% tax rate
will apply.  All other preferential tax treatments have generally
terminated on December 31, 2007.  The New EIT Law also provides that
the State Council can grant tax waivers or preferential tax rates for “qualified
high-tech or new-tech companies in need of special state support,” but the
qualification criteria for such high-tech or new-tech companies are not yet
clear.  Due to the application of the New EIT Law and its
implementation rules, certain of our subsidiaries may no longer be able to enjoy
any preferential income tax treatment, and certain others may need to pay higher
transitional income tax rates starting January 1, 2008.  As a result,
we expect our effective income tax rate to gradually increase from our 2007
level unless we qualify for new tax benefits under the new tax
regime.
  In
addition, pursuant to the New EIT Law and its implementation rules, we may be
deemed as PRC resident enterprise if our “de facto management body” is located
in China, in which case our global income will be subject to PRC income tax at
the rate of 25%.  However, it is currently unclear how the “de facto
management body” is determined.  See “Item 3. Key information — D.
Risk factors — Risks related to doing business in China — We may be treated as a
resident enterprise for PRC tax purposes under the New EIT Law and we may
therefore be subject to PRC income tax for any dividends we receive from our
subsidiaries, which may materially and adversely affect the amount of dividends
we must pay to our shareholders.”  If we are not deemed as a PRC
resident enterprise, then our dividend payable by our PRC subsidiaries to us
will be subject to 10% withholding tax if such dividend is derived from profits
generated after January 1, 2008.
  RESULTS
OF OPERATIONS
  The
following table sets forth a summary of our consolidated statement of income for
the periods indicated.  The operation results of any period are not
necessarily indicative of the results that may be expected for any future
period.
  For
      the Year Ended December 31,2005
                
                
                2006
                
                
                2007RMB
                
                
                %
                
                
                RMB
                
                
                %
                
                
                RMB
                
                
                US$
                
                
                %(in
      thousands, except percentages)Revenues
                
                
                177,327
                
                
                
                100.0
                
                
                
                289,650
                
                
                
                100.0
                
                
                
                435,519
                
                
                
                59,622
                
                
                
                100.0Cost
      of revenues
                
                
                (133,085
                )
                
                
                (75.1
                )
                
                
                (215,332
                )
                
                
                (74.3
                )
                
                
                (277,826
                )
                
                
                (38,034
                )
                
                
                (63.8
                )Gross
      profit
                
                
                44,242
                
                
                
                24.9
                
                
                
                74,318
                
                
                
                25.7
                
                
                
                157,693
                
                
                
                21,588
                
                
                
                36.2Operating
      expensesResearch and development
      expenses
                
                
                (352
                )
                
                
                (0.2
                )
                
                
                (902
                )
                
                
                (0.3
                )
                
                
                (8,370
                )
                
                
                (1,146
                )
                
                
                (1.9
                )Selling and marketing
      expenses
                
                
                (11,181
                )
                
                
                (6.3
                )
                
                
                (13,990
                )
                
                
                (4.8
                )
                
                
                (29,053
                )
                
                
                (3,977
                )
                
                
                (6.7
                )General and administrative
      expenses
                
                
                (13,913
                )
                
                
                (7.8
                )
                
                
                (14,170
                )
                
                
                (4.9
                )
                
                
                (50,668
                )
                
                
                (6,936
                )
                
                
                (11.6
                )Total
      operating expenses
                
                
                (25,446
                )
                
                
                (14.3
                )
                
                
                (29,062
                )
                
                
                (10.0
                )
                
                
                (88,091
                )
                
                
                (12,059
                )
                
                
                (20.2
                )Income
      from operations
                
                
                18,796
                
                
                
                10.6
                
                
                
                45,256
                
                
                
                15.6
                
                
                
                69,602
                
                
                
                9,529
                
                
                
                16.0Other
      income (expenses)
                
                
                (803
                )
                
                
                (0.5
                )
                
                
                (1,254
                )
                
                
                (0.4
                )
                
                
                4,453
                
                
                
                609
                
                
                
                1.0Income
      before minority interests and income taxes
                
                
                17,993
                
                
                
                10.1
                
                
                
                44,002
                
                
                
                15.2
                
                
                
                74,055
                
                
                
                10,138
                
                
                
                17.0Income
      tax expenses
                
                
                (3,462
                )
                
                
                (2.0
                )
                
                
                (3,271
                )
                
                
                (1.1
                )
                
                
                (5,528
                )
                
                
                (757
                )
                
                
                (1.3
                )Income
      before minority interests
                
                
                14,531
                
                
                
                8.2
                
                
                
                40,731
                
                
                
                14.1
                
                
                
                68,527
                
                
                
                9,381
                
                
                
                15.7Minority
      interests
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                (1,813
                )
                
                
                (248
                )
                
                
                (0.4
                )Net
      income
                
                
                14,531
                
                
                
                8.2
                
                
                
                40,731
                
                
                
                14.1
                
                
                
                66,714
                
                
                
                9,133
                
                
                
                15.3
   69
  Year
ended December 31, 2007 compared to year ended December 31, 2006
  Revenues
  Our
revenues increased 50.4% to RMB435.5 million (US$59.6 million) in 2007 from
RMB289.7 million in 2006.  This increase was primarily due to the
overall growth in our business combined with the effect of our acquisition of
e-Channels on November 24, 2006 and our several acquisitions in
2007.
  Our
revenues from IT solutions and services increased 131.9% to RMB230.6 million
(US$31.6 million) in 2007 from RMB99.4 million in 2006, primarily due to the
increase in the number of projects we undertook in 2007, both from the
acquisitions and from organic growth, as well as an increase in the average
contract value of our projects.  Our significant increase in revenues
from IT solutions and services resulted from both organic growth and
acquisitions of e-Channels and the five companies we acquired in 2007, all or
which contributed exclusively IT solutions and services revenue.  Our
organic growth resulted primarily from our shift in business focus to IT
solutions and services beginning in 2006.
  Our
revenues from system integration increased 7.7% to RMB204.9 million (US$28.0
million) in 2007 from RMB190.2 million in 2006, primarily due to an increase in
the average contract value of our projects.  As a result of the
significant difference in revenue growth rate, our revenues from IT solutions
and services as a percentage of total revenues increased to 53.0% in 2007 from
34.3% in 2006.
  Cost
of revenues
  Our cost
of revenues increased 29.0% to RMB277.8 million in 2007 (US$38.0 million) from
RMB215.3 million in 2006, primarily due to the increase in our
revenues.  Cost of revenues increased at a slower rate than our
revenues primarily due to the fact that the majority of our revenue increase in
2007 was from IT solutions and services, and cost of revenues accounted for a
much smaller percentage of IT solutions and services revenue as compared to
system integration revenue.
  Cost of
revenues for IT solutions and services increased 121.5% to RMB96.1 million
(US$13.2 million) in 2007 from RMB43.4 million in 2006, generally in line with
the increase in IT solutions and services provided.  The increase in
cost of revenues for IT solutions and services was primarily due to an increase
in personnel cost of RMB35.1 million and an increase in project-related travel
expenses of RMB9.7 million, and, to a lesser extent, increases in outsourcing,
training provided to our clients on the use of our solutions, and allocated
overhead costs.  The significant increase in personnel cost was
primarily due to increased headcount from our November 2006 acquisition of
e-Channels and other 2007 acquisitions, as well as additional employees we hired
to carry out our increased business volume.  The number of our
employees in project development and implementation was 477 and 1,077,
respectively, at December 31, 2006 and 2007.
  Cost of
revenues for system integration increased 5.7% to RMB181.7 million (US$24.9
million) in 2007 from RMB171.9 million in 2006, slightly lower than the increase
in our system integration revenue.  The increase in cost of revenues
for system integration was primarily due to increases in costs of third-party
hardware and software that we purchased for our clients in connection with our
increase in business volume.
  Gross
profit and gross margin
  As a
result of the foregoing, our gross profit increased 112.2% to RMB157.7 million
(US$21.6 million) in 2007 from RMB74.3 million in 2006.  Our gross
margin improved to 36.2% in 2007 from 25.7% in 2006, primarily due to the higher
percentage of revenues from IT solutions and services in 2007 as compared to
2006.  In 2007, our gross margin was 58.3% for IT solutions and
services and 11.3% for system integration, as compared to 56.3% and 9.6%,
respectively, in 2006.
  Operating
expenses
  Our
operating expenses increased 203.1% to RMB88.1 million (US$12.1 million) in 2007
from RMB29.1 million in 2006, due to increases in each of research and
development expenses, selling and marketing expenses and general and
administrative expenses.
  70
  Research and development
expenses.  Research and development expenses increased 827.9%
to RMB8.4 million (US$1.1 million) in 2007 from RMB0.9 million in 2006,
primarily due to the increase in research and development-related personnel cost
of RMB5.1 million.  This increase in personnel cost resulted primarily
from an increase in the number of personnel devoted to research and development
due to the acquisition of e-Channels in November 2006 and additional
acquisitions we made in 2007.  The number of our research and
development employees increased from 21 at the end of 2006 to 35 at the end of
2007.  To a lesser extent, the increase in research and development
expenses was also due to increases in research and development related travel
expenses, amortization of capitalized intangible assets as well as allocated
overhead costs such as depreciation and rental.  Our research and
development expenses as a percentage of revenues increased to 1.9% in 2007 from
0.3% in 2006.
  Selling and marketing
expenses.  Selling and marketing expenses increased 107.7% to
RMB29.1 million (US$4.0 million) in 2007 from RMB14.0 million in 2006, primarily
due to the significant increase in personnel cost.  This increase in
personnel cost resulted primarily from an increase in sales and marketing
headcount associated with POS merchant acquiring business that we initiated in
2007 as well as the acquisition of e-Channels in November 2006, and the
additional acquisitions in 2007.  The number of our sales and
marketing personnel increased from 46 at the end of 2006 to 344 at the end of
2007, the majority of which were sales staff for our POS merchant acquiring
business. Other
selling and marketing expenses, such as those associated with business
development activities, travel expenses and overhead costs also increased due to
our increase in selling and marketing personnel and activities.  Our
selling and marketing expenses as a percentage of revenues increased to 6.7% in
2007 from 4.8% in 2006.
  General and administrative
expenses.  General and administrative expenses increased 257.6%
to RMB50.7 million (US$6.9 million) in 2007 from RMB14.2 million in 2006,
primarily due to an increase in personnel costs of RMB18.4 million and
amortization of e-Channels intangible assets of RMB9.2 million that occurred
only in 2007.  The increase in personnel cost was primarily due to the
increases in the number of administrative personnel from the acquisitions of
e-Channels in November 2006 and the additional acquisitions in
2007.  The number of our employees in general and administrative
functions increased from 68 at the end of 2006 to 121 at the end of
2007.  This increase in general and administrative personnel also
resulted in the increase of related travel expenses and other overhead costs
allocated to general and administrative functions, such as rental, depreciation
and amortization and general office expenses.  In addition, an
increase in professional service fees in 2007 resulting from becoming a NASDAQ
listed public company, and a foreign exchange loss in 2007 also contributed to
the increase.  Our increase in general and administrative expenses was
partially offset by an increase in various PRC government credits of RMB4.2
million, which were due to an increase in revenues from certain software
projects that qualified for such credits.  Our general and
administrative expenses as a percentage of revenues increased to 11.6% in 2007
from 4.9% in 2006.
  Income
from operations
  As a
result of the foregoing, our income from operations increased 53.8% to RMB69.6
million (US$9.5 million) in 2007 from RMB45.3 million in 2006, and our operating
margin increased to 16% in 2007 from 15.6% in 2006.
  Other
income (expenses)
  Total
other income was RMB4.5 million (US$0.6 million) in 2007 as compared to total
other expenses of RMB1.3 million in 2006, primarily due to investment income
from short-term investments of RMB3.5 million.  Our net interest
expenses decreased to RMB0.1 million (US$0.02 million) in 2007 from RMB1.1
million in 2006, primarily due to an increase in interest income from additional
cash deposits received from the share exchange transaction in connection with
the acquisition of China Unistone in November 2006 and from the exercise of our
warrants in June 2007.
  Minority
interests
  Minority
interests amounted to RMB1.8 million (US$0.2 million) in 2007 as compared to nil
in 2006, primarily due to the 20% minority interest in Yuxinyicheng Information
we established in January 2007, the 40% minority interest in Hongzhi that we
established in July 2007 and the 25% minority interest in Easycon that we
acquired in July 2007.
  71
  Income
tax expenses
  Income tax
expenses increased 69.0% to RMB5.5 million (US$0.8 million) in 2007 from RMB3.3
million in 2006, primarily due to our increased taxable income.  Our
effective tax rate was 7.5% in 2007 compared 7.4% in 2006.
  Net
income
  As a
result of the foregoing, net income increased 63.8% to RMB66.7 million (US$9.1
million) in 2007 from RMB40.7 million in 2006, and net margin increased to 15.3%
in 2007 from 14.1% in 2006.
  Year
ended December 31, 2006 compared to year ended December 31, 2005
  Revenues
  Our
revenues increased 63.3% to RMB289.7 million in 2006 from RMB177.3 million in
2005.  This increase was primarily due to the increase in both IT
solutions and services revenue and system integration revenue.  Our IT
solutions and services revenue increased 62.7% to RMB99.4 million in 2006 from
RMB61.1 million in 2005, and our system integration revenue increased a similar
63.7% to RMB190.2 million in 2006 from RMB116.2 million in 2005.  The
increases in both IT solutions and services revenue and system integration
revenue were primarily due to increases in the number of projects we undertook
as well as the average contract value of our projects.  IT solutions
and services revenue as a percentage of our revenues was similar in these two
years, which was 34.5% in 2005 and 34.3% in 2006.
  Cost
of revenues
  Our cost
of revenues increased 61.8% to RMB215.3 million in 2006 from RMB133.1 million in
2005, generally in line with our increase in revenues.
  Cost of
revenues for IT solutions and services increased 68.5% to RMB43.4 million in
2006 from RMB25.8 million in 2005, primarily due to an increase in outsourcing
cost of RMB7.7 million, an increase in personnel costs of RMB6.3 million and an
increase in project-related travel cost of RMB3.4 million.  The
increase in outsourcing costs was due to an increase in business volume and our
increase in using outsourced services; the increase in personnel costs was
primarily due to an increase in the number of employees we hired to carry out
our increased business volume, and the increase in project-related travel costs
was due to an increase in the number of projects in locations that require our
employees to travel.  The number of our employees in project
development and implementation increased from 158 at the end of 2005 to 477 at
the end of 2006, a substantial number of which was from e-Channels.
  Cost of
revenues for system integration increased 60.2% to RMB171.9 million in 2006 from
RMB107.3 million in 2005.  This increase in cost of revenues for
system integration was primarily due to increases in costs of third-party
hardware and software that we purchased for our clients in connection with the
increase in our business volume.
  Gross
profit and gross margin
  As a
result of the foregoing, our gross profit increased 68.0% to RMB74.3 million in
2006 from RMB44.2 million in 2005.  Our gross margin improved slightly
to 25.7% in 2006 from 24.9% in 2005, primarily due to improved gross margin for
our system integration, partially offset by a slight decrease in gross margin
from IT solutions and services.  Gross margin for system integration
increased to 9.6% in 2006 from 7.7% in 2005, while gross margin for IT solutions
and services decreased slightly to 56.3% in 2006 from 57.8% in
2005.
  Operating
expenses
  Our
operating expenses increased 14.2% to RMB29.1 million in 2006 from RMB25.4
million in 2005, due to increases in each of research and development expenses,
selling and marketing expenses, and general and administrative
expenses.
  72
  Research and development
expenses.  Research and development expenses increased 156.3%
to RMB0.9 million in 2006 from RMB0.4 million in 2005, primarily due to an
increase of research and development personnel and activities.  The
number of our research and development employees increased from 13 at the end of
2005 to 21 at the end of 2006.  Our research and development expenses
as a percentage of revenues increased slightly to 0.3% in 2006 from 0.2% in
2005.
  Selling and marketing
expenses.  Selling and marketing expenses increased 25.1% to
RMB14.0 million in 2006 from RMB11.2 million in 2005, primarily due to increases
in the number of sales and marketing personnel and sales and marketing
activities.  Our sales and marketing personnel increased from 31 at
the end of 2005 to 46 at the end of 2006.  Our selling and marketing
expenses as a percentage of revenues decreased to 4.8% in 2006 from 6.3% in
2005, as our revenues increased at a faster pace relative to our selling and
marketing expenses.
  General and administrative
expenses.  General and administrative expenses increased 1.8%
to RMB14.2 million in 2006 from RMB13.9 million in 2005, primarily due to an
increase in professional fees of RMB1.7 million relating to the three-party
merger in November 2006 and an increase in staff costs of RMB1.2 million
resulting from the increase in headcount.  The number of our employees
performing general and administrative functions increased from 28 at the end of
2005 to 68 at the end of 2006, primarily due to the three-party
merger.  Our increase in general and administrative expenses was
offset by an increase in PRC government credit we received of RMB2.2 million,
which was due to an increase in revenues from certain software projects that
qualified for such credits.  Our general and administrative expenses
as a percentage of revenues decreased to 4.9% in 2006 from 7.8% in 2005, as our
revenues increased at a much faster pace relative to our general and
administrative expenses.
  Income
from operations
  As a
result of the foregoing, our income from operations increased 140.8% to RMB45.3
million in 2006 from RMB18.8 million in 2005, and our operating margin increased
to 15.6% in 2006 from 10.6% in 2005.
  Other
income (expenses)
  Total
other expenses were RMB1.3 million in 2006 as compared to RMB0.8 million in
2005, primarily due to an increase in net interest expense of RMB0.7 million
resulting from increased bank borrowing for our working capital
needs.
  Income
tax expenses
  Income tax
expenses decreased 5.5% to RMB3.3 million in 2006 from RMB3.5 million in 2005,
despite our increased taxable income, primarily due to tax holiday benefits in
relation to Shanghai Software that we received in 2006.  Our income
tax rate for Shanghai Software was 0% for 2006 and 15% for 2005.  Our
effective tax rate decreased to 7.4% in 2006 from 19.2% in 2005.
  Net
income
  As a
result of the foregoing, net income increased 180.3% to RMB40.7 million in 2006
from RMB14.5 million in 2005, and net margin increased to 14.1% in 2006 from
8.2% in 2005.
  INFLATION
  According
to the China Statistical Bureau, China’s overall national inflation rate, as
represented by the general consumer price index, was approximately 1.8%, 1.5%
and 4.8% in 2005, 2006 and 2007, respectively.  The inflation rate has
risen in China in 2007, and we cannot assure you that we will not be adversely
affected by inflation in China in the future.
  73
  B. 
 Liquidity and
capital resources.
  LIQUIDITY
AND CAPITAL RESOURCES
  We have
historically financed our operations through sales of equity interests to
investors, bank loans and cash generated from operations.  Our
principal use of cash for the years ended December 31, 2005, 2006 and 2007 was
for our operating activities as well as acquisitions.  As of December
31, 2007, we had RMB222.5 million (US$30.5 million) in cash and cash
equivalents, consisting of cash on hand and bank deposits with original maturity
of three months or less.
  We believe
that our current cash and anticipated cash flow from operations is sufficient to
meet our current cash needs.  We may, however, require additional cash
due to changing business conditions or other future developments, including any
investments or acquisitions we may decide to pursue.  In the
long-term, we intend to rely primarily on cash flow from operations and
additional borrowings from banks to meet our anticipated cash
needs.  If our anticipated cash flow is insufficient to meet our
requirements, we may also seek to sell additional equity, debt or equity-linked
securities.  We cannot assure you that any financing will be available
in the amounts we need or on terms acceptable to us, if at all.
  The
following table sets forth our outstanding borrowings as of the dates
indicated.
  As
      of December 31,2005
                
                
                2006
                
                
                2007RMB
                
                
                RMB
                
                
                RMB
                
                
                US$(in
      thousands)Short-term
      bank borrowings
                
                
                12,000
                
                
                
                32,000
                
                
                
                35,000
                
                
                
                4,792Current
      portion of long-term bank borrowings
                
                
                1,500
                
                
                
                3,500
                
                
                
                –
                
                
                
                –Long-term
      bank borrowings
                
                
                3,500
                
                
                
                –
                
                
                
                –
                
                
                
                –
 
 The
outstanding short-term borrowings of RMB35 million as of December 31, 2007
comprise two short-term loans we borrowed in 2007.  One was for a
principal amount of RMB15 million from September 7, 2007 to March 7, 2008 with
an annual interest rate of 6.831%, and the other was for a principal amount of
RMB20 million from December 14, 2007 to December 14, 2008 with an annual
interest rate of 8.019%.  These two loans were guaranteed by
Yuxinyicheng and Mr. Weidong Hong, our Chief Executive Officer, without a
guarantee fee.
  We
received cash in the amount of RMB138.2 million from the share exchange
transaction in connection with the acquisition of China Unistone on November 24,
2006.  See “Item 4. Information on the Company — A. History and
development of the Company — Corporate  history.”  In
addition, we received cash in the amount of RMB252.6 million (US$34.6 million)
in June of 2007 in relation to the conversion of our outstanding
warrants.
  The
following table sets forth a summary of our cash flows for the periods
indicated.
  For
      the Year Ended December 31,2005
                
                
                2006
                
                
                2007RMB
                
                
                RMB
                
                
                RMB
                
                
                US$(in
      thousands)Net
      cash provided by (used in) operating activities
                
                
                14,806
                
                
                
                (13,460
                )
                
                
                (33,321
                )
                
                
                (4,562
                )Net
      cash used in investing activities
                
                
                (13,556
                )
                
                
                (54,059
                )
                
                
                (62,576
                )
                
                
                (8,567
                )Net
      cash provided by financing activities
                
                
                1,635
                
                
                
                123,161
                
                
                
                220,033
                
                
                
                30,123Net
      increase in cash
                
                
                2,885
                
                
                
                55,642
                
                
                
                124,136
                
                
                
                16,994Cash
      and cash equivalents at beginning of year
                
                
                39,831
                
                
                
                42,716
                
                
                
                98,358
                
                
                
                13,465Cash
      and cash equivalents at end of year
                
                
                42,716
                
                
                
                98,358
                
                
                
                222,494
                
                
                
                30,459
  
 74
 Operating
activities
  We had a
net cash outflow from operating activities of RMB33.3 million (US$4.6 million)
in 2007 compared with a net cash outflow of RMB13.5 million in 2006, while our
revenues increased to RMB435.5 million (US$59.6 million) in 2007 compared with
RMB289.7 million in 2006.  Our net cash outflow from operating
activities in 2007 was primarily due to an increase in trade accounts receivable
of RMB70.6 million, an increase in other current assets of RMB56.0 million, an
increase in costs and estimated earnings in excess of billings on uncompleted
contracts of RMB29.5 million, and a decrease in other current liabilities of
RMB19.1 million, which were partially offset by cash received from our clients
and an increase in trade accounts payable of RMB51.8 million.  The
increase in trade accounts receivable was primarily due to the increase in our
revenues; the increase in other current assets was primarily due to an increase
of payment in advance to our vendors for which equipment has not been delivered
to our clients as of December 31, 2007; the increase in costs and estimated
earnings in excess of billings on uncompleted contracts was primarily due to an
increase in our uncompleted projects as of December 31, 2007; the decrease in
other current liabilities was primarily due to payment of accrued expenses and
taxes; and the increase in trade accounts payable was primarily due to better
credit terms we were able to get from our suppliers and an increase in our
business volume.
  We had a
net cash outflow from operating activities of RMB13.5 million in 2006 compared
with a net cash inflow of RMB14.8 million in 2005, while our revenues increased
to RMB289.7 million in 2006 compared with RMB177.3 million in
2005.  Our net cash outflow from operating activities in 2006 was
primarily due to an increase in trade accounts receivable of RMB47.8 million, a
decrease in trade accounts payable of RMB10.5 million, and a decrease in
billings in excess of costs and estimated earnings on uncompleted contracts of
RMB6.3 million, which were partially offset by cash received from our clients
and a decrease in inventories of RMB5.8 million.  The increase of
trade accounts receivable was primarily due to an increase in our revenues and
delay in payment by certain of our bank clients due to their application for
initial public offering; the decreases in trade accounts payable and inventories
were primarily due to a decrease in the number of our system integration
projects at the end of 2006; and the decrease in billings in excess of costs and
estimated earnings on uncompleted contracts was primarily due to the decrease in
the number of uncompleted projects at the end of 2006.
  We had a
net cash inflow from operating activities of RMB14.8 million in 2005, primarily
due to cash received from clients and an increase in trade accounts payable of
RMB23.2 million in 2005, which was offset by an increase in other current assets
of RMB9.9 million, an increase in trade accounts receivable of RMB5.9 million,
an increase in costs and estimated earnings in excess of billings on uncompleted
contracts of RMB5.9 million and an increase in inventories of RMB5.2
million.  The increase in trade accounts payable was primarily due to
the extension of our trade accounts payable cycle resulting from our better
management of trade accounts payable;  the increase in other current
assets was primarily due to increased payment in advance from our clients; the
increase in trade accounts receivable was primarily due to an extension of
payment cycle of a significant client that resulted from a more stringent
internal approval process by the client; the increase of costs and estimated
earnings in excess of billings was primarily due to an increase in IT solutions
and services revenue and more uncompleted projects as of the end of 2005; and
the increase in inventory was primarily attributable to one undelivered client
order of RMB6.9 million as of the end of 2005.
  Investing
activities
  Net cash
used in investing activities was RMB62.6 million (US$8.6 million) in 2007,
primarily comprising payment of purchase of subsidiary of RMB51.8 million and
capital expenditure of RMB34.3 million, partially offset by decrease in deposits
paid for acquisitions of businesses of RMB20.0 million.  Payment of
purchase of subsidiary related to our acquisitions of Sunrisk, Recency, Easycon,
Fujie and Fuyi, and capital expenditure related to the purchase of POS terminals
and other hardware equipment and software tools for our research and development
activities as well as office decoration expenses due to the significant increase
of our number of offices nationwide.
  Net cash
used in investing activities was RMB54.1 million in 2006, primarily comprising
deposit for acquisition of business of RMB44.8 million related to the
establishment of Yuxinyicheng Information of RMB20.0 million and the acquisition
of Sunrisk of RMB24.8 million, and payment of purchase of subsidiary of RMB7.8
million as part of the cash consideration related to the acquisition of
e-Channels.
  75
  Net cash
used in investing activities was RMB13.6 million in 2005, primarily comprising
deposit for acquisition of business of RMB7.0 million and capital expenditure of
RMB5.4 million.  Deposit for acquisition of business related to the
acquisition of a related company, Jianyin Computer Co., Limited, or Jianyin
Computer, and capital expenditure was for the purchase of developed software as
well as for office equipment, furniture and vehicles.  We sold Jianyin
Computer in 2006.
  Financing
activities
  Net cash
provided by financing activities was RMB220.0 million (US$30.1 million) in 2007,
primarily comprising proceeds from exercise of warrants of RMB252.6 million and
bank borrowings of RMB55.0 million, partially offset by repayment of bank
borrowings of RMB55.5 million, deemed distribution of RMB26.6 million related to
the cash payment to the selling shareholders of Sihitech BVI in connection with
the exercise of our warrants (which was required under the three-party merger
agreement), and dividend paid to the shareholders of Sihitech BVI and e-Channels
BVI of RMB11.7 million.
  Net cash
provided by financing activities was RMB123.2 million in 2006, primarily
comprising proceeds from the share exchange transaction of RMB138.2 million and
bank borrowings of RMB20.0 million, partially offset by a deemed distribution
payment of RMB21.3 million as part of the consideration relating to the
three-party merger in November 2006, dividends paid to the selling shareholders
of Sihitech BVI and e-Channels BVI of RMB5.7 million, repayment of borrowing
from an ex-owner of Sihitech BVI of RMB4.0 million and repayments of bank
borrowings of RMB3.5 million.
  Net cash
provided by financing activities was RMB1.6 million in 2005, primarily
comprising bank borrowings of RMB25.0 million, borrowings from an ex-owner of
RMB4 million and loans from a business to be acquired, Jianyin Computer, of
RMB3.0 million, partially offset by repayment of bank borrowings of RMB20.0
million, dividends paid to the then shareholders and minority interests of
RMB9.4 million.
  CAPITAL
EXPENDITURES
  Our
capital expenditures amounted to RMB5.4 million, RMB2.9 million and RMB34.3
million (US$4.7 million) in 2005, 2006 and 2007, respectively.  Our
capital expenditures consisted principally of purchases of developed software,
development tools, computer equipment, office equipment and furniture, and
vehicles, as well as office decoration and purchase of POS
terminals.  Our capital expenditures increased significantly in 2007
primarily due to the purchase of POS terminals and office decoration, as we
significantly increased our number of offices related to our POS
merchant-acquiring business.
  C.  
Research and
development, patents and license, etc.
  For
information on our research and development activities and intellectual property
information, see “Item 4. Information on the Company — Business overview —
Research and development” and “Item 4. Information on the Company — Business
overview — Intellectual property.”
  D.  
Trend
information.
  For
information on the principal trends and uncertainties affecting our results of
operations, financial condition and businesses, see “Item 3. Key Information —
Risk factors”, “Item 4. Information on the Company — Business overview” and
elsewhere in this Item.
  E.  
Off-balance sheet
arrangements.
  We have
not entered into any financial guarantees or other commitments to guarantee
payment obligations of any third parties.
  F.  
Tabular disclosure of
contractual obligations.
  The
following table sets forth our contractual obligations and commercial
commitments as of December 31, 2007.
  76
  Payment
      Due by PeriodTotal
                
                
                Within
      1 Year
                
                
                1-3
      years
                
                
                3-5
      years
                
                
                More
      than 5 years(RMB
      in thousands)Bank
      debt
                
                
                35,000
                
                
                
                35,000
                
                
                
                –
                
                
                
                –
                
                
                
                –Interest
      on bank debt
                
                
                1,717
                
                
                
                1,717
                
                
                
                –
                
                
                
                –
                
                
                
                –Capital
      leases
                
                
                3,861
                
                
                
                1,451
                
                
                
                2,410
                
                
                
                –
                
                
                
                –Operating
      leases
                
                
                4,226
                
                
                
                3,198
                
                
                
                1,028
                
                
                
                –
                
                
                
                –Total
                
                
                44,804
                
                
                
                41,366
                
                
                
                3,438
                
                
                
                –
                
                
                
                –
  Our
capital leases primarily relate to leases of computers, and our operating leases
relate to the renting of our offices.
  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 (“statutory safe harbors”)
shall apply to all forward-looking information provided in Item 5.E and F of
this Item.
  77
  ITEM
6.       DIRECTORS, SENIOR MANAGEMENT AND
EMPLOYEES
  A.  
Directors and senior
management.
  The
following table sets forth certain information regarding our directors and
executive officers as of December 31, 2007.
  Name
                
                Age
                
                PositionChih
      T. Cheung
                
                37
                
                Non-Executive
      Chairman of the BoardWeidong
      Hong
                
                41
                
                Director
      and Chief Executive OfficerShuo
      Zeng
                
                38
                
                Director
      and Chief Operating OfficerLi
      Liao
                
                42
                
                Independent
      DirectorLawrence
      Yeung
                
                62
                
                Independent
      DirectorChi
      Wei Joong
                
                52
                
                Independent
      DirectorHenry
      Wang
                
                49
                
                Independent
      DirectorRemington
      Hu
                
                41
                
                Chief
      Financial Officer
  Chih T. Cheung was the
Chairman of the board of China Unistone, our predecessor from May 2004 to
November 2006, and has been the non-executive Chairman of our board since
November 2006.  Since September 2005, Mr. Cheung has been the Managing
General Partner of Staples Asia Investment Limited, a subsidiary of Staples,
Inc., created to make investments and form partnerships in the office product
market in Asia.  From March 2003 until February 2006, he was a senior
advisor to the Chairman of the Chinatrust Commercial Bank.  Prior to
that, Mr. Cheung co-founded and was the Chief Executive Officer of HelloAsia
Corporation from its inception in 1999 until February 2002.  In
February 2002, Mr. Cheung negotiated the merger of HelloAsia into Brience, Inc.
and served as executive vice president of Brience until February
2003.  Prior to forming HelloAsia, Mr. Cheung co-founded and was the
Chief Executive Officer of Crimson Solutions.  He currently sits on
the boards of a number of private companies.  Mr. Cheung graduated
from Harvard College, received an A.M. from Harvard Graduate School of Arts and
Sciences, a J.D. from Harvard Law School and an M.B.A. from Harvard Business
School.
  Weidong Hong has been our
Chief Executive Officer and a director of our board since November
2004.  Mr. Hong is a founder and is also the Chairman and Chief
Executive Officer of Beijing Sihitech.  Prior to founding Beijing
Sihitech in June 1999, he was part of the senior management of Secom China Ltd.,
the Japanese publicly listed electronic security services provider, where from
December 1994 to May 1997 he served as Vice President of the PC
Department.  From May 1997 to June 1999, Mr. Hong held the position of
General Manager of Beijing Global Infotech Co., Ltd., a company engaged in the
business of providing IT services to the Chinese banking industry.  He
holds B.E. and EMBA degrees from Tsinghua University.
  Shuo Zeng has been our Chief
Operating Officer and a director of our board since November
2004.  Mr. Zeng is a founder and Chairman and Chief Executive Officer
of e-Channels.  From July 1991 to May 2000, Mr. Zeng held several
senior positions in the Nantian Group, a manufacturer of electronic and
communication equipment in China that is publicly listed in the Shenzhen Stock
Exchange, including general manager of the Information Product Department and
Finance Project & System Integration Department.  He holds a B.E.
in automation from Beijing Polytechnic University.
  Li Liao has been an
independent director of our board since November 2006.  Mr. Li is a
distinguished academician, and has served as the Associate Dean and Director of
EMBA Program as well as a Professor of Finance at the prestigious School of
Economics and Management of Tsinghua University since September
2000.  Between May 1999 and August 2000, he served as the Assistant to
Chairman at the Esquel Group, a company engaged in apparel
manufacturing.  He received a B.E. in Electrical Engineering and a
Ph.D. in Engineering Economics from Tsinghua University, as well as an MBA in
Financial Engineering from the MIT Sloan School of Management.
  Lawrence Yeunghas been an
independent director on our board since October 2007.  Mr. Yeung
retired from the United Nations.  Prior to his retirement, Mr. Yeung
worked at the United Nations for over 20 years.  He was a director of
information systems and technologies at the United Nations and the United
Nations Development
  78
  Program.  Mr.
Yeung was responsible for implementing global information and communications
systems in over 145 country offices, including acclaimed global safety and
security systems.  In addition to overseeing the United Nations’ vast
internal information systems, Mr. Yeung has assisted member and developing
countries around the world in the application of information systems and
technologies.  Mr. Yeung also served extensively on the United
Nations’ financial, personnel and procurement committees, and oversaw the award
of contracts and subsequent project implementations.  Mr. Yeung is a
graduate of computer science and electronic engineering from the University of
Sydney and the University of New South Wales.
  Chi Wei Joong has been an
independent director on our board since November 2006.  Since March
2004, Mr. Joong has been the General Manager and President for the credit card
division of China Merchants Bank, the largest credit issuer in
China.  Before that, from March 1999 to January 2004 he was an
Executive Vice President of the retail banking division of Chinatrust Commercial
Bank, the largest credit issuer and one of the leading financial holdings
company in Taiwan.  From 1997 to 1998, he served as the Financial
Director of AIG Credit Card Company (Taiwan).  Between 1995 and 1997,
he served as Financial Director for the credit card division of the Taipei City
Bank (Taiwan).  He also worked at American Express in the
U.S.  Currently, he also serves on the advisory board for Visa
International.  Mr. Joong studied at Keynes University and New York
University.
  Henry Wang has been an
independent director on our board since November 2006.  Since February
2003, Mr. Wang has served as the general manager of the Operating Center of
China Construction Bank.  From July 2000 to February 2003, he served
as the general manager of Settlement Accounts Department of China Construction
Bank.  Before that, he worked in the Funds Clearing Department and
conducted project auditing and consulting activities in the Investment and
Research Department of China Construction Bank.  He studied at Beihang
University and later at South Western University of Finance and
Economics.
  Remington Hu has been our
Chief Financial Officer since February 2008.  Mr. Hu has over 18 years
of experience in venture investments, corporate finance and
entrepreneurship.  From 2004 to 2007, he was the chief representative
in China for CVM Capital Partners LLC, a leading venture capital firm from
Taiwan.  From 2002 to 2004, Mr. Hu was the Chief Financial Officer of
the Wholesale and Retail Business Group of Hong Kong-listed Yue Yuen Industrial
Holdings Limited, where he managed the financial operations of China's largest
sporting goods retailer.  Mr. Hu was also a co-founder and the Chief
Operating Officer and Chief Financial Officer of eSOON Communications
International Corp, a leading e-contact center solution provider with presence
throughout Greater China.  Mr. Hu received his MBA in finance from the
Wharton School of Business of the University of Pennsylvania, and a B.S. degree
in computer science from National Chiao Tung University in Taiwan.
  B. Compensation.
  We pay our
executives and our non-executive Chairman salaries and bonuses.  We
pay our independent directors who are not employees a meeting fee of US$3,000
and reimbursement of expenses.  Directors who serve as a committee
Chairman also receive US$500 per committee meeting.  All of our
independent directors will be granted 750 ordinary shares of the Company per
meeting.  In 2007, the aggregate cash compensation paid to our
directors and executive officers as a group was RMB1.8 million (US$0.2
million).
  2006
PERFORMANCE EQUITY PLAN
  Our stock
options are granted under the China Unistone Acquisition Corporation 2006
Performance Equity Plan, which became the Yucheng Technologies Limited 2006
Performance Equity Plan (the “Plan”) by operation of law under the terms of our
merger with China Unistone Acquisition Corporation.  We adopted and
obtained shareholder approval of the Plan in November 2006, under which we could
issue share options with the right to purchase up to 1,500,000 ordinary shares
to our directors, officers, employees, and consultants.  We granted no
options under the Plan as of December 31, 2007.
  On
December 13, 2005, China Unistone’s board approved its 2006 Performance Equity
Plan and its shareholders subsequently approved such plan.  The
purpose of the stock option plan was to enhance its ability to recruit and
retain employees, officers, directors and consultants of outstanding ability and
to further motivate them by providing an opportunity to acquire a proprietary
interest in our company.  After the three-party merger in November
2006, we assumed China Unistone’s 2006 Performance Equity Plan.  We
could issue share options with
  79
  the right
to purchase up to 1,500,000 ordinary shares to our directors, officers,
employees, and consultants under the plan.  To date, no awards have
been granted under the plan.  The following describes the principal
terms of the plan.
  Administration.  Our
compensation committee administers the 2006 Performance Equity
Plan.  Subject to the provisions of the plan, the compensation
committee determines, among other things, the persons to whom from time to time
awards may be granted, the specific type of award to be granted, the number of
shares subject to each award, share prices, any restrictions or limitations on
the awards, and any vesting, exchange, surrender, cancellation, acceleration,
termination, exercise or forfeiture provisions related to the
awards.  The committee makes all determinations of any questions
arising under the plan or any rule or regulation established pursuant to the
plan.
  Eligible
participants.  Awards may be granted to employees, officers,
directors and consultants who are deemed to have rendered or are able to render
significant services to us, and who have contributed or have the potential to
contribute to our success.  Incentive stock options may only be
awarded to individuals who are our employees at the time of
grant.  However, an award may be granted in connection with an
individual’s hiring or retention, at any time on or after the date he or she
reaches an agreement with us.
  Share reserve.  The
plan reserves 1,500,000 ordinary shares to be granted as awards.  The
total number of ordinary shares available for issuance under the plan is subject
to the adjustment in the event of any merger, reorganization stock split,
reverse stock split, stock dividend payable on our ordinary shares, combination
or exchange of shares, or other extraordinary event resulting in a change of our
shares as a whole.
  Options.  Under the
plan our compensation committee may award stock options that are intended to
qualify as “incentive stock options” within the meaning of Section 422 of the
U.S. Internal Revenue Code of 1986, as amended, or the Code, as well as those
not intended to be so qualified.  Our compensation committee will fix
the term of each stock option.  However, incentive stock options may
be granted only within the ten-year period commencing from the effective date of
the plan, and may only be exercised within ten years from the date of the grant,
or five years from the date of the grant in the case of a participant who at the
time the stock option is granted owns more than 10% of the total combined voting
power of all of our classes of voting securities.  The exercise price
of stock options granted under the plan will be determined by our compensation
committee at the time of the grant, but in no event will the price be less than
the market price of any share of common stock.  The number of shares
covered by incentive stock options which become exercisable for the first time
by participants in any year cannot have an aggregate fair market value in excess
of US$100,000, measured at the date of the grant.  Payment of the
exercise price may be made in cash, in shares of our ordinary shares owned by
the participant, in a combination of the two, or otherwise, as reflected in the
applicable award agreement.  Unless otherwise provided in the grant of
a stock option, if a participant’s employment with us or any of our subsidiaries
is terminated for any reason other than due to death or disability, the
participant’s stock option will automatically terminate.  In addition,
if a holder’s employment with us is terminated for cause, the compensation
committee may require this holder to return to us the economic value of any
shares realized by that holder during the six month period prior to the holder’s
termination.  However, if the participant’s employment is terminated
without cause or due to retirement on or after the age of 65, then the portion
of his or her stock option which has vested as of the date of termination may be
exercised: for three months after termination or for the balance of the stock
option’s exercise period, whichever is shorter; or for a greater or lesser
period as may be specified by the compensation committee in the
grant.
  Stock appreciation
rights.  Under the plan, our compensation committee may grant
stock appreciation rights to participants who have received or are receiving
stock options.  A stock appreciation right entitles the holder to
surrender to us all or a portion of a stock option in exchange for a number of
shares of our ordinary shares determined by multiplying the excess of the fair
market value per share of our ordinary shares on the exercise date over the
exercise price per share by the number of shares subject to the stock option and
then dividing it by the fair market value of the ordinary shares on the date the
stock appreciation right is exercised
  Restricted
stock.  Our compensation committee may award shares of our
ordinary shares which are subject to restrictions as the compensation committee
may determine in addition to, or in lieu of, other awards granted to
participants under the plan.  The compensation committee will
determine at the time of the award, the period during which the award may be
subject to forfeiture and the vesting schedule of the shares under the
award.  A participant will have the right to vote the restricted stock
granted to him and to receive dividend payments distributed on the shares in the
form of cash or cash equivalents.
  80
  Deferred
stock.  Our compensation committee may award shares of our
ordinary shares to be received at the end of a specified deferral period and
upon satisfaction of any other applicable restrictions, terms and conditions
provided for in the grant of the award.  Any deferred stock that does
not vest will be forfeited.  A participant will not have any rights as
a stockholder by virtue of the award of deferred stock until the expiration of
the applicable deferral period and the issuance and delivery of a stock
certificate evidencing the award of the deferred stock.  A participant
may request that the compensation committee defer issuance of an award of
deferred shares for an additional specified period, subject to certain
conditions.
  Stock reload
options.  Our compensation committee may grant to a participant
an option covering a number of shares up to the amount of shares of our ordinary
shares held by the participant for at least six months, which is used to pay all
or part of the exercise price of an option, and any shares withheld by us as
payment for withholding taxes.  Any stock reload option will have an
exercise price equal to the fair market value of our ordinary shares as of the
date of the exercise of the stock option to which it is
related.  Unless otherwise provided in the stock reload option grant,
a stock reload option may be exercised commencing one year after it is granted
and will expire on the date of expiration of the stock option to which the
reload option is related.
  Other stock-based
awards.  Our compensation committee may award other stock-based
awards, subject to limitations under applicable law, in addition to, or in lieu
of, other awards granted to participants under the plan.  These other
stock-based awards are payable in, valued in, or otherwise based on, or related
to, our ordinary shares.  These other stock-based awards may be in the
form of the right to purchase our ordinary shares which are not subject to any
restrictions or conditions, convertible or exchangeable debentures or other
rights convertible into shares of our ordinary shares, as well as awards valued
by reference to the value of securities of, or the performance of, one of our
subsidiaries.
  Change of control and accelerated
vesting.Our 2006 Performance Equity Plan provides that in the
event of a change of control event, as described in the plan, not approved by
our board, the vesting periods with respect to options and awards granted and
outstanding under the plan shall become fully vested and
exercisable.  Where such change of control event is approved by our
board, the compensation committee may (i) accelerate the vesting of any and all
stock options and other awards granted and outstanding under the plan or (ii)
require a holder of any award granted under the plan to relinquish the award to
us upon payment by us to the holder of cash in an amount equal to the fair
market value of the award for ordinary shares, or the difference between the
fair market value of the award and the award’s exercise price (if lower than the
fair market value) for options or stock appreciation rights, or US$0.01 per
share for awards that are out-of-the money.
  Transferability.  With
respect to the transferability of stock options, except as expressly provided in
the plan, expressly provided in the award agreement or in certain limited
circumstances, the right to exercise stock options, receive restricted stock
after the expiration of the restriction period or deferred stock after the
expiration of the deferral period, receive payment under other stock-based
awards, or exercise a stock appreciation right cannot be transferred except by
will or the laws of descent and distribution.  However, with the
approval of the compensation committee, a participant may transfer a stock
option under certain limited circumstances.
  Amendment and
Termination.  The plan will terminate when there are no awards
outstanding and when no further awards may be granted, provided that incentive
options may only be granted until December 13, 2015.  Our board has
the right to amend, suspend or discontinue any provision of the plan, provided
that the action may not adversely affect awards previously granted between a
participant and us without the participant’s consent.
  EMPLOYMENT
AGREEMENTS
  We have
entered into employment agreements with each of Messrs. Chih Cheung, Weidong
Hong, Shuo Zeng and Remington Hu.  Compensation of our executives
comprise salaries and bonuses, including equity bonuses.  They are
also provided regular benefits in accordance with PRC laws and
regulations.  In addition, if the employment of an executive is
terminated by us without cause, the executive is entitled to US$300,000 and
other benefits throughout the term of the agreement.  All of our
independent directors are compensated for attending board and committee
meetings, including cash, reimbursement of costs and 750 ordinary shares per
board meeting, maximum 3,000 shares per annum.  Our employment
agreements with independent directors can be terminated with or without
cause.
  81
  C. Board
Practices.
  TERMS
OF DIRECTORS AND EXECUTIVE OFFICERS
  Our board
consists of seven directors.  Our directors are not subject to a term
of office limitation, and hold office until the next annual meeting of members
or until such director’s earlier resignation, removal from office, death or
incapacity.  Any vacancy on our board resulting from death,
resignation, removal or other cause, and any newly created directorship
resulting from any increase in the authorized number of directors between
meetings of members, may be filled either by the affirmative vote of a majority
of all the directors then in office (even if less than a quorum) or by a
resolution of members.
  Our
officers are appointed by our board.  The officers shall hold office
until their successors are duly elected and qualified, but any officer elected
or appointed by the directors may be removed at any time, with or without cause,
by resolution of directors.  Any vacancy occurring in any office may
be filled by resolution of directors.
  INDEPENDENCE
OF DIRECTORS
  We have
elected to follow the rules of NASDAQ to determine whether a director is
independent.  Our board will also consult with counsel to ensure that
our board’s determinations are consistent with those rules and all relevant
securities and other laws and regulations regarding the independence of
directors.  The NASDAQ listing standards define an “independent
director” generally as a person, other than an officer of the Company, who does
not have a relationship with the Company that would interfere with the
director’s exercise of independent judgment.  Consistent with these
considerations, our board has affirmatively determined that,
Messrs.  Li Liao, Chi Wei Joong, Henry Wang and Lawrence Yeung are our
independent directors.
  BOARD
COMMITTEES
  Our board
has established an audit committee, a nominating committee and a compensation
committee.
  Audit
Committee
  Our audit
committee consists of Messrs. Lawrence Yeung, Chi Wei Joong and Li
Liao.  Our board has determined that all of our audit committee
members are independent directors within the meaning of NASDAQ Marketplace Rule
4200(a)(15), and meet the criteria for independence set forth in Rule
10A-3(b)(1) of the Securities and Exchange Act of 1934, as amended, or the
Exchange Act.
  Our board
has determined that each of Messrs. Yeung, Joong and Liao has an understanding
of generally accepted accounting principles and financial statements, the
ability to assess the general application of such principles in connection with
our financial statements, including estimates, accruals and reserves, experience
in analyzing or evaluating financial statements of similar breadth and
complexity as our financial statements, an understanding of internal controls
and procedures for financial reporting, and an understanding of audit committee
functions.
  Our board
believes that Mr. Joong qualifies as an “audit committee financial expert”
within the meaning of all applicable rules.  Our board believes that
Mr. Joong 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.
  We adopted
an audit committee charter under which the committee is responsible for
reviewing the scope, planning and staffing of the audit and preparation of the
financial statements.  This includes consultation with management, the
auditors and other consultants and professionals involved in the preparation of
the financial statements and reports.  The committee is responsible
for performing oversight of relationship with our independent
auditors.  The committee also has a general compliance oversight role
in assuring that our directors, officers and management comply with our code of
ethics, reviewing and approving of related party transactions, dealing with
complaints regarding accounting, internal controls and auditing matters, and
complying with accounting and legal requirements applicable to us.
  82
  Pursuant
to the terms of its charter, the audit committee’s responsibilities include,
among other things:
  ·
                annually
      reviewing and reassessing the adequacy of the committee’s formal
      charter;
  ·
                reviewing
      our annual audited financial statements with our management and our
      independent auditors and the adequacy of our internal accounting
      controls;
  ·
                reviewing
      analyses prepared by management and independent auditors concerning
      significant financial reporting issues and judgments made in connection
      with the preparation of our financial
  statements;
  ·
                the
      engagement of the independent
auditors;
  ·
                reviewing
      the independence of the independent
auditors;
  ·
                reviewing
      our auditing and accounting principles and practices with the independent
      auditors, and reviewing major changes to our auditing and accounting
      principles and practices as suggested by the independent auditors or our
      management;
  ·
                the
      appointment of the independent auditors to our board, which firm is
      ultimately accountable to the audit committee and our
    board;
  ·
                approving
      professional services provided by the independent auditors, including the
      range of audit and non-audit fees;
and
  ·
                reviewing
      all related party transactions on an ongoing basis for potential conflicts
      of interest.
  The audit
committee will pre-approve the services to be provided by our independent
auditors going forward.  The audit committee also will also review and
recommend to the board of directors whether or not to approve transactions
between us and any officer or director that occurs outside the ordinary course
of business.
  Compensation
Committee
  Our
compensation committee consists of Messrs. Chi Wei Joong and Li Liao, each of
whom is an “independent director” as that term is used in the NASDAQ corporate
governance rules.  Our compensation committee assists the board in
reviewing and approving the compensation structure of our directors and
executive officers, including all forms of compensation to be provided to our
directors and executive officers.  The responsibilities of our
compensation committee include, among other things:
  ·
                reviewing
      and recommending to the board with respect to the total compensation
      package for our executive officers;
  ·
                reviewing
      and recommending to the board with respect to the compensation of our
      directors;
  ·
                reviewing
      periodically and recommending to the board with respect to any long-term
      incentive compensation or equity plans, programs or similar arrangements,
      annual bonuses, employee pension and welfare benefit plans; and administer
      our stock option plans, including authority to make and modify awards
      under such plans.  Currently, our only stock option plan is the
      2006 Performance Equity Plan.
  Nominating
Committee
  Our
nominating committee consists of Messrs. Chi Wei Joong and Li
Liao.  The nominating committee is responsible for overseeing the
selection of persons to be nominated to serve on our board.  The
nominating committee will identify, evaluate and recommend candidates to become
members of our board with the goal of creating a balance of knowledge and
experience.
  The
committee will also consider suggestions from individual shareholders, based
upon its assessment of certain criteria, including the proposed person’s
merits.  The suggested nominee must provide a statement of consent to
being considered for nomination.
  83
  D. Employees.
  We had
217, 612 and 1,674 employees as of December 31, 2005, 2006 and 2007,
respectively.  The following table sets forth our employees as of
December 31, 2007 based on functional area.
 Category
                
                Number
      of EmployeesProject
      development and implementation
                
                
                1077Research
      and development
                
                
                35Sales
      and marketing
                
                
                344General
      and administrative
                
                
                218Total
                
                
                1,674
 
 We pay our
sales staff a combination of salaries and sales commissions, and sales
commissions represent a significant portion of the total compensation they
receive.  We pay salaries to all other employees, which are
supplemented by periodic cash bonuses that are generally based on
performance.  We also contribute to social insurance for our employees
each month, which includes pension, medical insurance, unemployment insurance,
occupational injuries insurance and housing providence fund in accordance with
PRC regulations.  Our compensation and benefits packages are
competitive in the industry.  Our employees are not represented by any
collective bargaining agreement and we have never experienced any strike or
similar work stoppage.  We consider our relations with our employees
to be good.
  We invest
significant resources in the training and development of our
employees.  We require our employees to participate in our various
internal training programs.  Through these programs, we help ensure
that each entry-level employee acquires the necessary skills to execute its
duties and other employees continue to maintain and improve their current
skill-sets.  In addition to trainings on technical skills and
development, we also provide training programs that cover topics ranging from
our clients, our market and the financial services industry in
general.
  E.           Share
ownership.
  The
following table sets forth information with respect to the beneficial ownership
of our ordinary shares as of March 31, 2007, by:
  ·
                each
      of our directors and executive officers who beneficially own our ordinary
      shares; and
  ·
                each
      person known to us to own beneficially more than 5.0% of our ordinary
      shares.
  Name
                
                Number
      of Ordinary Shares
                
                
                Percentage
      of Outstanding
                    Ordinary
      Shares(1)Directors
      and executive officers:Chih
      T. Cheung(2)(3)
                  Chairman
      of the Board
                
                
                216,000
                
                
                
                1.3
                %Weidong
      Hong(2)(3)(4)
                  CEO
      and Director
                
                
                2,252,090
                
                
                
                13.6
                %Shuo
      Zeng(2)(3)
      (5)
                  COO
      and Director
                
                
                816,360
                
                
                
                4.9
                %Li
      Liao(3)
                  Director
                
                
                0
                
                
                
                0
                %Lawrence
      Cheung(3)
                  Director
                
                
                0
                
                
                
                0
                %Chi
      Wei Joong(3)
                  Director
                
                
                0
                
                
                
                0
                %Henry
      Wang(3)
                  Director
                
                
                0
                
                
                
                0
                %Remington
      Hu
                  CFO
                
                
                0
                
                
                
                0
                %
 84
 Name
                    
                    Number
      of Ordinary Shares
                    
                    
                    Percentage
      of Outstanding
                        Ordinary
      Shares(1)Directors
      and executive officers:Directors
      and officers as a group (eight persons)(4)
                    
                    
                    3,284,450
                    
                    
                    
                    19.8
                    %Principal
      shareholders:Sihitech
      Company Limited(6)
                    
                    
                    2,252,090
                    
                    
                    
                    13.6
                    %Profit
      Loyal Consultants Limited(7)
                    
                    
                    849,752
                    
                    
                    
                    5.1
                    %Scott
      A. Fine(8)
                    
                    
                    1,205,173
                    
                    
                    
                    7.3
                    %Peter
      J. Richards(8)
                    
                    
                    1,205,173
                    
                    
                    
                    7.3
                    %Philip
      J. Hempleman(9)
                    
                    
                    1,030,000
                    
                    
                    
                    6.2
                    %
 (1)
                Beneficial
      ownership and percentage has been determined in accordance with Rule 13d-3
      under the Securities Exchange Act of 1934, based on 16,610,853 shares
      outstanding.
  (2)
                The
      business address of the person is c/o 3rd Floor, Tower B, Finance &
      Trust Building, No. 5 Anding Road, Chaoyang District, Beijing
      PRC.
  (3)
                Each
      of these persons directly or indirectly is a party to or benefits from a
      voting agreement covering 5,694,320 shares of Yucheng voting stock
      representing 34.3% thereof, in respect of the nomination, election and
      removal of directors.
  (4)
                Includes
      675,807 shares held by Mr. Hong’s spouse.  Represents shares
      held through Sihitech Company Limited, a BVI company owned by Mr. Hong and
      his spouse, of which Mr. Hong has voting and dispositive
      authority.
  (5)
                Represents
      shares held through Elite Concord International Limited, a BVI company
      owned by Mr. Zeng, of which Mr. Zeng has voting and dispositive
      authority.
  (6)
                A
      BVI company owned by Mr. Hong and his spouse, of which Mr. Hong has voting
      and dispositive authority.  The business address of Sihitech
      Company Limited is TrustNet Chambers, P.O. Box 3444, Roadtown Tortola,
      British Virgin Islands.
  (7)
                A
      BVI company owned Ms. Gehua Ma, of which Ms. Ma has voting and dispositive
      authority.  The address of Profit Loyal Consultants Limited is
      TrustNet Chambers, P.O. Box 3444, Roadtown Tortola, British Virgin
      Islands.
  (8)
                Messrs.
      Fine and Richards, as members, direct the operations of Empire GP, L.L.C.
      and Empire Capital Management, L.L.C.  Empire GP is the general
      partner of Empire Capital Partners, L.P, which directly owned 524,889
      shares.  Empire Capital Management manages the Empire Overseas
      Fund and the Charter Oak Funds, which in aggregate owned 680,284
      shares.  The information is derived from a Schedule 13G filed by
      such entities with the SEC on February 13,
2008.
  (9)
                Mr.
      Hempleman is the managing partner of Ardsley Advisory Partners and Ardsley
      Partners and in that capacity directs their operations.  Ardsley
      Advisory Partners is the investment manager of Ardsley Offshore Fund Ltd.
      and the investment advisor of certain managed accounts.  It is
      also the investment advisor of Ardsley Partners Fund II, L.P. and Ardsley
      Partners Institutional Fund, L.P.  Ardsley Partners is the
      general partner of Ardsley Partners Fund II, L.P. and Ardsley Partners
      Institutional Fund, L.P.  Ardsley Partners Fund beneficially
      owned 427,600 of our shares.  Ardsley Partners Institutional
      Fund, L.P.  beneficially owned 267,000 of our
      shares.  Ardsley Offshore Fund Ltd. owned 293,600 of our
      shares.  Ardsley Advisory Partners beneficially owned 1,000,000
      of our shares.  Ardsley Partners beneficially owned 694,600 of
      our shares.  The address of Ardsley Offshore Fund Ltd. is
      Romasco Place, Wickhams Cay, Roadtown Tortola, British Virgin
      Islands.  The address of all other parties is 262 Harbor Drive,
      Stamford, Connecticut 06902.  The information is derived from a
      Schedule 13G filed by such entities with the SEC on February 14,
      2008.
  According
to Schedule 13G filed by Mr. Jack Silver on February 13, 2008, Mr. Silver
beneficially  owned 187,004 shares, as compared to 1,422,500 shares he
beneficially owned on January 29, 2007 as reported on our annual report for
fiscal 2006.
  None of
the above shareholders have voting rights that differ from the voting rights of
other shareholders.  We have not granted any stock
options.  As of March 31, 2008, we had 2,323 shareholders on
record.
  ITEM
7.   MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS
  A.  Major
shareholders.
  Please
refer to Item 6.E “Directors, Senior Management and Employees — Share
ownership.”
  85
  B.  Related party
transactions.
  REGISTRATION
RIGHTS AGREEMENT
  We have a
registration rights agreement with the nine initial shareholders of China
Unistone in respect of the 750,000 ordinary shares they hold pursuant to which
the holders of the majority of the shares will be entitled to make up to two
demands that we register the shares.  The holders of the majority of
the shares may elect to exercise these registration rights at any time after the
date on which these ordinary shares are released from escrow.  In
addition, these shareholders have certain “piggy-back” registration rights on
registration statements filed subsequent to the date on which these shares of
common stock are released from escrow.  We will bear the expenses
incurred in connection with the filing of any such registration
statements.
  VOTING
AGREEMENT
  Eight of
our principal shareholders, including our Chairman, Mr. Chih Cheung, our Chief
Executive Officer, Mr. Weidong Hong, and our Chief Operating Officer, Mr. Shuo
Zeng, which in aggregate control 34.3% of our total issued and outstanding
shares as of December 31, 2007, have entered into a voting agreement whereby
they agree to vote, for a period of three years ending November 24, 2009 or
until the voting agreement is terminated by the unanimous written agreement of
all parties to the voting agreement, all of their respective shares held during
the term of the agreement for six directors nominated by the selling
shareholders of Sihitech BVI and e-Channels BVI and three directors nominated by
our Chairman Mr. Cheung and Mr. James Li, one of the eight
shareholders.  The parties to the voting agreement have also agreed
not to take any action that would change the number of directors or the process
of nomination, election or removal of directors as set forth in our Articles of
Association and Memorandum of Association, unless they agree unanimously on such
action.  As a result, these individuals in effect control our board,
which may also cause the current management to remain in place without
opportunity for the other shareholders to effectuate change.  Each of
the parties to the agreement disclaim that they are part of a group for purposes
of Section 13(d) of the Exchange Act.
  CASH
ADVANCES AND BORROWINGS WITH RELATED PARTIES
  In 2005
and 2006, we made cash advances to, and borrowed from certain related parties,
including our executive officers and affiliated entities.  These
transactions had no fixed terms and were non-interest bearing and payable on
demand.  We did not In compliance with the provisions of the
Sarbanes-Oxley Act of 2002, we, neither directly nor indirectly nor through any
subsidiary, will make loans, extend credit, maintain credit or arrange for the
extension of credit or renew an extension of credit in the form of a personal
loan to or for any director or executive officer of the Company in the
future.  Moreover, we have adopted an audit committee charter that
requires our audit committee to review and approve all related party
transactions, assure compliance with the Company’s code of ethics and monitor
and discuss with the auditors and outside counsel policies and compliance with
applicable accounting and legal standards and requirements.
  Cash
advances made to and borrowings with our executives
  We have
made cash advances to Mr. Weidong Hong, our Chief Executive Officer and
principal shareholder and Mr. Shuo Zeng, our Chief Operating Officer and
principal shareholder.  In 2005, we received borrowings and payments
from, and made cash advances and repayments to, the two executives an aggregate
of RMB0.6 million and RMB3.5 million, respectively.  The net balance
due from the two executives as of December 31, 2005 was RMB2.6
million.  In 2006, we received borrowings and payments from, and made
cash advances and repayments to, the two executives an aggregate of RMB1.1
million and RMB3.6 million, respectively.  The net balance due from
the two executives as of December 31, 2006 was RMB0.4 million.  In
2007, we received borrowings and payments from, and made cash advances and
repayments to, the two executives an aggregate of approximately RMB0.3 million
and RMB54,000, respectively.  There was no balance due to the two
executives as of December 31, 2007.
  Cash
advances made to and borrowings from our affiliates
  Our
affiliate companies in 2005, 2006 and 2007 included the following:
   86
  ·
                Beijing
      Hengli Plastic Machinery Co., Ltd., or Hengli, a plastic mold
      manufacturer, in which we hold 50%
interest.
  ·
                Shanghai
      Sihitech Sanjian Technology Co, Ltd., or Sanjian, a software and hardware
      technology company, in which we held 50% interest.  Sanjian was
      closed on December 20, 2007 due to business
  considerations.
  ·
                Beijing
      Sihitech Shuyi Technology Co., Ltd., or Shuyi, in which we held 35%
      interest.  All of the shareholders of Shuyi agreed to transfer
      their ownership interests in Shuyi to other individuals on December 12,
      2005.
  In 2005,
we received borrowings and payments from, and made cash advances and repayments
to, the three affiliated companies an aggregate of RMB0.5 million and RMB1.4
million, respectively.  The net balance due to the three affiliates as
of December 31, 2005 was RMB1.4 million.  In 2006, we received no
borrowings and payments from the two remaining affiliated companies, Sanjian and
Hengli, and made cash advances and repayments to the two affiliated companies an
aggregate of RMB0.5 million.  The net balance due to the two
affiliated companies as of December 31, 2006 was RMB0.9 million.  In
2007, we received no borrowings and payments from the remaining affiliated
company, Hengli, and made cash advances and repayments to Hengli an aggregate of
approximately RMB69,000.  There was no balance due to Hengli and
RMB0.9 million due from Sanjian as of December 31, 2007.
  C.
 Interests of
experts and counsel.
  Not
applicable.
  ITEM
8.   FINANCIAL INFORMATION
  A.  Consolidated statements and
other financial information.
  We have
appended consolidated financial statements filed as part of this annual
report.  See “Item 18. Financial Statements.”
  LEGAL
PROCEEDINGS
  We are
subject to legal proceedings, investigations and claims incidental to the
conduct of our business from time to time.  Other than the legal
proceeding described below, we are neither currently a party to, nor are we
aware of, any legal proceeding, investigation or claim that is likely to have a
material adverse effect on our business, financial condition or results of
operations.
  On August
21, 2007, a suit was filed in the San Diego Superior Court against China
Unistone, Beijing Sihitech, and Chih T. Cheung.  Plaintiff added the
Company as a Doe defendant on February 22, 2008.  In this suit, the
plaintiff has alleged breach of an oral contract regarding a finder's
fee.  Specifically, the plaintiff has alleged (1) breach of an oral
contract as against all defendants; (2) specific performance as to China
Unistone, Mr. Cheung and the Company; (3) constructive trust as to China
Unistone and the Company; and (4) fraud as against China Unistone, Mr. Cheung
and the Company.  The plaintiff seeks general damages of US$109,275
cash and the issuance of 150,179 shares of the Company (the pled successor in
interest to China Unistone), and the payment of 4% of any future compensation
that Beijing Sihitech and its shareholders are entitled to receive as a result
of the Company's acquisition of Beijing Sihitech.  The court has
granted our motion to remove China Unistone as defendant as it is no longer an
existing entity.  The lawsuit is still in its initial stages and it is
not possible to reliably predict the outcome of this litigation.  The
Company and the other defendants intend to vigorously defend against the claims
asserted.
  On March
21, 2007, the same plaintiff as in the San Diego Superior Court action discussed
above filed a nearly identical action in the United States District Court for
the Southern District of California.  On motion by the Company, the
Court dismissed the action in its entirety due to lack of subject matter
jurisdiction.
  87
  DIVIDEND
POLICY
  We have
never declared or paid any dividends, nor do we have any present plan to pay any
cash dividends on our ordinary shares in the foreseeable future.  We
currently intend to retain most, if not all, of our available funds and any
future earnings to operate and expand our business.
  Our board
of directors may, by resolution, authorize payment of dividends if the directors
are satisfied, on reasonable grounds, we will, immediately after the
distribution of dividends, satisfy the solvency test as stipulated in Section 56
of the BVI Business Companies Act.  Even if our board decides to pay
dividends, the form, frequency and amount will depend upon our future operations
and earnings, capital requirements and surplus, general financial condition,
contractual restrictions and other factors that our board may deem
relevant.
  Our
ability to pay dividends depends substantially on the payment of dividends to us
by our PRC subsidiaries.  In particular, each of our PRC subsidiaries
may pay dividends only out of its accumulated distributable profits, if any,
determined in accordance with its articles of association and the accounting
standards and regulations in China.  Moreover, pursuant to applicable
PRC laws and regulations, 10% of after-tax profits of each of our consolidated
PRC entities is required to be set aside in a statutory surplus reserve fund
annually until the reserve balance reaches 50% of such PRC entity’s registered
capital.  As of December 31, 2007, the accumulated balance of our
statutory reserve funds amounted to RMB24.8 million (US$3.4 million), and the
accumulated profits of our consolidated PRC entities that were available for
dividend distribution amounted to RMB89.2 million (US$12.2
million).  Our restricted reserves are not distributable as cash
dividends.  Allocations to these statutory reserves may only be used
for specific purposes and are not distributable to us in the form of loans,
advances, or cash dividends.  Furthermore, if any of our subsidiaries
and consolidated variable interest entities incurs debt on its own behalf in the
future, the instruments governing the debt may restrict its ability to pay
dividends or make other payments to us.
  Under the
New EIT Law and its implementation rules issued by the PRC State Council, both
of which became effective on January 1, 2008, dividends from our PRC
subsidiaries to us may be subject to a withholding tax at the rate of 10% if
such dividend is derived from profits generated after January 1,
2008.  If we are deemed to be a PRC resident enterprise, the
withholding tax may be exempted, but in such a case we will be subject to a 25%
tax on our global income, and our non-PRC investors may be subject to PRC income
tax withholding.  See “Item 10. Additional Information — E. Taxation —
PRC Taxation”.
  Cash
dividends on our ordinary shares, if any, will be paid in U.S.
dollars.
  B.  Significant
changes.
  We have
not experienced any significant changes since the date of our audited
consolidated financial statements included in this annual report.
  ITEM
9.   THE OFFER AND LISTING
  A.  Offering and listing
details.
  The common
stock of China Unistone was quoted on the Over-The-Counter Bulletin Board, or
OTCBB, under the symbol “CUAC.OB.”  China Unistone merged with and
into Yucheng for the purpose of redomestication out of the United
States.  From November 27, 2004 to March 13, 2007, our ordinary shares
were quoted on the OTCBB under the symbol “YCHTF.OB.”  On March 14,
2007, our ordinary shares were admitted for listing on the NASDAQ Global Market
under the symbol “YTEC.”
  The
following table sets forth the historical high and low trading prices for our
ordinary shares, and those for the common stock of China Unistone, for the
periods indicated.  The OTCBB market quotations reported below reflect
inter-dealer prices, without markup, markdown or commissions and may not
represent actual transactions.
   88




The
      OTCBB
                  Price
      Per
                  Common
      Stock
              
              
              The
      NASDAQ
                  Global
      Market
                  Price
      Per ShareHigh
              
              
              Low
              
              
              High
              
              
              Low(US$)Annual
      Market PricesYear 2004
                (from
      November 24, 2004)
              
              
              5.20
              
              
              
              4.78
              
              
              
              N/A
              
              
              
              N/AYear 2005
              
              
              6.75
              
              
              
              0.98
              
              
              
              N/A
              
              
              
              N/AYear 2006
              
              
              8.85
              
              
              
              5.35
              
              
              
              N/A
              
              
              
              N/AYear 2007
                (until
      March 13, 2007)
              
              
              8.30
              
              
              
              6.47
              
              
              
              N/A
              
              
              
              N/AYear 2007
                (from
      March 14, 2007)
              
              
              N/A
              
              
              
              N/A
              
              
              
              17.45
              
              
              
              7.25Quarterly
      Market PricesFirst Quarter 2006
              
              
              8.40
              
              
              
              6.77
              
              
              
              N/A
              
              
              
              N/ASecond Quarter
2006
              
              
              8.85
              
              
              
              6.25
              
              
              
              N/A
              
              
              
              N/AThird Quarter 2006
              
              
              7.00
              
              
              
              5.40
              
              
              
              N/A
              
              
              
              N/AFourth Quarter
2006
              
              
              7.55
              
              
              
              5.35
              
              
              
              N/A
              
              
              
              N/AFirst Quarter 2007
                (until
      March 13, 2007)
              
              
              8.30
              
              
              
              6.47
              
              
              
              N/A
              
              
              
              N/AFirst Quarter 2007
                (from
      March 14, 2007)
              
              
              N/A
              
              
              
              N/A
              
              
              
              8.80
              
              
              
              7.52Second Quarter
      2007
              
              
              N/A
              
              
              
              N/A
              
              
              
              9.50
              
              
              
              8.06Third Quarter 2007
              
              
              N/A
              
              
              
              N/A
              
              
              
              9.73
              
              
              
              7.25Fourth Quarter
2007
              
              
              N/A
              
              
              
              N/A
              
              
              
              17.45
              
              
              
              10.94First Quarter 2008
              
              
              N/A
              
              
              
              N/A
              
              
              
              18.13
              
              
              
              11.76Monthly
      Market PricesNovember  2007
              
              
              N/A
              
              
              
              N/A
              
              
              
              14.10
              
              
              
              10.94December 2007
              
              
              N/A
              
              
              
              N/A
              
              
              
              14.50
              
              
              
              12.99January 2008
              
              
              N/A
              
              
              
              N/A
              
              
              
              14.18
              
              
              
              11.76February 2008
              
              
              N/A
              
              
              
              N/A
              
              
              
              18.13
              
              
              
              15.04March 2008
              
              
              N/A
              
              
              
              N/A
              
              
              
              17.77
              
              
              
              13.85April 2008
              
              
              N/A
              
              
              
              N/A
              
              
              
              17.50
              
              
              
              15.05
 
  On April
30, 2008, the closing price of our ordinary shares was US$15.10 per
share.
  B.   
Plan of
distribution.
  Not
applicable
  C.    Markets.
  See Item
9.A above.
  D.    Selling
shareholders.
  Not
applicable.
  E.    Dilution.
  Not
applicable.
  89
   F.    Expenses of the
issue.
  Not
applicable.
  ITEM
10.  ADDITIONAL INFORMATION
  A.   Share
capital.
  Not
applicable.
  B.   Memorandum and articles of
association.
  SUMMARY
OF MEMORANDUM AND ARTICLES OF ASSOCIATION
  Charter
  Our
charter documents consist of our Memorandum of Association and Articles of
Association.  The Memorandum of Association and the Articles of
Association loosely resemble the articles of incorporation and the bylaws,
respectively, of a corporation incorporated in a state in the United
States.  We may amend our Memorandum of Association and Articles of
Association by a resolution of our shareholders or by a resolution of our
directors.  This description and summary does not purport to be
complete and does not address all differences between BVI corporate laws and
those in the United States.  Copies of our Memorandum of Association
and Articles of Association have been filed as exhibits to our initial
registration statement on Form S-4 (file number 333-132814).
  Corporate
Powers
  Yucheng
was first incorporated as a company under the International Business Companies
Act, 1984, or the IBC Act, on November 17, 2005 and became subject to the BVI
Business Companies Act, 2004 on January 1, 2007 when the BVI Business Companies
Act, 2004 replaced the IBC Act.  Our Memorandum of Association and
Articles of Association state that the Company can carry out any object not
prohibited by the laws of the BVI.
  Directors
  The
directors may fix their compensation for services rendered to us.
  By a
resolution of directors, the directors may exercise all our powers to borrow
money, mortgage our property, issue debentures, and issue stock or other
securities for any debt, liability or obligation given by us.
  A director
may resign or retire from our board at any time.  The director must
give one month written notice of his resignation to us.  Directors
hold office until the next annual meeting of members or until such director’s
earlier resignation, removal from office, death or incapacity.  We
currently do not have a staggered election of directors.
  The
shareholding qualification for directors may be fixed and varied by a resolution
of members and, unless it is fixed, no shareholding qualification is
required.  A director must be an individual.
  To the
fullest extent permitted by the BVI Business Companies Act, 2004, none of our
directors shall be personally liable to the Company or its shareholders for or
with respect to any acts or omissions in the performance of his or her duties as
a director of the Company.
  Rights
of Shares
  We are
authorized to issue 60,000,000 ordinary shares.  The ordinary shares
have one vote each, are subject to purchase or acquisition by us for fair value
and have the same rights with regard to dividends and distributions upon our
liquidation.  We are also authorized to issue 1,000,000 preferred
shares in one series of no par value.  The directors are authorized to
issue the preferred shares and to fix the rights and preferences attached to the
preferred shares.
  90
   Meetings
  An annual
meeting of members must be held each year at such date and time as may be
determined by the directors, but no later than one year after the end of our
fiscal year pursuant to relevant NASDAQ rules.  Special meetings of
members may be called by the directors pursuant to a resolution of directors to
that effect or upon the written request of members holding more than 50 percent
of the votes of our outstanding voting shares.  No less than seven
days’ notice of meetings is required to be given to members.
  A meeting
of members may be called on short notice if members holding not less than 90
percent of the total number of shares entitled to vote on all matters to be
considered at the meeting, or 90 percent of the votes of each class or series of
shares where members are entitled to vote thereon as a class or series together
with not less than a 90 percent majority of the remaining votes, have agreed to
a short notice of the meeting, or if all members holding shares entitled to vote
on all or any matters to be considered at the meeting have waived notice of the
meeting and for this purpose presence at the meeting shall be deemed to
constitute waiver.
  The
inadvertent failure of the directors to give notice of a meeting to a member, or
the fact that a member has not received notice, does not invalidate the
meeting.
  A member
may be represented at a meeting of members by a proxy who may speak and vote on
behalf of the member.  A written instrument giving the proxy such
authority must be produced at the place appointed for the meeting before the
time for holding the meeting.
  A meeting
of members is duly constituted if, at the commencement of the meeting, there are
present in person or by proxy not less than 50 percent of the votes of the
shares or class or series of shares entitled to vote on resolutions of members
to be considered at the meeting.
  Limitations
on Ownership of Securities
  There are
no limitations on the right of nonresidents or foreign persons to own our
securities imposed by BVI law or by our Memorandum and Articles of
Association.
  Change
in Control of Company
  There are
no provisions in our Memorandum and Articles of Association that would operate
only to delay, defer or prevent a change of control of our
company.  However, the board of directors has the power to issue
preferred shares with such rights attaching to them as they decide and this
power could be used in a manner that would delay, defer or prevent a change of
control of our company.
  Ownership
Threshold
  There are
no provisions governing the ownership threshold above which shareholder
ownership must be disclosed.
  Changes
in Capital
  Subject to
the provisions of the BVI Business Companies Act, 2004, we may, by a resolution
of directors or members, amend our Memorandum and Articles of Association to
increase or decrease the number of shares authorized to be
issued.  The directors of a company may, by resolution, authorize a
distribution (including a capital distribution) by their 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.
  91
   DIFFERENCES
IN CORPORATE LAW
  The
companies law of the BVI differs from laws applicable to U.S. corporations and
their shareholders.  Set forth below is a summary of the significant
differences between the provisions of the companies law applicable to us and the
laws applicable to companies incorporated in the United States and their
shareholders.
  Protection
for minority shareholders
  Under the
laws of most U.S. jurisdictions, majority and controlling shareholders of a
company generally have certain “fiduciary” responsibilities to the minority
shareholders.  Corporate actions taken by majority and controlling
shareholders which are unreasonable and materially detrimental to the interests
of minority shareholders may be declared null and void.  Minority
shareholders may have less protection for their rights under BVI law than they
would have under U.S. law.
  Powers
of directors
  Unlike
most U.S. jurisdictions, the directors of a BVI company, subject in certain
cases to court’s approvals but without shareholders’ approval, may implement the
sale, transfer, exchange or disposition of any asset, property, part of the
business, or securities of the company, with the exception that shareholder
approval is required for the disposition of over 50% in the value of the total
assets of the company.
  Conflict
of interests
  Similar to
the laws of most U.S. jurisdictions, when a director becomes aware of the fact
that he has an interest in a transaction which the company is to enter into, he
must disclose it to our board.  However, with sufficient disclosure of
interest in relation to that transaction, the director who is interested in a
transaction entered into or to be entered into by the Company may (i) vote on a
matter relating to the transaction; (ii) attend a meeting of directors at which
a matter relating to the transaction arises and be included in the quorum; and
(iii) sign a document on behalf of the company, or do any other thing in his
capacity as a director, that relates to the transaction.
  Written
consent and cumulative voting
  Similar to
the laws of most U.S. jurisdictions, under the BVI law, shareholders are
permitted to approve matters by way of written resolution in place of a formal
meeting.  BVI law does not make a specific reference to cumulative
voting, and our current Memorandum and Articles of Association have no provision
authorizing cumulative voting.
  Independent
directors
  There is
no requirement for a majority of the directors of the company to be independent
as a matter of BVI law.
  Redemption
  Our shares
are not redeemable at the shareholders’ option.  We may redeem our
shares only with the consent of the shareholders whose shares are to be
redeemed, except that the consent from the shareholders is not needed under the
circumstances of (i) the compulsory redemption with respect to fractional shares
held by our shareholders in the circumstance of share division and (ii) the
compulsory redemption, at the request of the shareholders holding 90% of the
votes of the outstanding shares entitled to vote, of the remaining issued
shares.
  Takeover
provisions
  The
Memorandum and Articles of Association of our company does not alter the general
provisions of BVI law and therefore measures such as a “poison pill” would have
to be in place before a takeover offer, as, if not, the directors could be seen
as exercising their powers for an improper purpose in trying to introduce such a
measure.
  92
   Furthermore,
the creation of additional class of shares would require an amendment to the
Memorandum and Articles of Association of our company.  This can only
be done by a resolution of shareholders or a resolution of
directors.  The directors do not however, have the power to amend the
memorandum and articles to (a) restrict the rights or powers of the members to
amend the memorandum or articles, (b) to change the percentage of members
required to pass a resolution to amend the memorandum and articles, or (c) in
circumstances where the memorandum or articles cannot be amended by the
members.  The introduction of a poison pill would require an amendment
to the Memorandum and Articles of Association of our company which may only be
done by way of shareholder resolution.
  Shareholder’s
access to corporate records
  A
shareholder is entitled, on giving written notice to the company, to inspect the
company’s (i) Memorandum and Articles of Association; (ii) register of members;
(iii) register of directors; and (iv) minutes of meetings and resolutions of
members and of those classes of members of which the shareholder is a
member.
  The
directors may, if they are satisfied that it would be contrary to the company’s
interests to allow a member to inspect any document listed above (or any part
thereof), refuse the member to inspect the document or limit the inspection of
the document.  Our board may also authorize a member to review the
company account if requested.
  Indemnification
  Under our
Memorandum and Articles of Association, we may indemnify our directors or any
person who is or was, at the request of the company, serving as a director of,
or in any other capacity is or was acting for, another body corporate or a
partnership, joint venture, trust or other enterprise against expenses
(including legal fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by such persons in connection with legal, administrative
or investigative proceedings to which they are a party or are threatened to be
made a party by reason of their acting as our directors or agents.  To
be entitled to indemnification, these persons must have acted honestly and in
good faith and in the best interest of the company, and they must have had no
reasonable cause to believe their conduct was unlawful.
  Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling us under the foregoing
provisions, we have been advised that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
  Mergers
and similar arrangements
  Under the
laws of the BVI, two or more companies may merge or consolidate in accordance
with Section 170 of the BVI Business Companies Act, 2004.  A
merger means the merging of two or more constituent companies into one of the
constituent companies, and a consolidation means the uniting of two or more
constituent companies into a new company.  In order to merge or
consolidate, the directors of each constituent company must approve a written
plan of merger or consolidation which must be authorized by a resolution of
shareholders.
  While a
director may vote on the plan even if he has a financial interest in the plan of
merger of consolidation, in order for the resolution to be valid, the interest
must have been disclosed to our board forthwith upon him becoming aware of such
interest.  The transaction will not be avoidable if the shareholders
approve or ratify it.
  Shareholders
not otherwise entitled to vote on the merger or consolidation may still acquire
the right to vote if the plan of merger or consolidation contains any provision
which, if proposed as an amendment to the memorandum or articles of association,
would entitle them to vote as a class or series on the proposed
amendment.  In any event, all shareholders must be given a copy of the
plan of merger or consolidation irrespective of whether they are entitled to
vote at the meeting or consent to the written resolution to approve the plan of
merger or consolidation.
  The
shareholders of the constituent companies are not required to receive shares of
the surviving or consolidated company, but may receive debt obligations or other
securities of the surviving or consolidated company, or other assets, or a
combination thereof.  Furthermore, some or all of the shares of a
class or series may be converted into a kind of asset while the other shares of
the same class or series may receive a different kind of asset.  As
such, not all the shares of a class or series must receive the same kind of
consideration.
  93
   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.
  We are not
aware of any reported class action having been brought in a BVI
court.  Reported derivative actions have been brought but
unsuccessfully for technical reasons.  The court of the BVI may, on
the application of a shareholder of a company, grant leave to that shareholder
to bring proceedings in the name and on behalf of that company, or intervene in
proceedings to which the company is a party for the purpose of continuing,
defending or discontinuing the proceedings on behalf of the
company.  In determining whether to grant leave, the High Court of the
BVI must take into account (i) whether the shareholder is acting in good
faith; (ii) whether the derivative action is in the interests of the
company taking account of the views of the company’s directors on commercial
matters; (iii) whether the proceedings are likely to succeed; (iv) the
costs of the proceedings in relation to the relief likely to be obtained; and
(v) whether an alternative remedy to the derivative claim is
available.
  Leave to
bring or intervene in proceedings may be granted only if the High Court of the
BVI is satisfied that (i) the company does not intend to bring, diligently
continue or defend, or discontinue the proceedings, as the case may be; or
(ii) it is in the interests of the company that the conduct of the
proceedings should not be left to the directors or to the determination of the
shareholders as a whole.
  In
determining whether to grant leave to a shareholder in these circumstances, the
BVI Court must take the following matters into account:
  (a)   whether
the member is acting in good faith;
  94
   (b)   whether
the derivative action is in the interests of the company taking account of the
views of the company’s directors on commercial matters;
  (c)   whether
the proceedings are likely to succeed;
  (d)   the
costs of the proceedings  in relation to the relief likely to be
obtained; and
  (e)   whether
an alternative remedy to the derivative claim is available.
  C.  Material
contracts.
  We have
not entered into any material contracts related to our business operations other
than in the ordinary course of business and other than those described in “Item
4. Information on the Company” and in “Item 7. Major Shareholders and Related
Party Transactions” or elsewhere in this annual report.
  D.  Exchange
controls.
  BRITISH
VIRGIN ISLANDS
  There are
no material exchange controls restrictions on payment of dividends, interest or
other payments to the holders of our ordinary or preferred shares or on the
conduct of its operations in the BVI, where we were
incorporated.  There are no material BVI laws which impose any
material exchange controls on us or that affect the payment of dividends,
interest or other payments to nonresident holders of its ordinary or preferred
shares.  BVI law and our Memorandum and Articles of Association impose
no material limitations on the right of nonresidents or foreign owners to hold
or vote our ordinary or preferred shares.
  CHINA
  For
exchange controls in China, see “Item 4. Information on the Company — B.
Business overview — Regulation — Regulations on foreign exchange.”
  E.  Taxation.
  BRITISH
VIRGIN ISLANDS TAXATION
  Under the
present laws of the BVI, there are no applicable taxes on our profits or
income.  There are no taxes on profits, income, nor are there any
capital gains tax, estate duty or inheritance taxes applicable to any ordinary
shares held by nonresidents of the BVI.  In addition, there is no
stamp duty or similar duty on the issuance, transfer or redemption of the
ordinary shares as the Company does not hold any interest in land in the
BVI.  Dividends remitted to the holders of ordinary shares resident
outside the BVI will not be subject to withholding tax in the BVI.
  European
Union Directive on the Taxation of Savings Income (Directive
2003/48/EC)
  The
European Union has formally adopted a new Directive regarding the taxation of
savings income, or the EU Savings Tax Directive.  Since July 1, 2005,
member states are required to provide to the tax authorities of another member
state details of payments of interest and other similar income paid by a person
within its jurisdiction to or for an individual resident in that other member
state, except that Austria, Belgium and Luxembourg instead impose a withholding
system for a transitional period (unless during such period they elect
otherwise).
  The BVI is
not a member of the European Union and not within the European Union fiscal
territory, but the government of the United Kingdom had requested that the
Government of the BVI voluntarily apply the provisions of the EU Savings Tax
Directive.  The Mutual Legal Assistance (Tax Matters) (Amendment) Act
introduces a withholding tax system in respect of payments of interest, or other
similar income, made to an individual beneficial owner resident in a European
Union member state by a paying agent situated in the BVI.  The
withholding tax system will apply for a transitional period prior to the
implementation of a system of automatic communication to European Union member
states of information regarding such payments.  During this
transitional period, such an individual beneficial owner resident in a European
Union member state will be entitled to request a paying agent not
  95
   to
withhold tax from such payments but instead to apply a system by which the
details of such payments are communicated to the tax authorities of the European
Union member state in which the beneficial owner is a resident.
  No stamp
duty is payable in the BVI in respect of instruments relating to transactions
involving our company as our company does not hold any interest in land in the
BVI.
  PRC
TAXATION
  The New
EIT Law and its implementation rules became effective on January 1,
2008.  Under the previous income tax regime, foreign investors were
exempted from PRC income tax on dividends and gains realized upon liquidation of
or transferring equity interest in a foreign-invested
enterprise.  Under the New EIT Law and its implementation rules, we,
as a BVI company with substantially all of our management located in China, may
be deemed a resident enterprise for income tax purposes, in which case our
global income may be subject to 25% of PRC income tax, and an income tax rate of
10% will normally be applicable to dividends payable to our non-PRC investors,
and gains realized on our liquidation or the transfer of our shares by our
non-PRC investors, if such income or gain is derived from sources within
China.  According to a notice issued by the PRC State Council,
dividend from profits generated before January 1, 2008 will still be exempt from
such taxation.  However, it is currently uncertain whether we may be
deemed a resident enterprise, or how to interpret whether any income or gain is
derived from sources within China.  See “Item 3. Key information ─ D.
Risk factors ─ Risks related to doing business in China ─ We may be treated as a
resident enterprise for PRC tax purposes under the New EIT Law and we may
therefore be subject to PRC income tax for any dividends we receive from our
subsidiaries, which may materially and adversely affect the amount of dividends
we must pay to our shareholders.” and “Item 3. Key information ─ D. Risk factors
─ Risks related to doing business in China ─ Dividends payable by us to our
non-PRC shareholders, and gains on the sales of our ordinary shares, may be
subject to withholding taxes under PRC tax laws, which may materially reduce the
value of your investment.”  If we are not deemed a resident
enterprise, then dividends payable to our non-PRC investors, and gains realized
on our liquidation or the transfer of our shares by our non-PRC investors will
not be subject to PRC income tax withholding.
  UNITED
STATES FEDERAL TAXATION
  The
following is a discussion of the material U.S. federal tax consequences of
purchasing, owning and disposing of shares by U.S. Holders (as described below),
but it does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to a particular person’s decision to acquire
the securities.
  The
discussion applies to investors in shares that hold the shares as capital assets
for U.S. federal income tax purposes and it does not describe all of the tax
consequences that may be relevant to holders subject to special rules, such
as:
  ·
              certain
      financial institutions;
  ·
              insurance
      companies;
  ·
              dealers
      and traders in securities or foreign
currencies;
  ·
              persons
      holding shares as part of a hedge, “straddle,” integrated transaction or
      similar transaction;
  ·
              persons
      whose functional currency for U.S. federal income tax purposes is not the
      U.S. dollar;
  ·
              partnerships
      or other entities classified as partnerships for U.S. federal income tax
      purposes;
  ·
              persons
      liable for the alternative minimum
tax;
  ·
              tax-exempt
      organizations;
  ·
              persons
      holding shares that own or are deemed to own 10% or more of our voting
      stock; or
  ·
              persons
      who hold the shares in connection with a trade or business outside the
      United States; or
  ·
              persons
      who acquired our shares pursuant to the exercise of any employee stock
      option or otherwise as
compensation.
  96
   This
discussion is based on the U.S. Internal Revenue Code of 1986, as amended, or
the Code, administrative pronouncements, judicial decisions and final, temporary
and proposed Treasury regulations, all as of the date hereof.  These
laws are subject to change, possibly on a retroactive basis.  Persons
considering the purchase of ordinary shares should consult their own tax
advisors with regard to the application of the U.S. federal income tax laws to
their particular situations as well as any tax consequences arising under the
laws of any state, local or non-U.S. taxing jurisdiction.
  As used in
this discussion, the term “U.S. Holder” means a beneficial owner of shares that,
for U.S. federal income tax purposes, is:
  ·
              a
      citizen or resident of the United
States;
  ·
              a
      corporation, or other entity taxable as a corporation, created or
      organized in or under the laws of the United States or any political
      subdivision thereof; or
  ·
              an
      estate or trust the income of which is subject to U.S. federal income
      taxation, regardless of its source.
  This
discussion assumes that we are not, and will not become, a passive foreign
investment company, a “PFIC,” for U.S. federal income tax purposes, as described
below.
 
 Taxation
of dividends
  The gross
amount of any distributions paid with respect to shares, other than certain pro
rata distributions of shares, generally will be treated as foreign source
dividend income for U.S. federal income tax purposes.  U.S. Holders
will not be entitled to claim a dividends-received deduction with respect to
distributions paid by us.  Dividends will be included in a U.S.
Holder’s income on the date of such U.S. Holder’s receipt of the
dividend.
  Subject to
applicable limitations, dividends received by certain non-corporate U.S. Holders
in taxable years beginning before January 1, 2011 will be taxable at a maximum
rate of 15%.  Non-corporate U.S. Holders should consult their own tax
advisors to determine whether they are subject to any special rules that limit
their ability to be taxed at this favorable rate.
  In the
event that we are deemed to be a Chinese “resident enterprise” under PRC tax
law, you may be subject to PRC withholding taxes on dividends paid to you with
respect to the ordinary shares.  In addition, subject to certain
conditions and limitations, PRC withholding taxes on dividends not in excess of
the rate allowed under the Treaty, if applicable, may be treated as foreign
taxes eligible for credit against your U.S. federal income tax
liability.  The rules governing the foreign tax credit are
complex.  You are urged to consult your tax advisors regarding the
availability of the foreign tax credit in your particular
circumstances.
  Taxation
of capital gains
  Upon sale
or other disposition of the shares, a U.S. Holder will generally recognize
capital gain or loss for U.S. federal income tax purposes in an amount equal to
the difference between such holder’s tax basis in the shares sold or disposed of
and the amount realized on the sale or other disposition.  Such gain
or loss will be long-term capital gain or loss if the U.S. Holder has held the
shares for more than one year and will generally be U.S. source gain or loss for
foreign tax credit purposes.  However, in the event that we are deemed
to be a Chinese “resident enterprise” under PRC tax law, gains on disposal may
be subject to PRC tax.  In that event, a U.S. Holder may be eligible
for the benefits of the Treaty.  Under the Treaty, if any PRC tax were
to be imposed on any gain from the disposition of the shares, the gain would be
treated as PRC source income.  You are urged 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 your particular circumstances.
  Passive
foreign investment company rules
  We believe
that we were not a PFIC for United States federal income tax purposes for our
taxable year ended December 31, 2007.  However, since PFIC status
depends upon the composition of a company’s income and assets and the market
value of its assets (including goodwill) from time to time, and since we have
and will continue to
  97
   have a
significant amount of passive assets and the value of our assets may be based,
in part, on the market value of our shares, which is subject to change, there
can be no assurance that we will not be a PFIC for any taxable
year.
  In
general, if wewere
a PFIC for any taxable year during which a U.S. Holder held shares, gain
recognized by such U.S. Holder on a sale or other disposition (including certain
pledges) of the shares would be allocated ratably over the U.S. Holder’s holding
period for the shares.  The amounts allocated to the taxable year of
the sale or other disposition and to any year before we became a PFIC would be
taxed as ordinary income.  The amount allocated to each other taxable
year would be subject to tax at the highest rate in effect for individuals or
corporations, as appropriate, for such taxable year, and an interest charge
would be imposed on the amount allocated to such taxable
year.  Similar rules would apply to any distribution in respect of
shares in excess of 125% of the average of the annual distributions on shares
received by a U.S. Holder during the preceding three years or such holder’s
holding period, whichever is shorter.  Certain elections may be
available that would result in alternative treatments (such as a mark-to-market
treatment) of the shares.  U.S. Holders should consult their tax
advisers to determine whether such elections are available and, if so, what the
consequences of the alternative treatments would be in those holders' particular
circumstances.
  Information
reporting and backup withholding
  Payment of
dividends and sales proceeds that are made within the United States or through
certain U.S.-related financial intermediaries generally are subject to
information reporting and to backup withholding unless (i) the U.S. Holder is a
corporation or other exempt recipient or (ii) in the case of backup withholding,
the U.S. Holder provides a correct taxpayer identification number and certifies
that backup withholding does not apply.
  The amount
of any backup withholding from a payment to a U.S. Holder will be allowed as a
credit against the U.S. Holder’s U.S. federal income tax liability and may
entitle the U.S. Holder to a refund, provided that the required information is
furnished to the Internal Revenue Service.
  F.   
Dividends and paying
agents.
  Not
applicable.
  G.    Statement by
experts.
  Not
applicable.
  H.    Documents on
display.
  We have
filed this annual report on Form 20-F with the SEC under the Securities Exchange
Act of 1934, as amended, or the Exchange Act.  Statements made in this
annual report as to the contents of any document referred to are not necessarily
complete.  With respect to each such document filed as an exhibit to
this annual report, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
  We are
subject to the informational requirements of the Exchange Act and file reports
and other information with the SEC.  Reports and other information
which the Company filed with the SEC, including this annual report on Form 20-F,
may be inspected and copied at the public reference room of the SEC at 100 F.
Street N.E., Washington, D.C. 20549.  You can also obtain copies of
this annual report on Form 20-F by mail from the Public Reference Section of the
SEC, 100 F. Street N.E., Washington, D.C. 20549, at prescribed
rates.  Additionally, copies of this material may be obtained from the
SEC’s Internet site at http://www.sec.gov.  The SEC’s telephone number
is 1-800-SEC-0330.  As a foreign private issuer, we are exempt from
the rules under the Exchange Act prescribing the furnishing and content of
quarterly reports and proxy statements, and officers, directors and principal
shareholders are exempt from the reporting and short-swing profit recovery
provisions contained in Section 16 of the Exchange Act.
  I.     Subsidiaries
information.
  Not
applicable.
  98
   ITEM
11.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
  INTEREST
RATE RISK
  Our
exposure to interest rate risk primarily relates to the interest rates for our
outstanding debt and the interest income generated by bank deposits and other
interest earning short-term investments.  As of December 31, 2007, we
had short-term bank borrowings in the amount of RMB35 million.  Our
short-term bank borrowings are subject to floating interest
rates.  Assuming the principal amount of the outstanding bank
borrowings remains approximately the same as of December 31, 2007, each 1%
increase in applicable interest rate would add RMB0.4 million per year to our
interest expenses.  On the other hand, any decrease in interest rate
would reduce interest income generated from our interest-earning
instruments.  We have not used any derivative financial instruments to
manage our interest risk exposure.  We have not been exposed to
material risks due to changes in interest rates.  However, our future
interest expenses may be higher and interest income may be lower than expected
due to changes in market interest rates.
  FOREIGN
EXCHANGE RISK
  The value
of the Renminbi against the U.S. dollar and other currencies may fluctuate and
is affected by, among other things, changes in China’s political and economic
conditions.  The conversion of Renminbi into foreign currencies,
including U.S. dollars, has been based on rates set by the People’s Bank of
China, the central bank of the PRC.  On July 21, 2005, the PRC
government changed its decade-old policy of pegging the value of Renminbi to the
U.S. dollar.  Under this new policy, the Renminbi is permitted to
fluctuate within a narrow and managed band against a basket of certain foreign
currencies.  As a result, from July 21, 2005 to April 30, 2007, the
Renminbi has appreciated approximately 16% to the U.S. dollar.  While
the international reaction to the Renminbi revaluation has generally been
positive, there remains significant international pressure on the PRC government
to adopt an even more flexible currency policy, which could result in a further
and more significant appreciation of the Renminbi against the U.S.
dollar.
  We use
Renminbi as our reporting currency, and all of our revenues and a substantial
majority of our costs are denominated in Renminbi.  However, proceeds
from many of our financing activities are denominated in U.S. dollars, and
certain of our costs, in particular third-party hardware and software products,
are also denominated in U.S. dollars.  Fluctuations in exchange rates,
primarily those involving the U.S. dollar, may affect our costs and operating
margins as well as our net income.  For example, to the extent that we
need to convert U.S. dollars we receive from our future financing activities
into Renminbi for our operations, appreciation of the Renminbi against the U.S.
dollar would have an adverse effect on the Renminbi amount we receive from the
conversion.  Conversely, if we decide to convert Renminbi into U.S.
dollars for the purpose of making payments for dividends on our common shares or
for other business purposes, appreciation of the U.S. dollar against the
Renminbi would have a negative effect on the U.S. dollar amount available to
us.  We have not used any forward contracts or currency borrowings to
hedge our exposure to foreign currency exchange risk.
  ITEM
12.   DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES
  Not
applicable.
  99
   PART
II
  ITEM
13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  Not
applicable.
  ITEM
14. MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
  Not
applicable.
  ITEM
15.  CONTROLS AND PROCEDURES
  EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
  Our
management has evaluated the effectiveness of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended), or the Exchange Act, as of the end
of the fiscal year covered by this report.  Based on such evaluation,
our chief executive officer and chief financial officer have concluded that, as
of the end of the fiscal year covered by this report, our disclosure controls
and procedures were partially ineffective in providing reasonable assurance that
information required to be disclosed by the Company in reports it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the
SEC.  This was due to a significant deficiency that existed in the
design and operation of our internal control over financial reporting that
adversely affected our disclosure controls relating to the inappropriate accrual
of inventories purchased.
  MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
  The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting.  Internal control
over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated
under the Securities Exchange Act of 1934 as a process designed by, or under the
supervision of, the Company’s principal executive and principal financial
officers and effected by the Company’s board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
  ·
              Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;
  ·
              Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the Company
      are being made only in accordance with authorizations of management and
      directors of the Company; and
  ·
              Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.
  Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2007.  In making
this assessment, the Company’s management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework.  Based on our assessment,
management believes that, as of December 31, 2007, the Company’s internal
control over financial reporting was effective based on those
criteria.
  100
   This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
independent registered public accounting firm pursuant to temporary rules of the
SEC that permit us to provide only management’s report in this annual
report.  However, in connection with its audit of our financial
statements, our independent registered public accounting firm reported a
significant deficiency in our internal controls over our ability to produce
financial statements free from material misstatements, namely the inappropriate
accrual of inventories purchased.
  We have
started to formulate a program which we believe will remedy the significant
deficiency described above.  We expect to review and, as appropriate,
revise our accounting and management information systems software.  We
also expect to increase the areas to be reviewed and discussed with the board of
directors.  We will continue these efforts until we are satisfied that
all significant deficiencies have been eliminated.  We expect that
resolution of the above will take several months.
  CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
  There has
been no change in our internal control over financial reporting during the year
ended December 31, 2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
  ITEM
16A.  AUDIT COMMITTEE FINANCIAL EXPERT.
  The board
of directors believes that Mr. Chi Wei Joong, members of our audit committee,
meet the criteria for an “audit committee financial expert” as established by
the SEC.
  Mr. Chi
Wei Joong will not be deemed an “expert” for any purpose, including, without
limitation, for purpose of Section 11 of the U.S. Securities Act of 1933, as
amended, as a result of being designated or identified as an audit committee
financial expert.  The designation or identification of Mr. Joong as
an audit committee financial expert does not impose on him any duties,
obligations or liabilities that are greater than the duties, obligations and
liabilities imposed as a member of the audit committee and board of directors in
the absence of such designation or identification.  The designation or
identification of Mr. Chi Wei Joong as an audit committee financial expert does
not affect the duties, obligations or liabilities of any other member of the
audit committee or board of directors.
  ITEM
16B.  CODE OF ETHICS.
  Our board
of directors adopted a code of ethics on March 20, 2006 that applies to our
directors, officers and employees and to those of our subsidiaries.  A
copy of the form of our code of ethics was filed as Annex G to our registration
statement on Form S-4 filed with the SEC on March 29, 2006, and with effect as
of November 3, 2006.
  ITEM
16C.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.
  (a)  Audit
Fees.
  The
aggregate fees billed for 2006 and 2007 for professional services rendered by
BDO McCabe Lo Limited for the audit of our annual financial statements were
US$201,338 and US$120,000 respectively.
  (b)  Audit
— Related Fees
  No fees
were billed in each of the last two fiscal years for assurance and related
services by our principal accountant that are reasonably related to the
performance of the audit or review of our financial statements and are not
reported under paragraph (a) of this Item 16C for 2006 and 2007,
respectively.
  (c)  Tax
Fees
  We did not
enter into any engagement in 2006 or 2007 for professional services rendered by
our principal accountant for tax compliance, tax advice or tax
planning.
  101
   (d)  All
Other Fees
  No fees
were billed in each of the last two fiscal years for products and services
provided by our principal accountant, other than the services reported in
paragraphs (a) through (b) of this Item 16C for 2006 and 2007.
  (e)  Audit
Committee Pre-Approval Policies and Procedures.
  The Audit
Committee is to pre-approve all auditing services and permitted non-audit
services to be performed for us by our independent auditor, including the fees
and terms thereof (subject to the de minimis exceptions for non-audit services
described in Section 10A(i)(l)(B) of the Exchange Act which are approved by the
Audit Committee prior to the completion of the audit).
  ITEM
16D.  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES.
  We have
not been granted an exemption from the applicable listing standards for the
audit committee of our board of directors.
  ITEM
      16E.
              PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
    PURCHASERS.
  None
  102
   PART
III
  ITEM
17.  FINANCIAL STATEMENTS
  We have
elected to provide financial statements pursuant to Item 18.
  ITEM
18.  FINANCIAL STATEMENTS
  The
consolidated financial statements for the Company and its subsidiaries are
included at the end of this annual report.
  ITEM
19.  EXHIBITS
  Exhibit
  Number         Description
  1.1
              Memorandum
      of Association of Registrant (incorporated by reference from Registration
      Statement No. 333-132814 - Annex B)
  1.2
              Articles
      of Association of Registrant (incorporated by reference from Registration
      Statement No. 333-132814 - Annex C)
  2.1
              Specimen
      Common Stock Certificate of Registrant (incorporated by reference from
      Registration Statement No. 333-132814 – Exhibit
  4.1)
  2.2
              Specimen
      Warrant Certificate of Registrant (incorporated by reference from
      Registration Statement No. 333-132814 – Exhibit
  4.2)
  3.1
              Form
      of Voting Agreement among Sihitech Company Limited, Mega Capital Group
      Services Limited, Profit Loyal Consultants Limited, Elite Concord
      International Limited, China Century Holdings Group Limited, Shinning
      Growth Investment Group Limited, Chih Cheung, and James Li (incorporated
      by reference from Registration Statement No. 333-132814 – Exhibit
      10.21)
  4.1
              Securities
      Purchase Agreement among Registrant, Yucheng Technologies Limited,
      Sihitech Company Limited, Mega Capital Group Services Limited, Profit
      Loyal Consultants Limited, Elite Concord International Limited, China
      Century Holdings Group Limited, Shinning Growth Investment Group Limited,
      Chih Cheung, James Li, James Preissler, for the acquisition of Ahead
      Billion Venture Limited, and Port Wing Development Company Limited, dated
      December 20, 2005 (incorporated by reference from Registration Statement
      No. 333-132814 – Annex A)
  4.2
              Amendment
      to Securities Purchase Agreement dated June 29, 2006 (incorporated by
      reference from Registration Statement No. 333-132814 - Annex
      A)
  4.3
              Amendment
      to Securities Purchase Agreement dated October 27, 2006 (incorporated by
      reference from Registration Statement No. 333-132814 - Annex
      A)
  4.4
              Amendment
      to Securities Purchase Agreement dated July 31, 2007 (incorporated by
      reference from Foreign Issuer Report on Form 6-K, filed August 24,
      2007)
  4.5
              China
      Unistone/Yucheng 2006 Performance Equity Plan (incorporated by reference
      from Registration Statement No. 333-132814 –Annex
  D)
  4.6
              Form
      of Registration Rights Agreement among China Unistone Acquisition
      Corporation and the Initial Stockholders (incorporated by reference from
      Registration Statement 333-117639, dated July 23, 2004, Exhibit
      10.14)
  4.7
              Form
      of Voting Agreement among Sihitech Company Limited, Mega Capital Group
      Services Limited, Profit Loyal Consultants Limited, Elite Concord
      International Limited, China Century Holdings
  Group
  103
  Limited,
      Shinning Growth Investment Group Limited, Chih Cheung, and James Li
      (incorporated by reference from Registration Statement No. 333-132814 –
      Exhibit 10.21)
 4.8
              Form
      Sihitech Software Development Agreement (incorporated by reference from
      Registration Statement No. 333-132814 – Exhibit
  10.23)
  4.9
              Form
      e-Channels Software License Agreement (incorporated by reference from
      Registration Statement No. 333-132814 – Exhibit
  10.24)
  4.10
              Form
      Sihitech Service Agreement (incorporated by reference from Registration
      Statement No. 333-132814 – Exhibit
10.25)
  4.11
              Form
      e-Channels Technology Service Contract (incorporated by reference from
      Registration Statement No. 333-132814 – Exhibit
  10.26)
  4.12
              Form
      e-Channels Software Sales Agreement (incorporated by reference from
      Registration Statement No. 333-132814 – Exhibit
  10.27)
  4.13
              Equity  Interest
      Transfer Agreement  re. Beijing Sunrisk Information Technology
      Company Limited (incorporated by reference from Exhibit 4.1 to Form 6-k
      filed February 13, 2007)
  4.14
              Form
      of Employment Agreement between Yucheng Technologies Limited and Hong
      Weidong (incorporated by reference from Registration Statement No.
      333-132814 – Exhibit 10.18)
  4.15
              Form
      of Employment Agreement between Yucheng Technologies Limited and Zeng Shuo
      (incorporated by reference from Registration Statement No. 333-132814 –
      Exhibit 10.19)
  4.16
              Form
      of Employment Agreement between Yucheng Technologies Limited and Chih T.
      Cheung (incorporated by reference from Registration Statement No.
      333-132814 – Exhibit 10.20)
  4.17*
              Form
      of Employment Agreement between Yucheng Technologies Limited and Remington
      Hu
  4.18
              Equity  Interest
      Transfer Agreement  re. Beijing Sunrisk Information Technology
      Company Limited (incorporated by reference from Exhibit 4.1 to Form 6-k
      filed February 13, 2007)
  8.1*
              List
      of subsidiaries
  11.1
              Code
      of Ethics (incorporated by reference from Registration Statement No.
      333-132814 - Annex G)
  12.1*
              CEO
      Certification Pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)) (17 CFR
      240.13a-14(a)) or Rule 15d-1(a) (17 CFR
  240.15d-14(a))
  12.2*
              CFO
      Certification Pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule
      15d-1(a) (17 CFR 240.15d-14(a))
  13.1*
              CEO
      Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
  13.2*
              CFO
      Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
  ___________________________
 * Filed
with this annual report on Form 20-F
  104
 
  
  SIGNATURE
  The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
  Date: May
5, 2008
 YUCHENG
      TECHNOLOGIES LIMITED/s/
      Weidong HongName:
              Weidong
      HongTitle:
              Chief
      Executive Officer
    105




INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
   PageReport
      of Independent Registered Public Accounting Firm
                  F-1Consolidated
      Balance Sheets as of December 31, 2006 and 2007
                  F-2Consolidated
      Statements of Income for the Years Ended December 31, 2005, 2006 and
      2007
                  F-4Consolidated
      Statements of Stockholders Equity for the Years Ended December 31, 2005,
      2006 and 2007
                  F-5Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2005, 2006 and
      2007
                  F-6Notes
      to the Consolidated Financial Statements for the Years Ended December 31,
      2005, 2006 and 2007
                  F-8
 
 YUCHENG
TECHNOLOGIES LIMITED
 AND
 SUBSIDIARIES
   Consolidated
Financial Statements
   Years
Ended December 31, 2006 and 2007
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To the
Board of Directors of and Stockholders of
 Yucheng
Technologies Limited:
 
 We have
audited the accompanying consolidated balance sheets of Yucheng Technologies
Limited and subsidiaries (the “Company”) as of December 31, 2006 and 2007, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2007. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. Our audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of financial statements. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Yucheng
Technologies Limited and subsidiaries as of December 31, 2006 and 2007 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2007, in conformity with accounting
principles generally accepted in the United States of America.
 
 
 BDO McCabe
Lo Limited
  /s/ BDO
McCabe Lo Limited
  Hong
Kong
 May 2,
2008
 
 
 F-1
 
 
 YUCHENG
TECHNOLOGIES LIMITED AND SUBSIDIARIES
 Consolidated
Balance Sheets
 
 (Expressed
in Chinese Renminbi)
  Assets
                
                2006
                
                
                2007
                
                
                2007RMB
                
                
                RMB
                
                
                USD(note
      2 (c))Current
      assets:Cash
      and cash equivalents
                
                
                98,357,657
                
                
                
                222,493,839
                
                
                
                30,459,415Trade
      accounts receivable, net (note 3)
                
                
                116,606,333
                
                
                
                203,450,849
                
                
                
                27,852,428Costs
      and estimated earnings inexcess
      of billings on uncompletedcontracts
      (note 4)
                
                
                17,022,985
                
                
                
                46,564,308
                
                
                
                6,374,655Due
      from related parties (note 25)
                
                
                386,867
                
                
                
                937,453
                
                
                
                128,337Inventories
                
                
                5,655,156
                
                
                
                8,856,190
                
                
                
                1,212,413Precontract
      costs
                
                
                1,605,795
                
                
                
                3,660,318
                
                
                
                501,098Deposits
      for acquisitions of businesses (note 5)
                
                
                44,750,000
                
                
                
                -
                
                
                
                -Other
      current assets (note 6)
                
                
                21,035,434
                
                
                
                86,341,261
                
                
                
                11,820,122Deferred
      income taxes (note 7)
                
                
                427,601
                
                
                
                -
                
                
                
                -Total
      current assets
                
                
                305,847,828
                
                
                
                572,304,218
                
                
                
                78,348,468Investments
      in and advances toaffiliates
      (note 2(v))
                
                
                3,161,376
                
                
                
                2,255,210
                
                
                
                308,738Fixed
      assets, net (note 8)
                
                
                6,461,479
                
                
                
                33,324,414
                
                
                
                4,562,113Intangible
      assets, net (note 9)
                
                
                36,207,527
                
                
                
                41,207,670
                
                
                
                5,641,331Goodwill
      (note 23)
                
                
                37,273,607
                
                
                
                169,361,506
                
                
                
                23,185,596Other
      non-current assets
                
                
                45,383
                
                
                
                708,037
                
                
                
                96,931Deferred
      income taxes (note 7)
                
                
                143,426
                
                
                
                2,586,208
                
                
                
                354,052Total
      assets
                
                
                389,140,626
                
                
                
                821,747,263
                
                
                
                112,497,229
 
 See
accompanying notes to consolidated financial statements.
 F-2
 
 YUCHENG
TECHNOLOGIES LIMITED AND SUBSIDIARIES
 Consolidated
Balance Sheets (continued)
 
 (Expressed
in Chinese Renminbi)
  Liabilities
      and stockholders’ equity
                
                2006
                
                
                2007
                
                
                2007RMB
                
                
                RMB
                
                
                USD(note
      2 (c))Current
      liabilitiesShort-term
      loan (note 10)
                
                
                32,000,000
                
                
                
                35,000,000
                
                
                
                4,791,501Current
      instalment of long-term loan (note 12)
                
                
                3,500,000
                
                
                
                -
                
                
                
                -Obligations
      under capital leases (note 13)
                
                
                -
                
                
                
                1,450,841
                
                
                
                198,620Trade
      accounts payable (note 11)
                
                
                36,742,492
                
                
                
                93,759,731
                
                
                
                12,835,711Billings
      in excess of costs and estimatedearnings
      on uncompleted contracts (note 4)
                
                
                978,248
                
                
                
                6,928,568
                
                
                
                948,521Employee
      and payroll accruals
                
                
                2,671,365
                
                
                
                8,686,638
                
                
                
                1,189,201Dividends
      payable to ex-owners
                
                
                38,000,000
                
                
                
                26,273,407
                
                
                
                3,596,831Deemed
      distribution to ex-owners (note 1)
                
                
                -
                
                
                
                40,814,149
                
                
                
                5,587,458Outstanding
      payment in relation tobusiness
      acquisitions (note 23)
                
                
                -
                
                
                
                55,352,938
                
                
                
                7,577,819Income
      taxes payable
                
                
                4,240,717
                
                
                
                10,968,901
                
                
                
                1,501,643Due
      to related parties (note 25)
                
                
                907,948
                
                
                
                -
                
                
                
                -Other
      current liabilities (note 14)
                
                
                22,177,691
                
                
                
                36,491,891
                
                
                
                4,995,741Total
      current liabilities
                
                
                141,218,461
                
                
                
                315,727,064
                
                
                
                43,223,046Obligations
      under capital leases (note 13)
                
                
                -
                
                
                
                2,410,464
                
                
                
                329,993Deferred
      income taxes (note 7)
                
                
                5,292,707
                
                
                
                5,312,346
                
                
                
                727,260Total
      liabilities
                
                
                146,511,168
                
                
                
                323,449,874
                
                
                
                44,280,299Minority
      interests (note 15)
                
                
                -
                
                
                
                5,199,312
                
                
                
                711,786Commitments
      and contingencies (note 21)Stockholders’
      equityPreferred
      stock, $0.0001 par value, authorised2,000,000
      shares and none issued;
                
                
                -
                
                
                
                -
                
                
                
                -Common
      stock, $0.0001 par value, authorised60,000,000
      shares; 9,528,320 sharesand
      16,610,853 shares issued andoutstanding
      as of December 31, 2006and
      2007 (note 1)
                
                
                20,001,229
                
                
                
                20,006,616
                
                
                
                2,738,906Additional
      paid-in capital
                
                
                176,450,960
                
                
                
                361,624,414
                
                
                
                49,506,395Reserves
      (note 16)
                
                
                18,985,144
                
                
                
                24,868,832
                
                
                
                3,404,544Retained
      earnings
                
                
                27,331,325
                
                
                
                88,162,065
                
                
                
                12,069,390Accumulated
      other comprehensive loss (note 17)
                
                
                (139,200
                )
                
                
                (1,563,850
                )
                
                
                (214,091
                )Total
      Stockholders’ equity
                
                
                242,629,458
                
                
                
                493,098,077
                
                
                
                67,505,144Total
      liabilities and Stockholders’ equity
                
                
                389,140,626
                
                
                
                821,747,263
                
                
                
                112,497,229
  See
accompanying notes to consolidated financial statements.
   F-3
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Consolidated
Statements of Income
 
 (Expressed
in Chinese Renminbi)
  2005
                
                
                2006
                
                
                2007
                
                
                2007RMB
                
                
                RMB
                
                
                RMB
                
                
                USD(note
      2 (c))Revenues
      (note 18):IT
      solutions and services
                
                
                61,106,840
                
                
                
                99,435,584
                
                
                
                230,633,019
                
                
                
                31,573,669System
      integration
                
                
                116,219,840
                
                
                
                190,214,841
                
                
                
                204,885,823
                
                
                
                28,048,876Total
      revenues
                
                
                177,326,680
                
                
                
                289,650,425
                
                
                
                435,518,842
                
                
                
                59,622,545Cost
      of revenues:IT
      solutions and services
                
                
                (25,757,568
                )
                
                
                (43,406,442
                )
                
                
                (96,149,113
                )
                
                
                (13,162,817
                )System
      integration
                
                
                (107,327,345
                )
                
                
                (171,925,981
                )
                
                
                (181,677,025
                )
                
                
                (24,871,591
                )Total
      cost of revenues
                
                
                (133,084,913
                )
                
                
                (215,332,423
                )
                
                
                (277,826,138
                )
                
                
                (38,034,408
                )Gross
      profit
                
                
                44,241,767
                
                
                
                74,318,002
                
                
                
                157,692,704
                
                
                
                21,588,137Operating
      expenses:Research
      and development expenses
                
                
                (352,059
                )
                
                
                (901,833
                )
                
                
                (8,369,567
                )
                
                
                (1,145,794
                )Selling
      and marketing expenses
                
                
                (11,180,831
                )
                
                
                (13,989,741
                )
                
                
                (29,052,598
                )
                
                
                (3,977,301
                )General
      and administrativeexpenses
      (note 19)
                
                
                (13,912,349
                )
                
                
                (14,170,129
                )
                
                
                (50,668,370
                )
                
                
                (6,936,502
                )Total
      operating expenses
                
                
                (25,445,239
                )
                
                
                (29,061,703
                )
                
                
                (88,090,535
                )
                
                
                (12,059,597
                )Other
      income (expense):Interest
      income
                
                
                141,680
                
                
                
                116,954
                
                
                
                1,818,536
                
                
                
                248,958Interest
      expense
                
                
                (617,684
                )
                
                
                (1,262,652
                )
                
                
                (1,937,368
                )
                
                
                (265,226
                )Income
      from short-term investment
                
                
                -
                
                
                
                -
                
                
                
                3,494,446
                
                
                
                478,390Equity
      in net earnings (losses) of affiliates
                
                
                (758,609
                )
                
                
                (134,987
                )
                
                
                -
                
                
                
                -Other
      income (expense), net
                
                
                431,714
                
                
                
                26,576
                
                
                
                1,078,033
                
                
                
                147,582Income
      before minority interestsand
      income taxes
                
                
                17,993,629
                
                
                
                44,002,190
                
                
                
                74,055,816
                
                
                
                10,138,244Income
      tax expense (note 7)
                
                
                (3,463,029
                )
                
                
                (3,271,466
                )
                
                
                (5,528,247
                )
                
                
                (756,817
                )Income
      before minority interests
                
                
                14,530,600
                
                
                
                40,730,724
                
                
                
                68,527,569
                
                
                
                9,381,427Minority
      interests
                
                
                -
                
                
                
                -
                
                
                
                (1,813,141
                )
                
                
                (248,219
                )Net
      income
                
                
                14,530,600
                
                
                
                40,730,724
                
                
                
                66,714,428
                
                
                
                9,133,208Earnings
      Per Share (note 20)–
      basic
                
                
                3.87
                
                
                
                5.02
                
                
                
                5.08
                
                
                
                0.69–diluted
                
                
                3.87
                
                
                
                3.96
                
                
                
                4.34
                
                
                
                0.59Weighted
      average common shares outstanding–
      basic
                
                
                3,754,484
                
                
                
                8,118,335
                
                
                
                13,144,681
                
                
                
                13,144,681–diluted
                
                
                3,754,484
                
                
                
                10,292,308
                
                
                
                15,370,197
                
                
                
                15,370,197
 See
accompanying notes to consolidated financial statements.
 
 F-4
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Consolidated
Statements of Stockholders’ Equity
 
 (Expressed
in Chinese Renminbi)
 AccumulatedAdditional
                
                
                
                
                
                
                
                
                other
                
                
                TotalCommon shares
                
                
                paid-in
                
                
                
                
                
                Retained
                
                
                comprehensive
                
                
                stockholders’
                
                
                ComprehensiveShares
                
                
                Amount
                
                
                capital
                
                
                Reserves
                
                
                earnings
                
                
                loss
                
                
                equity
                
                
                IncomeRMB
                
                
                RMB
                
                
                RMB
                
                
                RMB
                
                
                RMB
                
                
                RMB
                
                
                RMBBalance
      as at  January 1, 2005
                
                
                -
                
                
                
                20,000,000
                
                
                
                13,000
                
                
                
                8,290,370
                
                
                
                12,864,775
                
                
                
                -
                
                
                
                41,168,145
                
                
                
                -Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                14,530,600
                
                
                
                -
                
                
                
                14,530,600
                
                
                
                14,530,600Transfer
      to reserves
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,285,594
                
                
                
                (3,285,594
                )
                
                
                -
                
                
                
                -
                
                
                
                -Dividend
      appropriation
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,100,000
                )
                
                
                -
                
                
                
                (2,100,000
                )
                
                
                -Balance
      as at December 31, 2005
                
                
                -
                
                
                
                20,000,000
                
                
                
                13,000
                
                
                
                11,575,964
                
                
                
                22,009,781
                
                
                
                -
                
                
                
                53,598,745
                
                
                
                14,530,600Recapitalization
      in connectionwith
      the Share ExchangeTransactions
      (note 1)
                
                
                7,954,484
                
                
                
                -
                
                
                
                126,221,524
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                126,221,524
                
                
                
                -Deemed
      distribution (note 1)
                
                
                -
                
                
                
                -
                
                
                
                (21,332,463
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (21,332,463
                )
                
                
                -Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                40,730,724
                
                
                
                -
                
                
                
                40,730,724
                
                
                
                40,730,724Issuance
      on acquisition of asubsidiary
                
                
                1,573,836
                
                
                
                1,229
                
                
                
                71,548,899
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                71,550,128
                
                
                
                -Transfer
      to reserves
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                7,409,180
                
                
                
                (7,409,180
                )
                
                
                -
                
                
                
                -
                
                
                
                -Dividend
      appropriation
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (28,000,000
                )
                
                
                -
                
                
                
                (28,000,000
                )
                
                
                -Foreign
      currency translationadjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (139,200
                )
                
                
                (139,200
                )
                
                
                (139,200
                )Balance
      as at December 31, 2006
                
                
                9,528,320
                
                
                
                20,001,229
                
                
                
                176,450,960
                
                
                
                18,985,144
                
                
                
                27,331,325
                
                
                
                (139,200
                )
                
                
                242,629,458
                
                
                
                40,591,524Warrant
      exercise
                
                
                6,866,486
                
                
                
                5,229
                
                
                
                252,601,693
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                252,606,922
                
                
                
                -Unit
      purchase option exercise
                
                
                216,047
                
                
                
                158
                
                
                
                (158
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Deemed
      distribution (note 1)
                
                
                -
                
                
                
                -
                
                
                
                (67,428,081
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (67,428,081
                )
                
                
                -Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                66,714,428
                
                
                
                -
                
                
                
                66,714,428
                
                
                
                66,714,428Transfer
      to reserves
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,883,688
                
                
                
                (5,883,688
                )
                
                
                -
                
                
                
                -
                
                
                
                -Foreign
      currency translationadjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,424,650
                )
                
                
                (1,424,650
                )
                
                
                (1,424,650
                )Balance
      as at December 31, 2007
                
                
                16,610,853
                
                
                
                20,006,616
                
                
                
                361,624,414
                
                
                
                24,868,832
                
                
                
                88,162,065
                
                
                
                (1,563,850
                )
                
                
                493,098,077
                
                
                
                65,289,778In US$(note 2
      (c))
                
                
                
                
                
                
                2,738,906
                
                
                
                49,506,395
                
                
                
                3,404,544
                
                
                
                12,069,390
                
                
                
                (214,091
                )
                
                
                67,505,144
                
                
                
                8,938,173
 
 See
accompanying notes to consolidated financial statements.
 
 F-5
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Consolidated
Statements of Cash Flows
 
 (Expressed
in Chinese Renminbi)
 2005
                  
                  
                  2006
                  
                  
                  2007
                  
                  
                  2007RMB
                  
                  
                  RMB
                  
                  
                  RMB
                  
                  
                  USD(note
      2 (c))Cash
      flows from operating activities:Net
      income
                  
                  
                  14,530,600
                  
                  
                  
                  40,730,724
                  
                  
                  
                  66,714,428
                  
                  
                  
                  9,133,208Adjustments
      to reconcile net income tonet
      cash provided by operating activities:Depreciation
      and amortization
                  
                  
                  3,347,961
                  
                  
                  
                  3,644,380
                  
                  
                  
                  16,585,488
                  
                  
                  
                  2,270,554Loss
      on disposal fixed assets
                  
                  
                  -
                  
                  
                  
                  56,368
                  
                  
                  
                  217,107
                  
                  
                  
                  29,722Loss
      on disposal of subsidiary
                  
                  
                  -
                  
                  
                  
                  204,902
                  
                  
                  
                  -
                  
                  
                  
                  -Loss
      (gain) on disposal of affiliate
                  
                  
                  -
                  
                  
                  
                  26,208
                  
                  
                  
                  (869,798
                  )
                  
                  
                  (119,075
                  )Minority
      interests
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,813,141
                  
                  
                  
                  248,219Share
      of (earnings) losses of affiliates
                  
                  
                  758,609
                  
                  
                  
                  134,987
                  
                  
                  
                  -
                  
                  
                  
                  -Income
      from short term investment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,494,446
                  )
                  
                  
                  (478,390
                  )Increase
      in trade accounts receivable
                  
                  
                  (5,926,332
                  )
                  
                  
                  (47,822,765
                  )
                  
                  
                  (70,622,155
                  )
                  
                  
                  (9,668,176
                  )(Increase)
      decrease in costs andestimated
      earnings in excess ofbillings
      on uncompleted contracts
                  
                  
                  (5,901,616
                  )
                  
                  
                  927,703
                  
                  
                  
                  (29,541,323
                  )
                  
                  
                  (4,044,208
                  )(Increase)
      decrease in due from
                  
                  
                  (2,856,337
                  )
                  
                  
                  2,212,389
                  
                  
                  
                  386,867
                  
                  
                  
                  52,962related
      parties(Increase)
      decrease in inventories
                  
                  
                  (5,198,200
                  )
                  
                  
                  5,773,191
                  
                  
                  
                  (3,570,912
                  )
                  
                  
                  (488,858
                  )Decrease
      (increase) in precontract costs
                  
                  
                  1,208,879
                  
                  
                  
                  (882,423
                  )
                  
                  
                  3,188,660
                  
                  
                  
                  436,528(Increase)
      in other current assets
                  
                  
                  (9,876,524
                  )
                  
                  
                  (495,033
                  )
                  
                  
                  (56,002,843
                  )
                  
                  
                  (7,666,791
                  )Decrease
      in current deferred tax assets
                  
                  
                  53,742
                  
                  
                  
                  149,155
                  
                  
                  
                  427,601
                  
                  
                  
                  58,539Increase
      in non-current deferredtax
      assets
                  
                  
                  (30,195
                  )
                  
                  
                  (10,065
                  )
                  
                  
                  (2,442,782
                  )
                  
                  
                  (334,417
                  )Increase
      (decrease) in tradeaccounts
      payable
                  
                  
                  23,182,526
                  
                  
                  
                  (10,461,863
                  )
                  
                  
                  51,805,698
                  
                  
                  
                  7,092,202(Decrease)
      increase in billings in excessof
      costs and estimated earnings onuncompleted
      contracts
                  
                  
                  (439,356
                  )
                  
                  
                  (6,276,883
                  )
                  
                  
                  5,950,320
                  
                  
                  
                  814,599Decrease
      in employee and payrollaccruals
                  
                  
                  (3,590,846
                  )
                  
                  
                  (253,347
                  )
                  
                  
                  (249,769
                  )
                  
                  
                  (34,193
                  )Increase
      in income taxes payable
                  
                  
                  1,874,169
                  
                  
                  
                  107,785
                  
                  
                  
                  6,700,763
                  
                  
                  
                  917,334Increase
      (decrease) in othercurrent
      liabilities
                  
                  
                  3,449,076
                  
                  
                  
                  (1,216,259
                  )
                  
                  
                  (19,108,790
                  )
                  
                  
                  (2,615,994
                  )Increase
      (decrease) in non-currentdeferred
      tax liabilities
                  
                  
                  219,748
                  
                  
                  
                  (8,665
                  )
                  
                  
                  (1,208,111
                  )
                  
                  
                  (165,391
                  )Net
      cash provided by (used in)operating
      activities
                  
                  
                  14,805,904
                  
                  
                  
                  (13,459,511
                  )
                  
                  
                  (33,320,856
                  )
                  
                  
                  (4,561,626
                  )Cash
      flows from investing activities:Capital
      expenditure
                  
                  
                  (5,367,706
                  )
                  
                  
                  (2,884,970
                  )
                  
                  
                  (34,295,309
                  )
                  
                  
                  (4,695,030
                  )Investment
      in trust
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (80,000,000
                  )
                  
                  
                  (10,952,003
                  )Collection
      of investment in trust
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  83,494,446
                  
                  
                  
                  11,430,393Payments
      for lending to third party
                  
                  
                  (1,250,000
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Payment
      of purchase of subsidiaries
                  
                  
                  -
                  
                  
                  
                  (7,793,085
                  )
                  
                  
                  (51,811,896
                  )
                  
                  
                  (7,093,050
                  )(Increase)
      decrease in deposits paid foracquisitions
      of businesses
                  
                  
                  (7,000,000
                  )
                  
                  
                  (44,750,000
                  )
                  
                  
                  20,000,000
                  
                  
                  
                  2,738,001Advances
      to affiliates
                  
                  
                  (437,892
                  )
                  
                  
                  (23,464
                  )
                  
                  
                  (69,440
                  )
                  
                  
                  (9,506
                  )Collection
      of advances to affiliates
                  
                  
                  500,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Proceeds
      from disposal of fixed assets
                  
                  
                  -
                  
                  
                  
                  5,000
                  
                  
                  
                  105,773
                  
                  
                  
                  14,480Proceeds
      from disposal of affiliate
                  
                  
                  -
                  
                  
                  
                  1,282,212
                  
                  
                  
                  -
                  
                  
                  
                  -Proceeds
      from disposal of subsidiary
                  
                  
                  -
                  
                  
                  
                  104,977
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      cash used in investing activities
                  
                  
                  (13,555,598
                  )
                  
                  
                  (54,059,330
                  )
                  
                  
                  (62,576,426
                  )
                  
                  
                  (8,566,715
                  )
 See
accompanying notes to consolidated financial statements.
   F-6
 
 YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Consolidated
Statements of Cash Flows (continued)
 
 (Expressed
in Chinese Renminbi)
 2005
                
                
                2006
                
                
                2007
                
                
                2007RMB
                
                
                RMB
                
                
                RMB
                
                
                USD(note
      2 (c))Cash
      flows from financing activities:Net
      cash flow from the ShareExchange
      Transaction, netof
      transaction costs
                
                
                -
                
                
                
                138,213,541
                
                
                
                -
                
                
                
                -Proceeds
      from warrant exercise
                
                
                -
                
                
                
                -
                
                
                
                252,561,431
                
                
                
                34,575,669Deemed
      distribution
                
                
                -
                
                
                
                (21,332,463
                )
                
                
                (26,613,939
                )
                
                
                (3,643,450
                )Proceeds
      from bank borrowings
                
                
                25,000,000
                
                
                
                20,000,000
                
                
                
                55,000,000
                
                
                
                7,529,502Proceeds
      from (repayment of)borrowing
      from ex-owner
                
                
                4,000,000
                
                
                
                (4,000,000
                )
                
                
                -
                
                
                
                -Repayments
      of borrowingsfrom
      affiliates
                
                
                (950,000
                )
                
                
                (500,001
                )
                
                
                -
                
                
                
                -Repayments
      of bank borrowings
                
                
                (20,000,000
                )
                
                
                (3,500,000
                )
                
                
                (55,500,000
                )
                
                
                (7,597,952
                )Repayment
      of capital leases
                
                
                -
                
                
                
                -
                
                
                
                (699,755
                )
                
                
                (95,796
                )Proceeds
      from loan from abusiness
      to be acquired
                
                
                2,976,000
                
                
                
                -
                
                
                
                -
                
                
                
                -Dividends
      paid to ex-owners
                
                
                (8,379,710
                )
                
                
                (5,720,291
                )
                
                
                (11,726,593
                )
                
                
                (1,605,371
                )Contributions
      from minority interests
                
                
                -
                
                
                
                -
                
                
                
                7,012,320
                
                
                
                959,987Dividends
      paid to minority interests
                
                
                (1,011,493
                )
                
                
                -
                
                
                
                -
                
                
                
                -Net
      cash provided by financingactivities
                
                
                1,634,797
                
                
                
                123,160,786
                
                
                
                220,033,464
                
                
                
                30,122,589Net
      increase in cashand
      cash equivalents
                
                
                2,885,103
                
                
                
                55,641,945
                
                
                
                124,136,182
                
                
                
                16,994,248Cash
      and cash equivalents atbeginning
      of year
                
                
                39,830,609
                
                
                
                42,715,712
                
                
                
                98,357,657
                
                
                
                13,465,167Cash
      and cash equivalentsat
      end of year
                
                
                42,715,712
                
                
                
                98,357,657
                
                
                
                222,493,839
                
                
                
                30,459,415Supplemental disclosures of
      cash flow informationInterest
      paid
                
                
                617,684
                
                
                
                1,262,652
                
                
                
                1,937,367
                
                
                
                265,226Income
      taxes paid
                
                
                1,337,313
                
                
                
                2,796,415
                
                
                
                2,050,777
                
                
                
                280,751Supplemental disclosures of
      non-cash investing activitiesCapital
      lease obligation
                
                
                -
                
                
                
                -
                
                
                
                4,561,060
                
                
                
                624,409Additional
      consideration on acquisitions
                
                
                -
                
                
                
                -
                
                
                
                55,352,938
                
                
                
                7,577,793Deemed
      distributions to ex-owners
                
                
                -
                
                
                
                -
                
                
                
                40,814,149
                
                
                
                5,587,452
 
 See
accompanying notes to consolidated financial statements.
   F-7
 YUCHENG
TECHNOLOGIES LIMITED AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 1 Organization
and description of business
 
 Yucheng
Technologies Limited (“Yucheng”), incorporated on November 24, 2006 under the
laws of the British Virgin Islands (“BVI”), and its subsidiaries are engaged in
systems integration, software solution services,  information
technology (“IT”) consulting and training services, maintenance and support,
launching Point of Sale (“POS”) merchant-acquiring outsourced services, sales of
self-developed IT products, computer software, hardware and peripheral
equipment, communication equipment and undertaking computer network projects.
Its major customers are first tier state-owned commercial banks in
China.
 
 On January
15, 2007, Beijing Yuxinyicheng Technologies Limited (“Yuxinyicheng”) established
a subsidiary, Beijing Yuxinyicheng Information Technology Limited. On July 18,
2007, Yuxinyicheng established another subsidiary, Shanghai Yuxinhongzhi
Information Technology Limited. During the year, Yuxinyicheng acquired 5
companies, Beijing Sunrisk Information Technology Limited, Beijing Easycon
Electronics Limited, Chengdu Recency Technologies Limited, Shanghai Fujie
Business Consulting Limited, and Shanghai Fuyi Business Consulting Limited. For
the acquisition effect, see footnote 23.
 
 At
December 31, 2005, 2006 and 2007, details of Yucheng’s subsidiaries
(collectively with Yucheng  referred to as the “Company”) are as
follows:
 
 Name
              
              Date
      of incorporation or establishment
              
              Place
      of incorporation or establishment
              
              Percentage
      of ownership
              
              Principal  activity2005
              2006
              2007Port
      Wing Development Co., Ltd.
                (“e-Channels
      BVI”)
              
              November
      3, 2005
              
              BVI
              
              N/A
              100%
              100%
              
              Investment
      holdingAhead
      Billion Venture Ltd.
                (“Sihitech
      BVI”).
              
              November
      3, 2005
              
              BVI
              
              N/A
              100%
              100%
              
              Investment
      holdingBeijing
      Yuxinyicheng Technologies Ltd.
                (“Yuxinyicheng”)
              
              October
      19, 2006
              
              People’s
      Republic of China (“PRC”)
              
              N/A
              100%
              100%
              
              System
      integration, software development, information technology consulting,
      maintenance and support
 
 
 
 F-8
  
 YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 Name
              
              Date
      of incorporation or establishment
              
              Place
      of incorporation or establishment
              
              Percentage
      of ownership
              
              Principal  activity2005
              2006
              2007Beijing
      e-Channels Century Technology Co., Ltd.(“e-Channels”)
              
              February
      5, 2001
              
              PRC
              
              N/A
              100%
              100%
              
              Technology
      development, technology transfer, consulting and training services, sales
      of self-developed products, computer software, hardware and peripheral
      equipment, communication equipment and undertaking computer network
      projectsBeijing
      Sihitech Technology Co., Ltd.
                (“Beijing
      Sihitech”)
              
              June
      16, 1999
              
              PRC
              
              100%
              100%
              100%
              
              System
      integration, software development, information technology consulting,
      maintenance and supportBeijing
      Sihitech Software Co., Ltd.
                (“Beijing
      Software”)
              
              January
      28, 2002
              
              PRC
              
              100%
              100%
              100%
              
              System
      integration, software development, information technology consulting,
      maintenance and supportShanghai  Sihitech
      Technology Co., Ltd.
                (“Shanghai
      Sihitech”)
              
              June
      20, 2001
              
              PRC
              
              100%
              100%
              100%
              
              System
      integration, software development, information technology consulting,
      maintenance and supportShanghai
      Sihitech Software Co., Ltd.
                (“Shanghai
      Software”)
              
              May
      28, 2005
              
              PRC
              
              100%
              100%
              100%
              
              System
      integration, software development, information technology consulting,
      maintenance and supportBeijing
      Sihitech Information Consulting Co., Ltd.(“Sihitech
      Consulting”)
              
              April
      12, 2001
              
              PRC
              
              100%
              -
              -
              
              Information
      technology consulting
 
 
 F-9
 
 YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 Name
              
              Date
      of incorporation or establishment
              
              Place
      of incorporation or establishment
              
              Percentage
      of ownership
              
              Principal  activity2005
              2006
              2007Guangzhou
      Sihitech Technology
                Co.,
      Ltd.
                (“Guangzhou
      Sihitech”)
              
              January
      5, 2000
              
              PRC
              
              100%
              100%
              100%
              
              System
      integration, software development, information technology consulting,
      maintenance and supportBeijing
      Yuxinyicheng Information   Technology Limited
                (“YuxinyichengInformation”)
              
              January
      15, 2007
              
              PRC
              
              -
              -
              80%
              
              Launching
      Point of Sale (POS) merchant-acquiring outsourced services for bank in
      China and providing related maintenance supportShanghai
      Yuxinhongzhi Information Technology Limited
                (“Hongzhi”)
              
              July
      18, 2007
              
              PRC
              
              -
              -
              60%
              
              System
      integration,
                Software
      development, information technology consulting, maintenance and
      supportBeijing
      Sunrisk Information Technology Limited
                (“Sunrisk”)
              
              April
      14, 2005
              
              PRC
              
              -
              -
              100%
              
              Software
      development, information technology consulting, maintenance and
      supportBeijing
      Easycon Electronics Limited
                (“Easycon”)
              
              December
      25, 1997
              
              PRC
              
              -
              -
              75%
              
              System
      integration, software development, information technology consulting,
      maintenance and supportChengdu
      Recency Technologies Limited
                (“Recency”)
              
              July
      15, 1997
              
              PRC
              
              -
              -
              100%
              
              Software
      development, information technology consulting, maintenance and
      supportShanghai
      Fujie Business Consulting Limited
                (“Fujie”)
              
              December
      13, 2005
              
              PRC
              
              -
              -
              100%
              
              Software
      development, information technology consulting, maintenance and
      support
 
 
 F-10
 
 YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 Name
              
              Date
      of incorporation or establishment
              
              Place
      of incorporation or establishment
              
              Percentage
      of ownership
              
              Principal  activity2005
              2006
              2007Shanghai
      Fuyi Business Consulting Limited
                (“Fuyi”)
              
              December
      6, 2005
              
              PRC
              
              -
              -
              100%
              
              Software
      development, information technology consulting, maintenance and
      supportBeijing
      Yuxinyicheng Software Co. , Ltd.
                (“Yuxinyicheng
      Software”)
              
              August
      6,
                2007
              
              PRC
              
              -
              -
              100%
              
              System
      integration, software development, information technology consulting,
      maintenance and supportGuangzhou
      Yuxinyicheng Information Technology Limited
                (“Guangzhou
      Yuxinyicheng”)
              
              November
      26, 2007
              
              PRC
              
              -
              -
              100%
              
              System
      integration, software development, information technology consulting,
      maintenance and supportXiamen
      Yucheng Technology Limited
                (“Xiamen
      Yucheng”)
              
              April
      9,
                2007
              
              PRC
              
              -
              -
              100%
              
              System
      integration, software development, information technology consulting,
      maintenance and support
 
 The IT
industry is characterized by rapid technological change and competitive pricing
pressures. The Company financial results are affected by a wide variety of
factors, including general economic conditions in the local market, economic
conditions specific to the IT industry, technological and creative skills of its
personnel, the timely development of new products and the ability to safeguard
patents and intellectual property in a rapidly evolving market.  As a
result, the Company may experience significant period-to-period fluctuations in
future operating results due to the factors mentioned above or other
factors.
 
 The
majority of the revenues of the Company are from customers who are concentrated
in the financial services industry in PRC.  Any unfavourable economic
conditions affecting the local financial services industry could have a material
adverse effect on the Company’s future financial position and results of
operations.
 
 The trade
accounts receivable of the Company include amounts due from banks and IT service
companies.  The Company performs ongoing credit evaluations of its
customers (see Note 2 (e)).  Sales to the Company's largest bank
customer and its subsidiaries were approximately 61.2%, 54.0% and 59.2% of
revenues in 2005, 2006 and 2007, respectively.  The Company’s total
revenue from its largest bank customer in 2007 results from 236 separate and
independent contracts, the largest of which accounts for 29.1% of 2007 revenue
from the bank’s head office, as well as 4.9% and 2.7% of revenue from the China
CITIC Bank and the Bank of Communication. Trade accounts receivable as at
December 31, 2006 and 2007 included receivables from the largest bank customer
and its subsidiaries totalling RMB53.6 million and, RMB92.7 million
respectively.
 
 F-11
 
 YUCHENG
TECHNOLOGIES LIMITED AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 The
Share Exchange Transactions
 
 On
December 20, 2005, China Unistone Acquisition Corporation (“CUAC”) entered into
a Stock Purchase Agreement with Sihitech BVI and e-Channels BVI and all
stockholders of Sihitech BVI and e-Channels BVI for CUAC’s acquisition of
Sihitech BVI and e-Channels BVI. For the acquisition, CUAC formed its wholly
owned subsidiary, Yucheng. On November 24, 2006, the closing date of the
acquisition (the “Closing Date”), CUAC merged with and into Yucheng for the
purpose of redomestication out of the United States of America. The
redomestication merger was achieved by a one-for-one exchange of all the
outstanding common stock of CUAC for common stock of Yucheng and the assumption
of all the rights and obligations of CUAC by Yucheng, including assumption of
the outstanding warrants of CUAC. Immediately after the redomestication merger,
Yucheng acquired all the common stock of Sihitech BVI and e-Channels BVI by the
issuance of shares and payments of cash consideration to the shareholders of
Sihitech BVI (“Sihitech BVI Shareholders) and of e-Channels BVI (“e-Channels BVI
Shareholders”) or their designee, making them wholly owned subsidiaries (the
“Share Exchange Transactions”).
 
 Sihitech
BVI Shareholders and their designee were paid an aggregate of US$2,731,884 in
cash, using the funds held in the trust account of CUAC, and were issued an
aggregate of 3,754,484 ordinary shares of Yucheng for all the outstanding common
stock of Sihitech BVI. This transaction was accounted for as a recapitalisation
of Sihitech BVI. Since Yucheng is not an operating company, this transaction is
treated as the issuance of shares of Sihitech BVI for the net tangible assets
(consisting principally of cash and short-term investments) of Yucheng. The
carrying value of the assets of Yucheng approximates their fair value,
therefore, no "purchase accounting" fair value adjustments were required and no
goodwill has been recorded in this portion of this transaction. The payment of
the cash consideration is accounted for as a deemed distribution.
 
 e-Channels
BVI Shareholders and their designee were paid an aggregate of US$1,268,116 in
cash, using the funds held in the trust account of CUAC, and were issued an
aggregate of 1,573,836 shares of common stock of Yucheng for all the outstanding
common stock of e-Channels BVI. This Transaction, between the recapitalized
Sihitech BVI and e-Channels BVI, was accounting for using the purchase method of
accounting with Sihitech BVI treated as the accounting acquirer.
 
 As a
result of the Share Exchange Transactions the historical financial statements of
Yucheng for the periods prior to the Closing Date are those of Sihitech and its
subsidiaries and all references to the consolidated financial statements of
Yucheng apply to the historical consolidated financial statements of Sihitech
and its subsidiaries prior to the Closing Date and the consolidated financial
statements of Yucheng and its subsidiaries subsequent to the Closing Date.
Yucheng’s equity components are stated in terms of Sihitech before the Closing
Date, with an adjustment to reflect the effect of the recapitalisation on the
equity components at the Closing Date.
 
 The
aggregate consideration paid at the Closing Date were US$4,000,000 and 5,328,320
common shares of Yucheng. Of the US$4,000,000, as security for the
indemnification obligations of Sihitech BVI Shareholders and e-Channels BVI
Shareholders, US$250,000 was held back by Yucheng for 12 months after the
Closing Date and paid subject to continued retention if there is a pending
claim. The holdback amount is not a limitation on the indemnification amounts,
which are generally limited to the full consideration paid.
   F-12
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
  Of the
total number of shares issued at the Closing Date, an aggregate of 773,045
shares of common stock issued to Sihitech BVI Shareholders are subject to return
and cancellation if the net profit as shown in the audited consolidated
financial statements of Yucheng prepared in accordance with the generally
accepted accounting principles in the United States of America (“US GAAP”) for
the year ended December 31, 2006 plus all compliance expenses of being public is
less than US$6,073,941. Pursuant to the supplemental agreement dated May 9,
2007, this clause had been amended such that the 773,045 shares are subject for
return and cancellation if the proforma table in the notes to the audited
consolidated financial statements of Sihitech and its subsidiaries and
e-Channels under US GAAP for the year ended December 31, 2006 is lower than
US$6,073,941.  As of December 31, 2006, Yucheng does not consider the
above contingency to be probable and accordingly, no adjustment for the purchase
price in respect to the 773,045 shares of common stock was recorded in the
consolidated financial statements of Yucheng for the year ended December 31,
2006.
 
 Additional
purchase price payment will be made to Sihitech BVI Shareholders, e-Channels BVI
Shareholders and their designee up to an amount of US$10,000,000 if either of
the following occurs during any fiscal years of Yucheng after the Closing Date
until December 31, 2009 from funds generated in the additional financing or from
appreciate of the stock price of Yucheng as described below:
 
 (1)
              Yucheng
      will pay an additional US$5,000,000 to Sihitech BVI Shareholders,
      e-Channels BVI Shareholders and their designee if Yucheng receives at
      least US$34,500,000 in gross proceeds in additional financing, including
      from the exercise of outstanding public warrants, the successful
      completion of a secondary offering, or a private investment by a strategic
      investor. According to an amendment agreement dated on August 24, 2007
      (the “Amendment”), the additional US$5,000,000 was changed to
      US$4,960,000; or
 
 (2)
              Yucheng
      will pay an additional US$1,000,000 if the average closing price of the
      stock of Yucheng in any sixty consecutive trading days of 2006 is above
      US$10.00; US$2,000,000 if the average closing price of the stock of
      Yucheng in any sixty consecutive trading days of 2007 is above US$12.00;
      and US$3,000,000 if the average closing price of the stock of Yucheng in
      any sixty consecutive trading days of 2008 is above
    US$14.40.
 
 Notwithstanding
the foregoing, the maximum amount to be paid under the above events shall not
exceed US$10,000,000.
 
 As of
December 31, 2006, Yucheng did not consider the outcome of the above
contingencies to be probable and accordingly, no adjustment for the contingent
purchase price payments was recorded in the financial statements.
 
 As of
December 31, 2007, Yucheng received US$34,332,430 (equivalent to approximately
RMB252,606,922) in gross proceeds as a result of the exercise of outstanding
public warrants (note 22). Accordingly, Yucheng paid an additional US$4,960,000
(equivalent to approximately RMB37,772,880) to Sihitech BVI Shareholders,
e-Channels BVI Shareholders and their designee. Among the payments of the
additional purchase price, US$3,494,707(equivalent to approximately
RMB26,613,939) was paid to Sihitech BVI Shareholders and their designee which
are accounted for as a deemed distribution. The remaining of US$1,465,293
(equivalent to approximately RMB11,158,941) was paid to e-Channels BVI
Shareholders and their designee which are accounted for as an adjustment to the
purchase price in respect of the acquisition of e-Channels.
 
 
 F-13
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 In
addition, the condition of the average closing price of the stock of Yucheng in
any sixty consecutive trading days of 2007 being above US$12.00 was achieved,
Yucheng was obligated to make payments of the additional purchase price of
US$2,000,000 to Sihitech BVI Shareholders, e-Channels BVI Shareholders and their
designee. Among the obligations of the additional purchase price, US$1,409,156
(equivalent to approximately RMB10,293,321) was accrued to Sihitech BVI
Shareholders and their designee which are accounted for as a deemed
distribution. The remaining of US$590,844 (equivalent to approximately
RMB4,315,879) was accrued to e-Channels BVI Shareholders and their designee
which are accounted for as an adjustment to the purchase price in respect of the
acquisition of e-Channels.
 
 Following
to the Amendment, additional common shares, on an all-or-none basis, may be
issued to Sihitech BVI shareholders, e-Channels BVI shareholders and their
designee on a pro rate basis, based on the amount of consideration shares issued
on November 24, 2006, aggregating 952,832 common shares each year for four years
beginning in 2008, if the Company achieves net profit targets in the prior year
as indicated in the following table according to the financial statements
audited each year in accordance with accounting principles generally accepted in
the United States of America (“US GAAP”).  If the net profits of the
Company are not achieved, the obligation of Yucheng to issue the common shares
for that year is terminated, with no effect on subsequent years.
 
 Year
      ended/ ending
                December
      31,
              
              Net
      Profit2007
              
              US$   8.5
      million2008
              
              US$
      11.9 million2009
              
              US$
      16.7 million2010
              
              US$
      23.3 million
 
 As the net
profit target for year ended December 31, 2007 has been achieved, Yucheng will
issue 952,832 common shares for US$5,930,220 (equivalent to approximately
RMB43,317,887)  to Sihitech BVI shareholders, e-Channels BVI
shareholders and their designee in 2008 as additional purchase price. Among the
952,832 common shares to be issued, 671,344 common shares, amounted to
US$4,178,302 (equivalent to approximately RMB30,520,828), are estimated to be
issued to Sihitech BVI Shareholders and their designee of which was accrued as a
liability and a deemed distribution as of December 31, 2007.  The
remaining 281,488 common shares, amounted to US$1,751,918 (equivalent to
approximately RMB12,797,059), are estimated to be issued to e-Channels BVI
Shareholders and their designee which was accrued as a liability and an
adjustment to the purchase price in respect of the acquisition of
e-Channels.
 
 2 Summary
of significant accounting policies and practices
 
 The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the US GAAP.
  F-14
 YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 (a) Principles
of consolidation
 
 The
consolidated financial statements include the financial statements of Yucheng
and its subsidiaries.  All significant inter-company transactions and
balances are eliminated upon consolidation. Investments in operating companies
in which Yucheng has the ability to exercise significant influence, which is
normally indicated by a 20% to 50% interest, are accounted for under the equity
method. Yucheng’s share of these companies’ earnings or losses is included in
the consolidated statement of operations as equity in net earnings (loss) of
affiliates.
 
 (b)   Use
of estimates
 
 The
preparation of the consolidated financial statements requires management of the
Company to make a number of estimates and assumptions relating to the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period. Significant items subject to such
estimates and assumptions include the carrying amounts of property, office
equipment, furniture and motor vehicles, intangible assets, valuation allowances
for receivables and inventories, percentage of completion calculations relating
to revenue recognition, precontract costs, capitalized software costs and
valuation of deferred tax assets.  Actual results could differ from
those estimates.
 
 (c)   Convenience
translation into United States dollars
 
 The
consolidated financial statements are presented in Chinese Renminbi
(“RMB”).  The translation of RMB amounts into United States dollars
has been made for the convenience of the reader and has been made at the
exchange rate quoted by the People’s Bank of China on December 31, 2007 of
RMB7.3046 to US$1.00.  Such translation amounts should not be
construed as representations that the RMB amounts could be readily converted
into United States dollars at that rate or any other rate.
 
 (d) Cash and
cash equivalents
 
 Cash and
cash equivalents include cash on hand, cash accounts, interest bearing savings
accounts and time certificates of deposit which are unrestricted as to
withdrawal or use, and which have maturities of three months or less when
purchased.
 
 (e)   Trade
accounts receivable
 
 Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest.  The allowance for bad debt losses is estimated by
management based on individual accounts receivable which show signs of
uncollectibility and an aging analysis.  Account balances are charged
off against the allowance after all means of collection have been exhausted and
the potential for recovery is considered remote.  The Company does not
have any off-balance-sheet credit exposure related to its
customers.
 
 (f)   Inventories
 
 Inventories
are stated at the lower of cost or market.  Cost is determined using
the first-in, first-out method (FIFO). Inventories consist of IT hardware
equipment, all of which are finished goods.
   F-15
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 (g)   Fixed
assets
 
 Fixed
assets are stated at cost less accumulated depreciation and impairment losses
(2(j)). Depreciation is calculated on the straight-line method over the
estimated useful lives of the assets as follows:
  Estimated
      useful lifeBuilding
                20
      yearsOffice
      equipment
                5
      yearsFurniture
                5
      yearsMotor
      vehicles
                5
      yearsLeasehold
      improvements
                Shorter
      of lease terms or 5 years
 (h) Leases
 
 Leases are
categorized as either operating or capital leases depending on certain criteria
defined in Statement of Financial Accounting Standards (SFAS) No. 13, Accounting for
Leases.
 
 Where a
lease is classified as a capital lease, the asset is treated as if it had been
purchased outright. The amount initially recognized as an asset is the lower of
fair value of the leased asset or the present value at the beginning of the
lease term of minimum lease payments during the lease term, excluding that
portion of the payments representing executory costs such as insurance,
maintenance, and taxes to be paid by the lessor, together with any profit
thereon. The corresponding lease commitment is shown as liability. Lease
payments are analysed between capital and interest. The interest element is
charged to the income statement over the period of the lease and is calculated
so that it represents a constant proportion of the lease liability. The capital
element reduces the balance owed to the lessor.
 
 Where a
lease is classified as an operating lease, the total rental payments made under
the leases are recognized in the consolidated statement of income on a
straight-line basis over the terms of the leases.  Lease incentives
received are recognised in the consolidated statement of income as an integral
part of the total lease payments made.
 
 (i)    Intangible
assets
 
 (i)    Cost
of intangible assets
 
 Intangible
assets consist primarily of capitalized costs for computer software, customer
relationships and other technology. Intangible assets are stated at cost or fair
value less accumulated amortization and any impairment
write-downs.  Fair value of identifiable intangible assets is
estimated based upon discounted future cash flow projections.
 
 The
Company capitalizes development costs for marketable software incurred from the
time of technological feasibility until the software is ready for use in
accordance with SFAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed. All costs to establish
technological feasibility of a computer product to be sold, leased or otherwise
marketed are charged to research and development expense as incurred.
Technological feasibility is established through completeness of the working
model and its consistency with the product design. Costs incurred for
modification, components of large products, and enhancements are expensed. As
the working model is normally built during the process of project implementation
for clients, there are no high-risk development issues.
   F-16
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 Under the
provisions of SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, the Company capitalizes
costs associated with software developed or obtained for internal use when both
the preliminary project stage is completed and management has authorized further
funding for the project which it deems probable of completion and use for the
function intended. Technological feasibility is established upon completeness of
the product design and planning phases indicating that product can be built by
existing technology and tools. Capitalized internal-use software costs include
only (1) external direct costs of materials and services consumed in developing
or obtaining the software, (2) payroll and payroll-related costs for employees
who are directly associated with and who devote time to the project, and (3)
interest costs incurred, when material, while developing the software.
Capitalization of these costs ceases no later than the point at which the
project is substantially complete and ready for its intended
purpose.
 
 Research
and development costs and other computer software maintenance costs related to
software development are expensed as incurred.
 
 The
consolidated financial statements include intangibles obtained through the
acquisitions of subsidiaries at RMB32,178,383 and RMB37,089,383 as of December
31, 2006 and 2007 respectively, whose values have been estimated by the
management in the absence of ready ascertainable market
values.  However, because of the inherent uncertainty of the
valuation, it is reasonably possible that those estimated values may differ
significantly from the values that would have been used had a ready market for
these intangible assets existed, and the differences could be material to the
consolidated financial statements.
 
 (ii)    Amortization
 
 The
Company amortizes capitalized software development costs for marketable software
on a product-by-product basis.  The annual amortization is the greater
of the amount computed using (a) the ratio that current gross revenues for a
product bear to the total of current and anticipated revenues for that product
or (b) the straight-line method over the remaining estimated economic life of
the product including the period being reported upon.
 
 Purchased
computer software and capitalized computer software costs for internal use are
amortized on a straight-line basis over their estimated useful lives, and are
monitored on a regular basis to assess that the amortization method is still
appropriate and the remaining estimated life of the asset is
reasonable.
 
 Customer
relationships and other technology are amortized on a straight-line basis over
their estimated economic useful lives.
 
 The
estimated useful lives are as follows:
  Estimated
      useful lifeSoftware
      development costs-
      Internal-use software
                3
      years-
      Marketable software
                3
      yearsCustomer
      relationships
                3-5
      yearsOther
      technology
                3-5
      yearsPurchased
      software
                5-10
      years
  The
straight-line method of amortization reflects an appropriate allocation of the
cost of the intangible assets to earnings in proportion to the amount of
economic benefits obtained by the Company in each reporting period.
   F-17
  YUCHENG TECHNOLOGIES LIMITED
AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 (j)    Impairment
of long-lived assets
 
 The
Company evaluates for impairment its long-lived assets to be held and used,
including office equipment and motor vehicles, intangible assets and other
non-current assets, when events or changes in circumstances indicate, in
management’s judgment, that the carrying value of such assets may not be
recoverable in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.  Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to
estimate undiscounted future cash flows expected to be generated by the
asset.  If the carrying value of an asset exceeds its estimated future
cash flows, an impairment charge is recognized by the amount that the carrying
value exceeds the estimated fair value.
 
 Assets to
be disposed of would be separately presented in the balance sheet and reported
at the lower of carrying amount or estimated fair value less the cost to sell,
and are no longer depreciated.
 
 Judgments
and assumptions are inherent in management’s estimate of undiscounted future
cash flows used to determine recoverability of an asset and the estimate of an
asset’s fair value used to calculate the amount of impairment to recognize. The
use of alternate judgments and/or assumptions could result in the recognition of
different levels of impairment charges in the consolidated financial
statements.
 
 (k)   Goodwill
 
 Goodwill
represents the excess of the purchase price and related costs over the valued
assigned to net tangible and identifiable intangible assets of business acquired
and accounted for under the purchase method.
 
 The
Company accounted for the acquisition of e-Channels BVI as described in Note 1
and other subsidiaries in accordance with SFAS No. 141 Business Combinations, which
resulted in the recognition of goodwill. Goodwill represents the excess of
acquisition cost over the estimated fair value of the net assets acquired as of
the acquisition date. The portion of the purchase price allocated to goodwill
was RMB37,273,607 as of December 31, 2006 and RMB169,361,506 as of December 31,
2007 respectively.
 
 In
accordance with SFAS No. 142 Goodwill and Other Tangible
Assets, the impairment evaluation of goodwill is conducted annually, or
more frequently, if events or changes in circumstances indicate that an asset
might be impaired. The evaluation is performed by using a two-step process. In
the first step, the fair value of each reporting unit is compared with the
carrying amount of the reporting unit, including goodwill. The estimated fair
value of the reporting unit is generally determined on the basis of discounted
future cash flows. If the estimated fair value of the reporting unit is less
than the carrying amount of the reporting unit, then a second step must be
completed in order to determine the amount of the goodwill impairment that
should be recorded. In the second step, the implied fair value of the reporting
unit’s goodwill is determined by allocating the reporting unit’s fair value to
all of its assets and liabilities other than goodwill (including any
unrecognized intangible assets) in a manner similar to a purchase price
allocation. The resulting implied fair value of the goodwill that results from
the application of the second step is then compared to the carrying amount of
the goodwill and an impairment charge is recorded for the
difference.
 
 The
assumptions used in the estimate of fair value are generally consistent with the
past performance of each reporting unit and are consistent with the projections
and assumptions that are used in current operating plans. Such assumptions are
subject to change as a result of changing economic and competitive
conditions.
 
 F-18
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 (l)    Trade
accounts payable and other payables
 
 Trade
accounts payable and other payables are stated at cost, which approximate their
fair value.
 
 (m)  Revenue
recognition
 
 The
Company generates revenues primarily from solution services, consulting and
implementation, custom software development, IT service, business process
outsourcing and system integration, Revenue is recognized as
follows:
 
 (i) IT solutions and services –
IT solution and services mainly consist of implementation, customization,
post-contract customer support, training and consulting. Revenue from IT
solutions and services is generated primarily from customer orders in which
customers purchased bundled solutions that included the Company’s software and
third party’s hardware. If the bundled solution includes services that requires
significant production, modifications, or customization, the revenue is
recognized over the installation and customization period based on the
percentage of completion method in accordance with SOP No. 81-1, “Accounting for
Performance of Construction-Type and Certain Product-Type Contracts”
(“SOP 81-1”). Labor costs and direct project expenses are used to determine the
stage of completion. Revisions in estimated contract profits are made in the
period in which the circumstances requiring the revision become known.
Provisions, if any, are made currently for anticipated losses on uncompleted
contracts.
 
 In terms
of the nature of deliverables, contract terms, and the rights and obligations of
the Group and the customer, there are no differences between consulting and
implementation services and software development services. Consulting &
Implementation services encompasses consulting and customized solutions services
for banks and financial institutions to help banking clients develop IT
capabilities to meet the challenges of future business requirements. The
consulting service mainly consists of: 1) IT strategy review, which entails
understanding the clients' operating IT environment and the assessment of its
suitability in providing the client with the level of IT support necessary for
achieving their business objectives; 2) IT strategy formation, which means to
assist clients in formulating their future strategies, which required an in-dept
understanding of their business priorities and a thorough appreciation of a wide
range of available IT capabilities and solutions; and 3) IT infrastructure
architecture, which means to assist clients in designing their IT
infrastructures including hardware, system software, application software and
the selection of the appropriate solutions.  Revenue from consulting
and implementation services are also recognized using contract accounting on the
percentage of completion method based on the relationship of actual costs
incurred to total costs estimated to be incurred over the duration of the
contract.
 
 Costs and
estimated earnings in excess of billings on uncompleted contracts consist of
recognized recoverable costs and accrued profits on contracts for which billings
had not been presented to customers as of the balance sheet
date.  Billings in excess of revenue recognized for which payments
have been received are deferred until the applicable revenue recognition
criteria have been met.
 
 Fees for
maintenance and technical support services are recognised under the
straight-line method over the periods covered by the term.
  F-19
  YUCHENG
TECHNOLOGIES LIMITED AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 Revenue
from sales of IT equipment to the end users, which are limited to passing the IT
equipment to other system integrators, is treated as agency sales and records
the net difference between the amount it bills to system integrators and the
fees charged by third party IT manufacturers as revenue. The Company considered
the criteria set out in EITF 99-19 in determining whether it should recognise
such revenues at gross or net of revenue.  The Company believes that
based on its arrangement with the system integrators, end users (banks) and the
third party IT manufacturers, the net approach is appropriate as the Company is
not the primary obligor to the end users, does not take general inventory risk,
does not have latitude in establishing price and does not have discretion in
supplier selection with respect to the IT equipment or software delivered to end
users.
 
 ii) System integration– System
integration services mainly consist of value added services of planning,
designing, installing, integrating and testing of hardware sold to
customers.  Revenue from system integration services is recognized in
accordance with SAB Topic 13, Revenue Recognition, when the
following conditions are all met:  persuasive evidence of an
arrangement exists, system integration services have been rendered and products
have been delivered and accepted, the price is fixed or determinable and,
collectibility is reasonably assured. Customers’ sign-off on a Testing and
Acceptance Form evidences their acceptance of the system integration work being
completed at which time revenue is recognized. The contract revenue and related
costs are deferred if the Testing and Acceptance Form is not duly signed by both
parties. The Company does not recognize system integration services revenue on a
percentage of completion basis. The Company’s system integration services
revenue recognition policy does not differ between its integration services
involving servers, network equipment or storage.
 
 (n) Precontract
costs
 
 Due to the
business environment in which the Company operates, it is common practice that
the Company commences the software development or IT consulting project for its
banking clients without commercial contracts being signed. If the contracts are
not obtained during the reporting period where implementation costs have been
incurred, the Company defers revenue recognition for the related contracts until
contracts are obtained. In accordance with SOP 81-1, as modified by SOP 98-5,
costs that are incurred for a specific anticipated contract and that will result
in no future benefits unless the contract is obtained, including cost of
equipment, direct labour costs, and other ancillary costs, are deferred until
receipt of the signed contract, and are then included in contract costs or
inventory.  Such deferred costs, subject to their not being related to
costs of start-up activities, are evaluated periodically for probability of
recoverability.  If deemed unrecoverable, deferred costs are expensed
to operating expenses.
 
 Costs of
start-up activities, including organization costs, are expensed as
incurred.
 
 Costs
incurred for assets, such as costs for the purchase of materials, production
equipment, or supplies that are expected to be used in connection with
anticipated contracts are deferred outside the contract cost or inventory
classification if their recovery from future contract revenue or from other
dispositions of the assets is considered probable.
 
 F-20
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 (o) Capitalisation
of internal software development costs
 
 Internal
development of software products is accounted for in accordance with SFAS No.
86, “Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed”. SFAS No.
86 requires that the cost of developing software be expensed prior to
establishing technological feasibility and those costs be capitalized once
technological feasibility has been established. Capitalization ceases upon
general release of the software. The determination of whether internal software
development costs are subject to capitalization is, by its nature, highly
subjective and involves significant judgments. This decision could significantly
affect earnings during the development period. Further, once capitalized, the
software costs are generally amortized on a straight-line basis over the
estimated economic life of the product. The determination of the expected useful
life of a product is highly judgmental. Finally, capitalized software costs must
be assessed for realizability at the end of each reporting period.
 
 Internal
software development costs include payroll, employee benefits, and other
headcount-related costs associated with product development. The Company records
expenditure incurred before technological feasibility is established into
research and development cost and capitalizes expenditures incurred after that
point into the cost of intangible assets.  Internal software
development costs were RMB 2,460,630, RMB 2,268,380 and RMB 10,697,667 in 2005,
2006 and 2007, respectively, among which RMB 2,108,571, RMB 1,366,547 and RMB
2,328,100 were capitalized in 2005, 2006 and 2007.
 
 (p)  Retirement
benefits
 
 Pursuant
to the relevant laws and regulations in the PRC, the Company participates in a
defined contribution retirement plan for its employees arranged by a
governmental organization. The Company makes contributions to the retirement
scheme at the applicable rate based on the employees’ salaries.  The
required contributions under the retirement plans are charged to the
consolidated income statement on an accrual basis when they are
due.  The Company’s contributions totaled RMB2,045,686, RMB2,487,449
and RMB6,341,262 in 2005, 2006 and 2007, respectively.
 
 (q) Interest
 
 Interest
costs are expensed as incurred, except for those capitalized that are directly
attributable to the acquisition, construction or production of qualifying
assets.  No interest costs were capitalized for each of the years in
the three-year period ended December 31, 2007.
 
 (r)    Income
taxes
 
 Income
taxes are accounted for under the asset and liability
method.  Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating losses and tax credit carry
forwards.  Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled.  The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
 
 (s)   Government
subsidies
 
 Government
subsidies are recognized when received and when all the conditions for their
receipt have been met.  Such amounts are included as a credit in the
operating expense section of the consolidated statement of income.
   F-21
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 (t)    Tax
refunds
 
 Pursuant
to the laws and regulations of the PRC, the Company is entitled to a refund of
the 14.0% value-added tax (“VAT”) for certain self-developed software products.
The Company recognizes the VAT refunds at the same time as the revenues from
sales of the related enterprise software products. VAT refunds are included as a
credit in the operating expense section of the consolidated statement of
income.
 
 (u)   Financial
instruments
 
 Exposure
to credit and interest rates arises in the normal course of the Company’s
business.  Financial assets of the Company include cash and trade
accounts receivable, other receivables and amounts due from related
parties.  Financial liabilities of the Company include trade accounts
payable and other payables, short-term loans, employee and payroll accruals and
amounts due to related parties.  Adjustments are made for financial
assets if their carrying amount exceeds the value realizable in the foreseeable
future.  Financial liabilities are stated at their carrying
amounts.
 
 Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash and trade accounts receivable. The Company’s
cash is maintained with high quality financial institutions and the composition
and maturities are regularly monitored by management. Generally, any cash
equivalents may be redeemed upon demand and bear minimal risk.
 
 The fair
values of the above noted financial assets and financial liabilities are not
materially different from their carrying amounts.
 
 The trade
accounts receivable of the Company includes amounts due from banks and IT
service companies. The Company generally does not require
collateral.  An allowance for doubtful accounts is determined with
respect to those amounts that the Company has determined to be doubtful of
collection. The Company performs ongoing credit evaluations of its customers
(refer to accounting policy (e)).
 
 The
Company has no off-balance sheet concentration of credit risk such as foreign
exchange contracts, option contracts or other foreign hedging
arrangements.
 
 (v)   Investments
in and advances to affiliated companies
 
 The equity
method of accounting is used for investments in affiliated companies for which
the Company has the ability to exercise significant influence, but does not have
a controlling financial interest.  Investments in affiliated companies
accounted for under the equity method consist of a 50% equity interest in
Beijing Hengli Plastic Machinery Co., Ltd. (“Hengli”), a plastic mould
manufacturing company, a 50% equity interest in Shanghai Sihitech Sanjian
Technology Co., Ltd. (“Sanjian”), a software and hardware technology company,
and a 35% equity interest in Beijing Sihitech Shuyi Technology Co., Ltd.
(“Shuyi”), a software and hardware technology company.
 
 As at
December 31, 2006 and 2007, there was no amount of excess of cost over the
Company’s share of net assets of affiliated companies.
 
 None of
the affiliated companies provided products or services to the Company in 2005,
2006 and 2007.
 
 F-22
 
 YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 On
December 12, 2005, all of the owners of Shuyi have agreed to transfer their
ownership interests in Shuyi to other individuals. The Company had no ownership
interest in Shuyi as at December 31, 2005, 2006 and 2007.
 
 On
December 20, 2007, Sanjian was closed due to business consideration. The gain
resulted from the disposal was RMB869,798.
 
 The
carrying amounts of the investments in and advances to affiliates at December
31, 2006 and 2007 are as follows:
  Affiliates2006
                
                
                2007
                
                
                2007RMB
                
                
                RMB
                
                
                USDHengli
                
                
                2,185,770
                
                
                
                2,255,210
                
                
                
                308,738Sanjian
                
                
                975,606
                
                
                
                -
                
                
                
                -Total
                
                
                3,161,376
                
                
                
                2,255,210
                
                
                
                308,738
  Summary of
the combined financial information for the affiliates as of and for the years
ended December 31, 2005, 2006 and 2007 is as follows:
 2005
                
                
                2006
                
                
                2007
                
                
                2007RMB
                
                
                RMB
                
                
                RMB
                
                
                USDFinancial
      positionCurrent
      assets
                
                
                5,170,012
                
                
                
                3,485,813
                
                
                
                1,949,665
                
                
                
                266,909Property,
      plantand
      equipment, net
                
                
                3,819,195
                
                
                
                3,091,770
                
                
                
                2,553,756
                
                
                
                349,609Other
      non-current assets
                
                
                88,880
                
                
                
                10,130
                
                
                
                -
                
                
                
                -Total
      assets
                
                
                9,078,087
                
                
                
                6,587,713
                
                
                
                4,503,421
                
                
                
                616,518Current
      liabilities
                
                
                1,037,995
                
                
                
                865,105
                
                
                
                795,442
                
                
                
                108,896Total
      liabilities
                
                
                1,037,995
                
                
                
                865,105
                
                
                
                795,442
                
                
                
                108,896Owners’
      equity
                
                
                8,040,092
                
                
                
                5,722,608
                
                
                
                3,707,979
                
                
                
                507,622Total
      liabilities and equity
                
                
                9,078,087
                
                
                
                6,587,713
                
                
                
                4,503,421
                
                
                
                616,518Results
      of operationsSales
                
                
                1,079,698
                
                
                
                -
                
                
                
                -
                
                
                
                -Operating
      loss
                
                
                (1,089,799
                )
                
                
                (269,973
                )
                
                
                (53,189
                )
                
                
                (7,282
                )Net
      loss
                
                
                (1,120,304
                )
                
                
                (269,973
                )
                
                
                (53,189
                )
                
                
                (7,282
                )
 
 (w)  Share-based
compensation
 
 Yucheng
has adopted SFAS No. 123 (revised 2004) (“SFAS No. 123(R)”), “Share-Based Payments”, which
requires that share-based payment transactions with employees, such as share
options, be measured based on the grant-date fair value of the equity instrument
issued and recognized as compensation expense over the requisite service period,
with a corresponding addition to equity. Under this method, compensation cost
related to employee share options or similar equity instruments is measured at
the grant date based on the fair value of the award and is recognized over the
period during which an employee is required to provide service in exchange for
the award, which generally is the vesting period.
   F-23




YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 (x)   Segment
Information
 
 The
Company believes that it operates in one business segment.  Management
does view the business as consisting of revenues streams; however it is not
possible to attribute assets or indirect costs to the individual streams other
than certain direct expenses.
 
 (y)  Net
earnings per common share
 
 The
Company computes net earnings per common share in accordance with SFAS No. 128
Earnings per
Share.  Under the provisions of SFAS No. 128, basic earnings
per common share is computed by dividing the net earnings available to common
shareholders for the period by the weighted average number of shares of common
stock outstanding during the period.  The calculation of diluted net
earnings per share gives effect to common stock equivalents, however; potential
common stock in the diluted net earning per common share computation is excluded
in net loss periods if their effect is anti-dilutive.
 
 (z)   Recently
Issued Accounting Standards
 
 In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”.
SFAS 157 defines fair value, establishes a framework for measuring fair value,
and expands disclosure requirements regarding fair value measurement. This
statement simplifies and codifies fair value related guidance previously issued
and is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. The
Company is still considering that impact of SFAS 157 to its financial
statements.
 
 In
February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of SFAS No. 115,
which permits companies to measure many financial instruments and certain other
assets and liabilities at fair value on an instrument-by-instrument basis (the
fair value option). Adoption of FASB 159 is optional and it may be adopted
beginning in the first quarter of 2007. The Company is currently evaluating the
possible impact of adopting FASB No. 159 on its consolidated financial
statements.
 
 In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements”(SFAS 160). SFAS
160 requires all entities to report non-controlling (minority) interests in
subsidiaries as equity in the consolidated financial statements. SFAS 160
requires that transactions between an entity and non-controlling interests are
treated as equity transactions. SFAS 160 is effective for fiscal years beginning
after December 15, 2008. The Company is currently evaluating the effect of SFAS
160 on its consolidated financial statements and results of operation and is
currently not yet in a position to determine such effects.
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations,” (“SFAS 141R”) to improve the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial reports about a business combination and its effects.
This Statement applies to all transactions or other events in which an entity
obtains control of one or more businesses, and combinations achieved without the
transfer of consideration. SFAS No. 141 (revised 2007) is effective for
prospectively to business combinations for which the acquisition date is in on
or after December 15, 2008. An earlier adoption is not permitted. The Company is
still considering that impact of SFAS 141R, if any, will depend on the nature
and size or business combinations the Company consummates after the effective
date to its financial statements.
 
  F-24
 
 YUCHENG
TECHNOLOGIES LIMITED AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 3 Trade
accounts receivable, net
 
 Trade
accounts receivable at December 31, 2006 and 2007 consist of the
following:
 December
      312006
                
                
                2007
                
                
                2007RMB
                
                
                RMB
                
                
                USDPrimary
      bank customer and its subsidiaries
                
                
                53,607,006
                
                
                
                92,738,487
                
                
                
                12,695,902Other
      bank customers
                
                
                42,531,017
                
                
                
                80,825,045
                
                
                
                11,064,951General
      contractors
                
                
                20,468,310
                
                
                
                29,887,317
                
                
                
                4,091,575Total
                
                
                116,606,333
                
                
                
                203,450,849
                
                
                
                27,852,428
  The
provision for doubtful debt was nil as at December 31, 2006 and
2007.
  Retentions receivable from customers
included in trade accounts receivable at December31,2007 isRMB14,262,502 equivalent to
USD1,952,537  (2006: RMB5,499,244 equivalent to
USD752,847).
  4 Costs
and estimated earnings on uncompleted contracts
  December
      312006
                
                
                2007
                
                
                2007RMB
                
                
                RMB
                
                
                USDCosts
      incurred on uncompleted contracts
                
                
                11,883,076
                
                
                
                46,610,915
                
                
                
                6,381,036Estimated
      earnings
                
                
                22,622,611
                
                
                
                48,699,105
                
                
                
                6,666,90934,505,687
                
                
                
                95,310,020
                
                
                
                13,047,945Less:
      Billings to date
                
                
                (18,460,950
                )
                
                
                (55,674,280
                )
                
                
                (7,621,811
                )16,044,737
                
                
                
                39,635,740
                
                
                
                5,426,134
  The
amounts are included in the accompanying consolidated balance sheets under the
following captions:
  Costs
      and estimated earnings in excessof
      billings on uncompleted contracts
                
                
                17,022,985
                
                
                
                46,564,308
                
                
                
                6,374,655Billings
      in excess of costs and estimatedearnings
      on uncompleted contracts
                
                
                (978,248
                )
                
                
                (6,928,568
                )
                
                
                (948,521
                )16,044,737
                
                
                
                39,635,740
                
                
                
                5,426,134
  F-25
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 5 Deposits
for acquisitions of businesses
 December 312006
                  
                  
                  2007
                  
                  
                  2007RMB
                  
                  
                  RMB
                  
                  
                  USDBeijing
      Yuxinyicheng InformationTechnology
      Limited
                  
                  
                  20,000,000
                  
                  
                  
                  -
                  
                  
                  
                  -Beijing
      Sunrisk InformationTechnology
      Limited
                  
                  
                  24,750,000
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  
                  44,750,000
                  
                  
                  
                  -
                  
                  
                  
                  -
 On January
15, 2007, Yuxinyicheng established a wholly owned subsidiary named Beijing
Yuxinyicheng Information Technology Limited with registered capital of
RMB20,000,000. It is mainly engaged in the business of provide Chinese banks
with a total outsourced solution for merchants in China, including
Point-of-Sales machines and maintenance, merchant acquisition, authorization and
capture of transactions, clearing and settlement of transactions, information
reporting services related to transactions, merchant billing services and
merchant training. As of December 31, 2006, Yuxinyicheng paid RMB20,000,000 as
an investment deposit.
 
 Pursuant
to a purchase agreement dated on January 18, 2007, Yuxinyicheng purchased 100%
interest of Beijing Sunrisk Information Technology Limited from a third party
company for an aggregate consideration of RMB45,000,000. As of December 31,
2006, Yuxinyicheng paid RMB24,750,000 as an investment deposit. The acquisition
was completed on February 7, 2007.
 
 6Other
current assets
 December 312006
                
                
                2007
                
                
                2007RMB
                
                
                RMB
                
                
                USDPayments
      in advance
                
                
                7,864,800
                
                
                
                60,640,507
                
                
                
                8,301,687Other
      receivables
                
                
                12,810,818
                
                
                
                24,726,872
                
                
                
                3,385,110Prepaid
      expenses
                
                
                359,816
                
                
                
                973,882
                
                
                
                133,325Total
                
                
                21,035,434
                
                
                
                86,341,261
                
                
                
                11,820,122
  Other
receivables represented deposits and staff advances as of December 31,
2007.
 
 Payments
in advance represent part of purchase contract amount for which the equipment
has not been delivered to customers as of the end of year.
   F-26
 
 YUCHENG
TECHNOLOGIES LIMITED AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 7 Income
taxes
 
 A
reconciliation of the expected tax with the actual tax expense for the years
ended December 31, 2005, 2006 and 2007 are as follows:
 2005
                
                
                2006
                
                
                2007
                
                
                2007RMB
                
                
                RMB
                
                
                RMB
                
                
                USDIncome
      before minority interestsand
      income taxes
                
                
                17,993,629
                
                
                
                44,002,190
                
                
                
                74,055,816
                
                
                
                10,138,244Expected
      PRC income tax expense(note
      (i))
                
                
                2,699,045
                
                
                
                6,600,329
                
                
                
                11,108,372
                
                
                
                1,520,737Tax
      holiday benefits
                
                
                -
                
                
                
                (3,950,604
                )
                
                
                (4,726,606
                )
                
                
                (647,072
                )Increase
      in valuation allowance
                
                
                26,059
                
                
                
                -
                
                
                
                -
                
                
                
                -Differential
      tax rate on subsidiaries’income
                
                
                (411,159
                )
                
                
                -
                
                
                
                (1,858,893
                )
                
                
                (254,482
                )Non-taxable
      income
                
                
                (151,241
                )
                
                
                (119,540
                )
                
                
                (236,647
                )
                
                
                (32,397
                )Additional
      deductible research anddevelopment
      expense
                
                
                -
                
                
                
                (176,621
                )
                
                
                (500,198
                )
                
                
                (68,477
                )Non-deductible
      expenses-Non-deductible
      salaries and welfare
                
                
                714,253
                
                
                
                471,696
                
                
                
                415,618
                
                
                
                56,898-Non-deductible
      entertainment expenses
                
                
                243,201
                
                
                
                214,271
                
                
                
                366,233
                
                
                
                50,137-Others
                
                
                11,845
                
                
                
                252,183
                
                
                
                196,641
                
                
                
                26,920Under
      provision in prior years
                
                
                -
                
                
                
                -
                
                
                
                223,041
                
                
                
                30,534Equity
      in loss of affiliates
                
                
                113,791
                
                
                
                (20,248
                )
                
                
                -
                
                
                
                -Utilization
      of tax loss previouslynot
      recognized
                
                
                -
                
                
                
                -
                
                
                
                (842,751
                )
                
                
                (115,373
                )Tax
      rate difference (note (ii))
                
                
                217,235
                
                
                
                -
                
                
                
                791,353
                
                
                
                108,336Others
                
                
                -
                
                
                
                -
                
                
                
                592,084
                
                
                
                81,056Actual
      income tax expense
                
                
                3,463,029
                
                
                
                3,271,466
                
                
                
                5,528,247
                
                
                
                756,817Representing:Current
      tax expense
                
                
                3,219,734
                
                
                
                3,056,181
                
                
                
                8,751,539
                
                
                
                1,198,086Deferred
      tax expense (benefit)
                
                
                243,294
                
                
                
                215,285
                
                
                
                (3,223,292
                )
                
                
                (441,269
                )Total
      income tax expense
                
                
                3,463,028
                
                
                
                3,271,466
                
                
                
                5,528,247
                
                
                
                756,817
 
 F-27
 YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 Notes:
  (i) Yucheng,
and its subsidiaries, Port Wing and Ahead Billion are incorporated in the
British Virgin Islands and are not subject to taxation under the British Virgin
Islands. Yuxinyicheng and its major subsidiaries (together, the “PRC entities”)
are incorporated in the PRC and governed by the PRC laws.
 
 The normal
statutory rate of the tax rate of PRC Enterprise Income tax (“EIT”) is 33% (30%
of state income tax plus 3% local income tax). However, most of the PRC entities
were qualified as high-tech or software development companies and entitled to a
lower tax rate granted by the relevant tax authorities.
 
 The
provision for PRC income tax is based on a statutory rate of 15% for 2005, 2006
and 2007 since the registered offices of Beijing Sihitech and e-Channels were
relocated to a lower tax jurisdiction during 2003.  Pursuant to the
approval issued by the Local Tax Bureau in Beijing Changping District in 2003,
Beijing Sihitech is qualified as a high-tech company and entitled to an
additional 50% tax exemption of the standard tax rate of 15% to 7.5% for 2003
and 2004.
 
 Pursuant
to the approval issued by the Beijing Haidian District Local Tax Bureau,
e-Channels is qualified as high-tech company and entitled to an additional 50%
tax exemption of the standard tax rate of 15% to 7.5% for 2004, 2005 and
2006.
 
 The
statutory tax rate of Beijing Software is 15% since it is qualified as a
high-tech company.  Pursuant to the approval issued by the Local Tax
Bureau in Beijing Haidian District in 2003, Beijing Software was entitled to a
tax holiday from 2002 to 2004.  Pursuant to the filing with Local Tax
Bureau in Beijing Haidian District in 2005, Beijing Software was entitled to an
additional 50% tax exemption of the standard tax rate of 15% to 7.5% from 2005
to 2007.
 
 The
statutory tax rate of Shanghai Sihitech is 15% since it is registered in the
Pudong District of Shanghai.
 
 Pursuant
to the approval issued by the Local Tax Bureau in Pudong District of Shanghai in
2006, Shanghai Software is qualified as a software development company and
entitled to a tax holiday from 2006 to 2007, and an additional 50% tax exemption
of the standard tax rate of 15% to 7.5% from 2008 to 2010.
 
 The
statutory tax rate of Guangzhou Sihitech was 33% for 2003, and 15% since 2004
when Guangzhou Sihitech was qualified as a high-tech company at the end of
2003.  Pursuant to the notice issued by the Guangzhou Local Tax
Bureau, Guangzhou Sihitech is entitled to the tax rate of 15%.
 
 Pursuant
to the approval issued by the Local Tax Bureau in Beijing Haidian District in
2007, Yuxinyicheng is qualified as a high-tech company and entitled to a tax
holiday from 2007 to 2008, and an additional 50% tax exemption of the standard
tax rate of 15% to 7.5% from 2009 to 2011.
 
 Pursuant
to the approval issued by the Local Tax Bureau in Beijing Haidian District in
2005, Sunrisk is qualified as a high-tech company and entitled to a tax holiday
from 2005 to 2007, and an additional 50% tax exemption of the standard tax rate
of 15% to 7.5% from 2008 to 2010.
 
 The
statutory tax rate of Easycon is 15% since it was qualified as a high-tech
company in the Haidian district of Beijing since October 10, 2001.
 
 F-28
  YUCHENG
TECHNOLOGIES LIMITED AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 Pursuant
to the approval issued by the Local Tax Bureau of Chengdu Hi-Tech Development
District in 2007, Recency is qualified as a high-tech company and subject to the
statutory tax rate of 15% in 2007.
 
 The
statutory tax rate of Hongzhi is 15% since it is registered in the Zhangjiang
High-Technology Zone in Shanghai.
 
 The
statutory rate of Fujie and Fuyi was calculated at 3.3% on revenue as they were
classified small enterprise by the Local Tax Bureau in Shanghai
City.
 
 Rates
applicable for subsidiaries are as follows:
  2005
                
                2006
                
                2007Yuxinyicheng
                
                N/A
                
                33%
                
                0%Port
      Wing
                
                N/A
                
                0%
                
                0%Ahead
      Billion
                
                N/A
                
                0%
                
                0%Beijing
      Sihitech
                
                15%
                
                15%
                
                15%Beijing
      Software
                
                7.5%
                
                7.5%
                
                7.5%Shanghai
      Sihitech
                
                15%
                
                15%
                
                15%Beijing
      Sihitech Information Consulting Co., Ltd.
                
                33%
                
                N/A
                
                N/AGuangzhou
      Sihitech
                
                15%
                
                15%
                
                15%Shanghai
      Software
                
                15%
                
                0%
                
                0%e-Channels
                
                N/A
                
                7.5%
                
                15%Yuxinyicheng
      Information
                
                N/A
                
                N/A
                
                33%Sunrisk
                
                N/A
                
                N/A
                
                0%Easycon
                
                N/A
                
                N/A
                
                15%Recency
                
                N/A
                
                N/A
                
                15%Hongzhi
                
                N/A
                
                N/A
                
                15%Fujie
                
                N/A
                
                N/A
                
                3.3%
      of revenueFuyi
                
                N/A
                
                N/A
                
                3.3%
      of revenueYuxinyicheng
      Software
                
                N/A
                
                N/A
                
                33%Guangzhou
      Yuxinyicheng
                
                N/A
                
                N/A
                
                33%Xiamen
      Yucheng
                
                N/A
                
                N/A
                
                33%
 On March
1, 2007, the Fifth Plenary Session of the Tenth National People’s Congress
passed the Corporate Income Tax Law of the PRC (“new tax law”) which will take
effect on January  1, 2008.  As a result of the new tax law,
the statutory income tax rate will change from 33% to 25% with effect from
January 1, 2008.  The preferential tax rate currently enjoyed by the
Company will be gradually transitioned to the new standard rate of 25% over a
five-year transitional period.  In addition, article 28 of the new tax
law stated that the income tax rate of the “high-tech” company will remain at
15%.  As most of the subsidiaries operating in the PRC are currently
recognized as “high- tech” companies under the existing Income Tax Law of the
PRC, management reasonably believed that these subsidiaries can transit this
status under the new tax law.  Accordingly, the carrying amount of the
deferred tax assets and liabilities, as a result of the change in tax rate, is
reflected in the consolidated statements of operations of the Company for year
ended December 31, 2007.
  (ii) Tax rate
difference represents temporary differences which will reverse after the effect
of the new tax law.
  
 F-29
  YUCHENG
TECHNOLOGIES LIMITED AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
  (iii) Pre-tax
income and income tax expenses are both domestic.
 
 The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities at December 31, 2006 and 2007 are presented
below.
  December 312006
                
                
                2007
                
                
                2007RMB
                
                
                RMB
                
                
                USDDeferred
      tax assets:Accrued
      liabilities, deductible when paid
                
                
                638,470
                
                
                
                -
                
                
                
                -Accrued
      revenue on unsigned contractsfor
      tax purposes
                
                
                30,000
                
                
                
                -
                
                
                
                -Intangible
      assets
                
                
                143,426
                
                
                
                113,231
                
                
                
                15,501Future
      benefit of tax losses
                
                
                -
                
                
                
                2,472,977
                
                
                
                338,551Total
      deferred tax assets
                
                
                811,896
                
                
                
                2,586,208
                
                
                
                354,052Less:
      valuation allowance
                
                
                -
                
                
                
                -
                
                
                
                -Net
      deferred tax assets
                
                
                811,896
                
                
                
                2,586,208
                
                
                
                354,052Deferred
      tax liabilities:Deferred
      costs on unsigned contractsfor
      tax purposes
                
                
                (240,869
                )
                
                
                (225,059
                )
                
                
                (30,811
                )Capitalized
      internal-useand
      marketable software
                
                
                (818,322
                )
                
                
                (761,045
                )
                
                
                (104,187
                )Additional
      intangible assets throughacquisition
                
                
                (4,474,385
                )
                
                
                (4,326,242
                )
                
                
                (592,262
                )Total
      deferred tax liabilities
                
                
                (5,533,576
                )
                
                
                (5,312,346
                )
                
                
                (727,260
                )Net
      deferred tax liabilities
                
                
                (4,721,680
                )
                
                
                (2,726,138
                )
                
                
                (373,208
                )
  For the
purpose of balance sheet presentation, certain deferred tax assets and
liabilities have been offset. The following is the analysis of the deferred tax
balances for financial reporting purposes:
  December 312006
                
                
                2007
                
                
                2007RMB
                
                
                RMB
                
                
                USDDeferred
      tax assets - current
                
                
                427,601
                
                
                
                -
                
                
                
                -Deferred
      tax assets – non-current
                
                
                143,426
                
                
                
                2,586,208
                
                
                
                354,052Deferred
      tax liabilities – non current
                
                
                (5,292,707
                )
                
                
                (5,312,346
                )
                
                
                (727,260
                )(4,721,680
                )
                
                
                (2,726,138
                )
                
                
                (373,208
                )
  F-30
 YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 2005
                
                
                2006
                
                
                2007
                
                
                2007RMB
                
                
                RMB
                
                
                RMB
                
                
                USDValuation
      allowance on deferred tax assetsat
      the beginning of the year
                
                
                87,413
                
                
                
                113,472
                
                
                
                -
                
                
                
                -Increase
      (decrease) in valuation allowance
                
                
                26,059
                
                
                
                (113,472
                )
                
                
                -
                
                
                
                -Total
                
                
                113,472
                
                
                
                -
                
                
                
                -
                
                
                
                -
  A
significant portion of the deferred tax assets recognized relates to net tax
loss and credit carry forwards. The Company operates through the PRC entities
and the valuation allowance is considered on each individual basis. Where no
valuation allowance was recorded, the Company expects to generate sufficient
taxable income in the future.
 
 At
December 31, 2005, one of Beijing Sihitech’s subsidiaries had net operating loss
carry forwards for income tax purposes of RMB343,855. On November 16, 2006,
Beijing Sihitech disposed of the subsidiary and accordingly the corresponding
valuation allowance and the deferred tax assets were reversed during the year
ended December 31, 2006.
 
 The net
tax loss attributable to those PRC entities can only be carried forward for a
maximum period of five years.  The expiration period of unused tax
losses is as follows:
 December 312006
                
                
                2007
                
                
                2007RMB
                
                
                RMB
                
                
                USDYear
      ending December 31,2007
                
                
                -
                
                
                
                -
                
                
                
                -2008
                
                
                -
                
                
                
                -
                
                
                
                -2009
                
                
                -
                
                
                
                -
                
                
                
                -2010
                
                
                -
                
                
                
                -
                
                
                
                -2011
                
                
                -
                
                
                
                -
                
                
                
                -2012
                
                
                -
                
                
                
                9,891,908
                
                
                
                1,354,203Tax
      losses that can be carriedforward
      indefinitely
                
                
                -
                
                
                
                -
                
                
                
                --
                
                
                
                9,891,908
                
                
                
                1,354,203
 
 F-31
 YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 On January
1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes- an interpretation of FASB Statement No. 109(FIN48). This
Interpretation provides guidance for recognizing and measuring uncertain tax
positions, as defined in SFAS No. 109, Accounting for Income Taxes. FIN 48
prescribes a threshold condition that a tax position must meet for any of the
benefits of the uncertain tax position to be recognized in the financial
statements. Guidance is also provided regarding derecognition, classification
and disclosure of these uncertain tax positions. The Company classified all
interest and penalties related to tax uncertainties as income tax expense. The
Company’s liability for income taxes includes the liability for unrecognized tax
benefits, interest and penalties which relate to tax years still subject to
review by taxing authorities. Audit periods remain open for review until the
statute of limitations has passed. The completion of review or the expiration of
the statue of limitations for a given audit period could result in an adjustment
to the Company’s liability for income taxes. Any such adjustment could be
material to the Company’s results of operations for any given quarterly or
annual period based, in part, upon the results of operations for the given
period. On January 1, 2007, the Company had an uncertain tax positions arisen
from the Share Exchange Transactions. Yucheng considered such contingent tax
liabilities to be remote which would not affect the Company’s consolidated
financial position and results of operations or cash flow (note 21). There are
no estimated interest costs and penalties provided in the Company’s consolidated
financial statements for year ended December 31, 2007.
  8 Fixed
assets
  December 312006
                  
                  
                  2007
                  
                  
                  2007RMB
                  
                  
                  RMB
                  
                  
                  USDGross
      fixed assetsProperty
                  
                  
                  -
                  
                  
                  
                  3,925,312
                  
                  
                  
                  537,375Office
      equipments
                  
                  
                  7,642,109
                  
                  
                  
                  16,933,793
                  
                  
                  
                  2,318,237Machinery
                  
                  
                  -
                  
                  
                  
                  14,501,167
                  
                  
                  
                  1,985,210Furniture
                  
                  
                  367,018
                  
                  
                  
                  938,353
                  
                  
                  
                  128,461Motor
      vehicles
                  
                  
                  2,274,048
                  
                  
                  
                  4,168,461
                  
                  
                  
                  570,662Leasehold
      improvement
                  
                  
                  3,137,178
                  
                  
                  
                  3,852,499
                  
                  
                  
                  527,407Total
      gross fixed assets
                  
                  
                  13,420,353
                  
                  
                  
                  44,319,585
                  
                  
                  
                  6,067,352Accumulated
      depreciation
                  
                  
                  6,958,874
                  
                  
                  
                  10,995,171
                  
                  
                  
                  1,505,239Total
      fixed assets, net
                  
                  
                  6,461,479
                  
                  
                  
                  33,324,414
                  
                  
                  
                  4,562,113
  Depreciation
expense on fixed assets were RMB1,892,690, RMB1,813,737 and RMB4,200,931, which
includes amortization of fixed assets acquired under capital lease obligations
of nil, nil and RMB699,755 for 2005, 2006, and 2007 respectively. Gross assets
remaining under capital leases were nil and RMB4,561,060 at December 31,
2006 and 2007. Accumulated depreciation associated with capital leases were nil
and RMB699,755 at December 31, 2006 and 2007.
 
 F-32
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 9 Intangible
assets
  Capitalized
                  
                  
                  Capitalized
                  
                  
                  CustomerPurchased
                  
                  
                  marketable
                  
                  
                  internal-use
                  
                  
                  relation-
                  
                  
                  Othersoftware
                  
                  
                  software
                  
                  
                  software
                  
                  
                  ships
                  
                  
                  technology
                  
                  
                  TotalBalance
      as atJanuary
      1, 2006
                  RMB
                  
                  
                  1,498,800
                  
                  
                  
                  3,130,682
                  
                  
                  
                  145,967
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,775,449Additions
                  
                  
                  
                  -
                  
                  
                  
                  1,366,549
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,366,549Additions
      through acquisitionof a
      subsidiary (note 23)
                  
                  
                  
                  185,243
                  
                  
                  
                  2,029,692
                  
                  
                  
                  134,214
                  
                  
                  
                  9,682,788
                  
                  
                  
                  20,146,446
                  
                  
                  
                  32,178,383Elimination
      from disposalof
      subsidiary
                  
                  
                  
                  (282,211
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (282,211
                  )Amortization
                  
                  
                  
                  (377,096
                  )
                  
                  
                  (1,369,569
                  )
                  
                  
                  (83,978
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,830,643
                  )Balance
      as atDecember
      31, 2006
                  RMB
                  
                  
                  1,024,736
                  
                  
                  
                  5,157,354
                  
                  
                  
                  196,203
                  
                  
                  
                  9,682,788
                  
                  
                  
                  20,146,446
                  
                  
                  
                  36,207,527Additions
      through acquisitionsof
      subsidiaries (note 23)
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,964,400
                  
                  
                  
                  2,946,600
                  
                  
                  
                  4,911,000Additions
                  
                  
                  
                  5,145,600
                  
                  
                  
                  2,328,100
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,000,000
                  
                  
                  
                  12,473,700Amortization
                  
                  
                  
                  (232,820
                  )
                  
                  
                  (2,678,088
                  )
                  
                  
                  (51,027
                  )
                  
                  
                  (3,227,596
                  )
                  
                  
                  (6,195,026
                  )
                  
                  
                  (12,384,557
                  )Balance
      as atDecember
      31, 2007
                  RMB
                  
                  
                  5,937,516
                  
                  
                  
                  4,807,366
                  
                  
                  
                  145,176
                  
                  
                  
                  8,419,592
                  
                  
                  
                  21,898,020
                  
                  
                  
                  41,207,670Balance
      as atDecember
      31, 2007(note
      2(c))
                  USD
                  
                  
                  812,846
                  
                  
                  
                  658,129
                  
                  
                  
                  19,875
                  
                  
                  
                  1,152,642
                  
                  
                  
                  2,997,839
                  
                  
                  
                  5,641,331
 Amortization
expense was RMB1,455,271, RMB1,830,643 and RMB12,384,557 for the years ended
December 31, 2005, 2006 and 2007 respectively. Estimated annual amortization
expense for each of the next five years is as follows
 
 Year
      ending31 December
                  
                  RMB2008
                  
                  
                  15,003,7162009
                  
                  
                  13,991,1732010
                  
                  
                  5,024,0742011
                  
                  
                  4,286,7122012
                  
                  
                  2,746,99041,052,665
 
 10 Short-term
loan
  December 312006
                  
                  
                  2007
                  
                  
                  2007RMB
                  
                  
                  RMB
                  
                  
                  USDShort-term
      borrowing from bank
                  
                  
                  32,000,000
                  
                  
                  
                  35,000,000
                  
                  
                  
                  4,791,501
   F-33
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 The
short-term borrowing of RMB32,000,000 as of December 31, 2006 represents the sum
of three borrowings, comprising:
 
 (i)
                  the
      borrowing of RMB15,000,000 effective from July 14, 2006 to January 13,
      2007 with an annual interest rate of 5.94% and such borrowing was fully
      settled on January 13, 2007;
 (ii)
                  the
      borrowing of RMB2,000,000 effective from August 3, 2006 to August 3, 2007
      with an annual interest rate of 5.85%;
and
 (iii)
                  the
      borrowing of RMB15,000,000 effective from September 4, 2006 to September
      4, 2007 with an annual interest rate of
6.12%.
 
 All the
above three borrowings are secured by guarantee agreements with third parties
and are subject to an annual guarantee fee of 1.782% on these secured
borrowing.
 
 The
short-term borrowing of RMB35,000,000 as of December 31, 2007 represents the sum
of two borrowings, comprising:
 
 (i) the
borrowing of RMB20,000,000 effective from December 14, 2007 to December 14, 2008
with an annual interest rate of 8.019%; and
 (ii) the
borrowing of RMB15,000,000 effective from September 7, 2007 to March 7, 2008
with an annual interest rate of 6.831%.
 
 All the
above two borrowings are guaranteed by Yuxinyicheng and Mr. Weidong Hong without
bearing guarantee fee.
 
 11 Trade
accounts payable
  December 312006
                  
                  
                  2007
                  
                  
                  2007RMB
                  
                  
                  RMB
                  
                  
                  USDJianyin
      Technology Development Co., Ltd.
                  
                  
                  1,313,513
                  
                  
                  
                  -
                  
                  
                  
                  -Jianyin
      Computer Co., Ltd.
                  
                  
                  721,368
                  
                  
                  
                  -
                  
                  
                  
                  -Other
      suppliers
                  
                  
                  34,707,611
                  
                  
                  
                  93,759,731
                  
                  
                  
                  12,835,711Total
                  
                  
                  36,742,492
                  
                  
                  
                  93,759,731
                  
                  
                  
                  12,835,711
  Jianyin
Technology Development Co., Ltd. and Jianyin Computer Co., Ltd. are related
parties of the Company’s largest bank customer.
 
 12 Long-term
loan
  Long-term
loan at December 31, 2006 and 2007 consists of the following:
  December 312006
                  
                  
                  2007
                  
                  
                  2007RMB
                  
                  
                  RMB
                  
                  
                  USDLong-term
      loan from bank
                  
                  
                  3,500,000
                  
                  
                  
                  -
                  
                  
                  
                  -Less:
      current portion
                  
                  
                  (3,500,000
                  )
                  
                  
                  -
                  
                  
                  
                  -Long-term
      loan, excluding current portion
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
 
 
 F-34
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 The
long-term loan is effective from January 18, 2005 to December 28, 2007, with an
annual interest rate of 5.76%.  Interest is to be paid on December 27,
2005 and 2006.  Principal payments of RMB1,500,000 and RMB3,500,000
are due on December 28, 2006 and December 28, 2007,
respectively.  Borrowed amounts are secured by a guarantee agreement
with a third party.  The Company must pay an annual guarantee fee of
1.5% on the secured borrowing.
 
 13 Capital
leases
 
 Certain of
office equipment fixed assets have been acquired under capital leases. As of
December 31, 2007, obligations under capital leases – non-current were as
follows:
 RMB
                  
                  
                  USDYear
      ending December 31:2008
                  
                  
                  1,644,548
                  
                  
                  
                  225,1392009
                  
                  
                  1,659,192
                  
                  
                  
                  227,1432010
                  
                  
                  880,001
                  
                  
                  
                  120,472Total
      net minimum lease payments
                  
                  
                  4,183,741
                  
                  
                  
                  572,754Less:
      Amount representing interest
                  
                  
                  (322,436
                  )
                  
                  
                  (44,141
                  )Present
      value of net minimum lease payments
                  
                  
                  3,861,305
                  
                  
                  
                  528,613Less:
      current portion
                  
                  
                  (1,450,841
                  )
                  
                  
                  (198,620
                  )Obligations
      under capital leases – non-current
                  
                  
                  2,410,464
                  
                  
                  
                  329,993
  14 Other
current liabilities
  December 312006
                  
                  
                  2007
                  
                  
                  2007RMB
                  
                  
                  RMB
                  
                  
                  USDAdvances
      from customers
                  
                  
                  3,030,915
                  
                  
                  
                  10,067,724
                  
                  
                  
                  1,378,272Taxes
      payable, excluding income tax
                  
                  
                  10,297,029
                  
                  
                  
                  12,887,053
                  
                  
                  
                  1,764,238Accrued
      expenses
                  
                  
                  4,770,642
                  
                  
                  
                  3,727,646
                  
                  
                  
                  510,315Education
      surcharge payable
                  
                  
                  290,231
                  
                  
                  
                  392,480
                  
                  
                  
                  53,730Commission
      payable
                  
                  
                  -
                  
                  
                  
                  1,500,000
                  
                  
                  
                  205,350Others
                  
                  
                  3,788,874
                  
                  
                  
                  7,916,988
                  
                  
                  
                  1,083,836Total
                  
                  
                  22,177,691
                  
                  
                  
                  36,491,891
                  
                  
                  
                  4,995,741
  
 F-35
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
  15 Minority
interests
  December 312006
                  
                  
                  2007
                  
                  
                  2007RMB
                  
                  
                  RMB
                  
                  
                  USDBalance
      as of January 1, 2007
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Addition
      for the year
                  
                  
                  -
                  
                  
                  
                  5,199,312
                  
                  
                  
                  711,786Balance
      as of December 31, 2007
                  
                  
                  -
                  
                  
                  
                  5,199,312
                  
                  
                  
                  711,786
 
 Minority
interests as of December 31, 2007 pertain to the minority shareholders’ equity
interests in Yuxinyicheng Information, Hongzhi and Easycon.
 
 16 Reserves
  During the
three ended December 31, 2007, the Company has followed the PRC Company Law to
make appropriation of its profit to the statutory surplus reserve and statutory
public welfare reserve respectively.
  Statutory
surplus reserve
 
 In
accordance with PRC Company Law, the Company is required to appropriate at least
10% of the profit arrived at for each year to the statutory surplus
reserve.  Appropriation to the statutory surplus reserve by the
Company is based on profit arrived at under PRC accounting standards for
business enterprises for each year.
 
 The profit
arrived at must be set off against any accumulated losses sustained by the
Company in prior years, before allocation is made to the statutory surplus
reserve.  Appropriation to the statutory surplus reserve must be made
before distribution of dividends to owners.  The appropriation is
required until the statutory surplus reserve reaches 50% of the registered
capital.  This statutory surplus reserve is not distributable in the
form of cash dividends but only on liquidation. It can be used to make good of
previous losses, if any, and may be utilised for business expansion or converted
into capital by increasing registered capital to existing equity owners in
proportion to their equity holding, provided that remaining reserve balance
after such conversion is not less than 25% of the registered
capital.
 
 Statutory
public welfare reserve
 
 In
accordance with PRC Company Law, the Company appropriates 5% of the profit
arrived at for each year to the statutory public welfare
reserve.  Appropriation to the statutory public welfare reserve by the
Company is based on profit arrived at under PRC accounting standards for
business enterprises for each year.
 
 The fund
can only be utilized for capital items for the collective benefit of the
Company’s employees such as construction of dormitories, canteens and other
staff welfare facilities. This fund is non-distributable other than on
liquidation.  The transfer to this fund must be made before
distribution of any dividends.
 
  F-36
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 17 Accumulated
other comprehensive income (loss)
 
 As of
December 31, 2006 and 2007, the only component of accumulated other
comprehensive income (loss) was translation reserve.
 
 18 Revenues
 2005
                  
                  
                  2006
                  
                  
                  2007
                  
                  
                  2007Revenues
                  
                  RMB
                  
                  
                  RMB
                  
                  
                  RMB
                  
                  
                  USDIT
      solutions and servicesChannel
      related
                  
                  
                  5,528,851
                  
                  
                  
                  19,431,743
                  
                  
                  
                  53,008,534
                  
                  
                  
                  7,256,870Business
      related
                  
                  
                  917,889
                  
                  
                  
                  10,693,184
                  
                  
                  
                  45,523,879
                  
                  
                  
                  6,232,221Management
      related
                  
                  
                  39,709,447
                  
                  
                  
                  50,361,366
                  
                  
                  
                  97,494,405
                  
                  
                  
                  13,346,988IT
      services
                  
                  
                  14,950,653
                  
                  
                  
                  18,949,291
                  
                  
                  
                  34,606,201
                  
                  
                  
                  4,737,590System
      integration
                  
                  
                  116,219,840
                  
                  
                  
                  190,214,841
                  
                  
                  
                  204,885,823
                  
                  
                  
                  28,048,876Total
      revenues
                  
                  
                  177,326,680
                  
                  
                  
                  289,650,425
                  
                  
                  
                  435,518,842
                  
                  
                  
                  59,622,545
 
 During the
year ended December 31, 2007, the Company realigned its revenue streams based on
different types of services offered to customers, namely “Channel related”,
“Business related” and “Management related”. As required by SFAS no. 131, the
prior years’ information has been restated to conform with the current year’s
presentation.
  19 General
and administrative expenses
  General
and administrative expenses are shown net of the following credits:
  2005
                  
                  
                  2006
                  
                  
                  2007
                  
                  
                  2007RMB
                  
                  
                  RMB
                  
                  
                  RMB
                  
                  
                  USDValue-added
      tax refund for softwareproducts
      sold
                  
                  
                  179,486
                  
                  
                  
                  1,281,395
                  
                  
                  
                  2,554,227
                  
                  
                  
                  349,673Technology
      subsidy
                  
                  
                  372,000
                  
                  
                  
                  1,041,000
                  
                  
                  
                  3,302,741
                  
                  
                  
                  452,146Business
      tax and surcharges refund
                  
                  
                  75,900
                  
                  
                  
                  -
                  
                  
                  
                  1,459,746
                  
                  
                  
                  199,839Other
                  
                  
                  380,886
                  
                  
                  
                  837,968
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  
                  1,008,272
                  
                  
                  
                  3,160,363
                  
                  
                  
                  7,316,714
                  
                  
                  
                  1,001,658
 
 Some of
the subsidiaries of the Company were granted subsidies by the local government
to encourage development of high-tech enterprises.  There were no
performance obligations related with such subsidies.
 
 
 F-37
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 20 Earnings
per share
 
 The
following table sets forth the computation of basic and diluted net earnings per
share for the years indicated:
 2005
                  
                  
                  2006
                  
                  
                  2007
                  
                  
                  2007RMB
                  
                  
                  RMB
                  
                  
                  RMB
                  
                  
                  USDNet
      income (numerator)-
      basic and diluted
                  
                  
                  14,530,600
                  
                  
                  
                  40,730,724
                  
                  
                  
                  66,714,428
                  
                  
                  
                  9,133,208Shares
      (denominator):Weighted
      average ordinary sharesoutstanding
      used in computingbasic
      net earnings per share
                  
                  
                  3,754,484
                  
                  
                  
                  8,118,335
                  
                  
                  
                  13,144,681
                  
                  
                  
                  13,144,681Incremental
      weighted averagecommon
      shares from assumedexercise
      of Warrants (note 22)
                  
                  
                  -
                  
                  
                  
                  2,173,973
                  
                  
                  
                  1,191,573
                  
                  
                  
                  1,191,573common
      shares from assumedexercise
      of  UPOs (note 22)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  81,111
                  
                  
                  
                  81,111contingent
      considerations inrelation
      to Share Exchangetransaction
      (note 1)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  952,832
                  
                  
                  
                  952,832Weighted
      average common shareoutstanding
      used in computingdiluted
      net earnings per share
                  
                  
                  3,754,484
                  
                  
                  
                  10,292,308
                  
                  
                  
                  15,370,197
                  
                  
                  
                  15,370,197Net
      earnings per share - basic
                  
                  
                  3.87
                  
                  
                  
                  5.02
                  
                  
                  
                  5.08
                  
                  
                  
                  0.69Net
      earnings per share - diluted
                  
                  
                  3.87
                  
                  
                  
                  3.96
                  
                  
                  
                  4.34
                  
                  
                  
                  0.59
  For the
years prior to the date of the Share Exchange Transactions, the number of shares
included in the net earnings per common share above has been retrospectively
restated to reflect the number of shares to which Sihitech BVI Shareholders and
their designee are entitled at the date of the Share Exchange
Transaction.
 
 As
disclosed in note 1, the Share Exchange Transactions during 2006 provides for
potential purchase price reduction by return and cancellation of an aggregate of
773,045 common shares of Yucheng, the return and cancellation of which is
contingent upon failure of the attainment of certain amounts of earnings. As the
term of the contingency has not been met at December 31, 2007, Yucheng does not
consider the above contingency to be probable and accordingly, no adjustment for
the purchase price in respect to the 773,045 shares of common stock was recorded
in the consolidated financial statements of Yucheng for the year ended December
31, 2007. Accordingly, no adjustment to the number of shares to which Sihitech
BVI Shareholders and their designee maybe entitled at the date of the Share
Exchange Transaction is made in calculating the earnings per share for each of
the three years ended 31 December, 2007.
  F-38
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 21 Commitments
and contingencies
 
 Other than
the capital leases disclosed in note 13, the Company also leases office space
under operating leases. The leases typically run for one to three years with an
option to renew the lease annually thereafter.  Lease payments are
increased annually to reflect market rentals.  None of these leases
includes contingent rentals.
 
 Non-cancellable
operating lease rentals at December 31, 2007 are payable as
follows:
 RMB
                  
                  
                  USDPayable:Within
      1 year
                  
                  
                  3,197,666
                  
                  
                  
                  437,761Within
      1-2 years
                  
                  
                  1,028,347
                  
                  
                  
                  140,781Within
      2-3 years
                  
                  
                  -
                  
                  
                  
                  -4,226,013
                  
                  
                  
                  578,542
 
 The
Company recognized RMB3,120,831, RMB3,776,761 and RMB5,277,626 of rental expense
for the years ended December 31, 2005, 2006, and 2007,
respectively.
 
 In 2007,
the Company acquired 5 entities. Under the acquisition agreements, additional
considerations will be paid contingent on specific events in 2008 (note 23). As
of December 31, 2007, the maximum contractual obligation for the contingent
consideration in relations to the acquisitions is RMB6,210,000.
 
 Yucheng
has assessed the contingent tax liabilities that may arise from the Share
Exchange Transactions and consider such contingent tax liabilities to be remote.
As of December 31, 2007, such contingent tax liabilities are reasonably possible
to be approximately US$175,000 based on the information currently
available.  If these contingent tax liabilities were undertaken, an
amount of US$175,000 would be recorded as income tax payable and be charged to
equity because the assumption of such liabilities by Yucheng is part of the
recapitalisation in connection with the Stock Exchange
Transactions.  However, Yucheng does not expect to incur tax
liabilities in this connection.
 
 On August
21, 2007, a suit was filed in San Diego Superior Court against China Unistone
Acquisition Corporation, Beijing Sihitech and its non-executive chairman; and on
February 22, 2008 the Company was added as a Doe defendant in this lawsuit. The
plaintiff alleged China Unistone Acquisition Corporation breached an oral
contract regarding a finder’s fee and seeks general damages, US$109,275 cash,
the issuance of 150,179 shares of the Company and the payment of 4% of any
future compensation which Beijing Sihitech and its original shareholders are
entitled to receive as a result of the Company’s acquisition of Beijing
Sihitech. The lawsuit is in its initial stage and it is not possible to reliably
predict the outcome of this litigation with certainty. However, Yucheng believes
that these allegations are meritless and Yucheng is aggressively defending the
action and will seek to have it dismissed.  As of December 31, 2007,
no loss amount has been accrued because a loss is not considered
probable.
  F-39
 YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 The
Company provides indemnifications of varying scope and size to certain customers
against claims of intellectual property infringement made by third parties
arising from the use of the products.  Due to the nature of the
indemnification provided, the Company cannot estimate the fair value, nor
determine the total nominal amount of the indemnification.  The
Company evaluates estimated losses for such indemnifications under SFAS No. 5,
Accounting for
Contingencies, as interpreted by FIN 45, Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others.  The Company considers such factors as the
degree of probability of an unfavourable outcome and the ability to make a
reasonable estimate of the amount of loss.  To date, the Company has
not encountered material costs as a result of such obligations and have not
accrued any liabilities related to such indemnifications in the financial
statements.
 
 The
product warranty accrual reflects management’s best estimate of probable
liability under its product warranties.  Management determines the
warranty accrual based on known product failures (if any), historical
experience, and other currently available evidence.  As at December
31, 2006 and 2007, the warranty accrual was nil.  There has been no
significant activity impacting the results of operations for any period
presented.
  22 Warrants
and unit purchase options
  As part of
the Share Exchange Transaction, Yucheng assumed 4,200,000 shares of common
stock, 6,900,000 redeemable common stock purchase warrants (“Warrants”) and
300,000 unit purchase options (“UPOs”) issued by CUAC.  There was no
remeasurement required for these assumed Warrants and UPOs because such
assumption is part of the recapitalisation in connection with the Stock Exchange
Transactions set forth in note 1.
 
 Each
Warrant will entitle the holder to purchase from Yucheng one share of common
stock at an exercise price of US$5.00 commencing on the date of the Stock
Exchange Transactions and expiring on November 17, 2009 (being five year after
the date of the prospectus of CUAC). The Warrants will be redeemable at a price
of US$0.01 per Warrant upon 30 days’ notice after the Warrants become
exercisable, only in the event that the last sale price of the common stock is
at least US$8.50 per share for any 20 trading days within 30 trading day period
ending on the third day prior to the date on which notice of redemption is
given. 6,866,486 warrants have been exercised before December 31, 2007, and
33,514 warrants have been redeemed.
 
 UPOs were
granted and recorded in connection with the initial public offering of CUAC in
2004 to the underwriters for nominal consideration. UPOs may be exercised for
cash or on a cashless basis at the holders’ option, such that the holders may
use the appreciated value of the UPOs to exercise the option with the payment of
any cash.  UPOs are convertible into shares and Warrants at the
discretion of Yucheng and the UPOs holders. The 150,000 UPOs have been converted
to 216,047 common shares before December 31, 2007. The remaining 150,000 UPOs
will be expired on November 18, 2009.
 
 F-40
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 23 Acquisition
of subsidiaries
 
 Acquisition of
e-Channels
 
 On
November 24, 2006, Yucheng acquired all of the outstanding shares of e-Channels
BVI in exchange for an aggregate consideration of approximately RMB81.5 million,
which was satisfied by cash consideration of RMB9,902,287 and 1,573,836 shares
of common stock of Yucheng with a fair value of approximately RMB71,550,128. The
fair value of Yucheng’s shares was based upon the actual number of shares issued
to the e-Channels BVI shareholders using the average closing trading price of
Yucheng’s common stock on the Over-the-Counter Bulletin Board for the period
from 2 days before and after the announcement date of the
acquisition.
 
 Under the
Share Exchange Transaction, Yucheng are obligated to make additional payment in
relation to acquisition of e-Channels if the contingent conditions described in
note 1 are achieved. During the year ended December 31, 2007, the contingent
became certain and Yucheng were obligated to make an additional payment of
RMB28,271,879 among which RMB11,158,941 was settled by cash and the remaining of
RMB17,112,938 to be settled by cash and common stock was accrued and included in
the outstanding payment in relation to business acquisitions under current
liabilities as of December 31, 2007.
 
 Additional
cash purchase consideration
 
 This
acquisition was recorded by allocating the cost of the assets acquired,
including intangible assets and liabilities assumed, based on their estimated
fair values at the acquisition date. The excess of the cost of the acquisition
over the net of amounts assigned to the fair value of the assets acquired and
the liabilities assumed is recorded as goodwill. The valuation of assets and
liabilities has been determined and the purchase price has been allocated as
follows:
   F-41
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 RMBPlant
      and equipment
              
              
              1,153,323Intangible
      assets
              
              
              32,178,383Goodwill
              
              
              65,545,486Inventories
              
              
              1,085,475Trade
      receivables
              
              
              13,574,386Cost
      and estimated earnings in excess of billings on uncompleted
                Contracts
              
              
              10,302,776Pre-contract
      costs
              
              
              77,815Other
      current assets
              
              
              4,033,438Cash
      and bank balances
              
              
              2,109,202Short
      term loan
              
              
              (2,000,000
              )Trade
      payables
              
              
              (1,864,975
              )Billings
      in excess of costs and estimated earnings on uncompleted
                Contracts
              
              
              (1,250
              )Other
      current liabilities
              
              
              (859,087
              )Income
      taxes payables
              
              
              (800,804
              )Dividend
      payables to subsidiary ex-owners
              
              
              (10,000,000
              )Deferred
      income taxes
              
              
              (4,809,874
              )Long-term
      liability
              
              
              -Total
      purchase price
              
              
              109,724,294Satisfied
      by:Cash
      paid
              
              
              21,061,228Other
      payables
              
              
              17,112,938Common
      stock
              
              
              71,550,128109,724,294
  Analysis
of net outflow of cash and cash equivalents in respect of the purchase of the
subsidiary:
  RMBCash
      consideration
              
              
              (21,061,228
              )Cash
      and bank balances acquired in the acquisition
              
              
              2,109,202Total
      net cash paid in the acquisition
              
              
              (18,952,026
              )Less:
      cash paid during the year ended December 31, 2006
              
              
              7,793,085Net
      cash paid during the year ended December 31, 2007
              
              
              (11,158,941
              )
 
 The
goodwill from the acquisition of e-Channels of RMB65,545,486 is expected to be
non-deductible for tax purposes.
   F-42
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 Included
as intangible assets listed in the above table as of the acquisition date are
the following components of intangible assets based on management best
estimate:
 
 Amount
              
              Estimated
      useful lifeRMBPurchased
      software
              
              185,243
              
              5
      yearsCapitalized
      marketable software
              
              2,029,692
              
              3
      yearsCapitalized
      internal-use software
              
              134,214
              
              3
      yearsCustomer
      relationships
              
              9,682,788
              
              3
      yearsOther
      technology
              
              20,146,446
              
              3-5
      years32,178,383
 
 Acquisition of Sunrisk,
Easycon, Recency, Fuyie and Fuyi
 
 In 2007,
the Company acquired 5 entities for an aggregate consideration of
RMB106,740,000, among which RMB68,500,000 had been settled in cash and
RMB38,240,000 was accrued and included as of December 31, 2007. An additional
consideration may be paid in 2008 contingent on achieving specified earnings
levels in 2008. As of December 31, 2007, the contingency has not been resolved
and accordingly no adjustment for the purchase price in respect of the further
consideration of RMB6,210,000 was recorded in the consolidated financial
statements for the year 2007.
 
 On January
18, 2007, Yuxinyicheng acquired 100% equity interest of Sunrisk. According to
the acquisition agreement, the total consideration would be RMB45,000,000. As of
December 31, 2007, the targets have been achieved, total consideration shall be
RMB45,000,000, among which RMB34,500,000 has been paid and the remaining
RMB10,500,000 was accrued and included in the outstanding payment in relation to
business acquisitions under current liabilities. This acquisition was completed
on February 28, 2007.
 
 On May 14,
2007, Beijing Sihitech acquired 75% equity interest of Easycon. According to the
acquisition agreement the total consideration is RMB22,250,000. As of December
31, 2007, RMB17,250,000 of the total consideration has been paid, and the
remaining contingent payment of RMB5,000,000 was accrued and included in the
outstanding payment in relation to business acquisitions under current
liabilities. This acquisition was completed on June 30, 2007.
 
 On June
26, 2007, Yuxinyicheng acquired 100% equity interest of Recency. According to
the acquisition agreement, the total consideration would be RMB25,000,000. As of
December 31, 2007, RMB14,750,000 of the consideration has been paid and the
remaining RMB10,250,000 was accrued and included in the outstanding payment in
relation to business acquisitions under current liabilities. This acquisition
was completed on July 31, 2007.
 
 
 F-43
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 On October
31, 2007, Yuxinyicheng acquired 100% of interests of Fujie and Fuyi. According
to the acquisition agreement, the total consideration would be RMB14,490,000
with a maximum further consideration of RMB6,210,000 contingent on the audited
net income of the two companies for 2008. If the audited net income of the two
companies for 2008 are not less than RMB5,200,000, a further consideration
RMB6,210,000 would be paid. As of December 31, 2007, RMB2,000,000 has been paid,
and RMB12,490,000 was accrued and included in the outstanding payment in
relation to business acquisitions under current liabilities. The remaining
contingent payment of RMB6,210,000 in relation to 2008 specified earnings levels
was not accrued and only recorded at the cost of acquisition until the specified
earnings levels met. Yucheng does not consider the above contingency to be
probable and accordingly, no adjustment for the purchase price in respect to the
further consideration of RMB6,210,000 was recorded in the consolidated financial
statements for the year 2007.
 
 The
management believe that the above 5 acquisitions will broaden Yucheng’s existing
IT solution and service offerings and give Yucheng a platform to serve small to
medium sized banks. All the considerations were identified based on the market
and negotiation.
 
 Additional
cash purchase consideration
 
 These
acquisitions were recorded by allocating the cost of acquisitions to the assets
acquired, including intangible assets and liabilities assumed, based on their
estimated fair values at the acquisition date. The excess of the cost of the
acquisitions over the net of amounts assigned to the fair value of the assets
acquired and the liabilities assumed is recorded as goodwill. The valuation of
assets and liabilities has been determined and the purchase price has been
allocated as follows:
 
 RMBPlant
      and equipment
              
              
              2,296,850Intangible
      assets
              
              
              4,911,000Goodwill
              
              
              103,816,020Trade
      receivables
              
              
              16,222,361Pre-contract
      costs
              
              
              5,243,183Other
      current assets
              
              
              12,302,985Cash
      and bank balances
              
              
              3,097,045Trade
      payables
              
              
              (5,211,542
              )Other
      current liabilities
              
              
              (37,492,048
              )Income
      taxes payables
              
              
              (74,253
              )Long-term
      liability
              
              
              (770,000
              )Deferred
      income taxes
              
              
              (1,227,750
              )Minority
      interests
              
              
              3,626,149Total
      purchase price
              
              
              106,740,000Satisfied
      by:Cash
              
              
              68,500,000Other
      payables
              
              
              38,240,000106,740,000
 
 F-44
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 Analysis
of net outflow of cash and cash equivalents in respect of the purchase of the
subsidiary:
 RMBCash
      consideration
              
              
              (68,500,000
              )Cash
      and bank balances acquired in the acquisition
              
              
              3,097,045Total
      net cash paid in the acquisition
              
              
              (65,402,955
              )Less:
      cash paid during the year ended December 31, 2006
              
              
              24,750,000Net
      cash paid during the year ended December 31, 2007
              
              
              (40,652,955
              )
 
 The
goodwill from the acquisition of Sunrisk, Easycon, Recency, Fuyie and Fuyi of
RMB103,816,020 is expected to be non-deductible for tax purposes.
 
 Included
as intangible assets listed in the above table as of the acquisition date are
the following components of intangible assets based on management best
estimate:
 
 Amount
              
              Estimated
      useful lifeRMBCustomer
      relationships
              
              
              1,964,400
              
              5
      yearsOther
      technology
              
              
              2,946,600
              
              5
      years4,911,000
  Pro
Forma Results
  The
following unaudited pro forma financial information presents the combined
results of the operations of Sihitech, e-Channels and all companies acquired in
2007 as if the acquisitions had occurred as of January 1, 2006. The unaudited
pro forma information is not intended to represent or be indicative of the
Company’s consolidated results of operations or financial condition that would
have been reported had the acquisition been completed as of the beginning of the
periods presented and should not be taken as indicative of the Company’s future
consolidated results of operations or financial condition.
   F-45
  YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 2006
                
                
                2007
                
                
                2007RMB
                
                
                RMB
                
                
                USD(note
      2 (c))Revenues:IT
      solutions and services
                
                
                202,784,119
                
                
                
                261,907,993
                
                
                
                35,855,214System
      integration
                
                
                190,214,839
                
                
                
                204,885,823
                
                
                
                28,048,876Total
      revenues
                
                
                392,998,958
                
                
                
                466,793,816
                
                
                
                63,904,090IT
      solutions and services
                
                
                (88,397,476
                )
                
                
                (110,191,477
                )
                
                
                (15,085,217
                )System
      integration
                
                
                (171,925,980
                )
                
                
                (181,677,026
                )
                
                
                (24,871,591
                )Total
      cost of revenues
                
                
                (260,323,456
                )
                
                
                (291,868,503
                )
                
                
                (39,956,808
                )Gross
      profit
                
                
                132,675,502
                
                
                
                174,925,313
                
                
                
                23,947,282Operating
      incomes (expenses):Research
      and development expenses
                
                
                (3,764,931
                )
                
                
                (8,369,567
                )
                
                
                (1,145,794
                )Selling
      and marketing expenses
                
                
                (28,459,647
                ))
                
                
                (35,719,639
                )
                
                
                (4,890,020
                )General
      and administrative expenses
                
                
                (43,555,893
                )
                
                
                (55,452,862
                )
                
                
                (7,591,499
                )Total
      operating expenses
                
                
                (75,780,471
                )
                
                
                (99,542,068
                )
                
                
                (13,627,313
                )Other
      income (expenses):Interest
      income
                
                
                169,082
                
                
                
                1,833,507
                
                
                
                251,007Interest
      expense
                
                
                (1,624,712
                )
                
                
                (2,452,510
                )
                
                
                (335,749
                )Income
      from short-term investment
                
                
                -
                
                
                
                3,494,446
                
                
                
                478,390Equity
      in loss of affiliates
                
                
                (134,986
                )
                
                
                -
                
                
                
                -Other
      income (expense), net
                
                
                48,493
                
                
                
                (474,155
                )
                
                
                (64,912
                )Income
      before income taxesand
      minority interests
                
                
                55,352,908
                
                
                
                77,784,533
                
                
                
                10,648,705Income
      tax expense
                
                
                (3,982,389
                )
                
                
                (5,833,532
                )
                
                
                (798,611
                )Income
      before minority interests
                
                
                51,370,519
                
                
                
                71,951,001
                
                
                
                9,850,094Minority
      interests
                
                
                -
                
                
                
                (1,813,141
                )
                
                
                (248,219
                )Net
      income
                
                
                51,370,519
                
                
                
                70,137,860
                
                
                
                9,601,875Earnings
      Per Share–
      Basic
                
                
                6.33
                
                
                
                5.34
                
                
                
                0.73–
      Diluted
                
                
                4.99
                
                
                
                4.56
                
                
                
                0.62Weighted
      average common shares outstanding–
      basic
                
                
                8,118,335
                
                
                
                13,144,681
                
                
                
                13,144,681–
      diluted
                
                
                10,292,308
                
                
                
                15,370,197
                
                
                
                15,370,197
   F-46
 
 YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
  24 Disposal
of a subsidiary
 
 On May 8,
2006, Beijing Sihitech disposed its entire interest in Beijing Sihitech
Information Consulting Co., Ltd. The entire results, assets and liabilities of
Beijing Sihitech Information Consulting Co., Ltd.  have been excluded
from the consolidated financial statements since the effective date of the
disposal. The purchase price and preliminary fair value of the acquired assets
are not material to our consolidated financial statements.
 25 Significant
related party transactions
 
 (a)   Identity
of related parties
 
 Related
parties identified for the years ended December 31, 2005, 2006, and 2007 are
summarized as follows:
 Relationship
      with
                Shareholding
                Shareholding
                Shareholdingthe
      Company
                for
      2005
                for
      2006
                for
      2007Mr.
      Weidong Hong
                Shareholder
      and CEO
                Note
      1
                23.64%
                13.56%Mr.
      Shuo Zeng
                Shareholder
      and COO
                Note
      2
                7.12%
                4.91%Beijing
      HengliPlastic
      MachineCo.,
      Ltd.
                Affiliate
                50%
                50%
                50%Shanghai
      SihitechSanjian
      TechnologyCo.,
      Ltd. (“Sanjian”)
                Affiliate
                50%
                50%
                50%Beijing
      Sihitech ShuyiTechnology
      Co., Ltd.(“Shuyi”)
                Affiliate
                35%
                0%
                0%
 
 Note
1: Before the Share Exchange Transaction was completed on November 24, 2006, Mr.
Weidong Hong held 42% of Sihitech.
 Note
2: Before the Share Exchange Transaction was completed on November 24, 2006, Mr.
Shuo Zeng held 43% of e-Channels.
  F-47
 
 YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 (b)  
Related party transactions
 
 The
significant related party transactions of the Company are summarised as
follows:
 2005
                
                
                2006
                
                
                2007
                
                
                2007RMB
                
                
                RMB
                
                
                RMB
                
                
                USDAdvances
      to affiliates-Hengli
                
                
                437,892
                
                
                
                23,464
                
                
                
                69,440
                
                
                
                9,506Repayment
      of advances to affiliates-Hengli
                
                
                (500,000
                )
                
                
                -
                
                
                
                -
                
                
                
                -Repayment
      of borrowing from affiliates-Shuyi
                
                
                950,000
                
                
                
                500,000
                
                
                
                -
                
                
                
                -Borrowing
      from shareholder
                
                
                (5,000,000
                )
                
                
                -
                
                
                
                -
                
                
                
                -Repayment
      of borrowingfrom
      shareholder
                
                
                1,000,000
                
                
                
                4,000,000
                
                
                
                -
                
                
                
                -Advances
      to shareholders
                
                
                3,452,962
                
                
                
                3,609,155
                
                
                
                53,804
                
                
                
                7,366Collection
      of advances to shareholders
                
                
                (569,524
                )
                
                
                (1,056,234
                )
                
                
                (333,063
                )
                
                
                (45,596
                )
 
 The
transactions do not have fixed terms.  Balances relating to the above
transactions are non-interest bearing and payable on demand. Other than this
matter, the Board of Directors of the Company is of the opinion that the above
transactions were in the normal course of business and on normal commercial
terms.
 
 (c)   Related
party balances
 
 The
balances of related party receivables and payables at the year-end are
summarised as follows:
 December 312006
                
                
                2007
                
                
                2007RMB
                
                
                RMB
                
                
                USDDue
      from Mr. Weidong Hong and Mr. Shuo Zeng
                
                
                386,867
                
                
                
                -
                
                
                
                -Due
      from an affiliate
                
                
                -
                
                
                
                937,457
                
                
                
                128,337Due
      to affiliates
                
                
                (907,948
                )
                
                
                -
                
                
                
                -
 26 Share
option plan
 
 On
November 24, 2006, Yucheng adopted the 2006 performance equity plan (the “Plan”)
which allows Yucheng to offer a variety of incentive awards to employees.
Options to purchase 1,500,000 share of common stock of Yucheng are authorised
under the Plan.
 
 As of
December 31, 2007, no options under the Plan have been granted.
 
 
 F-48
 
 
 YUCHENG TECHNOLOGIES
LIMITEDAND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 (Expressed
in Chinese Renminbi)
 
 
 27 Subsequent
events
 
 On January
22, 2008, Beijing Sihitech acquired a further 25% equity interest of Easycon
from its minority shareholders at an aggregate consideration of RMB7,200,000.
RMB6 million was paid on February 2, 2008, RMB 1.2 million was paid on April 1,
2008.
 
 On
February 19, 2008, Yucheng signed a non-binding Memorandum of Understanding
(MoU) with 3i Infotech, a global provider of IT solutions and the fourth largest
Indian software products company to set up a 51:49 Joint Venture in the People's
Republic of China.