UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________

FORM 20-F

_______________

(Mark One)

o	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
	OR
x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
	OR
o	SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF EVENT REQUIRING THIS SHELL COMPANY REPORT FOR THE TRANSACTION PERIOD FORM TO

COMMISSION FILE NUMBER 001-34797

Camelot Information Systems Inc.

(Exact name of Registrant as specified in its charter)

The British Virgin Islands

(Jurisdiction of Incorporation or Organization)

Beijing Publishing House

A6 North Third Ring Road

Xicheng District, Beijing 100120

The People’s Republic of China

(Address of Principal Executive Offices)

Mr. Franklin King

Interim Chief Financial Officer

Camelot Information Systems Inc.

Beijing Publishing House

A6 North Third Ring Road

Xicheng District, Beijing 100120

The People’s Republic of China

Tel: +86-10-82019000

Fax: +86-10-82019100

Email: investors@camelotchina.com

(Name, Telephone, E-mail and/or Facsimile 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  Exchange On Which Registered
American depositary shares, each representing four	New York Stock Exchange

ordinary share, with no par value per share
Ordinary shares, with no par value per share *	New York Stock Exchange

* Not for trading, but only in connection with the listing on New York Stock Exchange of the American depositary shares.

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

          None          

(Title of Class)

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

          None          

(Title of Class)

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

Ordinary shares, with no par value 177,621,367

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

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

Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

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. Yes  x    No  ¨

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

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

Large accelerated filer ¨    Accelerated filer  x   Non-accelerated filer   ¨  

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

U.S. GAAP  x

International Financial Reporting Standards as issued by the International Accounting Standards Board  ¨

Other  ¨

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

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

(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 Sections 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. Yes ¨ No  ¨

Table of Contents

		Page
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS		1
CERTAIN TERMS AND CONVENTIONS		2
PART I		3
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	3
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	3
ITEM 3.	KEY INFORMATION	3
A.	SELECTED FINANCIAL DATA	3
B.	CAPITALIZATION AND INDEBTEDNESS	6
C.	REASONS FOR THE OFFER AND USE OF PROCEEDS	6
D.	RISK FACTORS	6
ITEM 4.	INFORMATION ON THE COMPANY	27
A.	HISTORY AND DEVELOPMENT OF THE COMPANY	27
B.	BUSINESS OVERVIEW	28
C.	ORGANIZATIONAL STRUCTURE	38
D.	PROPERTY, PLANTS AND EQUIPMENT	39
ITEM 4A.	UNRESOLVED STAFF COMMENTS	40
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	40
A.	OPERATING RESULTS	40
B.	LIQUIDITY AND CAPITAL RESOURCES	63
C.	RESEARCH AND DEVELOPMENT	66
D.	TREND INFORMATION	66
E.	OFF-BALANCE SHEET ARRANGEMENTS	66
F.	TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS	66
G.	SAFE HARBOR	67
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	67
A.	DIRECTORS AND SENIOR MANAGEMENT	67
B.	COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS	69
C.	BOARD PRACTICES	71
D.	EMPLOYEES	72
E.	SHARE OWNERSHIP	73
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	74
A.	MAJOR SHAREHOLDERS	74
B.	RELATED PARTY TRANSACTIONS	74
C.	INTERESTS OF EXPERTS AND COUNSEL	75
ITEM 8.	FINANCIAL INFORMATION	75
A.	CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION	75
B.	SIGNIFICANT CHANGES	75
ITEM 9.	THE OFFER AND LISTING	75
A.	OFFER AND LISTING DETAILS	75
B.	PLAN OF DISTRIBUTION	75
C.	MARKETS	76
D.	SELLING SHAREHOLDERS	76
E.	DILUTION	76
F.	EXPENSES OF THE ISSUE	76
ITEM 10.	ADDITIONAL INFORMATION	76
A.	SHARE CAPITAL	76
B.	MEMORANDUM AND ARTICLES OF ASSOCIATION	76
C.	MATERIAL CONTRACTS	81
D.	EXCHANGE CONTROLS	81
E.	TAXATION	81
F.	DIVIDENDS AND PAYING AGENTS	85
G.	STATEMENT BY EXPERTS	85
H.	DOCUMENTS ON DISPLAY	86
I.	SUBSIDIARY INFORMATION	86
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	86

i

ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	87
A.	DEBT SECURITIES	87
B.	WARRANTS AND RIGHTS	87
C.	OTHER SECURITIES	87
D.	AMERICAN DEPOSITARY SHARES	87
PART II		89
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	89
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	89
ITEM 15.	CONTROLS AND PROCEDURES	89
ITEM 16.	RESERVED	91
Item 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	91
Item 16B.	CODE OF ETHICS	91
Item 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	91
Item 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	92
Item 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	92
Item 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	93
Item 16G.	CORPORATE GOVERNANCE	93
Item 16H.	MINE SAFETY DISCLOSURE	94
PART III		95
ITEM 17.	FINANCIAL STATEMENTS	95
ITEM 18.	FINANCIAL STATEMENTS	95
ITEM 19.	EXHIBITS	95

ii

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements that involve risks and uncertainties. These forward-looking statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “is expected to,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements about:

· our expansion plans;

· our anticipated growth strategy;

· our plans to recruit more employees;

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

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

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

· our ability to attract and retain customers;

· trends and competition in the IT services industry; and

· general economic and business conditions, particularly in China.

We would like to caution you not to place undue reliance on forward-looking statements and you should read these statements in conjunction with the risk factors disclosed in “Item 3. Key Information — D. Risk Factors” and other information in this annual report and the documents that we refer to herein. Those risks are not exhaustive. We operate in a rapidly evolving environment. New risk factors emerge from time to time and it is impossible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. We do not undertake any obligation to update or revise the forward-looking statements except as required under applicable law.

1

CERTAIN TERMS AND CONVENTIONS

Unless otherwise indicated, references in this annual report to:

·  “Camelot,” “we,” “us,” “our company” or “our” refers to Camelot Information Systems Inc. and its consolidated subsidiaries;

·  “China” or the “PRC” refers to the People’s Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and Macau;

· “RMB” or “Renminbi” refers to the legal currency of the PRC;

·  “U.S. GAAP” or “GAAP” means accounting principles generally accepted in the United States of America; and

· “Greater China” refers to the PRC, Taiwan, the special administrative regions of Hong Kong and Macau.

Our financial statements are expressed in U.S. dollars, which is our reporting currency. The functional currency of our company is U.S. dollars and the functional currencies of our operating subsidiaries may vary based on the location of these entities. A majority of our net revenues and a significant majority of our expenses are denominated in Renminbi, the legal currency of China. Our financial records contain amounts denominated in Japanese Yen, Hong Kong dollars and New Taiwan dollars, and as a result, this report may contain translations of certain Renminbi, Japanese Yen, New Taiwan dollars and Hong Kong dollars amounts into U.S. dollars at specified rates. With respect to amounts not recorded in our reporting currency, or U.S. dollars, amounts of our assets and liabilities were translated from each subsidiary’s functional currency at the exchange rates as of the relevant balance sheet date; equity amounts were translated at historical exchange rates; and amounts of revenues, expenses, gains and losses were translated using the average rates for the relevant period. We make no representation that any currency amounts could have been, or could be, converted into any other currency at any particular rate, or at all. On April 20, 2012, the noon buying rates were RMB6.3080 to US$1.00, NT$29.45 to US$1.00, JPY81.60 to US$1.00 and HK$7.7613 to US$1.00. For more information, see “Item 3— Key Information— A. Selected Financial Data—Exchange Rate Information.”

2

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

The following selected consolidated statements of operations data for the years ended 2009, 2010 and 2011 and the consolidated balance sheet data as of December 31,  2010 and 2011 have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and are derived from our audited consolidated financial statements included elsewhere in this annual report. Our selected consolidated statement of operations data for the year ended December 31, 2007 and 2008, and selected consolidated balance sheet data as of December 31, 2007, 2008 and 2009 have been prepared in accordance with U.S. GAAP and are derived from our audited consolidated financial statements that are not included in this annual report on Form 20-F. Historical results are not necessarily indicative of results to be expected in any future period.

You should read the following selected consolidated financial and operating data in conjunction with our audited consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects”included elsewhere in this annual report.

	For the Year Ended December 31,
	2007			2008			2009			2010			2011
	(U.S. dollars in thousands, except share and per share data)
Consolidated statements of operations data:
Net revenues		51,380			90,772			118,003			192,863			227,120
Cost of revenues(1)(2)		(35,620	)		(64,187	)		(81,976	)		(130,862	)		(167,520	)
Gross profit		15,760			26,585			36,027			62,001			59,600
Selling and marketing expenses(1)(2)		(1,796	)		(3,818	)		(6,199	)		(11,138	)		(20,263	)
General and administrative expenses(1)		(5,700	)		(11,613	)		(12,627	)		(21,605	)		(45,065	)
Research and development costs		—			(1,705	)		(1,496	)		(2,741	)		(5,956	)
Postponed initial public offering costs		—			(2,457	)		—			—			—
Impairment of Intangible Assets		—			—			—			—			(8,552	)
Impairment of Goodwill		—			—			—			—			(21,457	)
Changes in fair value of contingent consideration for acquisitions of Agree, Tansun and Dimension		—			—			(549	)		(3,880	)		(1,669	)
Total operating expenses		(7,496	)		(19,593	)		(20,871	)		(39,364	)		(102,962	)
Government subsidies		27			—			56			123			255
Income (Loss) from operations		8,291			6,992			15,212			22,760			(43,107	)
Interest expense		(6	)		(310	)		(96	)		(475	)		(935	)
Interest income		396			244			118			498			1,194
Dividend income from short term investment		—			11			—			—			—
Gain/(loss) on short-term investment		—			(115	)		44			—			—
Gain from extinguishment of liability		—			3,926			—			—			—
Income (Loss) before provisions for income taxes		8,681			10,748			15,278			22,783			(42,848	)
Provisions for income taxes		(1,374	)		(1,400	)		(2,241	)		(4,100	)		1,791
Equity in earnings/(loss) of an affiliate, net of income taxes		6			—			—			—			—
Net income (Loss)		7,313			9,348			13,037			18,683			(41,057	)
Less: Net (loss)/income attributable to non- controlling interest		—			(66	)		(71	)		(86	)		233
Net income (loss) attributable to Camelot Information Systems Inc(3)		7,313			9,282			12,966			18,597			(40,824	)

3

Net income per share attributable to shareholders of Camelot Information Systems Inc.
Basic-ordinary shares	0.06	0.07	0.10	0.12	(0.23	)
Diluted-ordinary shares	0.06	0.07	0.10	0.11	(0.23	)
Net income(loss) per ADS attributable to shareholders of Camelot Information Systems Inc.
Basic-ADSs	0.26	0.30	0.40	0.48	(0.91	)
Diluted-ADSs	0.26	0.29	0.39	0.45	(0.91	)
Weighted average shares used in calculating net income per share
Basic-ordinary shares	73,691,478	77,394,257	82,035,859	128,663,415	179,954,056
Diluted-ordinary shares	114,516,885	127,587,315	133,017,168	165,258,030	179,954,056
Weighted average shares used in calculating net income per ADSs
Basic-ADSs	18,422,870	19,348,564	20,508,965	32,165,854	44,998,514
Diluted-ADSs	28,629,221	31,896,829	33,254,292	41,314,508	44,998,514

___________

Notes:

(1) Includes the following amounts of share-based compensation expenses for the years indicated：

	For the Year Ended December 31,
	2007		2008		2009		2010		2011
	(U.S. dollars in thousands)
Cost of revenues		89		130		147		136		1,463
Selling and marketing		55		94		158		354		7,427
General and administrative		355		852		938		2,434		10,476
Total share-based compensation expenses		499		1,076		1,243		2,924		19,366

(2) Includes the following amounts of amortization expense related to intangible assets acquired for business combination for the years indicated：

	For the Year Ended December 31,
	2007		2008		2009		2010		2011
	(U.S. dollars in thousands)
Cost of revenues		8		360		440		1,776		1,594
Selling and marketing expenses		946		2,372		3,224		4,332		3,213
General and administrative expenses		-		-		-		-		278
Total acquisition-related intangible amortization expenses		954		2,732		3,664		6,108		5,085

(3) To supplement the net income attributable to Camelot Information Systems Inc. presented in accordance with U.S. GAAP, we use the non-GAAP financial measure of net income attributable to Camelot Information Systems Inc., which is adjusted from results based on U.S. GAAP to exclude share-based compensation, acquisition-related intangible amortization, gain from extinguishment of liability, postponed initial public offering costs, changes in fair value of contingent consideration, and impairment of intangible assets and  goodwill. The non-GAAP financial measure is provided as additional information to enhance investors’ overall understanding of our current financial performance and prospects for the future. The non-GAAP financial measure should be considered in addition to results prepared in accordance with U.S. GAAP, but should not be considered a substitute for or superior to U.S. GAAP results. In addition, our calculation of the non-GAAP financial measure may be different from the calculation used by other companies, and therefore comparability may be limited.

The following table sets forth the reconciliation of our adjusted net income attributable to Camelot Information Systems Inc. to the U.S. GAAP net income attributable to Camelot Information Systems Inc.

4

	For the Year Ended December 31,
	2007		2008		2009		2010		2011
	(U.S. dollars in thousands)
Net income (loss) attributable to Camelot Information Systems Inc. (U.S. GAAP)		7,313		9,282		12,966		18,597		(40,824	)

Share-based compensation	499	1,076		1,243	2,924	19,366
Acquisition-related intangible amortization	954	2,732		3,664	6,108	5,085
Gain from extinguishment of liability	-	(3,926	)	-	-	-
Postponed initial public offering costs	-	2,457		-	-	-
Impairment of Intangible Assets	-	-		-	-	8,552
Impairment of Goodwill	-	-		-	-	21,457
Changes in fair value of contingent consideration	-	-		549	3,880	1,669
Total non-GAAP adjustments	1,453	2,339		5,456	12,912	56,129
Net income attributable to Camelot Information Systems Inc. (non-GAAP)	8,766	11,621		18,422	31,509	15,305

The following table sets forth our selected consolidated statements of balance sheet data as of December 31, 2007, 2008, 2009, 2010 and 2011.

	As of December 31,
	2007		2008		2009		2010		2011
	(U.S. dollars in thousands)
Consolidated balance sheet data:
Cash and cash equivalents		18,851		22,916		33,820		140,356		57,128
Term deposit		337		-		299		160		45,318
Total assets		72,352		118,905		191,267		341,465		315,396
Total liabilities		12,162		32,412		75,310		88,188		83,308
Total equity		60,190		86,493		115,957		253,277		232,088
Total liabilities and equity		72,352		118,905		191,267		341,465		315,396

Exchange Rate Information

Our business is primarily conducted in China and a substantial portion of our revenues are denominated in Renminbi. A majority of our net revenues and a significant majority of our expenses are denominated in Renminbi, the legal currency of China. Our financial records contain amounts denominated in Japanese Yen, Hong Kong dollars and New Taiwan dollars, and as a result this report may contain translations of certain Renminbi, Hong Kong dollars, New Taiwan dollars and Japanese Yen amounts into U.S. dollars at specified rates. With respect to amounts not recorded in our reporting currency, or U.S. dollars, amounts of our assets and liabilities were translated from each subsidiary’s functional currency at the exchange rates as of the relevant balance sheet date; equity amounts were translated at historical exchange rates; and amounts of revenues, expenses, gains and losses were translated using the average rates for the relevant period. With respect to amounts not recorded in our consolidated financial statements included elsewhere in this annual report, all translations from Renminbi to U.S. dollars in this annual report were made at a rate of RMB6.2939 to US$1.00, the noon buying rate set forth in the H.10 statistical release of the Federal Reserve Board in effect as of December 30, 2011, the last day of 2011 for which exchange rate data was available. We make no representation that any Renminbi or U.S. dollar amounts 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. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. On April 20, 2012, the noon buying rate was RMB6.3080 to US$1.00.

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 periodic reports or any other information to be provided to you.

	Noon Buying Rate
Period	Period End		Average(l)		Low		High
	(RMBper$1.00)
2007		7.2946		7.5806		7.2946		7.8127
2008		6.8225		6.9193		6.7800		7.2946
2009		6.8259		6.8295		6.8176		6.8470
2010		6.6000		6.7603		6.6000		6.8330
2011		6.2939		6.4475		6.2939		6.6364

5

October		6.3547		6.3710		6.3534		6.3825
November		6.3765		6.3564		6.3400		6.3839
December		6.2939		6.3482		6.2939		6.3733
2012
January		6.3080		6.3172		6.2940		6.3330
February		6.2935		6.2997		6.2935		6.3120
March		6.2975		6.3125		6.2975		6.3315
April (through April 20)	6.3080		6.3052		6.2975		6.3150

__________

Note:

(1) Annual averages are calculated using the average of month-end rates of the relevant year. Monthly averages are issued by G.5 statistical release of Federal Reserve Board, except April of 2012, which is calculated by using the average of daily rates during the relent period.

B. CAPITALIZATION AND INDEBTEDNESS

Not applicable.

C. REASONS FOR THE OFFER AND USE OF PROCEEDS

Not applicable.

D. RISK FACTORS

Risks Related to Our Business and Our Industry

We face securities class actions in the U.S. which may have material adverse effect on our business.

Several securities class action lawsuits have been filed in the United States District Court for the Southern District of New York on behalf of purchasers of our ADS between July 21, 2010 and August 17, 2011 (the "Class Period"), including those who acquired our ADSs pursuant to or traceable to our registration statements and prospectuses issued in connection with our initial public offering on July 21, 2010 and our secondary public offering on December 10, 2010 ("Offerings").  The complaint charges us, certain of our officers and directors, and the underwriters involved in our Offerings with violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. The complaint alleges that during the Class Period, we issued materially false and misleading statement regarding our business practices and financial results. The deadline of making motions for lead plaintiff was March 5, 2012 and as of the date of this report, no lead plaintiff has been appointed, to the best of our knowledge.

We believe the complaints that have been made aware of are lack of any merit, however, the confidence of our current or potential investors as well as our business reputation may be adversely affected. Further, we can not assure you that there are not any similar allegations against us in the future. Should we receive any unfavorable judgment against us out of these allegations, our results of operations and financial condition could be materially and adversely affected and our business reputation may also be damaged.

6

 We have identified three material weaknesses in our internal control over financial reporting and cannot assure you that such material weaknesses will be remedied or additional material weakness will not be identified in the future. Our failure to implement or maintain effective control over financial reporting could result in material misstatement in our financial statements which could require us to restate financial statement in the future, or cause us not to be able to provide timely financial information, which may cause investors to lose confidence in our reported financial information and have a negative effect on our stock price.

We are subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, or the SEC, as required by Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report on such company's internal control over financial reporting in its annual report, which contains management assessment of the effectiveness of the company's internal control over financial reporting. In addition, under such rules, our independent registered public accounting firm is required to attest to the effectiveness of our internal controls over financial reporting.

In connection with management's assessment of the effectiveness of our internal over financial reporting for the period covered by this annual report, our management has identified three material weaknesses in our internal control over financial reporting and has concluded that as of December 31, 2011, our disclosure controls and procedures and our internal control over financial reporting were not effective. Our independent registered public accounting firm has express an adverse opinion on the effectiveness of our internal control over financial reporting as of December 31, 2011. See "Item 15 — Controls and Procedures."

The material weaknesses identified were: (1) lack of sufficient skilled resources with U.S. GAAP knowledge for the purposes of financial reporting and lack of continuing professional training on U.S. GAAP and SEC regulations and rules for accounting personnel; (2) insufficient segregation of duties in relation to the (a) review and calculation of payroll expense and (b) initiation and approval of payments by a subsidiary;  and (3) lack of policies and procedures on selection of subcontractors, lack of documented approval of cash flows forecast by the board of directors, and insufficient IT security controls in relation to (a) system login, anti-virus scans, and system backup and (b) access, changes and version controls over certain spread sheets used in consolidation process.

Despite our efforts to ensure the integrity of our financial reporting process, we cannot assure you that the material weaknesses identified in our internal control over financial reporting would be successfully remediated. Further, we cannot assure you that additional weakness in our internal control over financial reporting will not be identified in the future. Any failure to maintain existing controls or implement new controls would result in additional material weakness and cause us fail to meet our periodic reporting obligations which in turn could cause our shares to be de-listed or suspended from trading on the NYSE. Further, any such failure could result in material misstatements and adversely affect the results of annual management evaluations regarding the effectiveness of our internal control over financial reporting. Any of the foregoing could cause investors to lose confidence in our reported financial information, leading to a decline in our share price or lawsuits being filed against us by our shareholders or otherwise harm our reputation.   In addition, we may require more resources and incur more costs than currently expected to remediate our identified material weaknesses or any additional material weakness that may be identified in the future, which may adversely affect our results of operations.

 We may be unable to attract and retain skilled professionals in the competitive job market for IT professionals.

Our business involves the delivery of professional services and is highly labor-intensive. Our ability to execute current and future projects and to obtain new customers depends largely on our ability to attract, train, motivate and retain highly skilled personnel, particularly project managers, independent consultants, project leaders and domain experts. The loss of a significant number of our professionals or the inability to attract, hire, develop, train and retain additional skilled personnel may materially and adversely affect our ability to manage, staff and successfully complete our existing projects and obtain new projects. For instance, our previous chief executive officer of Agree, Mr. Wang Yuhui, and some of his team members resigned from our company during the second quarter 2011, which led to the disruption of our project deliveries and new contract signing. We believe that there is significant competition for skilled technology professionals both in China and worldwide. Increasing competition for these individuals may also significantly increase our labor costs, which may materially and adversely affect our profit margins and results of operations.

The markets for IT services in China are highly competitive, and we may not be able to compete effectively.

The markets for IT services in China are highly competitive and we expect competition to intensify in the future. The profiles and identities of our competitors may vary among our service lines and customers. We primarily compete with Chinese IT services firms. We may also compete with foreign IT service providers as well as domestic offshore IT services providers. Some of the firms with which we compete in these markets have significantly greater financial resources and more established market positions than us. Furthermore, many of our competitors have acquired, and may continue to acquire in the future, companies that may enhance their market shares and service offerings. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Our ability to compete may be further limited by the non-compete provisions in the agreements with some of our customers. If we are unable to compete successfully with our existing or new competitors, our financial results may be materially and adversely affected.

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Wages for IT professionals in China have increased in recent years and may continue to increase at a higher rate in the future, making us potentially less competitive and less profitable.

Historically, wages for comparably skilled technical personnel in the Chinese IT services industry were lower than in developed countries, such as in Japan, the U.S. or Europe. In recent years, wages in the China IT services industry have increased and may continue to increase in the future. In order to attract and retain skilled personnel, we may need to continue to increase the wages of our work force. In addition, under the Regulations on Paid Annual Leave for Employees, which became effective on January 1, 2008, employees who have served more than one year for a specific employer are entitled to a paid vacation ranging from 5 to 15 days, depending on length of service. Furthermore, employees who waive such vacation time at the request of employers shall be compensated for three times their normal salaries for each waived vacation day. This mandated paid-vacation regulation, coupled with the trend of increasing wages, may result in increased wages for our services, making us potentially less competitive, and may increase our cost of revenues and operating expenses, resulting in lower profit margins.

We depend on a small number of customers to derive a significant portion of our revenues and this dependence is likely to continue.

We derive a significant portion of our revenue from a limited number of customers. In 2009, 2010 and 2011, approximately 31.6%, 33.7% and 34.1% of our net revenues were derived from our single largest client. In the same periods, approximately 49.0%, 48.2% and 53.4% of our net revenues were derived from our five largest customers. We expect revenues from these customers will continue to account for a significant portion of our revenues. If we lose any one of our major customers or any of these customers significantly reduces its volume of business with us, our net revenues and profitability would be substantially reduced. In addition, the volume of work we perform for specific customers may vary from year to year, particularly since we are generally not the exclusive service provider for our customers. Our high customer base concentration may also adversely affect our ability to negotiate unit prices, due to the volume of delivery items with these customers, which may in turn materially and adversely affect our results of operations.

If our delivery center agreements with IBM are terminated or are not renewed for any reason, our relationship with IBM as well as our overall business, operating results and financial condition will be materially and adversely affected.

In addition to our then existing business with IBM, in March 2008, we entered into a technical services agreement and a master statement of work, or a master SOW, with IBM to establish a delivery center to deliver enterprise application services exclusively for IBM’s customers. In May 2011, we renewed the technical services agreement and the master SOW with IBM for an additional four years, under which the right for IBM to purchase the delivery center at a price based on the cumulative revenues generated by and net book value of the delivery center has been removed. Our net revenues derived from this delivery center totaled US$15.7 million in 2009, US$36.5 million in 2010 and US$47.4 million in 2011, or 13.3%, 18.9% and 20.9% of our total net revenues, respectively. We expect this delivery center to continue to account for a material percentage of our total net revenues for the foreseeable future.

The renewed technical services agreement contains a number of key commercial and legal provisions, including:

· Termination.  The initial term is four years and can be renewed by IBM for one or more years with substantially the same terms and conditions. The technical services agreement may be terminated

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at an earlier date upon the occurrence of certain events, including, among others, a change of control, liquidation or bankruptcy of our company, and a failure by us to meet certain service standards.

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Non-compete undertaking.  We have agreed not to compete with IBM, in the field of SAP consulting services, for any existing or future business opportunity from IBM’s existing customers that is either continual or relating to any services provided by us under the technical services agreement. However, such non-compete undertaking does not apply to our existing customers. Our non-compete undertaking is effective throughout the term of the master SOW and for a period of 18 months following the termination of the master SOW.

In light of the materiality of the delivery center to our relationships with IBM and our future operating results, we may face a number of risks and uncertainties to our business. For instance, there is no assurance that (i) our delivery center agreements will not be terminated or will be renewed after the initial term; and (ii) there may be ambiguities in the interpretation of the scope of our non-compete undertaking, particularly in light of our potential overlapping customer base with IBM. As a result, we cannot assure you that we will not enter into a dispute with IBM relating to future customers and projects. The occurrence of any of the foregoing may materially and adversely affect our relationship with IBM, which has historically been our largest customer and strategic account, thereby materially and adversely affecting our overall business, results of operations and financial condition. See “Item 3. Key Information— D. Risk Factors — Risks Related to Our Business and Our Industry — We depend on a small number of customers to derive a significant portion of our revenues and this dependence is likely to continue.”

Our historical outstanding accounts receivable have been relatively high. Inability to collect our accounts receivable on a timely basis, if at all, could materially and adversely affect our financial condition, liquidity and results of operations.

Historically, our outstanding billed and unbilled accounts receivable have been relatively high. As of December 31, 2009, 2010 and 2011, our outstanding billed and unbilled accounts receivable were US$68.2 million, US$105.7 million and US$135.0 million, respectively. Although we conduct credit evaluations of our customers, we generally do not require collateral or other security from our customers. In addition, we have had a relatively high customer concentration. As a result, an extended delay or default in payment relating to a significant account will have a material and adverse effect on the aging schedule and turnover days of our accounts receivable. Our inability to collect our accounts receivable on a timely basis, if at all, could materially and adversely affect our financial condition, liquidity and results of operations.

Our revenues are highly dependent on customers primarily located in the PRC and certain other regions in Asia-Pacific.

Prior to 2006, we derived all of  our revenues from the PRC. However, as a result of a number of strategic acquisitions since 2006, we currently also derive a small portion of our revenues from customers in Taiwan and Japan.In 2009, 2010 and 2011, net revenues from the PRC, Taiwan and Japan in aggregate totaled US$117.2 million, US$190.5 million and US$225.2 million, respectively, representing 99.3%, 98.8% and 99.2% of our total net revenues, respectively. Accordingly, our revenues are highly dependent on the Greater China region and Japan, and in particular, on the continued technology spending of our existing and prospective customers in these regions. The growth in technology spending generally decreases in a challenging economic environment. Adverse economic conditions in the regions may cause some customers to reduce or defer their expenditures for IT services. Therefore, a decline in the level of economic activity in the Greater China region and Japan could materially and adversely affect our net revenues and profit margins.

We are subject to financial and business risks on completed or future acquisitions.

Since 2006, we have completed a number of strategic acquisitions to complement our business. We intend to continue to selectively acquire IT service companies to support our future growth. We are subject to a number of special financial and business risks in connection with our acquisition efforts, including among others, diversion of our management’s time, attention, and resources, decreased utilization during the integration process, loss of key acquired personnel, difficulties in integrating diverse corporate cultures, increased costs to improve or coordinate managerial, operational, financial, and administrative systems including dilutive issuances of equity securities, including convertible securities, assumption of legal liabilities, potential write-offs related to the impairment of goodwill and certain long term assets and additional conflicts of interest. In

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addition, we may be unable to manage an acquired entity profitably or successfully integrate its operations with our own. Any of these factors may adversely affect the growth of our business and results of operations.

Although we conduct due diligence in connection with our acquisitions, we may not be aware of all the risks associated with acquired businesses. Any discovery of adverse information concerning the acquired businesses since the completion of the acquisitions could materially and adversely affect our business, financial condition and results of operations. While we may be entitled to seek indemnification in certain circumstances, successfully asserting indemnification or enforcing such indemnification could be costly and time-consuming or may not be successful at all. In addition, acquired businesses may have significant lower gross margins than our existing business, which may apply downward pressure on our overall gross margin in the future.

Furthermore, acquired companies may not perform to our expectations for various reasons, including legislative or regulatory changes that affect the products or services in which the acquired companies specialize, and the loss of key customers and personnel. If we are unable to realize the benefits envisioned for such acquisitions, our overall profitability and growth plans may be adversely affected.

A global financial and economic crisis, a severe or prolonged downturn slowdown in the global or Chinese economy, may adversely affect our business, results of operations and financial condition.

The global financial markets experienced significant disruptions in 2008 and the United States, Europe and other economies went into recession. The recovery from the lows of 2008 and 2009 was uneven and it is facing new challenges, including the escalation of the European sovereign debt crisis since 2011. It is unclear whether the European sovereign debt crisis will be contained and what effects it may have. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies that have been adopted by the central banks and financial authorities of some of the world’s leading economies, including China’s. There have also been concerns over unrest in the Middle East and Africa, which have resulted in higher oil prices and significant market volatility, and over the possibility of a war involving Iran. There have also been concerns about the economic effect of the earthquake, tsunami and nuclear crisis in Japan. Economic conditions in China are sensitive to global economic conditions.

Any prolonged slowdown in the global or Chinese economy may have a negative impact on our business, results of operations and financial condition, and continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs. For example, our customers may decrease or delay the use of our services, while we may have difficulty expanding our customer base fast enough, or at all, to offset the impact of decreased use of our services by our existing customers. In addition, we could have difficulty collecting payments from our customers.

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Compliance with new and changing corporate governance and public disclosure requirements adds uncertainty to our compliance policies and increases our costs of compliance.

Changing laws, regulations and standards relating to accounting, corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations, NYSE rules, are creating uncertainty for companies like ours. These new or changed laws, regulations and standards may lack specificity and are subject to varying interpretations. Their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs of compliance as a result of ongoing revisions to such governance standards. In particular, compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal control over financial reporting requires the commitment of significant financial and managerial resources and external auditor's independent assessment of the internal control over financial reporting. We and our independent registered public accounting firm identified certain material weaknesses. See “Item 15. — Controls and Procedures”.

Following the identification of these material weaknesses, we have taken measures and plan to continue to take measures to remedy these weaknesses. However, the implementation of these measures may not fully address these material weaknesses in our internal control over financial reporting, and therefore we may not be able to conclude that they have been fully remedied. Our failure to remedy these material weaknesses or our failure to discover and address any other deficiencies could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. Moreover, effective internal control over financial reporting is important to prevent fraud. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our ADSs, may be materially and adversely affected.

Further, since 2009 and continuing into 2011, there has been an increased focus on corporate governance by the U.S. Congress and by the SEC in response to the recent credit and financial crisis in the United States. As a result of this increased focus, additional corporate governance standards have been promulgated with respect to companies whose securities are listed in the United States, including by way of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and more governance standards are expected to be imposed on companies whose securities are listed in the United States in the near future.

In addition, it may become more expensive or more difficult for us to obtain director and officer liability insurance. Further, our board members, chief executive officer, and chief financial officer could face an increased risk of personal liability in connection with their performance of duties and our SEC reporting obligations. As a result, we may face difficulties attracting and retaining qualified board members and executive officers, which could harm our business. If we fail to comply with new or changed laws or regulations, our business and reputation may be harmed.

Our financial performance and prospects could be affected by natural disasters or health epidemics.

Our business could be materially and adversely affected by natural disasters or the outbreak of health epidemics. In March 2011, a magnitude 9.0 earthquake followed by a tsunami struck northeast Japan devastating much of the affected areas and causing widespread damage and casualties. Historically, our sales to Japan accounted 9.9%, 7.7% and 9.3% of our revenue in each of  2009, 2010 and 2011. In addition, in May 2008, a magnitude 8.0 earthquake struck Sichuan Province and certain other parts of the PRC, causing severe damage and casualties.

Moreover, certain countries and regions, including the PRC, have encountered incidents of the H5N1 strain of bird flu, or avian flu, as well as severe acute respiratory syndrome, or SARS, over the past six years and, more recently in 2009, the outbreak of influenza A (H1N1).

We are unable to predict the effect, if any, that any future natural disasters and health and public security hazards may have on our business. Furthermore, such natural disasters and health and public security hazards may severely restrict the level of economic activity in affected areas, which may in turn materially and adversely affect our business and prospects.

 Our business and growth may be severely disrupted if we lose the services of our senior management and key technical personnel or if such persons compete against us and our non-compete agreements cannot be enforced.

                Our future success is significantly dependent upon the continued service of our senior management and key technical personnel. The loss of any other members of our senior management or key technical personnel may materially and adversely affect our business and operations. For instance, it could jeopardize our relationships with customers and result in the loss of customer engagements. If we lose the service of any senior management member or key technical personnel, we may not be able to locate and obtain the service of qualified replacements, and may incur additional expenses to recruit and train new personnel, which could severely disrupt our business and growth.  For instance, our third quarter 2011 financial results, particularly the Financial

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Industry IT service business, had been adversely affected to a significant extent, mainly due to the departures of Mr. Wang Yuhui, our previous chief executive officer of Agree and  some of his team members during second quarter of 2011, which led to the disruption of our project deliveries and new contract signing. In November, 2011, Mr. Gordon Lau, resigned his position as our chief financial officer and certain of our board members have also been changed in the period from October to March 2012. Although Mr. Wang returned to our company in the third quarter 2011  and serves as the chief executive officer of Camelot Financial Information Technology Services Co., Ltd, one of our subsidiaries that focuses on the banking, financial services and insurance market in December 2011, we can't assure you that similar departure of director or the management personal will not happen again in the future and should it happen, our business, customer relationships or results of business may be badly affected to a significant extent.  In addition, if any of our senior management or key technical personnel joins a competitor or forms a competing company, we may lose customers, know-how, key technical professionals and employees. Each of our senior management members and key technical personnel has entered into an employment agreement with us which contains non-competition provisions. However, if any dispute arises between any of our senior management members or key technical personnel and us, we cannot assure you that we will be able to successfully enforce these provisions.

Our business will be negatively affected if we are not able to anticipate and keep pace with rapid changes in technology or if growth in the use of technology in business by our customers is not as rapid as in the past.

The markets for IT services are characterized by rapid technological changes, evolving industry standards, changing customer preferences and frequent new product and service introductions. Our success will depend, in part, on our ability to develop and implement technology services and solutions and anticipate and keep pace with rapid and continuing changes in technology, industry standards and customer preferences. We may not be successful in anticipating or responding to these developments on a timely basis, and our service or solution offerings may not be successful in the marketplace. For example, if SAP-based ERP systems become obsolete or less accepted among end users, the demand for our services could be materially and adversely affected. In addition, services, solutions and technologies developed by our competitors may make our service or solution offerings uncompetitive, obsolete or force us to reduce prices, thereby adversely affecting our profit margins. Any one of these circumstances could materially and adversely affect our ability to obtain and successfully complete customer engagements.

Our growth prospects may be adversely affected if the market for our services and the industries that we service fail to grow as expected.

Our operations are conducted in two service lines. Our enterprise application services business primarily focuses on SAP-based ERP services. SAP competes with international players such as Oracle Corporation, or Oracle, and local players such as UFIDA Software Co., Ltd. and Kingdee International in China. If SAP fails to compete effectively against these companies in China, or if the demand for ERP services in China experiences lower than expected growth, if at all, our business and growth prospects may be materially and adversely affected. Our financial industry IT services business primarily services banks and insurance companies in China and Taiwan, where the financial services industry is extensively regulated. Accordingly, any significant regulatory changes in the industry may affect demand for our services. In addition, any adverse development in the financial services IT industry in China and Taiwan, whether due to a downturn in the economy or otherwise, may lead to reduced procurement budget of our financial institution customers, which may in turn lead to lower demand for our services, thereby adversely affecting our business and growth prospects.

Most of our engagements with customers are singular in nature and do not necessarily provide for subsequent engagements.

Our customers generally retain us on an engagement-by-engagement basis in connection with specific projects, rather than on a recurring basis under long-term contracts. Although a substantial majority of our revenue is generated from repeat business, which we define as revenue from a customer who also contributed to our revenue during the prior year, our engagements with our customers are typically for projects that are singular in nature. Therefore, we must seek to obtain new engagements when our current engagements are successfully completed or are terminated as well as maintain relationships with existing customers and secure new customers to expand our business. In addition, in order to expand our business, we may need to continue to expand our sales and marketing group, which would increase our expenses but may not necessarily result in a substantial increase in business. If we are unable to generate a substantial number of new engagements for projects on a continual basis, our business and results of operations may be materially and adversely affected.

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Many contracts with our customers generally can be terminated without cause and with little or no notice or penalty, which could negatively impact our revenue and profitability.

We often provide services to end customers through international IT service providers. In these cases, our contracts are signed with these service providers rather than with our end customers.  A number of our contracts with international IT service providers can be terminated with or without cause, without any notice and without termination-related penalties. However, historically, we have not experienced any terminations of any significant contracts. In addition, such contracts can be terminated immediately upon the termination of the international IT service providers’ contracts with the end customers under circumstances beyond our control. As a result, our revenue-generating engagements with many customers are not predictable and a high level of net revenues in one period is not necessarily predictive of continued high levels of net revenues in future periods. Our business depends on the decisions and actions of our customers, and a number of factors relating to our customers beyond our control might result in the termination of a project or the loss of a customer, including financial difficulties; a change in strategic priorities, resulting in a reduced level of IT spending; and a change in outsourcing strategy by moving more work to in-house IT departments or to our competitors.

We are subject to certain risks relating to our fixed-price contracts.

A significant portion of our customer contracts are on a fixed-price basis. As a result, we are subject to risks associated with estimating, planning and performing fixed-price, fixed-timeframe projects, and we bear the risk of cost overruns, completion delays and wage inflation in connection with these projects. If we fail to accurately estimate the resources and time required for a future project, or future rates of wage inflation, or if we fail to complete our contractual obligations within the contracted timeframe, our profitability may suffer.

In addition, a number of our fixed-price contracts contain pricing terms that condition a portion of the payment of fees by the customer on our ability to meet defined performance goals, service levels and completion schedules set forth in the contracts. Our failure to meet these goals or customer expectations in such contracts may result in less profitable or unprofitable engagements.

We may be liable to our customers for damages caused by a violation of intellectual property rights, the disclosure of other confidential information, system failures, errors or unsatisfactory performance of services, and our insurance policies may not be sufficient to cover these damages.

We often have access to, and are required to collect and store, sensitive or confidential customer information. Many of our customer agreements do not limit our potential liability for breaches of confidentiality. If any person, including any of our employees, penetrates our network security or misappropriates sensitive or confidential customer information, we could be subject to significant liability from our customers or from our customers’ customers for breaching contractual confidentiality provisions or privacy laws. The protection of the intellectual property rights and other confidential information of our customers are particularly important for us since our operation is mainly based in China. China, as well as Chinese companies, has not traditionally enforced intellectual property protection to the same extent as more developed countries such as the United States. Despite measures we take to protect the intellectual property and other confidential information of our customers, unauthorized parties, including our employees and sub-contractors, may attempt to misappropriate certain intellectual property rights that are proprietary to our customers or otherwise breach our customers’ confidences. Unauthorized disclosure of sensitive or confidential customer information or a violation of intellectual property rights may subject us to liabilities, whether through employee misconduct, breach of our computer systems, systems failure or otherwise, damage our reputation and cause us to lose customers.

Many of our contracts involve projects that are critical to the operations of our customers’ businesses, and provide benefits to our customers that may be difficult to quantify. Any failure in a customer’s system or any breach of security could result in a claim for substantial damages against us, regardless of our responsibility for such failure. Furthermore, any errors by our employees in the performance of services for a customer, or poor execution of such services, could result in a customer terminating our engagement and seeking damages from us.

Although we attempt to limit our contractual liability for consequential damages in rendering our services, these limitations on liability may be unenforceable in some cases, or may be insufficient to protect us from liability for damages. We do not have insurance coverage against potential losses or claims with respect to the IT services we provide. We do not maintain general liability insurance coverage, such as coverage for errors or omissions. While we believe that our practice is in line with the general practice in the IT services industry,

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there may be instances when we will have to internalize losses, damages and liabilities because of the lack of insurance coverage, which may in turn adversely affect our financial condition and results of operations.

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

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

Our financial results could suffer if we are unable to achieve or maintain the productivity and utilization of our professionals.

Our profitability depends to a large extent on the productivity and utilization of our professionals. Productivity and utilization of our professionals are affected by a number of factors, including, among other things, the number and size of customer engagements, the timing of the commencement, completion and termination of engagements, our ability to transition our professionals efficiently from completed engagements to new engagements, the hiring of additional professionals, unanticipated changes in the scope of customer engagements, our ability to forecast demand for our services and thereby maintain an appropriate number of professionals, billing rates for our professionals and conditions affecting the industries in which we practice as well as general economic conditions. Any of the factors above may result in low productivity and utilization of our employees and materially and adversely affect our results of operations and employee morale. If we are unable to achieve and maintain adequate overall productivity and utilization of our professionals, our financial results could materially suffer.

Any inability to manage our growth could disrupt our business, undermine our competitive position and reduce our profitability.

We have grown significantly in recent years as a result of the expansion of our service offerings and the undertaking of major acquisitions both within China and elsewhere. The total number of our IT professionals increased from 1,757 as of December 31, 2008 to 4,017 as of December 31, 2011. We expect our growth to place significant strain on our management and other resources. Specifically, we will need to continue to develop and improve our operational, financial and other internal controls, both in China and elsewhere. Continued growth imposes challenges on us in:

· recruiting, training and retaining sufficient skilled technical, marketing and management personnel;

· adhering to our high quality and process execution standards;

· preserving our culture, values and entrepreneurial environment;

· developing and improving our internal administrative infrastructure, particularly our financial, operational, communications and other internal systems; and

· maintaining high levels of customer satisfaction.

We cannot assure you that we will be successful in managing such risks and our failure to do so may disrupt our business, undermine our competitive position and reduce our profitability.

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We may be unsuccessful in identifying and acquiring suitable acquisition candidates, which could adversely affect our growth.

Historically, we have expanded our business and acquired additional customers through strategic acquisitions. We intend to continue to selectively acquire high-quality IT services companies to support our future growth. However, we may not be able to identify suitable future acquisition candidates. Even if we identify suitable candidates, we may be unable to complete an acquisition on terms commercially acceptable to us. Moreover, competition for future acquisition opportunities in our markets could increase the price we pay for businesses we acquire and could reduce the number of potential acquisition targets. If we fail to identify appropriate candidates or complete desired acquisitions, we may not be able to implement our growth strategies effectively or efficiently. In addition, the expenses we incur in evaluating and pursuing acquisitions could have a material adverse effect on our results of operations. Any of these factors may materially and adversely affect the growth of our business and results of operations.

As a result of our significant growth and acquisitions in recent years, evaluating our business and prospects may be difficult and our past results may not be indicative of our future performance.

Our business has grown and evolved significantly in recent years, both through organic growth and our strategic acquisitions. In light of the significance of our recent acquisitions, a period-to-period comparison of our historical operating results may not be meaningful. In addition, we may not be able to achieve a similar growth rate in future periods because of the continuing evolution of our business model. Therefore, you should not rely on our past results or historical rate of growth as an indication of our future performance.

Any significant failure in our information technology systems could subject us to contractual liabilities to our customers, harm our reputation and adversely affect our results of operations.

Our business and operations are highly dependent on the ability of our information technology systems to timely process various transactions across different markets and solutions. The proper functioning of our financial control, accounting, customer service and other data processing systems, together with the communication systems between our various subsidiaries and delivery centers is critical to our business and our competitiveness. Our business activities may be materially disrupted in the event of a partial or complete failure of any of these primary information technology or communication systems, which could be caused by, among other things, software malfunction, computer virus attacks, conversion errors due to system upgrading, damage from fire, earthquake, power loss, telecommunications failure, unauthorized entry or other events beyond our control. We may be liable to our customers for breach of contract for interruptions in service. Due to the numerous variables surrounding system disruptions, the extent or amount of any potential liability cannot be predicted. Moreover, actual or perceived concerns that our systems may be vulnerable to disruptions or unauthorized entry may deter customers from using our services.

Fluctuation in currencies may materially and adversely affect our business.

A significant portion of our revenues and assets and liabilities are denominated in currencies other than the Renminbi such as Japanese Yen, the New Taiwan dollar, and the U.S. dollar. The value of the Renminbi against the U.S. dollar, Japanese Yen 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, is based on rates set by the People's Bank of China. The PRC government allowed the Renminbi to appreciate by more than 20% against the U.S. dollars between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band.  As a consequence, the Renminbi fluctuated significantly during that period against other freely traded currencies, in tandem with the U.S. dollar. Since June 2010, the PRC government has allowed the Renminbi to appreciate slowly against the U.S. dollar again. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future. There remains significant international pressure on the Chinese government to adopt a substantial liberalization of its currency policy, which could result in further appreciation in the value of the Renminbi against the U.S. dollar. To the extent that we need to convert U.S. dollars into Renminbi for capital expenditures and working capital and other business purposes, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would 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 ordinary shares or ADSs, strategic acquisitions or investments or other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount

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available to us. We expect that a material portion of our revenues will continue to be generated in currencies other than the  Renminbi, including Japanese Yen, the New Taiwan dollar, and the U.S. dollar, for the foreseeable future and that a substantial majority of our expenses, including personnel costs, as well as operating expenditures, will continue to be denominated in Renminbi. Consequently, the results of our operations may be adversely affected as Renminbi appreciates against the U.S. dollar and other foreign currencies. In addition, any significant revaluation of the Renminbi may materially and adversely affect the value of, and any dividends payable on, our ADSs in U.S. dollar terms. As very limited types of hedging transactions are available in the PRC to reduce our exposure to exchange rate fluctuations, we have not entered into any such hedging transactions. Accordingly, we cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign exchange losses in the future. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currencies. See “Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China — PRC regulations on currency exchange and foreign investment may limit our ability to receive and use our revenues effectively and may delay or prevent us from making loans or additional capital contributions to our PRC operating subsidiaries.”

We face risks and uncertainties relating to our international operations.

Outside of the PRC, we have operations in a number of overseas locations such as Taiwan and Japan. We expect our net revenues derived from international markets to account for a material portion of our revenues in the future. Our international operations carry additional financial and business risks, including greater difficulties in managing and staffing foreign operations, cultural differences that may result in lower utilization, currency fluctuations that could adversely affect our financial position and operating results, unexpected changes in regulatory requirements, greater difficulties in collecting accounts receivable, longer sales cycles, restrictions on the repatriation of earnings, difficulties in enforcing judgments across multiple jurisdictions, and potentially adverse tax consequences, such as trapped foreign losses. If our revenues derived from international operations increase relative to our total net revenues, these factors could have a more pronounced effect on our results of operations.

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

As of March 31, 2012, our largest shareholders included our founders, Mr. Yiming Ma and Ms. Heidi Chou, each of whom owns approximately 8.1% and 7.7% of our outstanding ordinary shares and voting power.  Mr. Yiming Ma and Ms. Heidi Chou are husband and wife. Mr. Yiming Ma and Ms. Heidi Chou acting individually or as a group could exert substantial influence over matters such as electing directors and approving acquisitions, mergers or other business combination transactions. Any concentration of ownership and voting power, including the concentration of ownership and voting power resulted from the relationship between Mr. Yiming Ma and Ms. Heidi Chou, may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs.

We have granted, and may continue to grant employee stock options under our equity incentive plan . In addition, we have repriced, and may continue to reprice our outstanding stock options granted to our employees, any of which may result in increased share-base compensation expenses.

We have adopted the equity incentive plan on June 26, 2006. As of March 31, 2012, options to purchase a total of 16,811,328 ordinary shares of our company were outstanding ("2006 Equity Incentive Plan ").  For the year 2009, 2010 and 2011, we recorded US$1.2 million, US$2.9 million and US$19.4 million, respectively, in share-based compensation expenses. As of December 31, 2011, we had US$4.2 million of unrecognized share-based compensation expenses relating to share options, which are expected to be recognized over a weighted average vesting period of 1.2 years. We believe the granting of share options is of significant importance to our ability to attract and retain key personnel and employees, and we may continue to grant share options to employees in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our result of operations.

               On November 28, 2011, in order to retain key personnel under then-current market conditions, we reduced the exercise price of our outstanding options granted under our 2006 Equity Incentive Plan for all of the employees ("Share Repricing") and incurred US$14 million share-based compensation expenses due to that Share Repricing. As the trading price of our ADSs fluctuates, we can not assure you that we will not continue to reduce the exercise price of our outstanding options granted under the existing equity incentive plan or other equity incentive plans that may be

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adopted in the future. Should we reduce the exercise price of the outstanding options, our share-base compensation expenses will be increased and our operating results will be adversely affected.

As a foreign private issuer, we are permitted to, and we  may rely on exemptions from certain NYSE corporate governance standards applicable to U.S. issuers, including the requirements that a majority of an issuer’s directors consist of independent directors. This may afford less protection to our holders of ordinary shares and ADSs.

Section 303A of the Corporate Governance Rules of the New York Stock Exchange requires listed companies to have, among other things, a majority of its board members be independent and a nominating and corporate governance committee consisting solely of independent directors. As a foreign private issuer, however, we are permitted to follow home country practice in lieu of the above requirements. The corporate governance practice in our home country, the British Virgin Islands, does not require a majority of our board to consist of independent directors or the implementation of a nominating and corporate governance committee. Although we are currently comply with NYSE requirements, we may rely on the foreign private issuer exemption to the extent that a majority of our board of directors are not consisting of independent directors, where it is a possibility that fewer board members will be exercising independent judgment and the level of board oversight on the management of our company may decrease as a result.

We may be subject to significant fines, penalties and/or prosecution because our Hong Kong operations prior to November 5, 2010 were not compliant with certain local registration and/or licensing requirements as well as other Hong Kong laws and regulations.

In 2006, we initially acquired our Hong Kong operations, or Our Previous HK Operations, through Camelot BVI and Triumph, which are companies limited by shares incorporated in the British Virgin Islands and which became the two partners of Our Previous HK Operations. Under applicable Hong Kong law, Camelot BVI and Triumph were deemed to have established a place of business and carried on a business in Hong Kong since their acquisitions of Our Previous HK Operations. Therefore, both were required to obtain business registration certificates from the Business Registration Office of the Hong Kong government and to be registered with the Companies Registry of the Hong Kong government within one month of their acquisitions of Our Previous HK Operations. However, neither Camelot BVI nor Triumph obtained such certificates nor did they undertake such registration. Accordingly, Our Previous HK Operations and, in turn, Camelot BVI and Triumph were not in compliance with the registration and/or licensing requirements in Hong Kong. As a result of such non-compliance, each of Camelot BVI and Triumph, as well as the officers or agents of each of Camelot BVI and Triumph who authorized such non-compliance, face a maximum one-time fine of HK$53,000 (US$6,800) and a daily fine of HK$700 (US$90.3) for each day of non-compliance, or an aggregate total of approximately US$264,000 up to November 5, 2010.As of June 3, 2011, there has been no prosecution initiated by the relevant authorities. We are unable to reasonably estimate the actual amount that we may have to pay if the authorities were to become aware of the non-compliance and were to commence proceedings.

In addition, as an employer, Our Previous HK Operations were required to comply with legal obligations with regard to mandatory provident funds and compensation insurance for its employees under the Mandatory Provident Fund Schemes Ordinance (Cap. 485), or MPFSO, and under the Employees’ Compensation Ordinance (Cap. 282), or ECO, of the Hong Kong laws, respectively. Our Previous HK Operations were not compliant with certain provisions of the MPFSO for a duration of approximately 10 months between 2006 and 2007 by failing to ensure, in relation to one employee at the time that such employee becomes a member of a registered mandatory provident fund scheme and to make and deduct the respective employer and employee mandatory provident fund contributions in a total amount of HK$20,000 to the employee’s account of such scheme. Our Previous Hong Kong Operations were also not compliant with certain provisions of the ECO by failing to take out worker’s compensation insurance in relation to the said one employee.

As a result of the foregoing, Our Previous HK Operations may be subject to fines, penalties and/or prosecutions under local laws and regulations. In recent enforcement cases under the MPFSO, defaulting employer(s) have been ordered to repay all unpaid contributions, and a surcharge or a penalty of the higher of HK$5,000 or 5% of the total unpaid amount. Our Previous HK Operations have made up these default contributions into the relevant employee’s mandatory provident fund scheme account and has been in compliance with its legal obligations under the MPFSO since October 2007. Furthermore, with respect to the failure to take out compensation insurance, any fines, penalties and/or prosecutions to which our Hong Kong

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operations may be subject, may include, but not be limited to, facing a maximum fine of HK$100,000 (US$13,000).

In June, 2010, we transferred all of our shares in Our Previous HK operations to third party individuals and as a result of such transfer, we no long have any shareholder rights, duties or liabilities in Our Previous HK operations. Since November 5, 2010, our business in Hong Kong has been conducted through Kings Consulting Services Ltd, or Kings, a company which is limited by shares and incorporated in Hong Kong and which is a wholly owned subsidiary of Camelot BVI. The business contracts between our customers and Our Previous HK Operations have already been transferred to Kings by way of signing the supplemental agreements with the relevant customers. All new business contracts with our customers which have been entered into after November 5, 2010 have been entered into with Kings.

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

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

Risks Related to Doing Business in China

Adverse changes in political and economic policies of the PRC government could materially and adversely affect the overall economic growth of China, which could reduce the demand for our services and materially and adversely affect our results of operations.

A significant majority of our operations are conducted in China and a significant majority of our net revenues are derived from customers in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. Since the late 1970s, the PRC government has been reforming the economic system in China. These reforms have resulted in significant economic growth. However, we cannot predict the future direction of economic reforms or the effects such measures may have on our business, financial position or results of operations. Furthermore, while the economy of China has experienced significant growth in the past thirty years, growth has been uneven, both geographically and among various sectors of the economy. Any adverse change in the economic conditions in China, in policies of the PRC government or in laws and regulations in China, could materially and adversely affect the overall economic growth of China and market demand for our IT services. Such changes could adversely affect our businesses, lead to reduction in demand for our services and adversely affect our results of operations.

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

We conduct substantially all of our business through our subsidiaries in China. Our subsidiaries in China are generally subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to wholly foreign-owned enterprises and Sino-foreign equity joint ventures. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since these laws 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 involve uncertainties, which may limit legal protections available to us. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have retroactive effects. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

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PRC regulations on currency exchange and foreign investment may limit our ability to receive and use our revenues effectively and may delay or prevent us from making loans or additional capital contributions to our PRC operating subsidiaries.

Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transaction, can be made in foreign currencies without prior approval from State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, approval from appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated to foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

As an offshore holding company of our PRC operating subsidiaries, we may make loans to our PRC subsidiaries. However, any loans from our offshore holding company to our PRC subsidiaries are subject to PRC regulations. For example, loans by us to our subsidiaries in China, which are foreign-invested enterprises, to finance their activities cannot exceed statutory limits, usually the balance between the total investment amount and the registered capital contribution, and must be registered with the SAFE or its local counterparts.

We may also decide to finance our subsidiaries by means of capital contributions. These capital contributions must be approved by the PRC Ministry of Commerce, or the MOFCOM, or its local counterparts. Also, on August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign Invested Enterprises, or Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency registered capital into Renmibi by restricting how the converted Renminbi may be used. SAFE Circular 142 provides that the Renminbi capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the Renminbi capital converted from foreign currency registered capital of a foreign-invested company. The use of such Renminbi capital may not be altered without SAFE approval, and such Renminbi capital may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used. Violations of Circular 142 could result in severe monetary or other penalties.

In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, We cannot assure you that we will be able tocomplete the necessary government registrations or obtain these government approvals on a timely basis, if at all, with respect to future capital contributions by us to our subsidiaries. If we fail to receive such approvals or complete the necessary government registrations, our ability to capitalize our PRC operations may be adversely affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

These limitations on the free flow of funds between us and our PRC companies could restrict our ability to act in response to changing market conditions and reallocate funds among our PRC companies on a timely basis. Moreover, according to a circular jointly issued by the Ministry of Finance and the State Administration of Taxation on September 19, 2008, if the debt-to-equity ratio of a non-financial enterprise exceeds two-to-one, the interest expenses accrued from the exceeded debt shall not be deducted before taxation unless the shareholder loan in question can meet certain conditions. Although there is uncertainty at this time as to how the circular will be interpreted and implemented, such circular may have a negative impact on our PRC subsidiaries’ abilities to obtain loans from its shareholders.

The discontinuation of any of the preferential tax treatments or financial incentives currently available to us in the PRC or imposition of any additional PRC taxes on us could adversely affect our financial condition and results of operations.

China passed a new PRC Enterprise Income Tax Law and its implementing rules, both of which became effective on January 1, 2008. The PRC Enterprise Income Tax Law significantly curtails tax incentives granted to foreign-invested enterprises under the Foreign Invested Enterprise Income Tax Law. The PRC Enterprise Income Tax Law, however, (i) reduces the statutory rate of enterprise income tax from 33% to 25%, (ii) permits companies established before March 16, 2007 to continue to enjoy their existing tax incentives,

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adjusted by certain transitional phase-out rules promulgated by State Council on December 26, 2007, and (iii) introduces new tax incentives, subject to various qualification criteria.

The PRC Enterprise Income Tax Law and its implementing rules permit certain “high-technology enterprises” which hold independent ownership of core intellectual property and simultaneously meet a list of other criteria, financial or non-financial, as stipulated in the implementation rules of the PRC Enterprise Income Tax Law, to enjoy a reduced 15% enterprise income tax rate subject to certain new qualification criteria. Certain of our subsidiaries have been recognized by the local provincial level Municipal Science and Technology Commission, Finance Bureau, and State and Local Tax Bureaus as “high and new technology enterprises” and were further registered with the local tax authorities to be eligible to the reduced 15% enterprise income tax rate. The continued qualification of a “high and new technology enterprise” will be subject to annual evaluation and a three-year review by the relevant government authority in China. In addition, certain of our subsidiaries were entitled to preferential tax treatments due to other qualifications obtained from local governmental authorities such as "Manufacturing Foreign-Invested Enterprise" and "Software Enterprise".

Preferential tax treatments granted to our subsidiaries by the local governmental authorities are subject to review and may be adjusted or revoked at any time. The discontinuation of any preferential tax treatments currently available to us may cause our effective tax rate to increase, which could have a material adverse effect on our financial condition and results of operations. We cannot assure you that we will be able to maintain our current effective tax rate in the future.

We have also in the past been granted certain governmental financial subsidies. Government agencies may decide to reduce or eliminate subsidies at any time. We cannot assure you of the continued availability of the government incentives and subsidies currently enjoyed by some of our PRC subsidiaries. The discontinuation of these governmental incentives and subsidies could adversely affect our financial condition and results of operations.

Our global income and the dividends we may receive from our PRC subsidiaries may be subject to PRC tax under the PRC Enterprise Income Tax Law, which would have a material adverse effect on our results of operations.

Under the PRC Enterprise Income Tax Law and its implementing rules, both became effective from January 1, 2008, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation rules define the term “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. In addition, the SAT issued a bulletin on August 3, 2011 to provide more guidance on the implementation of the above circular with an effective date to be September 1, 2011. The bulletin made clarification in the areas of resident status determination, post-determination administration, as well as competent tax authorities. It also specifies that when provided with a copy of Chinese tax resident determination certificate from a resident Chinese controlled offshore incorporated enterprise, the payer should not withhold 10% income tax when paying the Chinese-sourced dividends, interest, royalties, etc. to the Chinese controlled offshore incorporated enterprise. Although both the circular and the bulletin only apply to offshore enterprises controlled by PRC enterprises and not those by PRC individuals or foreigners, like our company,  the determination criteria set forth in the circular and administration clarification made in the bulletin may reflect the SAT's general position on how the "de facto management body" test should be applied in determining the tax residency status of offshore enterprises and the administration measures should be implemented, regardless of whether they are controlled by PRC enterprises or PRC individuals. While we do not believe we should be considered a resident enterprise, if the PRC authorities were to subsequently determine that we should be so treated, a 25% enterprise income tax on our global income could significantly increase our tax burden and materially and adversely affect our cash flow and profitability. Pursuant to the PRC Enterprise Income Tax Law, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise in China to its foreign investors will be subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. We are a British Virgin Islands holding company and substantially all of our income may come from dividends from our PRC subsidiaries. To the extent these dividends are subject to withholding tax, the amount of fund

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available to us to meet our cash requirements, including the payment of dividends to our shareholders and ADS holders, will be reduced.

In addition, because there remains uncertainty regarding the interpretation and implementation of the PRC Enterprise Income Tax Law and its implementation rules, it is uncertain whether, if we are regarded as a PRC resident enterprise, dividends we pay with respect to our ordinary shares or ADSs, or the gain you may realize from the transfer of our ordinary shares or ADSs, would be treated as income derived from sources within the PRC and be subject to PRC tax. If we are required under the PRC Enterprise Income Tax Law to withhold PRC income tax on our dividends payable to our non-PRC corporate shareholders and ADS holders, or if you are required to pay PRC income tax on the transfer of our ordinary shares or ADSs, your investment in our ADSs or ordinary shares may be materially and adversely affected.

We may rely on dividends and other distributions on equity paid by our operating subsidiaries to fund cash and financing requirements, and limitations on the ability of our operating subsidiaries to pay dividends to us could have a material adverse effect on our ability to conduct our business.

We are a holding company, and we may rely on dividends and other distributions on equity paid by our operating subsidiaries for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders, service any debt we may incur and pay our operating expenses. If any of our operating subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. Furthermore, relevant PRC laws and regulations permit payments of dividends by our operating subsidiaries only out of their respective retained earnings, if any, determined in accordance with PRC accounting standards and regulations. In addition, we may  fail to make certain PRC government filings on a timely basis in connection with our acquisitions, which may also restrict the ability of these acquired entities to make dividend payments to our holding company.

Under PRC laws and regulations, our operating subsidiaries are required to set aside 10% of their respective after-tax profits each year to fund a statutory surplus reserve. This reserve is not distributable as dividends until the accumulated amount of such reserve has exceeded 50% of their respective registered capital. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation. As a result of these PRC laws and regulations, our operating subsidiaries are restricted in their ability to transfer a portion of their respective net assets to us in the form of dividends. Limitations on the ability of our operating subsidiaries to pay dividends to us could adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends, or otherwise fund and conduct our business.

The audit report included in this annual report are prepared by auditors who are not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection

Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the US Public Company Accounting Oversight Board (United States) (“the “PCAOB”), is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards.  Because our auditors are located in the Peoples’ Republic of China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of theChinese authorities, our auditors are not currently inspected by the PCAOB. 

Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality.  This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor's audits and its quality control procedures.   As a result, investors may be deprived of the benefits of PCAOB inspections.  

The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

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The regulation of the China Securities Regulatory Commission, or the CSRC, establishes more complex procedures for acquisitions conducted by non-PRC investors which could make it more difficult to pursue growth through acquisitions.

On August 8, 2006, six PRC regulatory agencies, namely, the MOFCOM, the State-owned Assets Supervision and Administration Commission of the State Council, or SASAC, the State Administration of Taxation, the State Administration for Industry and Commerce, or SAIC, the CSRC and SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rule, which became effective on September 8, 2006 and amended on June 22, 2009. This M&A Rule purports, among other things, to require offshore special purpose vehicles, or SPVs, formed for overseas listing purposes through acquisitions of PRC domestic companies and directly or indirectly controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on a non-PRC stock exchange.

The M&A Rule also established additional procedures and requirements that could make merger and acquisition activities by non-PRC investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a non-PRC investor takes control of a PRC domestic enterprise. We have grown our business in part by acquiring complementary businesses, and we may continue to do so in the future. Complying with the requirements of the M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the MOFCOM or its local counterparts, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

Recent PRC regulations relating to offshore investment activities by PRC residents and employee stock options granted by overseas-listed companies may increase our administrative burden, restrict our overseas and cross-border investment activity or otherwise adversely affect the implementation of our acquisition strategy.

SAFE promulgated regulations that require PRC residents and PRC corporate entities to register with local branches of SAFE in connection with their direct or indirect offshore investment activities. Under the SAFE regulations, PRC residents who make, or have previously made, direct or indirect investments in offshore companies, will be required to register those investments. In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is required to update such registration with the local branch of SAFE in the event of any material change involving its round-trip investment, any capital variation, such as an increase or decrease in capital, any transfer or swap of shares, merger, divestiture, long-term equity or debt investment or creation of any security interest. If any PRC shareholder fails to make the required SAFE registration or file or update the registration, the PRC subsidiaries of that offshore parent company may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation, to their offshore parent company, and the offshore parent company may also be prohibited from injecting additional capital into their PRC subsidiaries. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

We cannot provide any assurances that all of our future shareholders who are PRC residents will make or obtain the applicable registrations or approvals required by these SAFE regulations. The failure or inability of our PRC resident shareholders to comply with the registration procedures set forth therein may subject us to fines and legal sanctions, restrict our cross-border investment activities, or limit our PRC subsidiaries’ ability to distribute dividends or obtain foreign-exchange-dominated loans to our company.

 As it is uncertain how the SAFE regulations will be interpreted or implemented, we cannot predict how these regulations will affect our business operations or future strategy. For example, we may be subject to more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our results of operations and financial condition. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the SAFE regulations. This may restrict our ability to implement our acquisition strategy and could materially and adversely affect our business and prospects.

 On March 28, 2007, SAFE adopted the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-

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Listed Companies, or the Stock Option Rule. Under the Stock Option Rule, PRC citizens who are granted stock options by an overseas publicly-listed company are required, through a PRC agent or PRC subsidiary of such overseas publicly-listed company, to register with SAFE and complete certain other procedures. Under our 2006 Plan, we have a significant number of options to purchase ordinary shares outstanding as well as a significant number of option shares reserved for future issuance. We and our PRC employees and directors who have been granted stock options will be subject to the Stock Option Rule when our company becomes an overseas publicly-listed company. If we or our PRC optionees fail to comply with these regulations, we or our PRC optionees may be subject to fines and legal sanctions. Failure to comply with such provisions may also prevent us from being able to grant equity compensation to our employees, which is a significant component of the compensation of many of our PRC employees. In that case, our business operations may be materially and adversely affected.

Certain of our leased property interests may be defective and we may be forced to relocate our operations from the properties affected by such defects, which could cause a significant disruption to our business.

 Certain of our leased properties in China, all of which are used as offices, contain defects in their respective leasehold interests. Such defects include (i) the lack of evidence showing the landlord’s proper title or right to lease the property and/or (ii) the landlord’s failure to duly register the respective lease with the relevant PRC authority. According to relevant PRC laws, if a tenant lacks evidence of the landlord’s title or right to lease the property, the relevant lease agreement may not be valid or enforceable, and subject to challenge by third parties. Similarly, although the failure to register a lease agreement will not affect its effectiveness between the tenant and the landlord, such lease agreement may be subject to challenge by, and unenforceable against, a bona fide third party who leases the same property from the landlord and has duly registered the lease with the relevant PRC authority. The landlord and the tenant may also be subject to administrative fines for failures to register the relevant lease.

 We have initiated steps to cause our landlords to procure valid evidence as to the title or right to lease, as well as to complete the lease registration procedures. However, we cannot assure you that such defects will be cured in a timely manner or at all. Our business may be interrupted and additional relocation costs may be incurred if we are required to relocate our operations affected by these defects. Moreover, if our lease agreements are challenged by third parties, it could result in a diversion of our management’s attention and cause us to incur costs associated with defending these actions, even if such challenges are ultimately determined in our favor.

Changes to the political status and international relations of Taiwan may affect our business, operations and financial conditions.

 Several of our subsidiaries are incorporated in Taiwan. Taiwan has a unique international political status given that Taiwan and the Chinese mainland have been separately governed since 1949. Differences in the interpretation of the status of Taiwan between Taiwan and the PRC have given rise to continuous political debates which in turn have, from time to time, affected the political status of Taiwan. Although significant economic and cultural relations between Taiwan and the PRC have been established during recent years, the PRC has refused to renounce the possibility that it may in the future forcefully gain control of Taiwan. Changes in the relations between Taiwan and the PRC may have an adverse effect on Taiwan’s economy. We cannot be assured that present tensions will not be exacerbated, which could have an adverse impact on Taiwan’s economy and, in turn, an adverse impact, our business, operations and financial condition.

Risks Related to Our ADSs

The market price for our ADSs may be volatile.

The market price for our ADSs is likely to be highly volatile and subject to wide fluctuations. Since our ADSs became listed on the New York Stock Exchange on July 20, 2010 up to April 24, 2012, the closing prices of our ADSs have ranged from US$26.73 to US$1.78 per ADS, and the last reported trading price on April 24, 2012 was US$3.16 per ADS. The price of our ADSs may continue to fluctuate in response to various factors, which include the following:

· actual or anticipated fluctuations in our quarterly operating results;

· changes in financial estimates by securities research analysts;

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

· technological breakthroughs in the IT services industry;

· potential litigation or administrative investigations;

· addition or departure of key personnel;

· fluctuations in the exchange rate between the U.S. dollar and Renminbi;

· release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares or ADSs;

· sales or perceived sales of additional ordinary shares or ADSs; 

· general market conditions or other developments affecting us or our industry; and

· negative market perception and media coverage of our company or other companies in the same or similar industry with us.

In addition, the securities markets have 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 ADSs.

We may need additional capital and may not be able to raise funds on acceptable terms, if at all. In addition, any funding through the sale of additional ADSs or other equity securities could result in additional dilution to our shareholders and any funding through indebtedness could restrict our operations.

We may require additional cash resources to finance our continued growth or other future developments, including any investments or acquisitions we may decide to pursue. The amount and timing of such additional financing needs will vary principally depending on the timing of new product and service launches, investments and/or acquisitions, and the amount of cash flow from our operations. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities or securities convertible into our ordinary shares could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations.

Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:

· investors’ perception of, and demand for, securities of IT service solutions providers;

· conditions of the U.S. and other capital markets in which we may seek to raise funds;

· our future results of operations, financial condition and cash flows;

· governmental regulations of foreign investment in China or other jurisdictions;

· economic, political and other conditions in China and other jurisdictions; and

· PRC governmental policies relating to foreign currency borrowings.

We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all, especially if the current extreme volatilities in the capital markets worldwide continue or worsen as a result of recent global financial services and economic crises. If we fail to raise additional funds, we may need to sell debt or additional equity securities or to reduce our growth to a level that can be supported by our cash flow. Without additional capital, we may not be able to:

· further develop or enhance our customer base;

· acquire necessary technologies, products or businesses;

· expand operations in China and elsewhere;

· hire, train and retain employees;

· market our software solutions, services and products; or

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· respond to competitive pressures or unanticipated capital requirements.

Substantial future sales or perceived sales of our ADSs in the public market could cause the price of our ADSs to decline.

Sales of our ADSs in the public market or the perception that these sales could occur, could cause the market price of our ADSs to decline. All ADSs sold in our initial public offering in July 2010 and follow-on public offering in December 2010 are freely transferable without restriction or additional registration under the U.S. Securities Act of 1933, as amended, or the Securities Act, except to the extent acquired by persons deemed to be our “affiliates.”  Shares owned by our founders, Mr. Yiming Ma and Ms. Heidi Chou, are also available for sale, subject to volume and other restrictions as applicable under Rule 144 and Rule 701 under the Securities Act. We may also have shares issued upon exercise of the options that are granted to our directors and employees. To the extent these shares are sold into the market, the market price of our ADSs could decline.

Holders of ADSs have fewer rights than shareholders and must act through the depositary to exercise those rights.

 Holders of ADSs do not have the same rights of our shareholders and may only exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. The minimum notice period required to convene a general meeting will be seven days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your ordinary shares in order to allow you to cast your vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ADSs. In addition, in your capacity as an ADS holder, you will not be able to call a shareholder meeting. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ADSs are not voted as you requested.

The depositary for our ADSs will give us a discretionary proxy to vote our ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, except in limited circumstances, which could adversely affect your interests.

Under the deposit agreement for the ADSs, if you do not vote, the depositary will give us a discretionary proxy to vote our ordinary shares underlying your ADSs at our shareholders’ meetings unless:

· we have failed to timely provide the depositary with notice of meeting and related voting materials;

· we have instructed the depositary that we do not wish a discretionary proxy to be given;

· we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;

· a matter to be voted on at the meeting would have a material adverse impact on shareholders; or

· the voting at the meeting is to be made on a show of hands.

The effect of this discretionary proxy is that if you do not vote at shareholders’ meetings, you cannot prevent our ordinary shares underlying your ADSs from being voted, except under the circumstances described above. This may make it more difficult for shareholders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.

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Our company may be classified as a passive foreign investment company (or a “PFIC”) for United States federal income tax purposes, which could subject United States investors in our ADSs or ordinary shares to adverse tax consequences.

Although we do not believe that we were classified as a PFIC for the taxable year ended 2011, there is a significant risk that we will be classified as a PFIC for our current taxable year ending 2012 and future taxable years unless our share value increases and/or we invest a substantial amount of the cash and other passive assets that we hold in assets that produce or are held for the production of active income.  A non-United States corporation, such as our company, will be classified as a PFIC for United States federal income tax purposes for any taxable year, if either (1) 75% or more of its gross income for such year consists of certain types of “passive” income, or (2) 50% or more of its average quarterly assets as determined on the basis of fair market value during such year produce or are held for the production of passive income.  Because there are uncertainties in the application of the relevant rules and PFIC status is a fact-intensive determination made on an annual basis, no assurance may be given with respect to our PFIC status for any taxable year.

If we are classified as a PFIC for any year during which a U.S. investor holds our ADSs or ordinary shares, a U.S. investor may incur significantly increased United States income tax on gain recognized on the sale or other disposition of the ADSs or ordinary shares and on the receipt of distributions on the ADSs or ordinary shares to the extent such gain or distribution is treated as an “excess distribution” under the United States federal income tax rules.  Furthermore, a U.S. investor will generally be treated as holding an equity interest in a PFIC in the first taxable year of the U.S. investor’s holding period in which we become a PFIC and subsequent taxable years (“PFIC-Tainted Shares”) even if, we, in fact, cease to be a PFIC in subsequent taxable years.  Accordingly, a U.S. investor should, to the extent an election is available, consider making a “mark-to-market” election to avoid owning PFIC-Tainted Shares.  See the discussion under “Item 10.E. Taxation – Material United States Federal Income Tax Considerations – Passive Foreign Investment Company Considerations” concerning the United States federal income tax consequences of an investment in the ADSs or ordinary shares if we are or become classified as a PFIC, including the possibility of making a “mark-to-market” election.

You may not receive distributions on ordinary shares or any value for them if it is unlawful or impractical to make them available to you.

Subject to the terms and conditions of the deposit agreement, the depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs, in which case it may determine not to make such a distribution. Neither we nor the depositary have any obligation to register ADSs, ordinary shares, rights or other securities subject to such distribution under U.S. securities laws. Neither we nor the depositary have any obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive the distribution we make on our ordinary shares or any value for them if it is unlawful or impractical for us to make them available to you. These restrictions may materially and adversely affect the value of your ADSs.

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

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

 Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings and you may not receive cash dividends if it is impractical to make them available to you.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Also, under the deposit agreement, the depositary will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act, or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

In addition, the depositary of our ADSs has agreed to pay to you the cash dividends or other distributions the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs

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represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property and you will not receive such distribution.

 You may have difficulty enforcing judgments obtained against us.

 We are a company incorporated under the laws of the British Virgin Islands and substantially all of our assets are located outside of the United States. Substantially all of our current operations are conducted in the PRC. In addition, a majority of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the British Virgin Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state.

ITEM 4. INFORMATION ON THE COMPANY

A. HISTORY AND DEVELOPMENT OF THE COMPANY

Camelot Information Systems Inc. is a British Virgin Islands holding company incorporated in November 2000 and we conduct a significant majority of our business through our operating subsidiaries in China. Our principal executive offices are located at Beijing Publishing House, A6 North Third Ring Road, Xicheng District, Beijing, 100120, The People's Republic of China.  Our telephone number at this address is (86) 10-82019000 and our fax number is (86) 10-82019100.

Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above.  Our website is www.camelotchina.com.  The information contained on our website is not part of this annual report.  Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011.

In July 2010, we completed our initial public offering, in which, including the exercise of the over-allotment options, we issued and sold  of 9,166,667 ADSs representing 36,666,668 ordinary shares, and certain of our then shareholders sold 4,166,667 ADSs, representing 16,666,668 our ordinary shares. In December 2010, we completed our follow-on public offering of 7,160,206 ADSs representing 28,640,824 ordinary shares which were offered by our selling shareholders and we did not receive any proceeds from the sale of the ADSs by the selling shareholders. We also granted to the underwriters an option to purchase up to an additional 1,074,030 ADSs from us, which was exercised in full by the underwriters in December 2010. We received US$19.9 million from the sale of the 1,074,030 ADSs.

Historically, we have made a number of strategic acquisitions to complement our growth, including the acquisitions of Triumph Consulting & Service Co., Ltd. and its affiliates, or Triumph, Bayshore Consulting and Services Co., Ltd. and its PRC and offshore affiliates, or Bayshore, and Dalian Yuandong Digital Co., Ltd. and its PRC and offshore affiliates, or Dalian Yuandong, in 2006. Our significant acquisitions since 2007 include the following:

• In January 2007, we acquired 100% of Hwawei Digital Financial Technologies Co., Ltd. and its affiliates, or Hwawei, a specialized applications software implementation and development services provider to the financial service industry in Taiwan.

• In February 2008, we acquired 100% of Beijing Red River Valley Information Technology Co., Ltd and its offshore affiliates, or Red River Valley, which provides packaged software services tailored to the steel manufacturing industry in China to enhance operational productivity.

• In April 2008, we acquired 100% of VLife Technology Co., Ltd. and its PRC and offshore affiliates, or VLife. VLife focuses on providing application software development and implementation services to

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life insurance companies in Taiwan by incorporating specific insurance regulations, actuarial requirements and industry prerequisites.

• In April 2008, we acquired 100% of Beijing Yinfeng Technology Development Co., Ltd. and its offshore affiliates, or Yinfeng. Yinfeng provides mission critical risk management and internal auditing solutions, including the development of anti-money laundering systems, for banks in China.

• In July 2008, we acquired 85.47% equity interest in Harmonation Inc. and its affiliates, or Harmonation. Harmonation provides image solution and business process management application services to financial services companies in Taiwan to enhance operational efficiency, minimize storage costs and reduce paper expenses.

• In July 2009, we acquired 100% of Agree Technology Co., Ltd. and its PRC and offshore affiliates, or Agree, a company that provides comprehensive software solutions for automating teller systems and branch operations to clients in the financial services industry in China through developing mission critical financial software platforms and applications.

• In December 2009, we acquired 100% of Beijing Tansun Software Technology Co., Ltd. and its PRC and offshore affiliates, or Tansun , a company provides core business and enterprise software solutions and services for the financial services industry in China, including the consultation, design, development, implementation, testing and maintenance for key functions, such as corporate loan, risk management, supply chain financing, commercial loan, cash management, and internal collaboration and workflow.

• In January 2011, we acquired 100% equity interest in Dimension InfoTech Co. Ltd and its offshore affiliates, or Dimension, a specialist in SAP project implementation and SAP-based customized solutions based in China, for a total consideration of US$14.5 million, including 1,152,352 shares of our ordinary shares,  US$4.0 million of cash and performance-based considerations with a fair value of US$5.2 million as of the acquisition date.

In May 2011, we renewed the technical services agreement and the master SOW with IBM for an additional four-year term relating to the delivery center developed by Camelot to provide enterprise application services exclusively for IBM's customers. The renewal agreement with IBM is on substantially the same terms as the prior agreement, except that the right for IBM to purchase the delivery center has been removed.

In May 2011, our board of directors has authorized a share repurchase program of up to US$ 20 million running through the end of 2011. Any repurchase under the repurchase program may be made on the open market, depending on market conditions and other factors. The repurchase was funded from the company's available cash balance. As of December 31, 2011, we have repurchased 2,118,400 ADSs representing 8,473,600 ordinary shares of the company. As permitted under BVI law, we keep those shares as treasury shares.

In November 2011, our board of directors approved to reduce the exercise price of  all stock options granted to all employees under our 2006 Equity Incentive Plan. The reduced exercise price per ADS is US$0.01 or US$0.98 depending on their respective grant date ("Share Repricing"). Other than the exercise price of the option, the other terms of the options remained unchanged.

In December 2011, we established a wholly owned subsidiary Camelot Financial Information Technology Services Co., Ltd, in order to enhance our focus on clients, technology and markets in the banking, financial services and insurance sectors.  This new subsidiary will consolidate our Financial Industry Service resources and integrate teams from our previously acquired companies and our existing Financial Industry Service business line.

In April 2012, we signed a three-year strategic cooperative agreement (“Strategic Cooperative Agreement”) with Huawei Device Co. Ltd (“Huawei Device”) to develop enterprise application solutions for Huawei’s enterprise mobile solution platform.  Under the Strategic Cooperation Agreement, we will form special project teams to develop enterprise mobile application solutions for Huawei Device and will be named a strategic partner if Huawei accepts our enterprise mobile solutions.

See “Item 5. Operating and Financial Review and Prospects – B. Liquidity and Capital Resources” for a description of our principal capital expenditures in the last three financial years.

B. BUSINESS OVERVIEW

               We are a leading domestic provider of enterprise application services and financial industry IT services in China, and we focus on enterprises operating in the Chinese market. We focus on providing services at the higher end of the IT value chain. Our primary service lines are:

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· enterprise application services, or EAS, which primarily consist of (i) packaged software services for leading ERP software packages, and (ii) software development and maintenance services; and

· financial industry IT services, or FIS, which primarily consist of software solutions, system support and maintenance, as well as IT consulting services for the financial industry.

We provide services to a wide range of industries, including financial services, resources and energy, manufacturing and automobile, technology, as well as telecommunication, media and education. We provide our services to enterprise customers directly as well as indirectly through international IT service providers such as IBM, Accenture and HP.

The following table sets forth our net revenues by service line for the periods indicated.  

	For the Year Ended December 31,
	2009				2010				2011
	Amount		% of Total		Amount		% of Total		Amount		% of Total
	(U.S. dollars in thousands, except percentages)
Enterprise application services		79,423		67.3		126,555		65.6		159,181		70.1
Financial industry IT services		38,580		32.7		66,308		34.4		67,939		29.9
Total net revenues		118,003		100.0		192,863		100.0		227,120		100.0

Our enterprise application services business has historically been our largest service line. In recent years, we have significantly expanded our financial industry IT services business through both organic growth and acquisitions.

 Enterprise Application Services

Our largest service line, enterprise application services, largely consists of two main types of services: (i) packaged software services and (ii) software development and maintenance services.   

Packaged Software Services

We provide a wide range of implementation, customization and support services for packaged software systems to enterprise customers, with a focus on ERP software packages. Our packaged software services have a wide range of coverage in terms of both industries and applications. We have served clients and accumulated domain expertise in resources and energy, technology, manufacturing and automobile, as well as retail, consumer and transportation. We provide services for systems ranging from traditional ERP systems, such as those offered by SAP and Oracle, to new dimension applications, such as customer relationship management, business intelligence, supply chain management, integration tools and manufacturing supply execution.

 Packaged software systems purchased off-the-shelf generally require implementation prior to use. The system implementation process generally consists of installation of hardware and software, customization, test and documentation, configuration, training and delivery. A team with strong and relevant technical background, business expertise to match system functions and business processes, and deep understanding of implementation methodology is required to accomplish these tasks within the schedule and budget. In addition, the process of implementing, customizing and supporting a packaged software system poses significant challenges to organizations and may take several years. As a result, large enterprise organizations generally outsource such implementations to third-party IT service providers such as our company.

We have historically focused on SAP-based ERP services. We began providing services on SAP software package systems in 2001. We are certified vendors to many of the major international IT service providers including IBM and Accenture.

We acquired Triumph in 2006 and as a result of this acquisition, we have further strengthened our expertise in consulting services and expanded our customer base of mid-sized companies. In addition, through our acquisition of Red River Valley in 2008, we gained access to its domain expertise and customer base in the steel manufacturing industry, which we believe will assist to our goal of expanding into the automobile industry in China. In January 2011, we acquired Dimension, a specialist in SAP project implementation and SAP-based customized solutions.

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Packaged software services can be broadly divided into implementation services and maintenance services.

Packaged Software Implementation Services

Our packaged software implementation services primarily consist of the following:

· Packaged Software Integration.  We work with providers of packaged software to install and integrate these packages with our customers’ existing computer systems and with various Internet applications to meet the individual needs of our customers. ERP systems are built with the purpose of tightly integrating processes within an enterprise such as planning, manufacturing, sales, marketing, inventory control, customer service, finance and human resources. Our ERP integration services enable these systems to communicate with each other as well as the organization’s data warehouse, any custom-developed enterprise systems or legacy applications. Our integration services help our customers manage cost by reducing or eliminating duplicate data entry and time spent reconciling discrepancies between different systems. Our ERP integration services also enable our customers to streamline business processes and improve data access in support of data-based decision making.

· Solution Design.  Our professionals assist our customers in the design of application configuration options, detailed business procedure documentation, customized extensions, interfaces and data conversions. In addition, we help our customers identify process and organizational changes required for the implementation of ERP systems.

· Technical Configuration and Customization.  We provide configuration services to customers to match the ERP software package with the customers’ existing business processes. Further, we provide customization services to extend the use of the ERP system or change its use by creating customized interfaces and underlying application code.

· Training.  In connection with the implementation of a system, we provide training to the various members of the customer’s staff, such as network specialists and end-users to help them acquire the required ERP application knowledge and skills.

· Project Management.  We provide customer side project management for IT projects, starting from defining the scope, quality, time and cost considerations of the projects. For the duration of the projects, we provide systematic controlling, risk management, quality assurance and sub-contractor management. Our experts have the required IT specific knowledge on managing complex projects and achieving project goals.  

· Quality Assurance and Testing.  We assist our customers in planning, scripting, executing and monitoring system and stress tests to see if the expectations of the end customers, defined in service level agreements, will be met. For each particular customer, we focus on developing a framework for ongoing testing in order to seek continuous improvement in the predictability of our customer’s internal systems.

Packaged Software Maintenance Services

Our packaged software maintenance services primarily consist of (i) maintenance and production support services, and (ii) infrastructure management.

· Maintenance and production support.  We provide maintenance services for our customers’ ERP and other large software systems that cover a wide range of technologies and businesses. Our approach to software maintenance focuses on long-term functionality, stability and preventive maintenance. This approach, coupled with our quality processes, allows our customers to reduce recurring maintenance costs. We generally perform maintenance work at our development centers using secure and redundant communication links to our customers’ systems.

· Infrastructure management.  To address our customers’ specific requests to provide infrastructure and technology support, we provide solutions and services which range from routine maintenance of software to complex security solutions. Our services include administration, infrastructure management, migration, upgrades, configuration, backup, security management, performance management, operations monitoring and consolidation services for a variety of operating systems and platforms.

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In addition to packaged software implementation and maintenance services, we also provide IT consulting services, such as IT infrastructure assessment and technology roadmap development.

In 2007, we became one of the first packaged software service providers to establish a solution-based customer relationship management “competence center” to meet the growing demands of customers seeking packaged software solutions rather than services on particular software package systems. We continue to develop additional competence centers focusing on human resources, business intelligence, integration and manufacturing execution systems in response to client needs. In addition to better serving the needs of our customers, we believe that the competence centers enhance the skill-set of our professionals, increases our flexibility in allocating resources and maintain a level of challenge and work satisfaction among our professionals.

Software Development and Maintenance Services

We offer a wide range of software development, system migration and maintenance services based on existing and emerging technologies that are tailored to meet the specific needs of our customers. Our customers include IT service providers and corporations such as IBM, Nomura Research Institute, Ltd. and its affiliates, or NRI, and Hitachi. We are qualified as a Capability Maturity Model, or CMM, Level IV company. CMM is a service mark and refers to a development model elicited from actual data. CMM has been superseded by CMMI, though CMM continues to be a general theoretical process capability model used in the public domain.

 Financial Industry IT Services

We provide a wide range of services and solutions along the IT value chain to our financial industry customers, including (i) software solutions, (ii) system support and maintenance, and (iii) IT consulting services. We established our financial industry IT services business in 2002 to meet the special and growing needs of our financial industry customers. We significantly expanded the capabilities of our financial industry IT services through acquisitions since 2006.

 Software Solutions

We design, develop, implement and maintain customized IT solutions software for our financial industry customers to meet certain customer-specific demands. Our software solutions service offerings include the following areas:

· intermediary business solutions for commercial banks, including teller/counter systems, channel management solutions, payment and settlement solutions, and front end communication exchange midware;

· key function systems for commercial banks, including corporate loan, commercial loan, supply chain financing, cash management, as well as internal collaboration and workflow

· check image processing services for commercial banks;

· core life insurance solutions;

· risk management and anti-money laundering systems for banks;

· application localization and customization;

· data transformation and verification; and

· help desk support and production support.

System Support and Maintenance

We provide support and maintenance services of mainframe operating and database systems, such as IBM’s operating system and its sysplexes and subsystems, which are used by our financial industry customers. Our system software support and maintenance service offerings include the following areas:

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· maintenance of core banking systems, international banking systems, mutual fund systems, and credit card systems;

· system installation and customization;

· system performance health check and investigation of performance issues;

· system performance tuning;

· evaluation of longer-term capacity needs and recommendations on the architecture of new applications based on performance expectations;

· system and application emergency support;

· installation and maintenance of performance measurement tools; and

· installation and maintenance of program temporary fix packages.

IT Consulting Services

We capitalize on our domain expertise and knowledge base in the financial services industry to provide consulting services by teaming with international IT service providers such as IBM and Accenture. Our consulting services seek to provide businesses with the flexibility and capability to respond to their customers’ needs on a timely basis. Our consulting service offerings include the following areas:

· business process re-engineering;

· Basel II risk management;

· customer relationship management;

· financial services logical data model; and

· system conversion/cut-over.

Seasonality

Our first quarter sales and results of operations are usually lower than other quarters due to the general slowdown in business activities in China during the Chinese New Year period.

Sales and Marketing

We rely on our sales force to market and sell our solutions and services throughout mainland China, Taiwan, Japan and other locations.

The sales cycle for IT services is highly competitive, long and costly. As part of our strategy, we focus on securing new businesses from existing customers, particularly strategic accounts, by providing high-quality services and cross-selling new services. We also provide full-time account managers to serve the needs of our strategic accounts. On the other hand, from our customers’ perspectives, once a customer-provider relationship begins, there may be significant costs associated with switching to another provider. As a result, we have historically derived significant recurring revenues from repeat customers.

                We encourage our employees at every level to engage in managing our customer relationships. Our senior management seeks to develop and cultivate customer relationships by identifying customer needs and the types of services and solutions that we can provide to our customers. Our mid-level managers develop and maintain our customer relationships on a project-by-project basis by providing high-quality services and solutions, managing customer expectations and ensuring customer satisfaction. In addition, our dedicated sales teams for the large customers communicate with and provide support to such customers on an ongoing basis. Our sales staff receives a significant portion of its compensation from performance-based bonuses and some of our senior sales employees have received option grants under our equity incentive plan with the intention of aligning their interests with the growth of our business.

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Customers

Our customer base consists of end customers in the PRC, Taiwan, Japan and the U.S. as well as multinational IT service providers and large state-owned enterprises.

Customer Profile

The following table sets forth our net revenues by the geographical location of our customer for the periods indicated. For purpose of this table, we have determined the geographical location of a customer based on the place of incorporation of the contractual counterparty.

	For the Year Ended December 31,
	2009				2010				2011
	Amount		% of Total		Amount		% of Total		Amount		% of Total
	(U.S. dollars in thousands, except percentages)
PRC and Taiwan		105,567		89.4		175,860		91.1		204,112		89.9
Japan		11,642		9.9		14,663		7.7		21,120		9.3
Others		794		0.7		2,340		1.2		1,888		0.8

Total net revenues 118,003 100.0 192,863 100.0 227, 120 100.0

The following table sets forth, for the period indicated, our net revenues by industry in which our end customers operate.

	For the Year Ended December 31,
	2009				2010				2011
	Amount		% of Total		Amount		% of Total		Amount		% of Total
	(U.S. dollars in thousands, except percentages)
Financial services		41,276		35.0		69,950		36.2		66,350		29.2
Resources and energy		28,256		23.9		41,413		21.5		42,794		18.8
Manufacturing and automobile		20,139		17.1		34,003		17.6		39,213		17.2
Technology		12,153		10.3		20,947		10.8		27,178		12.0
Telecommunication, media and education		4,346		3.7		6,778		3.6		13,563		6.0
Construction and steel		3,949		3.3		7,530		3.9		5,402		2.4
Retail, consumer and transportation		6,558		5.6		5,420		2.8		8,821		3.9
Others		1,326		1.1		6,822		3.6		23,799		10.5
Total net revenues		118,003		100.0		192,863		100.0		227,120		100.0

In 2009, 2010 and 2011, our five largest customers accounted for 49.0%, 48.2% and 53.4%, respectively, of our net revenues.  During the same periods, our largest customer, IBM, which is also the only customer accounting for 10% or more of our total net revenues, accounted for 31.6%, 33.7% and 34.1%, respectively, of our net revenues.

General Customer Contracts

We have entered into services agreements both with the end customers and other IT service providers.

For services agreement directly signed with end customers, the terms vary based on different customers.

For services agreement signed with other IT service providers, the terms of our services are often governed by both a master agreement and a statement of work. Master agreements generally contain provisions relating to general responsibilities and obligations, service quality standards, confidentiality and ownership of intellectual property rights. However, master agreements are not commitments to purchase our services, and generally may be terminated without cause on short notice or when there is no outstanding statement of work under them. Statement of work generally describes our work scope, the delivery schedule, the acceptance methods, quality schedules and price and payment terms.

IBM Delivery Center Agreements

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In March 2008, we entered into a technical services agreement and a master statement of work, or a master SOW, with IBM to establish a delivery center to deliver enterprise application services exclusively for IBM’s customers. Our wholly owned subsidiary, Shanghai Camelot Information Technology Co. Ltd., or Camelot Shanghai, developed the delivery center in 2008. In May 2011, we renewed the technical services agreement and the master SOW with IBM for an additional four-year term. Our net revenues derived from this delivery center totaled US$15.7 million in 2009, US$36.5 million in 2010 and US$47.4 million in 2011, or 13.3%, 18.9% and 20.9% of our total net revenues, respectively.

Key terms of the renewed technical services agreement include the following:

· 3 Days Purchase Demand Priority. Subject to the accomplishment of IBM’s internal process and system setting, for technical service subcontracting demand of IBM 's application service business line (the scope of which will defined by IBM solely), IBM will provide us a purchase demand 3 days before it provides such purchase demand to other technical service suppliers. IBM reserves the right to change or cancel such 3 days priority, in the event we materially breach the renewed technical services agreement.  

· Term and Termination. The initial term was four years and can be renewed by IBM for one or more years with substantially the same terms and conditions. The technical services agreement may be terminated at an earlier date upon the occurrence of certain events, including, among others, a change of control, liquidation or bankruptcy of our company, and a failure by us to meet certain service standards.  

· Non-Compete Undertaking. We have agreed not to compete with IBM, in the field of SAP consulting services, for any existing or future business opportunity from IBM’s existing customers that is either continual or relating to any services provided by us under the technical service agreement. However, such non-compete undertaking does not apply to our existing customers. Our non-compete undertaking is effective throughout the term of the master SOW and for a period of 18 months following the termination of the master SOW.

Delivery of Our Services

We provide a significant majority of our services on-site through our IT professionals based in Beijing, Shanghai, Dalian, Zhuhai, Nanjing, Wuxi, Taipei and Tokyo, as well as through our professionals based in Kunshan and Jiaxing which primarily support our Shanghai operations. We had 2,454, 3,162 and 4,017 IT professionals as of December 31, 2009, 2010 and 2011, respectively. The following table sets forth, as of December 31, 2011, the number of our professionals by the location in which they are based.

	As of December 31, 2011		Services and Solutions Provided
	Number of IT Professionals	% of Total
Beijing	1,968	49.0	all service lines
Shanghai	396	9.9	all service lines
Dalian	482	12.0	enterprise application services
Taipei	153	3.8	financial industry IT services
Zhuhai	189	4.7	financial industry IT services
Jiaxing	26	0.6	enterprise application services
Tokyo	40	1.0	enterprise application services
Nanjing	20	0.5	enterprise application services
Xiamen	227	5.7	financial industry IT services
Kunshan	436	10.8	enterprise application services
Wuxi	80	2.0	enterprise application services
Total	4,017	100.0

On-site teams. Many of our customers require the presence of our project teams on their premises, particularly for mission critical or high-end projects. The customer’s team and our project team collaborate to develop services tailored to our customer’s specifications.

Off-site delivery. We believe that a key success factor in meeting our customers’ needs is our physical presence near the customers. Accordingly, we have established off-site delivery teams and facilities in our major markets, including Beijing, Dalian, Shanghai, Taipei and Tokyo. We largely service our Japanese clients from Dalian, which is generally considered a city with significant economic ties to Japan. We believe our off-site delivery capabilities allow us to respond quickly to customer requests and interact closely with the customer to develop IT solution and market services tailored to meet the needs of specific geographic markets.

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Competition

The markets for IT services in China are highly competitive. The profiles and identities of our competitors may vary among our service lines and customers. In our enterprise application service business, we primarily compete with Chinese IT services firms, and we believe our competitors are Neusoft Corporation and Hand Enterprise Solutions Co., Ltd. Competitors in our financial industry IT services business include Digital China Holdings Limited. In addition, we may also compete with offshore IT service providers including firms based in India, such as Tata Consultancy Services and Infosys Technologies Ltd, as well as domestic offshore IT services providers, such as VanceInfo Technologies Inc.

Intellectual Property

Ownership of software and associated deliverables we create for our customers is retained by or assigned to the customer, and we do not retain an interest in such software or deliverables. We develop certain software solutions and rely upon a combination of non-disclosure and other contractual arrangements and copyright, trade secret, patent and trademark laws to protect our proprietary rights in technology. We require our professionals to enter into non-disclosure and assignment of rights agreements to limit use of, access to and distribution of our and our customers’ proprietary information. The source code for our proprietary software is generally protected as trade secrets and as unpublished copyright works. Although we believe that our services do not infringe the intellectual property rights of others, we cannot assure you that such a claim will not be asserted. See “Item 3. Key Information—D. Risk Factor— We may be liable to our customers for damages caused by a violation of intellectual property rights, the disclosure of other confidential information, system failures, errors or unsatisfactory performance of services, and our insurance policies may not be sufficient to cover these damages” for detailed discussion.

Regulation

This section sets forth a summary of the most significant regulations or requirements that affect our business activities in China and our shareholders’ rights to receive dividends and other distributions from us.

Information Service Industry Regulations

On June 24, 2000, the State Council promulgated Certain Policies in Encouraging the Development of Software and Integrated Circuit Industry, or the Encouraging Policy, in order to promote the development of the software and integrated circuit industries in China. Pursuant to the Encouraging Policy, the software enterprises in China are entitled to preferential treatment, including financing support, tax preferential treatment, export incentives, discretion and flexibility in determining employees’ welfare benefits and remuneration. For example, a recognized software enterprise is entitled to an exemption from enterprise income tax, or EIT, for its first two profitable years and a 50% reduction of its applicable EIT rate for the subsequent three years. A key software enterprise under the State plan is entitled to a 10% EIT. All of the above qualifications are subject to an annual assessment by the relevant government authority in China. Enterprises which fail to meet the annual examination standards are not entitled to the favorable EIT treatments.

 On October 16, 2000, the Ministry of Information Industry, Ministry of Education, Ministry of Science and Technology and the State Administration of Taxation promulgated Certifying Standards and Administration Measures for Software Enterprises (Trial Implementation), or the Certifying Standards. The Certifying Standards further elaborated the provisions of the Encouraging Policy by establishing the specific standards and procedures for the recognition and annual assessment of software enterprises.

 On January 4, 2001, the Ministry of Foreign Trade and Economic Cooperation, Ministry of Information Industry, State Administration of Taxation, General Administration of Customs, State Administration of Foreign Exchange and the State Statistics Bureau promulgated the Circular Concerning Relevant Issues about Software Export, or the Circular. Pursuant to the Circular, enterprises exporting software are entitled to preferential treatment, including government financial support, preferential interest rates of export credit and preferential tax treatment.

Regulations on Foreign Exchange

 The principal regulation governing foreign exchange in China is the PRC Foreign Exchange Administration Regulations (1996) promulgated by PBOC, as amended in 1997 and 2008. Under these

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regulations, Renminbi is freely convertible only to the extent of current account items. For foreign exchange transactions under capital account items, such as making inbound and outbound direct investment, borrowing foreign loans, repatriation of investment and investment in securities outside China, prior approval of or registration with SAFE or its local branches 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 transactions involving capital account items, obtaining approval from SAFE or its local branches. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by the MOFCOM, SAFE and the National Development and Reform Commission, or the NDRC 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 No. 75, issued on October 21, 2005, (i) onshore residents 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 debt financing); (ii) when an onshore 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 onshore 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 or shares, mergers or divestitures, long-term equity or debt investments, or external guarantees, or other material events that do not involve return investments, such onshore 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 Circular 75, were also required to register with the local SAFE branch before March 31, 2006. In addition, according to Circular 75, onshore residents shall refer to domestic resident natural persons and domestic resident legal persons, and the former shall refer to those individuals who have PRC citizenship or other domestic lawful identity and those “individuals who do not have any domestic lawful identity in the PRC but reside in the PRC habitually for the purpose of economic interests.”

 To further clarify the implementation of Circular 75, the SAFE issued various rules, including Circular 106 on May 29, 2007 and Circular No.19 issued on May 20, 2011. Circular 106 distinguishes between various scenarios in offshore financing and round-trip investment, and puts forth the SAFE’s corresponding positions thereon. The overall theme is still on strengthening control over offshore financing routes by way of clarifying certain areas. Under Circular 106, onshore resident shareholders in an offshore company, which has at least two years’ operating history and has made investment in China, can apply for registration under Notice 75. There is no deadline for such registration. Also, under Circular 106, PRC subsidiaries of an offshore special purpose company are required to coordinate and supervise the filing of SAFE registrations by the offshore holding company’s shareholders who are PRC residents in a timely manner. If these shareholders fail to comply, the PRC subsidiaries are required to report such shareholders to the local SAFE authorities. If the PRC subsidiaries of the offshore parent company do not report to the local SAFE authorities, they may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to their offshore parent company, and the offshore parent company may be restricted in its ability to contribute additional capital into its PRC subsidiaries. Moreover, failure to comply with the above SAFE registration requirements could result in liabilities under PRC laws for evasion of foreign exchange restrictions. In accordance with Circular 106, “the individuals who do not have domestic lawful identity in the PRC but reside in the PRC habitually for the purpose of economic interests” mainly include the following (no matter whether he/she has a PRC legal identification certificate or not): (i) individuals who have domestic permanent residence leave this domestic permanent residence temporarily for reasons including overseas travel, study, medical treatment, work, or the requirements of overseas residence, etc.; (ii) individuals who hold domestic-funded rights and interests of domestic enterprises; and (iii) individuals who hold domestic-funded rights and interests in domestic enterprises which were converted into foreign-funded rights and interests with the same individuals holding the aforementioned rights and interests. Circular No.19 established more specific and stringent supervision on the registration process required by Circular No.75. For example, Circular No.19 imposes obligations on onshore subsidiaries of an offshore entity to make true and accurate statements to the local SAFE authorities concerning any shareholder or beneficial owner of the offshore entity who is a PRC citizen or resident. Untrue statements by the onshore subsidiaries may lead to potential liability for the subsidiaries, and in some instances, for their legal representatives or other liable individuals. In view of the fact that none of our

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direct or indirect shareholders is a PRC citizen or resides in the PRC habitually for the purpose of economic interests as specified in Circular 106, we understand none of our direct or indirect shareholders shall be deemed as a domestic resident natural person under Circular 75 and is subject to the requirement of registration with SAFE under the same. Furthermore, we have contacted the Beijing branch of SAFE and attempted to submit documents prepared for their registration. The officials at the local SAFE branch in Beijing stated that neither we nor our shareholders were in the categories which would require registration with SAFE. Therefore neither we nor our shareholders are subject to the requirement of registration with SAFE under Circular 75. Nonetheless, we are seeking further guidance from the relevant government authorities and will promptly take all steps to comply with their requirements when they become available.

On 29 August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or Circular 142. Pursuant to Circular 142, the Renminbi fund from the settlement of foreign currency capital of a foreign-invested enterprise must be used within the business scope as approved by the examination and approval department of the government, and cannot be used for domestic equity investment unless it is otherwise provided for.

PRC Regulations on Employee Stock Option Plans

In December 2006, the People’s Bank of China promulgated the Administrative Measures on Individual Person Foreign Exchange, or the PBOC Regulation, setting forth the respective requirements for foreign exchange transactions by individuals (both PRC or non-PRC citizens) under current account items and capital account items. In January 2007, SAFE issued the implementation rules for the PBOC Regulation which, among others, specified the approval requirement for certain capital account transactions such as a PRC citizen’s participation in the employee stock ownership plan or stock options plan of an overseas listed company.

On March 28, 2007, SAFE promulgated the Stock Option Rule to further clarify the formalities and application documents in connection with the subject matter. Under the Stock Option Rule, PRC individuals who will participate in the employment stock ownership plan or the stock option plan of an overseas listed company are required to appoint a domestic agent to deal with the relevant foreign exchange matters in the PRC. For participants of an employment stock ownership plan, an overseas custodian bank should be retained by the domestic agent to hold in trusteeship all overseas assets held by such participants under the employment stock ownership plan. In the case of a stock option plan, a financial institution with stock brokerage qualification at the place where the overseas listed company is listed or a qualified institution designated by the overseas listed company is required to be retained to handle matters in connection with the exercise or sale of stock options for the stock option plan participants. For participants who had already participated in an employment stock ownership plan or stock option plan before the date of the Stock Option Rule, the Stock Option Rule requires their domestic employers or domestic agents to make up for the relevant formalities within three months of the date of the Stock Option Rule. The failure to comply with the Stock Option Rule may subject the plan participants, the company offering the plan or the relevant intermediaries, as the case may be, to penalties under the PRC foreign exchange regime. We are seeking further guidance from the relevant government authorities and will promptly take all steps to comply with their requirements when they become available.

 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 investment. Such equity investment is subject to a series of laws and regulations generally applicable to any foreign-invested enterprise in China, which include the Wholly Foreign Owned Enterprise Law, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Contractual Joint Venture Enterprise Law, all as amended from time to time, and their respective implementing rules; the Tentative Provisions on the Foreign Exchange Registration Administration of Foreign-Invested Enterprise; and the Notice on Certain Matters Relating to the Change of Registered Capital of Foreign-Invested Enterprises.

Under the aforesaid laws and regulations, the increase of the registered capital of a foreign-invested enterprise is subject to the prior approval by the original approval authority of its establishment. In addition, the increase of registered capital and total investment amount shall both be registered with SAIC and SAFE. Shareholder loans made by offshore parent holding companies to their PRC subsidiaries are regarded as foreign debts in China for regulatory purposes, which is subject to a number of PRC laws and regulations, including the

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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, the shareholder loans made by offshore parent holding companies to their PRC subsidiaries shall be registered with SAFE. Furthermore, the total amount of foreign debts 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 government approval.

Regulations on Dividend Distribution

The Wholly Foreign-Owned Enterprise Law (1986), as amended in 2000, and the Implementing Rules of the Wholly Foreign-Owned Enterprise Law (1990), as amended in 2001, are the principal regulations governing distribution of dividends of wholly foreign-owned enterprises.  

Under these regulations, wholly foreign-owned 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 its general reserves fund until the accumulated amount of the reserve fund reaches 50% of the registered capital of such wholly foreign-owned enterprise. The reserve fund cannot be distributed as cash dividends. A wholly foreign-owned enterprise is also required to allocate a portion, determined at its discretion, of its after-tax profits to its staff welfare and bonus fund, which may not be distributed to the investors, either.

Under the PRC Enterprise Income Tax Law and its Implementation Rules, dividends, interests, rent or royalties payable by a foreign-invested enterprise, such as our PRC subsidiaries, to any of its foreign non-resident enterprise investors, and proceeds from the disposition of assets (after deducting the net value of such assets) by such foreign enterprise investor, shall be subject to a 10% withholding tax unless such foreign enterprise investor’s jurisdiction of incorporation has a tax treaty with China that provides for a reduced rate of withholding. If we were deemed to be non-resident for PRC tax purposes, dividends paid to our British Virgin Islands holding company from profits earned after January 1, 2008 would be subject to a withholding tax. In the case of dividends paid by our PRC subsidiaries to our non-PRC shareholders, the withholding tax would be 10%, unless such non-PRC shareholder’s tax jurisdiction has a tax treaty with China that provides for a different withholding arrangement.

Regulations on Taxation

See “Item 5. — Operating and Financial Review and Prospectus— A. Operating Results— Taxation.”

C. ORGANIZATIONAL STRUCTURE

The following diagram illustrates our corporate structure as of the date of this annual report:

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D. PROPERTY, PLANTS AND EQUIPMENT

We currently have offices located in 15 cities across the PRC, Taiwan, Japan and Hong Kong. Our principal executive offices in Beijing, which we began to occupy in November 2009, consist of approximately 4,336 square meters of office space. Our lease for this office space expires in July 2019, and our rent is approximately US$75,700 per month in 2010 and 2011. Our principal executive offices accommodate our executive team and corporate functions, as well as a portion of our IT professionals. For information of our property and equipment, also see Note 7 to the financial statements attached to this annual report.

We also occupy leased facilities for our other offices under non-cancelable operating leases that expire at various dates through 2020 and that include fixed or minimum payments, plus, in some cases, scheduled base rent increases over the terms of the lease. See “Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China —  Certain of our leased property interests may be defective and we may be forced to relocate our operations from the properties affected by such defects, which could cause a significant disruption to our business”.

The following table sets forth the location, type of ownership, and approximate size of our material facilities as of December 31, 2011.

Location	Type of Ownership	Approximate Size of Space
		(Square meters)
Beijing, PRC	leased	6,912
Beijing, PRC	owned	748
Kunshan, PRC	leased	3,256
Xiamen, PRC	owned	1,611
Dalian, PRC	leased	3,374
Taipei, Taiwan	leased	1,494
Nanjing, PRC	leased	436
Taichung, Taiwan	leased	406
Shanghai, PRC	leased	933
Zhuhai, PRC	leased	81

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Jiaxing, PRC	leased	266
Shenzhen, PRC	leased	876
Kaohsiung, Taiwan	leased	97
Hongkong, PRC	leased	44
Tokyo, Japan	leased	29
Wuxi, PRC	leased	1,594
Total space		22,157

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion and analysis of our financial condition and results of operations are based upon and should be read in conjunction with our consolidated financial statements and the related notes included in this annual report.  This discussion contains forward-looking statements that involve risks, uncertainties and assumptions.  We caution you that our business and financial performance are subject to substantial risks and uncertainties.  Our actual results could differ materially from those projected in the forward-looking statements as a result of various factors, including those set forth in "Item 3. Key Information — D. Risk Factors" and elsewhere in this annual report.

A. OPERATING RESULTS

Overview

We are a leading domestic provider of enterprise application services and financial industry IT services in China, and we focus on enterprises operating in the Chinese market. We focus on providing services at the higher end of the IT value chain. Our primary service lines are enterprise application services, or EAS and financial industry IT services, or FIS.

Our operations are primarily based in China, where we derive a substantial portion of our revenues. Since the establishment of our company, we have grown significantly through organic growth. Since 2006, we have also made a number of strategic acquisitions that expanded our presence in China and the Asia-Pacific region. In 2009, 2010 and 2011, our net revenues totaled US$118.0 million, US$192.9 million and US$227.1 million, respectively.  In 2009 and 2010, our net income attributable to Camelot Information Systems Inc. totaled US$13.0 million and US$18.6 million, respectively. In 2011, our net loss attributable to Camelot Information Systems Inc. totaled US$40.8 million.

Our total assets as of December 31, 2011 were US$315.4 million of which cash and cash equivalent amounted to US$57.1 million and term deposits amounted to US$45.3 million.  Our total liabilities as of December 31, 2011 were US$83.3 million accounting for 26.4% of total liabilities and shareholders' equity. As of December 31, 2011, our retained earnings accumulated to US$10.4 million.

 Factors Affecting Our Results of Operations

 We believe the most significant factors that affect our business and results of operations include the following

· Productivity and utilization.  The changes in productivity and utilization of our professionals are affected by the number and size of customer engagements, the timing of the commencement, completion and termination of engagements, billing rates of our professionals, and our ability to transition our professionals efficiently from completed engagements to new engagements. A key indicator we use to assess the productivity and utilization of our professionals is net revenues per employee, which is calculated based on the simple average number of employees at the beginning and end of each period, totaled approximately US$48,000,  US$58,600 and US$53,800, for 2009, 2010 and 2011, respectively. To enhance productivity and utilization of our professionals, we have increased the use of outsourcing services and are cautious in hiring permanent employees. Billing rates of our professionals have remained relatively stable in recent years and are expected to

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	continue to remain relatively stable for the foreseeable future. The productivity and utilization of our professionals will continue to affect our net revenues, gross profit and net income in the future.
·	Customer diversity.  In recent years, as we have expanded significantly in the financial industry IT services business, we have diversified our customer base. While we are seeking out new customers in both of our service lines, we intend to continue to enhance our strategic relationships and address the needs of our existing customers. The gain or loss of significant customers, or any significant change in the business volume from a particular customer will affect our operating performance. In particular, we have maintained a strong relationship with IBM for the past 14 years. IBM has been our largest customer in 2009, 2010 and 2011, accounting for 31.6%, 33.7% and 34.1% of our net revenues, respectively.  As part of our cooperation with IBM, we have entered into a number of initiatives, including the joint development of a service delivery center in March 2008, focused on enterprise application software and services. Our net revenues derived from this delivery center totaled US$15.7 million in 2009, US$36.5 million in 2010 and US$47.4 million in 2011, or 13.3%, 18.9% and 20.9% of our total net revenues, respectively. As this delivery center becomes more successful, we expect IBM to continue to be our largest customer and the net revenues contribution from IBM may increase even as we intend to continue to diversify our customer base.
·	Acquisitions.  As part of our growth strategy, we make, and plan to continue to make, strategic acquisitions from time to time to complement our existing business. We identify potential acquisition targets based on a variety of factors, such as the target’s profitability, growth potential, customer base, business and portfolio mix, domain expertise, shared management vision, and our ability to integrate the target’s business with our existing business. In recent years, our acquisitions (including those of VLife, Yinfeng, Harmonation, Agree and Tansun) have been primarily in the financial industry IT services area, which we believe will experience significant growth as banks continue to modernize their IT infrastructure. Although these acquisitions have helped us increase our net revenues and maintain our gross margins, they have also contributed to an increase in the absolute amounts of our operating expenses, which were US$20.9 million, US$39.4 million and US$102.9 million (including US$30.0 million impairment loss on intangible assets and impairment loss on goodwill) in 2009, 2010 and 2011, respectively. In addition, in light of the number of acquisitions we have made in recent years, our acquisition-related intangible amortization expenses have significantly affected our net income. As we continue to pursue acquisition opportunities in the future, our operating results and other aspects of our financial performance will be affected accordingly.
·	Quality, range and delivery of services.  We intend to increase our net revenues by continuing to expand our service offerings and providing quality service to our existing customers and to attract new customers. As a result, our financial results are affected by the market demand for our services, the amount of which is significantly dependent on the quality, range and delivery of our services as well as our industry expertise compared to those of our competitors. In particular, as part of our strategy, we will continue to expand our service offerings to provide high quality end-to-end solutions of customized software, onsite and offsite services, training and maintenance. Our acquisitions of Agree and Tansun are part of this effort in expanding our financial industry IT services business. The market acceptance of these services and our ability to attract new customers based on the offering of these services will affect our operating results. To expand our delivery channels, we are seeking to enter into additional cooperative programs with leading IT service providers, and build alternative delivery models (such as a remote delivery model) for our services. Our ability to expand into these additional delivery channels will affect the growth prospects of our business.
·	Ability and related costs incurred to attract, retain and motivate qualified employees.  Our ability to attract, train and retain a large and cost-effective pool of qualified professionals, including our ability to leverage and expand our proprietary database of qualified IT professionals, to develop additional joint training programs with universities, and our employees’ job satisfaction, will affect our financial performance. We have incurred significant costs, and plan to incur additional costs in the future, to attract qualified professionals to work for us. Our compensation and benefits expenses for our IT professionals totaled US$29.4 million, US$39.0 million and US$63.5 million for 2009, 2010 and 2011, respectively, which reflected 24.9%, 20.2% and 28.0% of our net revenues, respectively. These costs have included share-based compensation expenses of US$147,000, US$136,000 and US$1,463,000 for share options granted to our IT professionals for the years ended December 31, 2009, 2010 and 2011, respectively.

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Key Components of Results of Operations

Net Revenues

Our net revenues represent our total revenues less applicable business taxes and related surcharges. Our net revenues in 2009, 2010 and 2011 were US$118.0 million, US$192.9 million and US$227.1 million, respectively. Our business taxes and related surcharges in 2009, 2010 and 2011 were US$3.9 million, US$6.4 million and US$7.0 million, respectively.

Net Revenues by Service Line

 We provide our services primarily through two service lines: (i) enterprise application services; and (ii) financial industry IT services. The following table sets forth our net revenues by service line for the years indicated.

	For the Year Ended December 31,
	2009				2010				2011
	Amount		% of Total		Amount		% of Total		Amount		% of Total
	(U.S. dollars in thousands, except percentages)
Enterprise application services		79,423		67.3		126,555		65.6		159,181		70.1
Financial industry IT services		38,580		32.7		66,308		34.4		67,939		29.9
Total net revenues		118,003		100.0		192,863		100.0		227,120		100.0

Net Revenues by Pricing Model

The following table sets forth our net revenues by pricing model for the years indicated.

	For the Year Ended December 31,
	2009				2010				2011
	Amount		% of Total		Amount		% of Total		Amount		% of Total
	(U.S. dollars in thousands, except percentages)
Time-and-expense contracts		59,667		50.6		99,071		51.4		121,762		53.6
Fixed-price contracts		58,336		49.4		93,792		48.6		105,358		46.4
Total net revenues		118,003		100.0		192,863		100.0		227,120		100.0

Our customer contracts may be categorized by pricing model into time-and-expense contracts and fixed-price contracts. Under time-and-expense contracts, we are compensated for actual time incurred by our IT professionals at negotiated daily billing rates. Under some of these contracts, we also may be able to charge overtime rates in addition to the daily rate. Fixed-price contracts require us to perform services throughout the contractual period, and we are paid in installments upon completion of specified milestones under the contracts. Our billing rates have generally remained stable in 2009, 2010 and 2011.

A majority of our time-and-expense contracts are generated by our enterprise application services business. In comparison, a majority of our fixed-price contracts are generated by our financial industry IT services business. 

Net Revenues by Customer Concentration

The following table sets forth a distribution of our largest customers by revenue contribution and as a percentage of net revenues for the years indicated.

	For the Year Ended December 31,
	2009				2010				2011
	Amount		% of Total		Amount		% of Total		Amount		% of Total
	(U.S. dollars in thousands, except percentages)
Single largest		37,315		31.6		64,987		33.7		77,387		34.1
Five largest		57,869		49.0		92,974		48.2		121,211		53.4
Ten largest		74,325		63.0		115,456		59.9		155,193		68.3

Our five largest customers in 2011 were IBM, State Grid, Lenovo, China Construction Bank and Hitachi. Our five largest customers in 2010 were IBM, Hitachi, Lenovo, State Grid and China Construction Bank. Our five largest customers in 2009 were IBM, Hitachi, NRI, Bank of China and Accenture. IBM, with

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which our business relationship began in 2000, was our largest customer in each of 2009, 2010 and 2011. Our long-standing relationship with IBM has fostered new initiatives between our company and IBM, including the development of a service delivery center focused on enterprise application services.

Net Revenues by Industry

 The following table sets forth, for the years indicated, our net revenues by the industry in which our end customers operate.

	For the Year Ended December 31,
	2009				2010				2011
	Amount		% of Total		Amount		% of Total		Amount		% of Total
	(U.S. dollars in thousands, except percentages)
Financial services		41,276		35.0		69,950		36.2		66,350		29.2
Resources and energy		28,256		23.9		41,413		21.5		42,794		18.8
Manufacturing and automobile		20,139		17.1		34,003		17.6		39,213		17.2
Technology		12,153		10.3		20,947		10.8		27,178		12.0
Telecommunication, media and education		4,346		3.7		6,778		3.6		13,563		6.0
Construction and steel		3,949		3.3		7,530		3.9		5,402		2.4
Retail, consumer and transportation		6,558		5.6		5,420		2.8		8,821		3.9
Others		1,326		1.1		6,822		3.6		23,799		10.5
Total net revenues		118,003		100.0		192,863		100.0		227,120		100.0

Net Revenues by Customer Location

The following table sets forth our net revenues by the geographical location of our customers for the years indicated. For purpose of this table, we have determined the geographical location of a customer based on the place of incorporation of the contractual counterparty.

	For the Year Ended December 31,
	2009				2010				2011
	Amount		% of Total		Amount		% of Total		Amount		% of Total
	(U.S. dollars in thousands, except percentages)
PRC and Taiwan		105,567		89.4		175,860		91.1		204,112		89.9
Japan		11,642		9.9		14,663		7.7		21,120		9.3
Others		794		0.7		2,340		1.2		1,888		0.8
Total net revenues		118,003		100.0		192,863		100.0		227,120		100.0

Cost of Revenues

 Our cost of revenues mainly consists of outsourcing costs, compensation and benefit expenses (including share-based compensation expenses) of our IT professionals, travel expenses and material costs. The following table sets forth the components of our cost of revenues for the years indicated.

	For the Year Ended December 31,
	2009				2010				2011
	Amount		% of Total		Amount		% of Total		Amount		% of Total
	(U.S. dollars in thousands, except percentages)
Outsourcing costs		29,593		36.1		66,906		51.2		79,714		47.6
Compensation and benefit expenses		29,364		35.8		38,908		29.8		63,327		37.8
Travel expenses		12,584		15.4		11,353		8.7		10,945		6.5
Material costs		7,122		8.7		8,860		6.8		6,955		4.2
Others		3,313		4.0		4,835		3.5		6,579		3.9
Total cost of revenues		81,976		100.0		130,862		100.0		167,520		100.0

Outsourcing costs represent compensation paid directly by us for independent consultants selected from our pool of qualified professionals in our proprietary database as well as other subcontracted service providers. To supplement our resources, we generally directly engage these qualified independent consultants and other subcontracted service providers in order to control fixed costs, fulfill seasonal requirements and bolster our skill sets. Compensation and benefit expenses represent those relating to our IT professionals. We incur travel expenses primarily due to our IT professionals’ traveling to perform onsite work for our customers.

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We also incur material costs relating to purchasing and installing hardware and software for our customers. Others costs include the amortization of intangible assets of our acquired entities, primarily contract backlogs and completed technology.

 Operating Expenses

Selling and Marketing Expenses

 Selling and marketing expenses consist primarily of compensation and benefit expenses relating to our business development and marketing personnel, including share-based compensation expenses, travel expenses, selling and marketing-related office expenses and amortization expenses. In 2009, 2010 and 2011, our selling and marketing expenses totaled US$6.2 million, US$11.1 million and US$20.3 million , respectively, representing 5.3%, 5.8% and 8.9%, respectively, of our net revenues in these periods. We expect our selling and marketing expenses to increase as we continue our business expansion.

Amortization expenses as a component of selling and marketing expenses include amortization of intangible assets of our acquired entities. In 2009, 2010 and 2011, the intangible assets subject to amortization primarily consisted of customer relationships. Our selling and marketing expenses in 2009, 2010 and 2011 included US$3.2 million, US$4.3 million and US$3.2 million, respectively, in amortization expenses related to the intangible assets of our acquired entities and we currently estimate that we will incur US$1.6 million in 2012.

General and Administrative Expenses

 General and administrative expenses consist primarily of compensation and benefit expenses relating to personnel other than IT professionals and our business development team, including share-based compensation expenses, office expenses, depreciation expenses, travel expenses, rental expenses and overhead expenses. General and administrative expenses also include legal and other professional fees and other miscellaneous administrative costs. Depreciation expenses as a component of general and administrative expenses excluded those included in the cost of revenues and selling and marketing expenses. In 2009, 2010 and 2011, our general and administrative expenses totaled US$12.6 million, US$21.6 million and US$45.0 million, respectively, representing 10.7%, 11.2% and 19.8%, respectively, of our net revenues in these periods.  

Research and Development Costs

 Research and development costs primarily consist of compensation and benefit expenses relating to our research and development professionals. Historically, these costs primarily related to the research and development efforts at VLife, Harmonation, Agree, Tansun and Yinfeng, which we acquired in 2008 and 2009. In 2009, 2010 and 2011, our research and development costs totaled US$1.5 million, US$2.7 million and US$6.0 million, respectively.  

Change in fair value of contingent consideration for acquisitions of Agree, Tansun and Dimension.

 In connection with the acquisitions of Agree, Tansun and Dimension, we agreed to pay performance-based cash considerations as followed (1) for Agree, we agreed to pay additional performance-based cash considerations between RMB63 million (approximately US$9.3 million) and RMB75 million (approximately US$11.0 million), based on its earnings in 2010, (2) for Tansun, we agreed to pay performance-based cash considerations up to RMB40 million (approximately US$5.9 million) based on its earnings in 2010 and 2011 and (3) for Dimension, we also agreed to pay additional performance-based cash considerations with benchmark of RMB19.8 million (approximately US$3.2 million) based on its earnings in 2011 and 2012. The contingent consideration was recorded at fair value at the acquisition date and subsequently adjusted on a marked-to-market basis. In 2011, our change in fair value of contingent consideration for acquisitions of Agree, Tansun and Dimension are US$1.7 million.

Share-based Compensation Expenses

 On June 26, 2006, we adopted the 2006 Equity Incentive Plan, or the 2006 Plan, which allows us to grant options to our employees and directors to purchase up to 10,872,000 ordinary shares subject to vesting requirement. In March 2008, November 2008 and May 2010, we expanded the number of options that may be granted under the 2006 Plan by an additional 3,200,000, 5,426,012 and 4,000,000 ordinary shares, respectively, making the total number of options available for grant under the 2006 Plan 23,498,012 ordinary shares subject to vesting requirements.

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The following table sets forth the share-based compensation expenses recognized as part of cost of revenues, selling and marketing expenses, and general and administrative expenses, respectively, during the years presented.

	For the Year Ended December 31,
	2009		2010		2011
	(U.S. dollars in thousands)
Cost of revenues		147		136		1,463
Selling and marketing expenses		158		354		7,427
General and administrative expenses		938		2,434		10,476
Total share-based compensation expenses		1,243		2,924		19,366

Government Subsidies

 We receive government subsidies from the PRC government if we meet the conditions under certain incentive policies. In 2009, we received US$56,000 in government subsidies for our recruitment of new graduates during the financial crisis. In 2010, we received US$123,000 in government subsidies mainly for the off-shore outsourcing subsidies.  In 2011, we received US$255,000 in government subsidies relating to off-shore outsourcing activities. 

 Gain from Extinguishment of Liability

 As part of our acquisition of Red River Valley in February 2008, we paid US$4.0 million and agreed to pay an additional US$8.0 million in cash over a period of two years to the then equity holders of Red River Valley in two installments after the acquisition. On July 1, 2008, as a result of renegotiation between us and these equity holders, the remaining consideration payable of US$8.0 million was waived for a total consideration of US$3.3 million, consisting of (i) US$1.2 million in cash; and (ii) 1,800,000 of our shares with a fair value of US$2.1 million. We recognized a one-time gain of US$3.9 million from extinguishment of liability in 2008, which represents the difference between (i) US$3.3 million in total consideration to be paid as a result of our renegotiation; and (ii) US$7.2 million, which represents our US$8.0 million in liability owed prior to the date of the revised agreement (i.e. July 1, 2008), discounted to the present value on the date of such extinguishment.

Taxation

INCOME TAXES

The current and deferred components of income tax expense (benefit) were as follows:

	Years ended December 31,
	2009			2010			2011
	U.S.dollars in thousands）
Current
PRC		1,780			5,224			2,269
Others		1,199			200			-
Total current income taxes		2,979			5,424			2,269
Deferred
PRC		(558	)		(1,276	)		(3,031	)
Others		(180	)		(48	)		(1,029	)
Total deferred income taxes		(738	)		(1,324	)		(4,060	)
Total income taxes		2,241			4,100			(1,791	)

British Virgin Island

The Company and its subsidiaries that were incorporated in the BVI are not subject to taxation in their country of incorporation.  We have certain business activities conducted in the PRC which is only subject to PRC income taxes.  Subsidiaries incorporated in the BVI include Triumph and Konwell.

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Hong Kong

King’s was established in Hong Kong and is subject to Hong Kong profit tax at 16.5%.

Japan

Entoh was established in Japan and is subject to Japanese income taxes at 43%.

Taiwan

Taiwan Camelot, Hwawei, VLife and Harmonation were subject to Taiwan income taxes at 25%, 17% and 17% for 2009, 2010 and 2011.

PRC

Our PRC entities are subject to an enterprise income tax rate at 25% tax rate pursuant to the PRC Enterprise Income Tax (EIT), other than the preferential tax treatment enjoyed by certain entities described below.

Subsidiaries	0%	10%	12.5%	15%	20%	22%	24%
Camelot Beijing	-	-	-	2009 - 2013	-	-	-
Red River Valley	-	-	-	2009 - 2013	-	-	-
Yinfeng	-	-	-	2009 - 2013	-	-	-
Agree Zhuhai	-	-	-	2009 - 2013	-	-	-
Tansun Beijing	-	-	-	2009 - 2011	-	-	-
Faceita	-	-	-	2009 - 2011	-	-	-
Bayshore	-	-	-	2009 - 2011	-	-	-
Dimension	-	-	-	2011-2013	-	-	-
Jiaxing Camelot	2009	-	2010-2012	-	-	-	-
Shanghai Camelot	-	2009	-	-	-	2010	2011
Asialink	-	-	-	-	2009	2010	2011
Dalian Yuandong	-	2009	2010-2011	-	-	-	-
Agree Shanghai	2010-2011	-	2012-2014	-	-	-	-
Huaqiao	2010-2011	-	2012-2014	-	-	-	-
Kunshan	2011-2012	-	2013-2015	-	-	-	-
Beijing Heng En		2011

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An enterprise which qualifies as a high and new technology enterprise ("HNTE") is entitled to a tax rate of 15%. In 2008 Camelot Beijing, Red River Valley, Yinfeng, and Agree Zhuhai obtained the new HNTE status, which was renewed by these companies in 2011.  Therefore, they were entitled to the preferential income tax rate of 15% until 2013.  Bayshore, Faceita and Tansun Beijing obtained the HNTE status in 2009. Dimension obtained the HNTE status in 2011. We believe it is highly likely that our qualifying entities will continue to obtain the renewal in the future.

Jiaxing Camelot qualified as a "manufacturing foreign-invested enterprise" and therefore was entitled to a two-year EIT exemption from the earlier of its first tax-profitable year 2008 and followed by a 50% reduction in tax rate for the succeeding three years.  Accordingly, Jiaxing Camelot was entitled to EIT exemption for 2008 and 2009 and a preferential tax rate of 12.5% for 2010 to 2012.

Shanghai Camelot and Asialink were entitled to preferential tax rates based on their qualifications as "Software Enterprise of Pu Dong District of Shanghai" and subjected to a 24% tax rate in 2011 and Dalian Yuandong was subjected to a 12.5% tax rate in 2011.

Agree Shanghai and Huaqiao qualified as "Software Enterprise" in 2010 and were entitled to a two-year EIT exemption for 2010 and 2011, followed by a 50% reduction in tax rate for the succeeding three years, provided their business operations continue to qualify as "Software Enterprise."

Kunshan qualified as "Software Enterprise" in 2011 and were entitled to a two-year EIT exemption for 2011 and 2012, followed by a 50% reduction in tax rate for the succeeding three years.  Beijing Heng En was subject to 10% tax rate in 2011 verified by local tax authority, provided its business operation continues to qualify as "Software Enterprise."

 PRC Business Tax

Companies in China are generally subject to business tax and related surcharges by various local tax authorities at rates ranging from 5% to 6% on revenue generated from providing services and revenue generated from the transfer of intangibles such as copyrights. However, qualified technology companies may apply for an exemption from business tax for revenues generated from technology development, transfer or related consulting services.

Revenues from our services are subject to a 5% business tax and related surcharges on the revenues earned from providing services, except that Nanjing Camelot  Information Systems Engineering Co. Ltd, or Camelot Nanjing has qualified for business tax at 3%. In addition, according to an incentive agreement entered between Camelot Information Technology Co., Ltd. and the local government, Camelot Information Technology Co., Ltd. is entitled to certain amount of business tax refund as determined by local government and tax authorities on an annual basis for five years from 2011 through 2015.  

Value-Added Tax

                Pursuant to the Provisional Regulation of China on Value-Added Tax and its implementing rules, issued in December 1993 and amended in November 2008, all entities and individuals that are engaged in the businesses of sales of goods, provision of repair and placement services and importation of goods into China are

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generally subject to a value-added tax, or VAT, at a rate of 17% (with the exception of certain goods which are subject to a rate of 13%) of the gross sales proceeds received, less any VAT already paid or borne by the taxpayer on the goods or services purchased by it and utilized in the production of goods or provisions of services that have generated the gross sales proceeds. However, pursuant to the Encouraging Policy, an enterprise classified as a “software enterprise” will be entitled to a rebate of its net VAT liability to the extent that it exceeds 3% of the actual VAT burden relating to self-made software product sales (excluding export sales) before 2010. Such refund will not be treated as taxable income and must be used for funding its software research and development and the expansion of its production capacity. According to the Notice on Certain Policies Related to Value-Added Tax, issued in November 2005, an entity that develops software products on commission may be entitled to an exemption of VAT if, according to the contractual arrangement, the copyright of the products developed by it shall be owned by the commissioning party or jointly owned by the developer and commissioning party.

PRC Urban Maintenance and Construction Tax and Education Surcharge

 From December 1, 2010, the Tentative Regulations of the People’s Republic of China on Urban Maintenance and Construction Tax promulgated in 1985 and the Tentative Rules on Levy of Education Surcharge promulgated in 1986 by the State Council shall be applicable to foreign-invested enterprises, foreign enterprises and individual foreigners. Laws, regulations, rules and policies on urban maintenance and construction tax and education surcharge promulgated by the State Council and the finance and tax competent authorities under the State Council since 1985 shall be also applicable to foreign-invested enterprises, foreign enterprises and individual foreigners, which are generally subject to tax and surcharge by various local tax authorities at rate ranging from 1% to 7% on value-added tax amount, business tax amount and consumption tax amount.

Results of Operations

The following tables set forth a summary of our consolidated results of operations for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report.

	For the Year Ended December 31,
	2009						2010						2011
	Amount			% of Net Revenues			Amount			% of Net Revenues			Amount			% of Net Revenues
	(U.S. dollars in thousands, except percentages)
Net revenues		118,003			100.0	%		192,863			100.0	%		227,120			100.0	%
Cost of revenues		(81,976	)		(69.5	)%		(130,862	)		(67.9	)%		(167,520	)		(73.8	%)
Gross profit		36,027			30.5	%		62,001			32.1	%		59,600			26.2	%
Selling and marketing expenses		(6,199	)		(5.3	)%		(11,138	)		(5.8	)%		(20,263	)		(8.9	%)
General and administrative expenses		(12,627	)		(10.7	)%		(21,605	)		(11.2	)%		(45,065	)		(19.8	%)
Research and development costs		(1,496	)		(1.3	)%		(2,741	)		(1.4	)%		(5,956	)		(2.6	%)
Postponed initial public offering costs		-			-			-			-			-			-
Impairment of Intangible Assets		-			-			-			-			(8,552	)		(3.8	%)
Impairment of Goodwill		-			-			-			-			(21,457	)		(9.5	%)
Changes in fair value of contingent consideration for acquisition of Agree, Tansun and Dimension		(549	)		(0.5	)%		(3,880	)		(2.0	)%		(1,669	)		(0.7	%)
Total operating expenses		(20,871	)		(17.7	)%		(39,364	)		(20.4	)%		(102,962	)		(45.3	%)
Government subsidies		56			0.0	%		123			0.1	%		255			0.1	%
Income (loss) from operations		15,212			12.9	%		22,760			11.8	%		(43,107	)		(19.0	%)
Interest expense		(96	)		(0.1	)%		(475	)		(0.2	)%		(935	)		(0.4	%)
Interest income		118			0.1	%		498			0.2	%		1,194			0.5	%
Dividend income from short(term) investment		—			—			—			—			—			—
Gain on short term investment		44			0.0	%		—			—			—			—
Gain from extinguishment of liability		—			—			—			—			—			—
Income (loss) before provisions for income taxes		15,278			12.9	%		22,783			11.8	%		(42,848	)		(18.9	%)
Provisions for income taxes		(2,241	)		(1.9	)%		(4,100	)		(2.1	)%		1,791			0.8	%
Equity in earnings of an affiliate, net of income taxes		—			—			—			—			—			—
Net income (loss)		13,037			11.0	%		18,683			9.7	%		(41,057	)		(18.1	%)
Less: Net (loss) income attributable to non (controlling interest		(71	)		(0.1	)%		(86	)		0.0	%		233			0.1	%
Net income (loss) attributable to Camelot Information Systems Inc.		12,966			11.0	%		18,597			9.7	%		(40,824	)		(18.0	%)

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Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Net Revenues

For the year ended December 31, 2011, our net revenues increased by 17.8% to US$227.1 million from US$192.9 million in 2010. The overall growth in our net revenues reflected an increase in revenues from both of our service lines.

Our total net revenues for the year ended December 31, 2011 from our Enterprise Application Services increased by 25.8% to US$159.2 million from US$126.6 million in 2010, primarily reflecting the continuing growth of this service line and a general industry and financial market recovery in recent periods. Our net revenues from IBM increased from US$65.0 million in 2010 to US$77.4 million in 2011, primarily reflecting the continued strengthening of our relationship and the resulting additional business volume from IBM. Our total net revenues for the year ended December 31, 2011 from our Financial Industry IT Services business increased by 2.5% to US$67.9 million from US$66.3 million in 2010. The short term departure and return of Wang Yuhui, our previous chief executive officer of Agree and some of his team members during second quarter of 2011 has led to the disruption of our project deliveries and new contract signing during 2011.

Cost of Revenues

                For the year ended December 31, 2011, our cost of revenues increased by 28.0% to US$167.5 million from US$130.9 million for the year ended December 31, 2010 due to the continuing expansion of our business. The increase in our cost of revenues primarily reflected increases in the following components:

• an increase in outsourcing costs from US$66.9 million for the year ended December 31, 2010 to US$79.7 million for the year ended December 31, 2011, as we increased the use of independent consultants directly and other subcontracted service providers, whom we directly engaged and paid, to supplement our resources in light of a higher than anticipated recovery in the demand for our services, coupled with our conservative view in the hiring of permanent employees; and

• an increase in compensation and benefit expenses from US$38.9 million for the year ended December 31, 2010 to US$63.3 million for the year ended December 31, 2011, reflecting a combination of the increase in the share-based compensation and an organic increase in our recruitment of IT professionals.

 Gross Profit

For the year ended December 31, 2011, our gross profit decrease by 3.9% to US$59.6 million from US$62.0 million in 2010. Our gross margin decreased from 32.1% in 2010 to 26.2% in 2011, primarily reflecting the decrease in the proportion of revenues derived from financial industry IT services due to the short term departure and retune of our previous chief executive officer of Agree and  some of his team members during the second quarter of 2011, which led to the disruption of our project deliveries and new contract signing.

Selling and Marketing Expenses

Our selling and marketing expenses increased from US$11.1 million in 2010 to US$20.3 million in 2011. The increase primarily reflected the increase in employees' compensation as well as the share-based compensation due to the increasing expenses derived from our share repricing.

General and Administrative Expenses

General and administrative expenses increased significantly from US$21.6 million in 2010 to US$45.0 million in 2011, primarily reflecting (i) an expansion of our support functions to support our status as a publicly-listed company; (ii) an increase in share-based compensation due to the increasing expenses derived from our

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option repricing; (iii) an increase in professional fee we paid to auditors and legal counsels relating to the improvement in our internal control procedures; and (iv) an increase in provision of account receivables.

Research and Development Costs

Our research and development costs increased from US$2.7 million in 2010 to US$6.0 million in 2011. The increase primarily reflected our increased investment in research and development of our financial industry IT services.

Loss on impairment of intangible assets and goodwill

Due to the significant decline in our stock price and departures of our previous chief executive officer of Agree and some of the team members, we performed impairment assessments on goodwill and intangible assets as of September 30, 2011. Based on the assessments, impairment loss on intangible assets in the amount of US$8.6 million and impairment loss on goodwill in the amount of US$21.5 million were recorded.

Change in fair value of contingent consideration for acquisitions of Agree, Tansun and Dimension

In 2011, the change of fair value of contingent consideration in connection with acquisitions of Agree, Tansun and Dimension were US$1.7 million, with a corresponding charge in earnings, primarily reflecting the changes in present value of the contingent considerations. See “Item 5 Operating and Financial Review and Prospects— Operating Expenses — Change in fair value of contingent consideration for acquisitions of Agree, Tansun and Dimension.

Interest Expense

Our interest expense increased from US$475,000 in 2010 to US$935,000 in 2011, primarily reflecting the increase of bank borrowings for our working capital needs related to our continued growth.

Interest Income

Interest income increased to US$1.2 million in 2011 from US$498,000 in 2010, primarily reflecting the increase of the average balance of our bank deposits, including the deposit of the proceeds from our initial public offering and our secondary offering in 2010.

Income Taxes

Our effective tax rate decreased from 18% in 2010 to 4.2% in 2011, primarily due to unrecognized long term deferred tax liabilities revived along with the impairment of intangible assets.

Net Income (Loss)

As a result of the foregoing, we incurred net loss of US$40.8 million in 2011 compared to net income of US$18.6 million in 2010.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Net Revenues

For the year ended December 31, 2010, our net revenues increased by 63.5% to US$192.9 million from US$118.0 million in 2009. The overall growth in our net revenues reflected an increase in revenues from both of our service lines.

Our total net revenues for the year ended December 31, 2010 from our enterprise application services increased by 59.3% to US$126.6 million from US$79.4 million in 2009, primarily reflecting the continuing growth of this service line and a general industry and financial market recovery in recent periods. Our net revenues from IBM increased significantly from US$37.3 million in 2009 to US$65.0 million in 2010, primarily reflecting the continued strengthening of our relationship and the resulting additional business volume from IBM. In addition, our net revenues were positively affected by the growth in business from our existing domestic customers such as  China Petroleum & Chemical Corporation and its affiliates (through  Petro-CyberWorks Information Technology Company Limited, a joint venture between Sinopec and PCCW Limited) and State Grid.

Our total net revenues for the year ended December 31, 2010 from our financial industry IT services business increased by 71.9% to US$66.3 million from US$38.6 million in 2009, primarily reflecting the

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combination of strong organic growth and contribution from Agree and Tansun in 2010, both of which were acquired in the second half of 2009.

Cost of Revenues

For the year ended December 31, 2010, our cost of revenues increased significantly to US$130.9 million from US$82.0 million for the year ended December 31, 2009 due to the continuing expansion of our business. The increase in our cost of revenues primarily reflected increases in the following components:

•             an increase in outsourcing costs from US$29.6 million for the year ended December 31, 2009 to US$66.9 million for the year ended December 31, 2010, as we increased the use of independent consultants directly and other subcontracted service providers, whom we directly engaged and paid, to supplement our resources in light of a higher than anticipated recovery in the demand for our services, coupled with our conservative view in the hiring of permanent employees;

•             an increase in compensation and benefit expenses from US$29.4 million for the year ended December 31, 2009 to US$38.9 million for the year ended December 31, 2010, reflecting a combination of the acquisitions of Tansun and Agree and an organic increase in our recruitment of IT professionals; and

•             amortization of intangible assets of US$1.8 million for the year ended December 31, 2010 from our acquisitions of Agree and Tansun.

Gross Profit

For the year ended December 31, 2010, our gross profit increased by 72.1% to US$62.0 million from US$36.0 million in 2009, reflecting the growth in revenue from both our EAS and FIS business lines. Our gross margin increased from 30.5% in 2009 to 32.1% in 2010, primarily reflecting the shift towards higher-margin products and services, Which was partially offset by an increase in acquisition-related intangible amortization.

Selling and Marketing Expenses

Our selling and marketing expenses increased from US$6.2 million in 2009 to US$11.1 million in 2010. The increase primarily reflected:

• amortization of intangible assets from our acquisitions of Agree and Tansun;

• an increase in employees compensation; and

• the sales and marketing expenses incurred by Agree and Tansun.

General and Administrative Expenses

General and administrative expenses increased from US$12.6 million in 2009 to US$21.6 million in 2010, primarily reflecting (i) an expansion of our support functions to support our status as a publicly-listed company; (ii) an increase in share-based compensation; and (iii) the general and administrative expenses incurred by Agree and Tansun.

Research and Development Costs

Our research and development costs increased from US$1.5 million in 2009 to US$2.7 million in 2010. The increase primarily reflected our increased investment in research and development of our financial industry IT services.

Change in fair value of contingent consideration for acquisitions of Agree and Tansun

As of December 31, 2010, the fair value of the contingent considerations in connection with the acquisitions of Agree and Tansun increased by US$3.9 million to US$16.7 million from US$12.8 million as of

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December 31, 2009, with a corresponding charge in earnings, primarily reflecting the changes in present value of the contingent considerations.

Interest Expense

Our interest expense increased from US$96,000 in 2009 to US$475,000 in 2010, primarily reflecting the increase of bank borrowings for our working capital needs related to our continued growth.

Interest Income

Interest income increased to US$498,000 in 2010 from US$118,000 in 2009, primarily reflecting the increase of the average balance of our bank deposits, including the deposit of the proceeds from our initial public offering in 2010.

Income Taxes

Our effective tax rate increased from 14.7% in 2009 to 18.0% in 2010, primarily due to that preferential tax rates enjoyed by  some of our subsidiaries for 2010 were less favorable compared to the tax rates for 2009.

Net Income

As a result of the foregoing, our net income increased to US$18.7 million in 2010 from US$13.0 million in 2009.

Inflation

Inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for January 2010, 2011 and 2012 were increases of 1.5%, 4.9% and 4.5%, respectively. Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected if China experiences  higher rates of inflation in the future. For example, certain operating costs and expenses, such as employee compensation and office operating expenses may increase as a result of higher inflation.  Additionally, because a substantial portion of our assets consists of cash and cash equivalents, high inflation could significantly reduce the value and purchasing power of these assets. We are not able to hedge our exposure to higher inflation in China.

Foreign Currency

See “Item 11. Quantitative and Qualitative Disclosures about Market Risk”.

Critical Accounting Policies

The preparation of our consolidated financial statements and related notes requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities. We have based 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 values of assets and liabilities that are not readily apparent from other sources. Our management has discussed the development, selection and disclosure of these estimates with our board of directors. Actual results may differ from these estimates under different assumptions or conditions.

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe that the following critical accounting policies are the most sensitive and are those that require the more significant

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estimates and assumptions used in the preparation of our consolidated financial statements. You should read the following descriptions of critical accounting policies, judgments and estimates in conjunction with our consolidated financial statements and other disclosures included with this report.  

Revenue Recognition

We offer enterprise application services and financial industry IT services for which revenues are generated from contracts either on a time-and-expense basis or fixed-price basis.

Revenues are considered realizable and earned when all of the following criteria are met: persuasive evidence of a sales arrangement exists; delivery has occurred or services have been rendered; price is fixed or determinable; and collectibles is reasonably assured.

Revenues from time-and-expense contracts are recognized as the related services are rendered. Under time-and-expense contracts, we are reimbursed for actual hours incurred at negotiated hourly billing rates. Customers may terminate the contracts at any time before the work is completed but are obligated to pay the actual service hours incurred at the contract billing rate. The rights to software developed by us on behalf of our customers belong to the customers.

Reimbursable out-of-pocket expenses are recognized as revenues when billed. The related costs are recognized as cost of revenues when incurred.

Revenues from service-only fixed-price contracts are generally recognized using the proportional performance method based on the proportion of actual service hours incurred to the budgeted service hours. Our long history of providing service offerings that are similar in nature has provided us the ability to reasonably estimate the service hours expected to be incurred on each project.

To date, we have not incurred a material loss on any of our contracts. However, as a matter of policy, provisions for estimated losses on such engagements will be made during the period in which a loss becomes probable and can be reasonably estimated.

Under certain contracts, we are subject to payment penalties if we fail to complete the projects within a specified time. To date, we have not incurred a material penalty on any of our contracts. However, as a matter of policy, we consider penalty provisions under a contract when estimating the total revenue generated under such contract and evaluates such provisions throughout the life of the contract.

In addition to service-only contracts, we also enter into multiple-element fixed-price arrangements, in which the deliverables mainly include licenses of self-developed core software and third-party software, related project services such as customization, modification, implementation and integration, and support and maintenance services which include bug fixes, technical support via telephone and site visit, and unspecified upgrades on a when-and-if-available basis.

For an arrangement with a software deliverable, we have considered whether the software is more than incidental to the arrangement as a whole. In most of our cases, the software deliverable is more than incidental and essential to the functionality of other deliverables as well as the system as a whole and therefore we believe authoritative accounting literatures in relation to software revenue recognition apply.

With respect to our obligation to provide support and maintenance services, we have considered whether we have adequate evidence that would allow us to bifurcate the revenues attributable to the support and maintenance services from the revenues attributable to other products and project services. In most of our cases, we do not have sufficient evidence of the fair value of the support and maintenance services and accordingly, the entire arrangement is accounted for as one accounting unit resulting in revenue being recognized on a straight line basis over the support and maintenance services period once the support and maintenance services become the only undelivered element. The accumulated contract cost is deferred and recognized as cost of revenue ratably over the same period as revenue is recognized.

For some arrangements entered by one of our subsidiaries, we believe we have sufficient evidence of the fair value of the support and maintenance services as the support and maintenance services are sold separately on a regular basis. For these arrangements, under the residual method, the amount of consideration allocated to deliverables other than the support and maintenance services equals the total arrangement

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consideration less the fair value of the support and maintenance services, which is recognized as revenue using the proportional performance method over the project services period. The proportional performance is determined based on the proportion of actual service hours incurred to the budgeted total service hours. The arrangement consideration allocated to the support and maintenance services is recognized as revenue ratably over the support and maintenance services period, which is usually one to two years.

A number of fixed-price contracts can be terminated without cause. However, we are entitled to collect revenue in relation to services rendered up to the point of termination.

On the basis of our revenue recognition, we classify accounts receivable into billed accounts receivable and unbilled accounts receivable. Upon recognizing revenue, the revenue amount is immediately recognized as an unbilled accounts receivable on our balance sheet. For our fixed-price contracts, we send invoices to our customers after the payment milestones specified under the contracts are completed. Upon sending out the invoice, we recognize the underlying revenue amount as billed receivable. The standard contracts of our large customers generally provide them with a credit period ranging from 45 days to 60 days, beginning from the date of the invoice. IBM, which historically has been our largest customer, has a credit period of 60 days.

We make a specific allowance if there is strong evidence showing that a certain account receivable, billed or unbilled, is likely to be irrecoverable. We evaluate the recoverability of our accounts receivable based on a number of factors, including an aging analysis of the account receivable balances, historical bad debt rates, repayment patterns and customer creditworthiness.

Goodwill and Intangible Assets

Goodwill represents the cost of an acquired business in excess of the fair value of identifiable tangible and intangible net assets purchased. We generally seek the assistance of an independent valuation firm in determining the fair value of the identifiable tangible and intangible net assets of the acquired business. We assign all the assets and liabilities of an acquired business, including goodwill, to reporting units.

There are several methods that can be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, we typically use the income method. This method starts with a forecast of all of the expected future net cash flows associated with a particular intangible asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method or other methods include the amount and timing of projected future cash flows; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s economic life cycle and the competitive trends impacting theasset, including consideration of any technical, legal, regulatory or economic barriers to entry. Determining the useful life of an intangible asset also requires judgment as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives.

Goodwill is tested for impairment at least on December 31 of each year. Impairment is tested using a two-step process. The first step compares the fair value of each reporting unit to its carrying amount, including goodwill. Although we have had one reporting segment, under the reporting segment, we have service lines focusing on different industries and different types of IT services. Each service line qualifies to be a reporting unit for goodwill impairment analysis. As of December 31, 2010 and 2011, we had two reporting units: enterprise application services and financial industry IT services.  Previous to this, as of December 31, 2009, we had three reporting units:  China enterprise application services, China financial industry IT services, and Taiwan financial industry IT services.  During 2010, upon the signing of the Economic Cooperation Framework Agreement, between Mainland China and Taiwan, our China FIS entities and Taiwan FIS entities have been exploring opportunities in both areas. In anticipation of the synergy of between our China FIS and Taiwan FIS, we have combined both service lines for the future development of financial industry IT services and manage China FIS and Taiwan FIS as one service line. Accordingly the financial information of the entire financial industry IT services is reviewed by management for performance evaluation and decision making.

If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities

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of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being the discounted cash flow method.

The following table sets forth the estimated fair values and carrying values of each of our reporting units and goodwill allocated to our reporting units as of September 30, and December 31, 2011:

Reporting Unit	Enterprise Application Services						Financial Industry IT Services
	(U.S. dollars in thousands, except percentages)
	September 30			December 31			September 30			December 31
Estimated fair value		185,481			147,762			66,792			77,535
Carrying value (after impairment loss recorded)		118,346			134,252			59,245			62,269
Percentage by which the fair value exceed the carrying value		57	%		10	%		13	%		25	%
The amount of goodwill allocated to the reporting units (after impairment loss recorded)		22,288			22,574			5,353			5,424
Discount rates as a measure of risk and uncertainty associated with the key assumptions of projected cash flow of our reporting units		20	%		20	%		21	%		21	%

Due to the significant decline in our stock price and departures of our previous chief executive officer of Agree and some of his team members, we performed an impairment assessment on goodwill. The tests resulted in an impairment loss of US$21,457 for Financial industry IT services. And no impairment loss needs to be recognized for Enterprise application services.

As of December 31, 2011, we performed annual goodwill impairment tests and concluded that there was no goodwill impairment as of December 31, 2001.

In the goodwill impairment test, the Company used the income approach, which was believed to be more reliable than the market approach in determining the fair value of the Company’s reporting unit. Accordingly, it adopted a discounted cash flow (“DCF”) method under the income approach, which considers a number of factors that include expected future cash flows, growth rates and discount rates, and requires the Company to make certain assumptions and estimates regarding industry economic factors and future profitability of its business unit. The assumptions are inherently uncertain and subjective.

When applying the DCF method for the reporting unit, the Company incorporated the use of projected financial information and a discount rate developed using market participant based assumptions. The cash flow projections were based on five-year financial forecasts developed by management that included revenue projections with compound annual growth rate of 11% and 16% for Enterprise application services and Financial industry IT services, respectively, capital spending trends, and investments in working capital to support anticipated revenue growth. With the consideration of the risk and nature of the reporting unit’s cash flows and the rates of return market participants would require to invest their capital in the reporting unit, the discount rate selected was 20.0% and 21.0% and terminal value growth rate was 3% and 3% for Enterprise application services and Financial industry IT services, respectively.

Intangible assets with determinable useful lives are amortized either on a straight-line basis or using an accelerated method in the case of customer relationships. Intangible assets that are determined to not have determinable useful lives are not amortized but are tested for impairment at least annually.

We evaluate intangible assets with determinable useful life for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If these assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds the fair value of the assets.

Estimates of fair value result from a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions at a point in time. The judgments made in determining an estimate of fair value can materially impact our results of operations. The valuations are based on information available as of the impairment review date and are based on expectations and assumptions that have been deemed reasonable by management. Any changes in key assumptions, including unanticipated events and circumstances, may affect the accuracy or validity of such estimates and could potentially result in an impairment charge.

Income Taxes

In preparing our consolidated financial statements, we must estimate our income taxes in each of the jurisdictions in which we operate. We estimate our actual tax exposure and assess temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which we include in our consolidated balance sheet. We must then assess the likelihood that we will recover our deferred tax assets from future taxable income. If we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance, we must include an expense within the tax provision in our consolidated statement of operations.

Management must exercise significant judgment to determine our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We base the valuation allowance on our estimates of taxable income in each jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. If actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance, which could materially impact our financial position and results of operations.

U.S. GAAP requires that an entity recognize the impact of an uncertain income tax position on the income tax return at the largest amount that is more likely than not to be sustained upon audit by the relevant tax authority. If we ultimately determine that payment of these liabilities will be unnecessary, we will reverse the liability and recognize a tax benefit during that period. Conversely, we record additional tax charges in a period in which we determine that a recorded tax liability is less than the expected ultimate assessment. We did not recognize any significant unrecognized tax benefits during the periods presented in this annual report.

Uncertainties exist with respect to the application of the New EIT Law and its implementation rules to our operations, specifically with respect to our tax residency status. The New EIT Law specifies that legal entities organized outside of the PRC will be considered residents for PRC income tax purposes if their "de facto management bodies" are located within the PRC. The New EIT Law's implementation rules define the term "de facto management bodies" as establishments that carry out substantial and overall management and control over the manufacturing and business operations,personnel, accounting, properties, etc. of an enterprise. On April 22, 2009, the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, was issued. Circular 82 provides certain specific criteria for determining whether the "de facto management body" of a Chinese-controlled offshore-incorporated enterprise is located in China. Further the Administrative Measures of Enterprise Income Tax of Chinese controlled Offshore Incorporated Resident Enterprises (Trial), or Bulletin No. 45, took effect on September 1, 2011, and provides more guidance on the implementation of Circular 82. According to Circular 82, a Chinese-controlled offshore-incorporated enterprise will be regarded as a PRC tax resident by virtue of having a "de facto management body" in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following conditions set forth in Circular 82 are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise's primary assets, accounting books and records, company seals and board and shareholder resolutions are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC. In addition, Bulletin No. 45 provides clarification in resident status determination, post-determination administration and competent tax authorities. It also specifies that when provided with a copy of Chinese tax resident determination certificate from a resident Chinese-controlled offshore-incorporated enterprise, the payer should not withhold 10% income tax when paying certain Chinese-sourced income, such as dividends, interest and royalties to the Chinese-controlled offshore incorporated enterprise.

Although both the circular and the bulletin only apply to offshore enterprises controlled by PRC enterprises and not those by PRC individuals, the determination criteria set forth in the circular and administration clarification made in the bulletin may reflect the SAT's general position on how the "defacto management body" test should be applied in determining the tax residency status of offshore enterprises and the administration measures should be implemented, regardless of whether they are controlled by PRC enterprises or PRC individuals.

Despite the uncertainties resulting from limited PRC tax guidance on the issue, we do not believe that our legal entities organized outside of the PRC are tax residents under the New EIT Law. If one or more of our legal entities organized outside of the PRC were characterized as PRC tax residents, our results of operations would be materially and adversely affected. See "Risk Factors—Risks Related to Doing Business in China—Our global income and the dividends we may receive from our PRC subsidiaries may besubject to PRC tax under the PRC Enterprise Income Tax Law, which would have a material adverse effect on our results of operation."

Fair value of our common stock

Before the completion of our initial public offering in July 2010, we were a private company with no quoted market prices for our ordinary shares. We had therefore needed to estimate the fair value of our ordinary shares at various dates for the purpose of:

(1)          determining the fair value of our shares at the date of acquisition when we have acquired another entity and the consideration given includes our ordinary shares; and

(2)          determining the fair value of our ordinary shares at the date of the grant of a stock based compensation award to our employees as one of the inputs into determining the grant date fair value of the award.

After our initial public offering in July 2010, the fair value of our ordinary shares is determined by reference to the trading prices of our ADSs on the New York Stock Exchange as of the acquisition date of a business or the grant date of a stock based compensation award.

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The following table sets forth the fair value of our ordinary share at different times prior to the completion of our initial public offering.

Date	Class of Shares	Fair Value	Purpose of Valuation	DLOM*	Discount Rate
January 1, 2006	Ordinary Shares	US$0.61	Acquisition of Dalian Yuandong	28%	28%
June 30, 2006	Ordinary Shares	US$0.55	Employee share option grant	13%	27.5%
June 30, 2007	Ordinary Shares	US$0.86	Employee share option grant	10%	25%
October 15, 2007	Ordinary Shares	US$1.01	Employee share option grant	10%	23%
April 1, 2008	Ordinary Shares	US$1.22	Acquisition of VLife and Yinfeng and employee share option grant	14%	19%
July 1, 2008	Ordinary Shares	US$1.44	Acquisition of Harmonation and extinguishment of liability with Red River Valley	15%	19%
October 31, 2008	Ordinary Shares	US$1.11	Employee share option grant	15%	19%
July 1, 2009	Ordinary Shares	US$1.25	Employee share option grant and acquisition of Agree	15%	19%
November 2, 2009	Ordinary Shares	US$1.27	Employee share option grant	15%	19%
December 30, 2009	Ordinary Shares	US$1.47	Acquisition of Tansun	15%	18%
February 28, 2010	Ordinary Shares	US$3.03	Employee share option grant	5%	14%
May 18, 2010	Ordinary Shares	US$3.00	Employee share option grant	N/A	N/A

______

* DLOM means discount for lack of marketability.

When estimating the fair value of the ordinary shares, our management has considered a number of factors, including the result of a third party appraisal and equity transactions of our company, while taking into account standard valuation methods and the achievement of certain events.

The fair value of the ordinary shares from 2006 to February 2010 was determined with the assistance of American Appraisal China Limited, or AA, an independent third party valuation firm because we were a privately held company and there were no quoted prices in active market for our ordinary shares during that period. The valuation reports from AA have been used as part of our analysis in reaching our conclusion on share values. We reviewed the valuation methodologies used by AA, who took into consideration of the guidance prescribed by the AICPA Audit and Accounting Practice Aid “Valuation of Privately-Held-Company Equity Securities Issued as Compensation,” or the Practice Aid, and believe the methodologies used are appropriate and the valuation results are representative of the fair value of our ordinary shares. The fair value of ordinary shares as of May 18, 2010 was based on the mid-point of our estimate of the estimated IPO price range set forth on the cover page of our preliminary prospectus for our initial public offering dated July 6, 2010. After our initial public offering on July 20, 2010, the quoted price in active market for our ordinary shares become available and can serve as Level 1 input of the fair value of ordinary shares as of August 16, 2010.

AA used a combination of (i) the discounted cash flow, or DCF, method of the income approach and (ii) the market multiple approach to assess the fair value of ordinary shares in 2006, 2007, 2008, 2009 and 2010. The determination of the fair value of our ordinary shares requires complex and subjective judgments to be made regarding our projected financial and operating results, our unique business risks, the liquidity of our shares and our operating history and prospects at the time of valuation.

The major assumptions used in calculating the fair value of ordinary shares include:

• Relative importance of DCF and market multiple approach: For the valuations in 2006, 2007 and April  2008, we assigned 50% weight to the DCF approach and 50% weight to market multiples as we considered the results derived from these approaches at these valuation dates were equally representative. Since July 2008, the credit crunch caused a sharp decline in market capitalization of the publicly traded comparable companies while our operations and long term cash flow forecast had not changed significantly over the same period. In view of this, we considered the income approach should be more reliable than the market approach in determining the fair values of our company at that time, and assigned 85% weight to the income approach and 15% weight to the market approach for the valuations performed in July 2008 to February 2010.

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• Weighted average cost of capital, or WACC: WACCs of 28%, 27.5%, 25%, 23%, 19%, 19%, 19%, 19%, 19%, 18% and 14% were used for dates as of January 1, 2006, June 30, 2006, June 30, 2007, October 15, 2007, April 1, 2008, July 1, 2008, October 31, 2008, July 1, 2009, November 2, 2009, December 30, 2009 and February 28, 2010, respectively. The WACCs were determined based on a consideration of the factors including risk-free rate, comparative industry risk, equity risk premium, company size and company- specific factors. The decrease in WACCs from 2006 to 2010 was due to the combined results of (i) the continuous growth of our business and company size, realization of synergistic effects through the acquisitions of Triumph, Bayshore, Dalian Yuandong, Hwawei, Red River Valley, Yingfeng, VLife, Harmonation, Agree and Tansun and (ii) the proximity to our initial public offering. Decrease in WACC used for the valuation resulted in an increase in the determined fair value of the ordinary shares.

• Comparable companies: In deriving the WACCs, which are used as the discount rates under the income approach, and market multiples, certain publicly traded companies in the software outsourcing industry were selected for reference as our guideline companies.

• Capital market valuation multiples: AA obtained and assessed updated capital market data of the selected comparable companies and used multiples of enterprise value to revenue, or EV/Revenue, and enterprise value to EBITDA, or EV/EBITDA, for its valuations. EV/Revenue multiples adopted in the valuation were 3.3, 3.0, 3.2, 2.7, 2.0 2.5, 1.5, 1.4, 1.9, 1.7 and 2.6, respectively, for January 1, 2006, June 30, 2006, June 30, 2007, October 15, 2007, April 1, 2008, July 1, 2008, October 31, 2008, July 1, 2009, November 2, 2009, December 30, 2009, and February 28, 2010. EV/EBITDA multiples adopted in the valuation were 13.9, 12.4, 13.4, 12.0, 10.2 14.0, 8.5, 7.3, 10.2, 13.2 and 12.9, respectively, for January 1, 2006, June 30, 2006, June 30, 2007, October 15, 2007, April 1, 2008, July 1, 2008, October 31, 2008, July 1, 2009, November 2, 2009, December 30, 2009 and February 28, 2010. The changes in the multiples used for each valuation date are the combined effects of (i) change in the valuation date and thus the period considered in calculating the multiples and (ii) changes in the trading prices and thus the multiples of the comparable companies as implied by the trading prices. Change in the figure of multiples used combined with an increase in our reported financial measures increased the determined fair value of the ordinary shares.

• Discount for lack of marketability, or DLOM: AA quantified DLOM using the Black-Scholes option pricing model. Under this option-pricing method, the cost of the put option, which can hedge the price change before the privately held shares can be sold, was considered as a basis to determine the DLOM. This option pricing method is one of the methods commonly used in estimating DLOM as it can take into consideration factors like timing of a liquidity event (e.g., an IPO) and estimated volatility of our shares. The farther the valuation date is from an expected liquidity event, the higher the put option value and thus the higher the implied DLOM. DLOMs of range from 10% to 28% were used in our valuations as of January 1, 2006, June 30, 2006, June 30, 2007, October 15, 2007, April 1, 2008, July 1, 2008, October 31, 2008, July 1, 2009, November 2, 2009, December 30, 2009, and February 28, 2010. The lower DLOM is used for the valuation, the higher is the determined fair value of the ordinary shares. In the third quarter of 2007, we started the preparation for our initial public offering and performed valuations to appraise the fair values of our ordinary shares in 2006 and 2007 on a retrospective basis for compliance with U.S. GAAP. Because of the proximity of the expected time of the offering, DLOM decreased from 28% for the valuation as of January 1, 2006 to 10% for the valuation as of October 15, 2007. In 2008, the global financial crisis increased the uncertainty and volatility of U.S. stock market and the increase in estimated volatility factor of our ordinary shares, together with the increase in expected time leading to liquidity event (i.e. IPO), increased the DLOM from 10% for the valuation as of October 15, 2007 to 15% for the valuation in July 2008 and 2009. As we successfully submitted our confidential filing in February 2010 in connection with our initial public offering, we expected that the time leading to liquidity event (i.e., IPO) would decrease and the liquidity of our ordinary shares would increase. As a result, we lowered the DLOM from 15% as of December 31, 2009 to 5% as of February 28, 2010.

The income approach involves applying appropriate discount rates to estimated cash flows that are based on earnings forecasts. Our revenues and earning growth rates, as well as major milestones that we have achieved, contributed significantly to the increase in the fair value of our ordinary shares from 2006 to February 2010. However, these fair values are inherently uncertain and highly subjective. The assumptions used in deriving the fair values are consistent with our business plan. These assumptions include: no material changes in

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the existing political, legal and economic conditions in China; our ability to retain competent management, key personnel and staff to support our ongoing operations; and no material deviation in market conditions from economic forecasts. These assumptions are inherently uncertain. The risk associated with achieving our forecasts were assessed in selecting the appropriate discount rates, which ranged from 14% to 28%.

Under the market approach, EV/revenue and EV/EBITDA multiples of comparable companies were calculated and analyzed. The trading multiples of the comparable companies vary but in general, the companies with higher projected growth, higher profit margin and lower business risk (manifested as lower required cost of capital and larger market capitalization) would have a higher multiple. AA compared each individual company to us and derived the adjusted multiples applicable to us based on the above factors. AA took the median of the adjusted multiples, multiplied that by the historical and forecast revenue and EBITDA of our company to come up with an enterprise value on a minority and freely tradable basis. To reflect the fact that we were a private company, a DLOM discount for lack of marketability has also been considered.

AA used the option-pricing method to allocate enterprise value to preferred and ordinary shares, taking into account the guidance prescribed by the AICPA Audit and Accounting Practice Aid, “Valuation of Privately-Held Company Equity Securities Issued as Compensation,” or the Practice Aid. The method treats common stock and preferred stock as call options on the enterprise’s value, with exercise prices based on the liquidation preference of the preferred stock.

The option-pricing method involves making estimates of the anticipated timing of a potential liquidity event, such as a sale of our company or a public offering, and estimates of the volatility of our equity securities. The anticipated timing is based on the plans of our board of directors and management. Estimating the volatility of the share price of a privately held company is complex because there is no readily available market for the shares. We estimated the volatility of our shares to range from 25.1% to 66.6% based on the historical volatilities of comparable publicly traded companies engaged in similar lines of business. Had we used different estimates of volatility, the allocations between preferred and ordinary shares would have been different.

The determined fair value of the ordinary shares increased from US$0.55 per share as of June 30, 2006 to US$0.86 per share as of June 30, 2007. We believe the increase in the fair value of ordinary shares in this period is primarily attributable to the following factors:

• the overall economic growth in our principal geographic markets led to an increased market demand for our IT services;

• we completed the acquisition of Hwawei on January 1, 2007, which expanded our service lines to Taiwan financial IT services market; and

• In April 2007, CVCI Funds’ exercise of their option to subscribe additional Series A preferred shares indicated that the uncertainty and risk perceived by investors in achieving our business plan was reduced. Accordingly, the discount rates, which reflect the market participant’s required rate of return, was lowered from 27.5% for the valuation on June 30, 2006 to 25% for the valuation on June 30, 2007. This resulted in an increase in our overall equity value and hence an increase in the estimated fair value of our ordinary shares.

The fair value of the ordinary shares increased from US$0.86 per share as of June 30, 2007 to US$1.01 per share as of October 15, 2007. We believe the increase in the fair value of the ordinary shares during this period was primarily attributable to the discount rate applied for discounted cash flow analysis decreased from 25% to 23% because of the combined results of (i) the continuous growth of our business and company size, realization of synergistic effects through the integration of business of companies acquired in 2006 and first half of 2007; and (ii) the proximity of our initial public offering as we started the preparation of the filing for that offering during this period.

The fair value of the ordinary shares decreased from US$1.22 per share as of April 1, 2008 to US$1.14 per share as of July 1, 2008 and US$1.11 per share as of October 31, 2008. We believe the decrease in the fair value of the ordinary shares during this period was the net effect of the following factors:

• We anticipated that, as a result of global financial crisis, our customers may reduce or technology spending, which in turn reduce the demand for our services and slow down our revenue growth rate. In view of the above, we lowered our forecasted revenue and earnings in 2008 and 2009 when

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preparing financial projection for valuation as of July 1, 2008 and October 31, 2008 to account for the change in market condition; and

• The impact of global financial crisis on our business was partially offset by the estimated synergetic effect brought by the acquisition of Harmonation in July 2008. We believed that this acquisition will create additional synergetic effect because the integration of the businesses of Harmonation, VLife and Hwawei will further strengthen our market position in Taiwan FIS market and increase our service offering.

The fair value of the ordinary shares increased from US$1.11 per share as of October 31, 2008 to US$1.25 per share as of July 1, 2009. We believe the increase in the fair value of the ordinary shares during this period was attributable to the following:

• We completed the acquisition of Agree on July 1, 2009, which strengthened our capabilities of our financial IT services; and

• We anticipated that the demand for our technology outsourcing services would gradually increase in connection with the recovery of the global economic conditions. In view of this, we increased the long term forecasted revenue and net income, when preparing our cash flow forecasts as of July 1, 2009.

The fair value of the ordinary shares increased from US$1.25 per share as of July 1, 2009 and US$1.27 as of November 2, 2009 to US$1.47 per share as of December 30, 2009. We believe the increase in the fair value of the ordinary shares during this period was attributable to the following. In December 2009, we successfully completed the acquisition of Tansun. We believe that the acquisition of Tansun would further strengthen our capabilities in providing IT service to the financial services industry, and reduce the risks associated with achieving our business plan and cash flow forecast. In view of the above, we lowered the non-systematic risk premium and hence the discount rate used for the valuation of our ordinary shares from 19% as of July 1, 2009 to 18% as of December 30, 2009.

The fair value of our ordinary shares increased from US$1.47 as of December 30, 2009 to US$3.03 as of February 28, 2010. The valuation as of February 28, 2010 was completed in May 2010. We believe the increase in the fair value of our ordinary shares in this period is largely attributable to the following factors:

Increase in forecasted performance

We increased our estimates for the growth in the performance of our business in terms of both total net revenues and income from operations from our previous estimates made as of December 31, 2009. In particular, we increased our forecasted revenue for 2010 and 2011 by approximately 10%, respectively.

Our total net revenues and income from operations in the three months ended March 31, 2010 increased by 72.1% and 90.4%, respectively, as compared to the three months ended March 31, 2009, reflecting the underlying growth in our business. As a result, income from operations as a percentage of revenue in the first quarter of 2010 improved to 4.0%, as compared to 3.6% in the three months ended March 31, 2009. Although our total net revenues declined in three months ended March 31, 2010 compared to the three months ended December 31, 2009, this occurrence reflected the seasonality of our business, and in particular, the impact of the Chinese New Year.

Our revised forecast took into consideration our actual performance in the three months ended March 31, 2010 and other events and factors that were unknown to us in December 2009, including the following:

• The growth of China’s IT service industry grew at a higher rate in the three months ended March 31, 2010 than we anticipated by the end of 2009 as increased competition among Chinese businesses led to (i) an increase in IT service spending as part of overall IT spending; and (ii) continued consolidation of a relatively fragmented IT service industry.

• Instances of the successful implementation of our integration plans for our acquired businesses strengthened our confidence in, and increased our estimates for, future revenues through capitalizing on cross-selling opportunities across various customers, industries and geographic regions. For example, when preparing our forecast in December 2009, we only had (i) a preliminary integration plan for Tansun (which included cross-selling efforts among Tansun and our other business units)

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and (ii) initial discussions with Tansun's management team on the budget for 2010. As such, the impact of these cross-selling efforts and the determination of the 2010 budget were not factored into the forecast in December 2009 due to the uncertainties in the implementation of Tansun’ s integration plan given that the acquisition of Tansun was only completed at the end of December 2009. Since the beginning of 2010, however, we have begun to realize revenue synergies sooner than we had anticipated at the end of 2009. As an example, Bayshore successfully referred clients to, and facilitated customers’ communication with, Tansun, which resulted in Tansun winning a testing service contract from one of the state-owned banks in China in the three months ended March 31, 2010. This result was not anticipated by the end of 2009. Winning this service contract served as an indicator for the successful implementation of our integration plan.

• In the three months ended March 31, 2010, we identified additional synergies from business unit integration efforts, such as office consolidation and centralization of solution development work.

• In the three months ended March 31, 2010, we also gained a number of key new clients in our EAS business, which was not anticipated in December 2009. These clients include (i) the SOFTBANK Group Development Center, through which our work with SOFTBANK Group in the development of communication technologies is performed; (ii) Pacific Andes International Holdings Ltd, which engaged us as its SAP global implementation services provider and has become one of the top clients of our EAS business; and (iii) Ernst & Young, which engaged us as a SAP services provider and has become one of our strategic alliance partners. Revenues from these new clients were not included in our forecast in December 2009.

• Commercial banks in China generally review their annual IT budgets during the first quarter of each year. After this review by the commercial banks in China in the three months ended March 31, 2010, the IT spending budget from the banking sector for the full year 2010 exhibited a growth which was higher than our expectations at the end of 2009.

• During the three months ended March 31, 2010, our FIS business units obtained additional customer feedback in respect of their new solution requirements and their receptiveness to a number of our enhanced products, including products on stress testing on market risks, auditing, and branch transformation. None of these factors was anticipated and therefore included in the December 2009 forecast, and forms a backdrop for the upward revision to our forecast.

Change in discount rate

The change in our financial forecast and the proximity in time to an IPO increased the estimated market capitalization of our company. The increase in our company size, in turn, lowered the small company risk premium, which is one of the components used in estimating a market participant’s required rate of return to invest in our shares, by approximately 3.5%. With consideration of the improvement of our performance and indications of the success of our integration plan, the non-systematic risk factor, another component used in estimating a market participant’s required rate of return for investing in our shares, was reduced by 1%, reflecting the decrease in the perceived risk in achieving our financial forecasts. The combination of the reduced small company risk premium and non-systematic risk factor, which was partially offset by an increase in risk free rate during the period, lowered the overall discount rate applied for valuing our ordinary shares from 18% as of  December 2009 to 14% as of February 2010.

The effects of the change in financial forecast, proximity in time to our IPO and the discount rate on the valuation are inter-related and it is difficult to precisely quantify the impact of these factors on the change in fair value of our ordinary shares. However, we estimate that the decrease in discount rate, change in financial forecast and decrease in DLOM accounted for approximately 40-50%, 30-40% and 10-20%, respectively, of the change in the fair value of our ordinary shares.

We have considered the guidance prescribed by the Practice Aid in determining the fair value of our ordinary shares as of various dates before our initial public offering. A detailed description of the valuation method used and the factors contributing to the changes in the fair value of our ordinary shares through to February 2010 is set out above. Paragraph 113 of the Practice Aid states that “the ultimate IPO price itself also is generally not likely to be a reasonable estimate of the fair value for pre-IPO equity transactions of the enterprise.” We, therefore, believe the ultimate IPO price itself is generally not likely to be a reasonable estimate of the fair value of our ordinary shares as of various dates before our initial public offering.

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Nevertheless, we believe that the implied change in fair value of our ordinary shares from US$3.03 per ordinary share on February 28, 2010 to US$3.00 per ordinary Share, the mid-point of the estimated price range as set forth on the cover page of our preliminary prospectus, dated July 6, 2010, was primarily attributable to the following factors as mitigated by the volatility of our stock price in the capital market since February 28, 2010:

• the price range was estimated assuming our initial public offering would be successfully completed, which would result in increased liquidity and marketability of our ordinary shares; and

• our initial public offering could provide us with additional capital, enhance our ability to access capital markets to grow our business, and raise our overall business profile.

We therefore used the mid-point of our estimate of our initial public offering price range in estimating the fair value of our common stock to determine the fair value at grant date of the stock option awards made on May 18, 2010.

Share-based Compensation

Our share-based payment transactions with employees are measured based on the grant date fair value of the equity instrument we issued and recognized as compensation expense over the requisite service period based on the graded vesting schedule, with a corresponding impact reflected in additional paid-in capital.

At the time of the grants, the exercise price was determined by the board of directors with inputs by management based on various objective and subjective factors.

The fair value of an option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the following assumptions:

	2009	2010	2011
Weighted average risk-free interest rate	4.04%	1.49%	1.35%
Weighted average expected term (number of years)	5.8	1.4	2.2
Weighted average expected volatility	42.7%	41.1%	45.5%
Weighted average expected dividend yield	—	—	—
Weighted fair value of underlying ordinary shares	1.26	2.90	1.01

The risk-free rate for periods within the expected life of the option is based on the implied yield rates of U.S. dollar denominated bond issued by the Chinese government as of the valuation dates. The expected life of options represents the period of time the granted options are expected to be outstanding. As we did not grant options prior to June 30, 2006 and no options have been exercised, no sufficient historical exercising pattern could be followed in estimating the expected life. Therefore, the expected life is estimated based on a consideration of factors including contractual term, vesting period and empirical study on exercise behavior of employee stock option. Our employees who received our stocks options are assumed to exhibit similar behavior. As we expected to grow our business with internally generated cash, we did not expect to pay dividends in the foreseeable future. Because we do not maintain an internal market for our share options, the expected volatility was based on the historical volatilities of comparable publicly traded companies engaged in similar lines of business.

 In determining the fair value of the share options granted prior to the completion of our initial public offering in July 2010, we used the fair value of our ordinary shares as determined through retrospective valuations prepared with the assistance of AA. For more information, see "— Fair Value of our common stock." After our initial public offering in July 2010, the fair value of our ordinary shares is determined by reference to the trading prices of our ADSs on the New York Stock Exchange as of the grant date of the share options.

Share-based compensation expense, based on the estimated fair value of share awards granted and the estimated forfeiture rate, will be recorded over vesting periods after the grant date on a straight-line basis with the amount of compensation expenses recognized in any period not less than the portion of the grant date fair value of the share awards vested during that period.

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The estimate of forfeiture rate is reviewed and adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimate. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change.

We recorded share-based compensation of US$1.1 million, US$1.2 million and US$2.9 million for options granted to employees for the years ended December 31, 2008, 2009 and 2010, respectively, according to the graded vesting schedule on a straight-line basis with the amount of compensation expenses recognized in any period not less than the portion of the grant date fair value of the options vested during that period. As of December 31, 2010, we had a total of US$3.2 million in unrecognized compensation expense related to unvested share options. The expense is expected to be recognized over 2.13 years according to the graded vesting schedule.

Allowance for doubtful accounts

We perform ongoing credit evaluations of our customers and establish an allowance for doubtful accounts based upon estimates, historical experience and other factors surrounding the credit risk of specific customers.

Recent Accounting Pronouncement

In May 2011, the FASB issued an authoritative pronouncement on fair value measurement. The guidance is the result of joint efforts by the FASB and International Accounting Standards Board to develop a single, converged fair value framework. The guidance is largely consistent with existing fair value measurement principles in US GAAP. The guidance expands the existing disclosure requirements for fair value measurements and makes other amendments, mainly including:

· Highest-and-best-use and valuation-premise concepts for nonfinancial assets—the guidance indicates that the highest-and-best-use and valuation-premise concepts only apply to measuring the fair value of nonfinancial assets.  

· Application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk—the guidance permits an exception to fair value measurement principles for financial assets and financial liabilities (and derivatives) with offsetting positions in market risks or counterparty credit risk when several criteria are met. When the criteria are met, an entity can measure the fair value of the net risk position.  

· Premiums or discounts in fair value measure—the guidance provides that premiums or discounts that reflect size as a characteristic of the reporting entity’s holding (specifically, a blockage factor that adjusts the quoted price of an asset or a liability because the market’s normal daily trading volume is not sufficient to absorb the quantity held by the entity) rather than as a characteristic of the asset or liability (for example, a control premium when measuring  the fair value of a controlling interest) are not permitted in a fair value measurement.  

· Fair value of an instrument classified in a reporting entity’s stockholders’ equity—the guidance prescribes a model for measuring the fair value of an instrument classified in stockholders’ equity; this model is consistent with the guidance on measuring the fair value of liabilities.  

· Disclosures about fair value measurements—the guidance expands disclosure requirements, particularly for Level 3 inputs. Required disclosures include:

(i)

For fair value measurements categorized in Level 3 of the fair value hierarchy: (1) a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, (2) a description of the valuation process in place (e.g., how the entity decides its valuation policies and procedures, as well as changes in its analyses of fair value measurements, from period to period), and (3) a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs.

(ii)

The level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair value must be disclosed.

The guidance is to be applied prospectively and is effective for interim and annual periods beginning after December 15, 2011, for public entities. Early application by public entities is not permitted. We do not expect the adoption of this guidance to have a significant effect on its consolidated financial statements.

In June 2011, the FASB issued an authoritative pronouncement to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The guidance eliminates the option to present the components of other

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comprehensive income as part of the statement of changes in stockholders’ equity. The guidance does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The guidance should be applied retrospectively. For public entities, the guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. In December 2011, the FASB issued an authoritative pronouncement related to deferral of the effective date for amendments to the presentation of reclassifications of items out of accumulated other comprehensive income. This guidance allows the FASB to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before update the pronouncement issued in June 2011. We do not expect the adoption of these pronouncements to have a significant effect on its consolidated financial statements.

In September 2011, the FASB issued an authoritative pronouncement related to testing goodwill for impairment. The guidance is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. The guidance permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued. We do not expect the adoption of this pronouncement to have a significant effect on its consolidated financial statements.

In December 2011, the FASB has issued an authoritative pronouncement related to Disclosures about Offsetting Assets and Liabilities. The guidance requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. We do not not expect the adoption of the guidance to have a material effect on its consolidated financial statements.

B. LIQUIDITY AND CAPITAL RESOURCES

Our operations and our growth have primarily been financed by cash generated from operations and more recently, from the issuance of our ADSs in our initial public offering in July 2010 and follow-on public offering in December 2010 and, to a lesser extent, bank borrowings. As of December 31, 2011, we had US$57.1 million in cash and cash equivalents and US$45.3 million in term deposits, compared to US$140.4 million in cash and cash equivalents and US$0.2 million in term deposit as of December 31, 2010.

Cash Flows and Working Capital

Our working capital, calculated as the difference between current assets and current liabilities, as of December 31, 2009, 2010 and 2011, was US$56.6 million, US$187.2 million and US$185.5 million, respectively. In the future, we may also finance our working capital from further issuances of equity or debt securities as well as bank borrowings. The ability of our operating subsidiaries to pay dividends and other distributions to our holding company is subject to the laws and regulations of the jurisdictions where our subsidiaries are incorporated.

We believe that our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for at least the next 12 months. 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.

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

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	For the Year Ended December 31,
	2009			2010			2011
	(U.S. dollars in thousands)
Net cash provided by (used in) operating activities		11,551			9,895			(4,801	)
Net cash provided by (used in) investing activities		(5,987	)		(13,747	)		(54,297	)
Net cash provided by (used in) financing activities		4,527			108,754			(25,166	)
Effect of exchange rate changes		813			1,634			1,036
Net increase (decrease) in cash and cash equivalents		10,904			106,536			(83,228	)
Cash and cash equivalents, beginning of year		22,916			33,820			140,356
Cash and cash equivalents, end of year		33,820			140,356			57,128

Operating Activities

              Net cash used in operating activities in 2011 was US$4.8 million, which was primarily attributable to net loss of US$41.1 million and an increase of account receivables of US$23.4 million, which were partially offset by certain non-cash expenses and changes in certain working capital amounts, mainly including a total impairment loss on goodwill and intangible assets of US$30.0 million, share-based compensation of US$19.4 million, amortization of intangible assets of US$5.3 million and accrued expenses and other payables of US$4.0 million.

Net cash provided by operating activities in 2010 was US$9.9 million, which was primarily attributable to net income of US$18.7 million, adjusted for an increase of US$7.5 million in account payable, an increase of US$6.5 million in accrued expenses and other payable, and certain non-cash expenses, primarily consisting of amortization of intangible assets of US$6.3 million, an increase of US$3.9 million in changes in fair value of contingent consideration for acquisition of Agree and Tansun and share-based compensation of US$2.9 million, and negatively impacted by changes in certain working capital amounts, primarily an increase of US$33.9 million in accounts receivables. The increase in accounts receivable was primarily due to the significant revenue increase in 2010.

Net cash provided by operating activities in 2009 was US$11.6 million, which was primarily attributable to net income of US$13.0 million, adjusted for an increase of US$1.1 million in deferred revenue, certain non-cash expenses, primarily amortization of acquired intangible assets of US$3.9 million and share-based compensation of US$1.2 million, and negatively impacted by changes in certain working capital accounts, primarily an increase of US$12.8 million in accounts receivable. The increase in accounts receivable was primarily due to the significant revenue increase in 2009.

Investing Activities

Net cash used in investing activities in the year end December 31,2011 was US$54.3 million, which was primarily attributable to a US$44.8 million payment for purchasing term deposits and a US$11.4 million payment for business acquisitions, which was partially offset by cash balance acquired from Dimension.

Net cash used in investing activities in the year ended December 31, 2010 was US$13.7 million, which was primarily attributable to a US$9.8 million payment for our acquisition of Tansun and the purchase of property and equipment in connection with our headquarters.

               Net cash used in investing activities in 2009 was US$6.0 million, which was primarily attributable to US$7.4 million and US$2.6 million paid for our acquisitions of Agree and Yinfeng, respectively, partially offset by US$3.5 million in cash balance acquired from such acquired companies.

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Financing Activities

Net cash used in financing activities in the year ended December 31, 2011 was US$25.2 million, which was primarily attributable to the payment of US$14.4 million for repurchase of ordinary shares, the repayment of borrowings of US$12.2 million and payment for the deferred consideration for acquisitions of US$8.0 million, which were partially offset by proceeds from borrowings of US$8.9 million.

Net cash provided by financing activities in the year ended December 31, 2010 was US$108.8 million, which was primarily attributable to the receipt of the net proceeds of US$110.6 million from our initial public offering and our follow-on public offering in 2010 as well as the deferred consideration payment of US$4.3 million for our acquisition of Yinfeng and US$9.3 million in the repayment of bank borrowings.

Net cash provided by financing activities in 2009 was US$4.5 million, which primarily reflected US$8.8 million in proceeds from bank borrowings, partially offset by US$4.0 million in repayments of bank borrowings.

Accounts Receivable

As of December 31, 2009, 2010 and 2011, our total billed and unbilled accounts receivable amounted to US$68.2 million, US$105.7 million and US$135.0 million, respectively, net of allowance for doubtful accounts.

Our accounts receivable balances were significantly affected by the relatively high concentration of our customer base. In 2009, 2010 and 2011, our ten largest customers accounted for 63.0%, 59.5% and 54.23%, respectively, of our net revenues. Our customer base primarily consists of leading international IT service providers, such as IBM, as well as large enterprise customers such as Lenovo, Sinopec (through PCITC), Hitachi and State Grid. The timing of invoicing and collection on our accounts receivable is affected by the budget cycles of our large enterprise customers in China. Nevertheless, we have well-established relationships with many of these blue-chip companies, and our historical write-off experienced with these customers has been insignificant.

Our billed receivables represent the amount billed based on agreed-upon contract milestones or payment terms that remain uncollected, and correspond to the period between billing and collection. As of December 31, 2009, 2010 and 2011, our billed receivables totaled US$21.0 million,US$43.1 million and US$47.8 million, respectively.

The following table sets forth the aging schedule of our billed receivables as of the dates indicated.

	As of December 31,
	2009				2010				2011
Aging Period	Billed		% of Total		Billed		% of Total		Billed		% of Total
	(U.S. dollars in thousands, except percentages)
<60 days		16,136		76.7		36,591		85.0		36,382		76.1
61-90 days		1,742		8.3		607		1.4		7,851		16.4
91-180 days		882		4.2		2,987		6.9		1,813		3.8
181-360 days		1,083		5.2		1,314		3.0		1,788		3.7
> 360 days		1,183		5.6		1,573		3.7		-		-
Total		21,026		100.0		43,072		100.0		47,834		100.0

Our unbilled receivables represent the excess of recognized revenues over billings, and correspond to the period between revenue recognition and invoicing. Such period generally arises from, with respect to our time-and-expense contracts, the time during which we reconcile accounts with our customers, and with respect to our fixed-price contracts, the period between revenue recognition and the time when our payment milestones are reached. The period of completing the account reconciliation process at many of our largest customers,

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including IBM, may require a significantly longer period than some of our other customers. Historically, we have not experienced disagreements with our customers over material amounts of unbilled receivables as a result of our account reconciliation process. With respect to our fixed-price contracts, the period between revenue recognition and the time when our payment milestones are reached may vary significantly based on the number of progress payments and the amount of each payment. As of December 31, 2009, 2010 and 2011, our unbilled receivables totaled US$47.2 million, US$62.6 million and US$87.2 million, respectively.

Capital Expenditure

Our capital expenditures in 2009, 2010 and 2011 were US$408,000, US$1,439,000 and US$756,000, respectively. Our capital expenditures related primarily to purchase of computers and office equipment in connection with our headquarters, improvement of leased premises and purchase of intangible assets such as software. We expect our capital expenditures to increase in the future as we expand our business to implement our growth strategy. We estimate that our capital expenditures will be approximately US$0.8 million in 2012, primarily used to purchase computer equipment and to remodel our headquarters.

C. RESEARCH AND DEVELOPMENT

Research and Development

Research and development costs primarily consist of compensation expenses relating to our research and development professionals. We incurred research and development expenses of US$1.5 million, US$2.7 million and US$6.0 million in 2009, 2010 and 2011, respectively.

D. TREND INFORMATION

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events since the beginning of our fiscal year 2011 that are reasonably likely to have a material effect on our net revenues, income from operations, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial condition.

E. OFF-BALANCE SHEET ARRANGEMENTS

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

F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The following table sets forth our contractual obligations as of December 31, 2011:

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	Payment by period
As of December 31, 2011	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
	(U.S. dollars in thousands)
Operating lease agreements		7,872		1,819		1,910		1,792		2,351
Bank borrowing
Principal		9,225		8,891		157		111		66
Interest		117		44		43		21		9
Deferred cash consideration for business acquisition		5,132		5,132		—		—		—
Deferred cash consideration for debt extinguishment		—		—		—		—		—
Total contractual obligations		22,346		15,886		2,110		1,924		2,426

The above table does not include the following contingent consideration in connection with the acquisition of Dimension in January 2011, which we agreed to pay an additional performance-based cash consideration, as determined using a specified formula based on Dimension’s earnings in 2012. This contingent consideration was recorded at a fair value of US$2.8 million as of December 31, 2011.

G. SAFE HARBOR

See “Special Note Regarding Forward-Looking Statements” on page 1 of this annual report.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. DIRECTORS AND SENIOR MANAGEMENT

Directors and Executive Officers

The following table sets forth our directors and executive officers, their ages as of the date of this report and the positions held by them. The business address for each of our executive officers and directors is c/o Camelot Information Systems Inc., Beijing Publishing House, A6 North Ring 3 Road, Xicheng District, Beijing, The People’s Republic of China.

Name	Age	Position
Yiming MA	52	Chairman and Chief Executive Officer
Heidi CHOU	48	Director and General Manager
Ching-Hua HO	55	Director and Chief Operating Officer
Ajit BHUSHAN(1)	49	Director
Dipak RASTOGI(2)	58	Director
Jian Wang	35	Independent Director
Shang-Wen HSIAO	50	Independent Director
Joanna Wang	44	Independent Director
David Dahu Wang	63	Independent Director
Claude LEGLISE(3)	56	Independent Director
Qian Zhao(4)	43	President
Franklin King	65	Interim Chief Financial Officer
Gordon Lau(5)	48	Chief Financial Officer
Jan-Kung (James) ROH	60	Chief Technology Officer

_______

Notes:

(1)	Mr. Ajit BHUSHAN resigned as our director on October 5, 2011.
(2)	Mr. Dipak RASTOGI resigned as our director on October 5, 2011.

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(3)	Mr. Claude LEGLISE resigned as our independent director on February 17, 2012.
(4)	Mr. Qian Zhao initially served as our independent director on September 27, 2011.He resigned as the independent director and served as our president on March 15, 2012.
(5)	Mr. Gordon Lau resigned as our Chief Financial Officer on November 8, 2011.

Yiming Ma has been our Chairman of the board of directors and Chief Executive Officer since the founding of our company. From 1986 to 1994, Mr. Ma was at IBM in the United States as a software designer, where he developed software solutions to IBM’s customers. Mr. Ma has over 20 years of experience in the software and IT services industry. Mr. Ma received his M.S. degrees in mathematics and computer science from the University of California, Santa Barbara, and a bachelor’s degree from East China Normal University. Mr. Ma is the husband of Ms. Chou.

Heidi Chou has been our Director since the founding of our company and our General Manager since December 12, 2011. She has previously served as our President from November 2010 until December 12, 2011. Ms. Chou is a co-founder of our company. From 1984 to 1991, she served in a variety of roles at IBM in the United States, including holding management positions in sales, marketing, project management and product development. Ms. Chou received an MBA from Stanford University and her bachelor’s degree in computer science and mathematics from the University of California. Ms. Chou is the wife of Mr. Ma.

Ching-Hua Ho has been a Director and our Chief Operating Officer since November 2010 and was our independent director from February 2008 to November 2010. Mr. Ho is currently a non-executive director, and from 2006 to 2009, the chief executive officer, of Kingdee International Software Group Co., Ltd. He also has over 20 year's experience in the IT industry. Mr. Ho was a vice president and general manager of Siebel Systems Inc. from 2004 to 2006, chief executive officer of UF Soft Inc. from 2002 to 2004, and a vice president and general manager of Broadvision Inc.’s Asia Pacific and Japan operations. Mr. Ho received his bachelor’s degree from National Taiwan University and a master’s degree in computer science from the University of Maryland.

Jian Wang has served as our independent director and audit committee member since October 12, 2011.  Mr. Wang is currently a partner of Beijing Sino Pro. Law Firm and has substantial experience in corporate restructuring, tax and accounting regulations, investments, international trade and corporate taxation. Mr. Wang received his master's and bachelor's degrees from the China University of Political Science and Law. He was also a visiting scholar at Xavier University (USA).

Shang-Wen Hsiao has been our independent director since 2008. Mr. Hsiao is currently the CFO of 21Vianet Group Inc., one of the largest carrier-neutral Internet data center services providers in China listed in the Nasdaq Stock Market. Prior to that, Mr. Hsiao also served as the CFO of Greatdreams (China), Inc. From July 2007 to June 2008, Mr. Hsiao served as the CFO of Memsic Inc. Mr. Hsiao also served as the CEO and CFO of Centuryfone Networking and Communication Co. from September 2003 to May 2007. From July 2000 to September 2003, Mr. Hsiao served as the CFO in YesKey Group. From January 1994 to July 2000, Mr. Hsiao was a senior manager of business, tax and legal advisory for Arthur Andersen LLP in Philadelphia and Shanghai. Mr. Hsiao currently also serves as director for Better Education Group and Centuryfone Networking and Communication Co. Mr. Hsiao has also served as a director for Cybermart, Inc. Mr. Hsiao received his J.D. degree from Rutgers School of Law in New Jersey in 1994 and a B.A. in finance and accounting from Temple University in 1989. Mr. Hsiao has been a certified public accountant since 1989 and was admitted to the Pennsylvania Bar in 1994.

Joanna Wang was appointed as our independent director in March 2012. She is currently working as a consultant to Fortune Resources International, Inc., a metal recycling solution provider. Prior to that, Ms. Wang served as Senior Vice President and the head of Beijing office of private equity investment firm Oaktree Capital from August 2007 to May 2010. From August 2006 to July2007, Ms. Wang was a director at Credit Suisse, a leading investment banking firm. Ms. Wang received a master's degree in Business Administration from the Harvard Business School in 1997 and a Bachelor's degree in Business Administration in 1991.

David Dahu Wang served as our independent director since March 2012. Before joining us, he served as a director of human resources and corporate counsel at LVMH China, a world leader in luxury products from 1998 to 2008. Prior to that, Mr. Wang worked as human resource director in several well-known international

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companies, including Kodak and Philips. Mr. Wang received his bachelor's degree in mathematics from east China Normal University.

Qian Zhao has served as our president since March 15, 2012. He previously served as our independent director since September 27, 2011 and audit committee member since November 9, 2011. Mr. Zhao is a founding partner of CXC China Sustainable Growth Fund (CXCG), as well as a managing director of CXCG’s management company, CXC Capital, Inc. He also co-founded Haiwen & Partners, a preeminent corporate finance law firm in Beijing. Prior to that, Mr. Zhao worked at Sullivan & Cromwell LLP in New York and at Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates in Beijing. He has been admitted to practice law in both China and New York and received a J.D. degree from New York University School of Law and a LL.B. from the University of International Business & Economics, Beijing. Mr. Zhao is also an independent director of Trina Solar Limited and SouFun Holdings Limited.

Franklin King joined us in January 2008 as the Chief Financial Officer and served as our Chief Strategy Officer in November 2009. Mr. King has been our interim Chief Financial Officer since November 8, 2011 after the departure of Gordon Lau. Before joining us, Mr. King worked for IBM for 34 years and served in various technical and management positions, including the general manager for various local IBM subsidiaries in China, Taiwan, Hong Kong, U.S. and Japan from 1995 to 2007. During his time as a general manager for IBM, Mr. Franklin King helped to establishthe IBM Software Services Company, set up service outlets in China, and developed as well as set up off-shoreoutsourcing services in cities in China. Mr. Franklin King received his bachelor’s degree from the Chong YuanUniversity in Taiwan and completed Executive Business Courses at Harvard University and Wharton School ofthe University of Pennsylvania.

Jan-Kung (James) ROH has been our Chief Technology Officer since 2001. Mr. Roh has over 20 year's experience in the financial industry. From 1998 to 2001, he was the CIO and Executive Vice President of Industrial Bank of Taiwan. From 1990 to 1996, Mr. Roh held several key executive positions at Chinatrust Commercial Bank in Taiwan. Mr. Roh received his M.S. degree in computer science from the University of Texas and bachelor’s degree in telecommunications from Cheng Kong University in Taiwan.

B. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS

In 2011, other than reimbursement of expenses incurred for attending board meetings, we paid US$2.1 million cash compensation to our executive officers and an aggregate US$0.1 million in compensation to our non-executive directors.

Employment Agreements with Executive Officers

We have entered into employment agreements with each of our executive officers. Under these employment agreements, our officers have agreed that during their respective terms of employment and for a period of two years thereafter, he or she will not use or disclose to any person any trade secrets or other confidential knowledge or information relating to our company. In addition, our executive officers have agreed to a one-year non-competition and non-solicitation period after the termination of his or her employment. Our executive officers have also agreed to assign patents, trademarks and other intellectual property rights developed during their terms of employment to us.

Amended and Restated 2006 Equity Incentive Plan

On June 26, 2006, our board of directors passed a resolution authorizing the granting of options to our employees to purchase up to 10,872,000 ordinary shares subject to vesting requirements. Such resolution was subsequently formalized as the 2006 Equity Incentive Plan, or the 2006 Plan. The purpose of our 2006 Plan was to (i) provide additional incentives to those officers, employees, directors, consultants and other of our service providers whose contributions are essential to the growth and success of our business; (ii) strengthen the commitment and loyalty of such persons to us; (iii) motivate such persons to diligently perform their responsibilities; and (iv) attract and retain competent and dedicated persons whose efforts will result in our long-term growth and profitability. In March 2008, November 2008, and May 2010, we expanded the number of options that may be granted under the 2006 Plan by an additional 3,200,000, 5,426,012, and 4,000,000 ordinary shares, respectively, making the total number of options available for grant under the 2006 Plan up to 23,498,012 ordinary shares subject to vesting requirements.

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On May 22, 2010, in contemplation of our initial public offering in July 2010, we adopted the Amended and Restated 2006 Equity Incentive Plan, or the Amended and Restated 2006 Plan. The Amended and Restated 2006 Plan further details the terms and conditions of the 2006 Plan and brings our stock incentive schemes to be more in line with those of similarly publicly-listed companies. To accomplish such purposes, the Amended and Restated 2006 Plan provides that we may grant incentive stock options, nonqualified stock options, restricted stock, restricted stock units and other awards. From and after the consummation of a public offering, our board of directors may determine that the Plan is intended, to the extent applicable, to satisfy the requirements of section 162(m) of the U.S. Internal Revenue Code of 1986 as amended, or the Code, and shall be interpreted in a manner consistent with the requirements thereof.

As of March 31, 2012, options to purchase a total of 16,811,328 ordinary shares were outstanding and options to purchase a total of 1,354,192 shares are reserved for future grants.  The number of shares reserved under the Amended and Restated 2006 Plan is also subject to adjustment in the event of a stock split, special dividend or other change in our capitalization. Any shares subject to an award granted under the Amended and Restated 2006 Plan that are forfeited, canceled or otherwise terminated will be added back to the shares available for issuance under the Amended and Restated 2006 Plan. Subject to listing requirements and applicable law, shares tendered or held back upon exercise of an option or settlement of an award to cover the exercise price or tax withholding may again be made available for issuance as awards under the Amended and Restated 2006 Plan, unless otherwise determined by the administrator.

Our board of directors acts as the administrator of the Amended and Restated 2006 Plan but may appoint a committee or an executive officer to administer the plan. Unless otherwise determined by the administrator, vesting of options granted under the Amended and Restated 2006 Plan will not accelerate upon a change in control (as defined in The Amended and Restated 2006 Plan), but vesting of restricted stock or restricted stock units shall accelerate and restrictions with respect to any shares subject to such awards shall lapse.

The Amended and Restated 2006 Plan has a term of ten years.

If a grantee’s service with our company terminates, any unvested option will expire on the date of the grantee’s termination of service and will be forfeited for no consideration, and any vested options may be exercised at the price of our shares on date of the grantee’s termination of service, subject to our right of first refusal.

The following table summarizes, as of March 31, 2012, the shares related to options which were granted under the Amended and Restated 2006 Plan to our directors and executive officers and to other individuals as a group.

Name	Number of Shares	Exercise Price ($/Share)	Date of Grant	Date of Expiration
Yiming MA	1,450,020	0.0025	June 30, 2006	June 30, 2014
Heidi CHOU	810,000	0.0025	June 30, 2006	June 30, 2014
Ching-Hua HO	*	0.2450	June 30, 2007	June 30, 2015
Jian WANG	-	-	-	-
Shang-Wen HSIAO	*	0.2450	June 30, 2007	June 30, 2015
Joanna Wang	-	-	-	-
David Wang	-	-	-	-
Qian ZHAO	-	-	-	-
Franklin King	-	-	-	-
Jan-Kung (James) ROH	-	-	-	-
Other individuals as a group	14,211,308	0.0025-0.7500	June 30, 2006 to January 31, 2012	August 16, 2011 to January 31, 2020
Total	16,811,328

_____

* The options and shares in aggregate held by each of these directors and officers represented less than 1% of our total outstanding shares.

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C. BOARD PRACTICES

Board of Directors

Our board of directors currently consists of seven directors, including three independent directors who satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange or NYSE, and meets the independence standards under Rule 10A-3 under the U.S. Securities Exchange Act, as amended, or the Exchange Act.

Committees of the Board of Directors

Audit Committee

Our audit committee consists of Shang-Wen Hsiao, Joanna Wang and Jian Wang and its chairman is Shang-Wen Hsiao. Each of Joanna Wang, Shang-Wen Hsiao and Jian Wang satisfies the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange and meet the independence standards under Rule 10A-3 under the Exchange Act. Mr. Shang-Wen Hsiao satisfies the criteria of an audit committee financial expert as set forth under the applicable rules of the SEC. The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things:

· appointment, compensation, retention and oversight of the work of our independent registered public accounting firm;  

· approving all auditing and non-auditing services permitted to be performed by our independent registered public accounting firm;  

· meeting separately and periodically with management and our independent registered public accounting firm;  

· oversight of annual audit and quarterly reviews, including reviewing with our independent registered public accounting firm the annual audit plans;  

· oversight of financial reporting processes and internal controls, including reviewing the adequacy and effectiveness of our internal controls policies and procedures on a regular basis; and  

· establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters.

Compensation Committee

Our compensation committee consists of Shang-Wen Hsiao and David Dahu Wang and its chairman is David DahuWang. Both David Dahu Wang and Shang-Wen Hsiao satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange. The compensation committee assists the board of directors in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Mr. Yiming Ma, our chief executive officer, may not be present at any committee meeting during which his compensation is deliberated.  The compensation committee is responsible for, among other things:

· reviewing at least annually our executive compensation plans;  

· evaluating annually the performance of our chief executive officer and other executive officers;  

· determining and recommending to the board of directors the compensation package for our chief executive officer and other executive officers;  

· evaluating annually the appropriate level of compensation for board and board committee service by non-employee directors;  

· reviewing and approving any severance or termination arrangements to be made with any of our executive officers; and  

· reviewing at least annually our general compensation plans and other employee benefits plans.

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Duties of Directors

Under British Virgin Islands law, our directors have a duty to act honestly in good faith with a view to our best interest. Our directors also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our amended and restated memorandum and articles of association. A shareholder has the right to seek damages if a duty owed by our directors is breached.

The functions and powers of our board of directors include, among other things:

· convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings;  

· declaring dividends and distributions;  

· appointing officers and determining the term of office of officers;  

· exercising the borrowing powers of our company and mortgaging the property of our company; and  

· approving the transfer of shares of our company.

Terms of Directors and Officers

A director may be removed before the expiration of such director’s term for cause by a shareholders resolution. Officers are elected by and serve at the discretion of the board of directors.

We have not entered into any director's service contract providing for benefits upon termination of employment.

Interested Transactions

A director may vote in respect of any contract or transaction in which he or she is interested, provided that the nature of the interest of any directors in such contract or transaction is disclosed by him or her forthwith after becoming aware of the fact that he or she is interested in a transaction entered into or to be entered into by us.

D. EMPLOYEES

As of December 31, 2009, 2010 and 2011, we had a total of 2,863, 3,718 and 4,718 employees, respectively.  The following table sets forth the number of our employees categorized by our areas of operations and as a percentage of our workforce as of December 31, 2011:

Employees	Number of employees		Percentage of total
IT Professionals
Enterprise application services		2,135		45.2	%
Packaged software		626		13.3	%
Software development		1,509		32.0	%
Financial industry IT services		1,882		39.9	%
Subtotal		4,017		85.2	%
Other employees		701		14.9	%
Administration		224		4.8	%
Sales and marketing		204		4.3	%
Accounting		81		1.7	%
HR		158		3.3	%
Senior management		34		0.7	%
Total		4,718		100.0	%

Our employees are not covered by any collective bargaining agreement.  We believe that we have a good relationship with our employees.

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E. SHARE OWNERSHIP

The following table shows the beneficial ownership of our ordinary shares as of March 31, 2012 by:

· each of our directors and executive officers; and  

· each person known to us to own beneficially more than 5% of our ordinary shares.

The calculation on the table below assumes that there are 191,476,370 ordinary shares which include (i) 177,621,367 ordinary shares issued and outstanding as of March 31, 2012 and (ii) 13,855,003 ordinary shares issuable upon the exercise of the stock options exercisable within 60 days after March 31, 2012. Beneficial ownership is determined in accordance with the rules and regulations of the United States Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days after March 31, 2012, including shares through the exercise of any option, warrant or other right or any other security.

	Ordinary Shares Beneficially Owned
	Number		%
Directors and Executive Officers:
Yiming Ma(1)		15,538,196		8.08	%
Heidi Chou(2)		14,897,212		7.75	%
Ching-Hua Ho		*		*
Jian Wang		-		-
Shang-Wen Hsiao		*		*
Joanna Wang		-		-
Qian Zhao		-		-
Franklin King		-		-
Jan-Kung (James) ROH		*		*
Principal  Shareholders:
Fidelity Management & Research Company(3)		19,198,144		9.98	%
Morgan Stanley & Company(4)		12,023,640		6.25	%
Credit Suisse Securities (USA), LLC(5)		11,214,448		5.83	%

_____

* Less than 1% of our total outstanding shares.

(1)	Consists of (i) 14,088,896 ordinary shares held by Benefit Overseas Limited, a British Virgin Islands investment holding company wholly owned and controlled by Mr. Ma (including 2,050,000 ordinary shares held by Mr. Ma as settlor and initial trustee in the Yiming Ma 2009 Annuity Trust, which is an irrevocable trust constituted under the laws of California); and (ii) options to purchase 1,450,020 ordinary shares held by Joint Link Technology Limited on behalf of Mr. Ma. The business address of these entities is Morgan & Morgan Building, P.O. Box 958, Pasea Estate, Road Town, Tortola, British Virgin Islands. Mr. Ma previously entered into certain margin loans, which were secured by a pledge of certain shares of our company that were beneficially owned by Mr. Ma.  In September 2011, due to market conditions and pursuant to margin calls, 1,990,697 ADSs beneficially owned by Mr. Ma were divested by one financial institution through sales on the open market and through transfers to other parties to cover the obligations of Mr. Ma under the margin loans.
(2)	Consists of (i) 13,278,896 ordinary shares held by Dreams Power Ltd. a British Virgin Islands investment holding company wholly-owned and controlled by Ms. Chou (including 2,050,000 ordinary shares held by Ms. Chou as settlor and initial trustee in the Heidi Chou 2009 Annuity Trust, which is an irrevocable trust constituted under the laws of California); and (ii) options to purchase 810,000   ordinary shares held by Joint Link Technology Limited on behalf of Ms. Chou. The business address of these entities is Morgan & Morgan Building, P.O. Box 958, Pasea Estate, Road Town, Tortola, British Virgin Islands. Ms. Chou previously entered into certain margin loans, which were secured by a pledge of certain shares of our company that were beneficially owned by Ms. Chou.  In September 2011, due to market conditions and pursuant to margin calls, 1,990,456 ADSs beneficially owned by Ms. Chou were divested by one financial institution through sales on the open market and through transfers to other parties to cover the obligations of Ms. Chou under the margin loans.
(3)	The principal business office of Fidelity Management and Research Company is 245 Summer Street, Boston, MA 02210-1133, United States, a wholly-owned subsidiary of FMR LLC and an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, is the beneficial owner of

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	19,198,144 ordinary shares represented by ADS as a result of acting as investment adviser to various investment companies registered under Section 8 of the Investment Company Act of 1940.
(4)	The principal business office of  Morgan Stanley & Company is  1585 Broadway, New York, NY 10036-8200, United States.
(5)	The principal business office of Credit Suisse Securities (USA), LLC is 11 Madison Avenue, New York, NY 10010-3629, United States.

As of March 31, 2012,  177,621,367 of our ordinary shares were issued and outstanding. To our knowledge, 96,882,304 ordinary shares, representing approximately 54.54% of our total outstanding shares, were held by holders in the in the United States, which includes 68,706,916 ordinary shares held of record by Citibank, N.A., the depositary of our ADS program. The number of beneficial owners of our ADSs in the United States is likely to be much larger than the number of record holders of our ordinary shares in the United States. None of our existing shareholders have different voting rights from other shareholders. See “Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers” for a description of the employment agreements we have entered into with our senior executive officers.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. MAJOR SHAREHOLDERS

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

B. RELATED PARTY TRANSACTIONS

Issuances and Sales of Shares

In recent years, we have issued our ordinary shares as partial consideration relating to a number of acquisitions, including:

· 1,800,000 shares relating to the extinguishment of liability with Red River Valley;  

· 2,250,000 shares relating to the acquisition of VLife;  

· 3,200,000 shares relating to the acquisition of Yinfeng;  

· 833,336 shares relating to the acquisition of Harmonation;  

· 4,866,180 shares relating to the acquisition of Agree;  

· 3,932,000 shares relating to the acquisition of Tansun; and  

· 1,152,352 shares relating to the acquisition of Dimension.

Employment Agreements

See “Item 6. Directors, Senior Management and Employees— B. Compensation of Directors and Executive Officers” for a description of the employment agreements we have entered into with our senior executive officers.

Share Incentives

See “Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers” for a description of share-based compensation awards we have granted to our directors, officers and other individuals as a group.

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C. INTERESTS OF EXPERTS AND COUNSEL

Not applicable.

ITEM 8. FINANCIAL INFORMATION

A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

See “Item 18. Financial Statements”

Legal Proceedings

We may from time to time be subject to various legal or administrative proceedings, either as plaintiff or defendant, arising in the ordinary course of our business. Except otherwise disclosed in this report, we are not currently a party to, nor are we aware of, any legal proceeding, investigation or claim that, in the view of our management, is likely to materially and adversely affect our business, financial position or results of operations. See Note 21 to our Financial Statements under Item 18.

Dividend Policy

Since our inception, we have not declared or paid any dividends on our ordinary shares. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance operations and to expand our business.

We are a holding company established in the British Virgin Islands, and our ability to pay dividends to our shareholders depends upon dividends that we receive from our subsidiaries. See “Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China — We may rely on dividends and other distributions on equity paid by our operating subsidiaries to fund cash and financing requirements, and limitations on the ability of our operating subsidiaries to pay dividends to us could have a material adverse effect on our ability to conduct our business.”

Our board of directors has complete discretion on whether to pay dividends, subject to the approval of our shareholders. Even if our board of directors 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 the board of directors may deem relevant. Cash dividends on our ADSs, if any, will be paid in U.S. dollars.

Holders of our ADSs will be entitled to receive dividends, if any, subject to the terms of the deposit agreement, to the same extent as the holders of our ordinary shares. Cash dividends will be paid to the depositary in U.S. dollars, which will distribute them to the holders of ADSs according to the terms of the deposit agreement. Other distributions, if any, will be paid by the depositary to the holders of ADSs in any means it deems legal, fair and practical.

B. SIGNIFICANT CHANGES

Except as disclosed elsewhere in this annual report, 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. OFFER AND LISTING DETAILS

See “ ­Item 9. The Offer and Listing — C. Markets”

B. PLAN OF DISTRIBUTION

Not applicable.

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C. MARKETS

Our ADSs, each representing four ordinary shares, has been listed on the NYSE since July 20, 2010 and trade under the symbol “CIS.” The following table provides the high and low trading prices for our ADSs on the NYSE for the periods indicated.

	Trading Price
	High		Low
	US$		US$
Annual High and Low
2010		24.90		10.55
2011		28.18		1.75
Quarterly Highs and Lows
Third Fiscal Quarter of 2010 (from July 20, 2010)		18.80		10.55
Fourth Fiscal Quarter of 2010		24.90		15.44
First Fiscal Quarter of 2011		28.18		14.14
Second Fiscal Quarter of 2011		21.10		12.75
Third Fiscal Quarter of 2011		15.33		2.68
Fourth Fiscal Quarter of 2011		3.84		1.75
First Fiscal Quarter of 2012		4.07		2.03
Monthly Highs and Lows
November 2011		3.29		1.75
December 2011		2.90		2.04
January 2012		3.15		2.03
February 2012		2.88		2.16
March 2012		4.07		2.08
April 24, 2012		3.94		2.60

D. SELLING SHAREHOLDERS

Not applicable

E. DILUTION

Not applicable

F. EXPENSES OF THE ISSUE

Not applicable

ITEM 10. ADDITIONAL INFORMATION

A. SHARE CAPITAL

Not applicable.

B. MEMORANDUM AND ARTICLES OF ASSOCIATION

On September 23, 2011, we adopted our Third Amended and Restated Memorandum and Articles of Association according to our Shareholders Resolution for Special Matters passed on our 2011 Annual General Meeting.

The following are summaries of material terms and provisions of our third amended and restated memorandum and articles of association, and the BVI Business Companies Act 2004, or the BVI Act, insofar as they relate to the material terms of our ordinary shares.

The holders of ADSs will not be treated as our shareholders and will be required to surrender their ADSs for cancellation and withdrawal from the depositary facility in which the ordinary shares are held in order to exercise shareholders’ rights in respect of the ordinary shares.

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Meetings

Subject to our third amended and restated articles of association, an annual general meeting and any extraordinary general meeting will be called by not less than seven days’ notice in writing. Notice of every general meeting will be given to all of our shareholders.

A meeting may be called by shorter notice than that mentioned above, but, subject to our articles of association, it will be deemed to have been duly called if shareholders holding at least 90% of the total voting rights on all the matters to be considered at the meeting have waived notice of the meeting and, for this purpose, the presence of a shareholder at the meeting shall constitute waiver in relation to all the shares which that shareholder holds.

A meeting of shareholders is duly constituted if, at the commencement of the meeting, there are present in person or by proxy not less than an aggregate of one-third of the votes of the Shares entitled to vote at the meeting. A quorum may comprise of a single shareholder or proxy and then such person may pass a Resolution of Shareholders and a certificate signed by such person accompanied where such person is a proxy by a copy of the proxy instrument shall constitute a valid Resolution of Shareholders.

Voting Rights Attaching to the Shares

Subject to any rights or restrictions attached to any shares, at any general meeting on a show of hands every shareholder who is present in person (or, in the case of a shareholder being a corporation, by its duly authorized representative) or by proxy shall have one vote and on a poll every shareholder present in person (or, in the case of a shareholder being a corporation, by its duly appointed representative) or by proxy shall have one vote for each share which such shareholder is the holder. Voting at any meeting of the shareholders is by show of hands unless a poll is demanded. A poll may be demanded by shareholders present in person or by proxy if the shareholder disputes the outcome of the vote on a proposed resolution and the chairman shall cause a poll to be taken.

No shareholder shall be entitled to vote or be reckoned in a quorum, in respect of any share, unless such shareholder is registered as our shareholder at the applicable record date for that meeting.

There is nothing under the laws of the British Virgin Islands which specifically prohibits or restricts the creation of cumulative voting rights for the election of our directors.

Protection of Minority Shareholders

The BVI Act has introduced a series of remedies available to members. Where a company registered under the BVI  Act conducts some activity which breaches the BVI Act or the Company's memorandum and articles of association, the court can issue a restraining or compliance order. Members can now also bring derivative, personal and representative actions under certain circumstances. The traditional English basis for members' remedies has also been incorporated into the BVI Act - where a member of a company considers that the affairs of the company have been, are being or are likely to be conducted in a manner likely to be oppressive, unfairly discriminating or unfairly prejudicial to him, he may now apply to the court for an order on such conduct.

Pre-emption Rights

There are no pre-emption rights applicable to the issuance of new shares under either British Virgin Islands law or our memorandum and articles of association.

Liquidation Rights

As permitted by British Virgin Islands law and our articles of association, we may be voluntarily liquidated under Part XII of the BVI Act if we have no liabilities and we are able to pay our debts as they fall due by resolution of directors and resolution of shareholders.

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 Modification of Rights

 As permitted by British Virgin Islands law, and our articles of association, if our shares are divided into more than one class of shares, we may vary the rights attached to any class only with the consent in writing of or by a resolution passed at a meeting by the holders of not less than 50% of the issued shares of that class.Notwithstanding the foregoing, creation or issuance of any new class or more than one class of shares by amending the memorandum or the articles of association shall not be deemed as variation of the rights of the shares hereunder.

Transfer of Shares

 Subject to any applicable restrictions set forth in our articles of association, any of our shareholders may transfer all or any of his or her shares by an instrument of transfer in the usual or common form or in any other form which our directors may approve.

 Our board of directors may, in its absolute discretion, decline to register any transfer of any share without assigning any reasons therefor. If our directors refuse to register a transfer they shall, within two months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal.

 Share Repurchase

 As permitted by the BVI Act and our articles of association, shares may be repurchased, redeemed or otherwise acquired by us. Our directors must determine that immediately following the redemption or repurchase whether we will be able to satisfy our debts as they fall due and the value of our assets exceeds our liabilities, subject to certain restrictions. Our directors may only exercise this power on our behalf, subject to the BVI Act, our memorandum and articles of association and to any applicable requirements imposed from time to time by the U.S. Securities and Exchange, the NYSE or any other stock exchange on which our securities are listed.

Dividends

 Subject to the BVI Act and our articles of association, our directors may declare dividends at a time and amount they think fit if they are satisfied, on reasonable grounds, that, immediately after distribution of the dividend, the value of our assets will exceed our liabilities and we will be able to pay our debts as they fall due.

No dividend shall carry interest against us.

Untraceable Shareholders

 We are entitled to sell any shares of a shareholder who is untraceable, as long as:

•   all checks, not being less than three in total number, for any sums payable in cash to the holder of such shares have remained uncashed for a period of 12 years;

•   we have not during that time or before the expiry of the three-month period referred to in the following point received any indication of the existence of the shareholder or person entitled to such shares by death, bankruptcy or operation of law; and

•   upon expiration of the 12-year period, we have caused an advertisement to be published in newspapers, giving notice of our intention to sell these shares, and a period of three months or such shorter period has elapsed since the date of such advertisement.

The net proceeds of any such sale shall belong to us, and when we receive these net proceeds we shall become indebted to the former shareholder for an amount equal to such net proceeds.

Board of Directors

We are managed by a board of directors which currently consists of seven directors. Our articles of association provide that the board of directors shall consist of not less than three directors.

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Our shareholders may, pursuant to our articles of association, at any time remove any director before the expiration of his or her period of office for cause, and may, pursuant to our articles of association, elect another person in his or her stead. Subject to our articles of association, the directors have power at any time and from time to time to appoint any person to be a director, either as an addition to the existing directors or to fill a vacancy as long as the total number of directors (exclusive of alternate directors) does not at any time exceed the maximum number fixed by or in accordance with our articles of association (if any).

 There are no share ownership qualifications for directors.

 Meetings of our board of directors may be convened at any time deemed necessary by the chairman of the Board or a majority of the directors then in office.

 A meeting of our board of directors will be competent to make lawful and binding decisions if at least a majority of the directors, including the chairman, are present or represented. At any meeting of our directors, each director, whether by his or her presence or by his or her alternate, is entitled to one vote.

 Questions arising at a meeting of our board of directors are required to be decided by simple majority votes of the directors present or represented at the meeting. In the case of a tie vote, the chairman of the meeting shall have a second or deciding vote. Our board of directors may also pass resolutions without a meeting by unanimous written consent.

 The remuneration to be paid to the directors shall be such remuneration as the directors shall determine. Under our articles of association, the independent directors shall also be entitled to reimbursement of out-of-pocket expenses in connection with the performance of his or her duties as director.

Issuance of Additional Ordinary Shares

 Our articles of association authorizes our board of directors to issue additional ordinary shares from time to time as our board of directors shall determine, to the extent of available authorized but unissued shares.

Our articles of association authorize our board of directors from time to time to issue ordinary shares to the extent permitted by the BVI Act.

British Virgin Islands Corporate Law

We were incorporated under, and are governed by, the laws of the British Virgin Islands.

Duties of Directors

British Virgin Islands law provides that every director of the company in exercising his powers or performing his duties, shall act honestly and in good faith and in what the director believes to be in the best interests of the company. Additionally, the director shall exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances taking into account the nature of the company, the nature of the decision and the position of the director and his responsibilities. In addition, British Virgin Islands law provides that a director shall exercise his powers as a director for a proper purpose and shall not act, or agree to the company acting, in a manner that contravenes British Virgin Islands law or the memorandum or articles of association of the company.

Interested Directors

The BVI Act provides that a director shall, after becoming aware that he is interested in a transaction entered into or to be entered into by the company, disclose that interest to the board of directors of the company. The failure of a director to disclose that interest does not affect the validity of a transaction entered into by the director or the company, so long as the director’s interest was disclosed to the board prior to the company’s entry into the transaction or was not required to be disclosed (for example where the transaction is between the company and the director himself or is otherwise in the ordinary course of business and on usual terms and conditions). As permitted by British Virgin Islands law and our third amended and restated memorandum and articles of association, a director interested in a particular transaction may vote on it, attend meetings at which it is considered, and sign documents on our behalf which relate to the transaction.

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Voting Rights and Quorum Requirements

Under British Virgin Islands law, the voting rights of shareholders are regulated by the company’s articles of association and, in certain circumstances, the BVI Act. The articles of association will govern matters such as quorum for the transaction of business, rights of shares, and majority votes required to approve any action or resolution at a meeting of the shareholders or board of directors. Unless the articles of association otherwise provide, the requisite majority is usually a simple majority of votes cast.

Mergers and Similar Arrangements

Under the BVI Act, two or more companies may merge or consolidate in accordance with the statutory provisions. A merger means the merging of two or more constituent companies into one of the constituent companies, and a consolidation means the consolidating 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. The plan of merger or consolidation must also be authorized by a resolution of members and the outstanding shares of every class of shares that are entitled to vote on the merger or consolidation as a class if the memorandum or articles so provide or if the plan of merger or consolidation contains any provisions that, if contained in a proposed amendment to the memorandum or articles, would entitle the class to vote on the proposed amendment as a class.

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 of members or consent to the written resolution to approve the plan of merger or consolidation.

Shareholder Suits

 We are not aware of any reported class action or derivative action having been brought in a British Virgin Islands court.In principle, we will normally be the proper plaintiff and a derivative action may not be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the British Virgin Islands, exceptions to the foregoing principle apply in circumstances in which:

•   a company is acting or proposing to act illegally or beyond the scope of its authority;

•   the act complained of, although not beyond the scope of its authority, could be effected duly if authorized by more than a simple majority vote which has not been obtained; and

•   those who control the company are perpetrating a “fraud on the minority.”

Corporate Governance

 British Virgin Islands laws do not restrict transactions with directors, requiring only that directors exercise a duty to act honestly, in good faith and in what the directors believe to be in the best interests to the companies for which they serve. Under our memorandum and articles of association, so long as a director discloses the nature of his interest in any contract or arrangement in which he is interested, such a director may vote in respect of any contract or proposed contract or arrangement in which such director is interested and may be counted in the quorum at such meeting.

Indemnification

 British Virgin Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the British Virgin Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our articles of association provide for the indemnification of our directors against all losses or liabilities incurred or sustained by him or her as a director of our company in defending any proceedings, whether civil or criminal and this indemnity only applies if he or she acted honestly and in good faith with a view to the best interests of the Company and, with respect to any criminal action, he or she must have had no reasonable cause to believe his or her conduct was unlawful.

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See our Registration Statement 333-170825 for our follow-on public offering for a further discussion of differences in British Virgin Islands law as compared with Delaware Corporate Law.

C. MATERIAL CONTRACTS

We have not entered into any material contracts other than in the ordinary course of business and other than those described in Item 4 "Information on the company" or elsewhere in this annual report on Form 20-F.

D. EXCHANGE CONTROLS

See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations on Foreign Currency Exchange.”

E. TAXATION

The following discussion of the material British Virgin Islands, PRC and United States federal income tax consequences of an investment in our ADSs or ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this annual report on Form 20-F, all of which are subject to change. This discussion does not deal with all possible tax consequences relating to an investment in our ADSs or ordinary shares, such as the tax consequences under state, local and other tax laws. Accordingly, each investor should consult its own tax advisor regarding the tax consequences of an investment in our ADSs or ordinary shares applicable under its particular circumstances.

British Virgin Islands Taxation

Companies incorporated or registered under the BVI Act are currently exempt from income and corporate tax.  In addition, the British Virgin Islands currently does not levy capital gains tax on companies incorporated or registered under the BVI Act.

There is no income tax treaty or conversion currently in effect between the United States and the British Virgin Islands.

People's Republic of China Taxation

Under the EIT Law, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation rules define the term “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. In addition, the SAT issued a bulletin on August 3, 2011 to provide more guidance on the implementation of the above circular with an effective date to be September 1, 2011. The bulletin made clarification in the areas of resident status determination, post-determination administration, as well as competent tax authorities. It also specifies that when provided with a copy of Chinese tax resident determination certificate from a resident Chinese controlled offshore incorporated enterprise, the payer should not withhold 10% income tax when paying the Chinese-sourced dividends, interest, royalties, etc. to the Chinese controlled offshore incorporated enterprise. Although both the circular and the bulletin only apply to offshore enterprises controlled by PRC enterprises and not those by PRC individuals or foreigners, like our company,  the determination criteria set forth in the circular and administration clarification made in the bulletin may reflect the SAT's general position on how the "de facto management body" test should be applied in determining the tax residency status of offshore enterprises and the administration measures should be implemented, regardless of whether they are controlled by PRC enterprises or PRC individuals. While we do not believe we should be considered a resident enterprise, if the PRC authorities were to subsequently determine that we should be so treated, we may be subject to EIT rate at 25% on our global income, except that the dividends we received from our PRC subsidiaries may be exempt from the EIT to the extent such dividends are deemed "dividends among qualified resident enterprises." If we are

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considered a resident enterprise, a 25% EIT could significantly increase our tax burden and materially and adversely affect our cash flow and profitability.

If we are considered a PRC resident enterprise under the EIT Law, our shareholders and ADS holders who are deemed non-resident enterprises may be subject to the 10% EIT on the dividends payable by us or any gains realized from the transfer of our shares or ADSs, if such income is deemed derived from China, provided that (i) such foreign enterprise investor has no establishment or premises in China, or (ii) it has establishment or premises in China but its income derived from China has no real connection with such establishment or premises. Furthermore, if we are considered a PRC resident enterprise and relevant PRC tax authorities consider the dividends we pay with respect to our shares or ADSs and the gains realized from the transfer of our shares or ADSs to be income derived from sources within the PRC, such dividends and gains earned by non-resident individuals may be subject to the 20% PRC individual income tax.

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

Material United States Federal Income Tax Considerations

The following is a summary of the material United States federal income tax considerations relating to the acquisition, ownership and disposition of our ADSs or ordinary shares by a U.S. Holder (as defined below) that will acquire our ADSs or ordinary shares and will hold our ADSs or ordinary shares as “capital assets” (generally, property held for investment) under the United States Internal Revenue Code of 1986, as amended, the (“Code”) as in effect on the date of this annual report, which is subject to differing interpretations or change, possible with  retroactive effect. This summary is based upon existing United States federal tax law. No ruling has been sought from the IRS with respect to any United States federal income tax consequences described below, and there can be no assurance that the IRS or a court will not take a contrary position. This summary does not discuss all aspects of United States federal income taxation that may be important to particular investors in light of their individual investment circumstances, including investors subject to special tax rules (for example, financial institutions, insurance companies, regulated investment companies, real estate investment trusts, broker-dealers, traders in securities that elect mark-to-market treatment, partnerships (or other entities treated as partnerships for United States federal income tax purposes) and their partners and tax-exempt organizations (including private foundations)), holders who are not U.S. Holders, holders who own (directly, indirectly or constructively) 10% or more of our voting stock, holders who acquire their ADSs or ordinary shares pursuant to any employee share option or otherwise as compensation, investors that will hold their ADSs or ordinary shares as part of a straddle, hedge, conversion, constructive sale or other integrated transaction for United States federal income tax purposes, or investors that have a functional currency other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this summary does not discuss any United States federal estate, gift or alternative minimum tax consequences or any non-United States (except to the extent expressly provided below), state or local tax considerations. Each U.S. Holder is urged to consult its tax advisor regarding the United States federal, state, local and non-United States income and other tax considerations of an investment in our ADSs or ordinary shares.

General

For purposes of this summary, a “U.S. Holder” is a beneficial owner of our ADSs or ordinary shares that is, for United States federal income tax purposes, (i) an individual who is a citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for United States federal income tax purposes) created in, or organized under the law of, the United States or any state thereof or the District of Columbia, (iii) an estate the income of which is includible in gross income for United States federal income tax purposes regardless of its source, or (iv) a trust (A) the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (B) that has otherwise validly elected to be treated as a United States person under the Code.

If a partnership (or other entity treated as a partnership for United States federal income tax purposes) is a beneficial owner of our ADSs or ordinary shares, the tax treatment of a partner in the partnership will

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generally depend upon the status of the partner and the activities of the partnership. If a U.S. Holder is a partner of a partnership holding our ADSs or ordinary shares, the U.S. Holder is urged to consult its tax advisor regarding an investment in our ADSs or ordinary shares.

The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement and any related agreement have been and will be complied with in accordance with the terms.  For United States federal income tax purposes, a U.S. Holder of ADSs will be treated as a beneficial owner of the underlying shares represented by the ADSs.  Accordingly, deposits or withdrawals of ordinary shares for ADSs will not be subject to United States federal income tax.

Threshold PFIC Classification Matters

 A non-United States corporation, such as our company, will be classified as a “passive foreign investment company” (or a “PFIC”), for United States federal income tax purposes, for any taxable year if either (i) 75% or more of its gross income consists of certain types of “passive” income or (ii) 50% or more of the value of its assets (determined on the basis of a quarterly average) produce or are held for the production of passive income ("passive assets").  For this purpose, cash is categorized as a passive asset and our goodwill and other unbooked intangibles associated with active business activities may generally be classified as active assets.  A non-U.S. corporation will be treated as owning a proportionate share of the assets and income of any other corporation in which it owns, directly or indirectly, more than 25% (by value) of the stock.

Passive Foreign Investment Company Considerations

If we are classified as a PFIC for any taxable year during which a U.S. Holder holds our ADSs or ordinary shares, and unless the U.S. Holder makes a mark-to-market election (as described below), the U.S. Holder will generally be subject to special tax rules that have a penalizing effect, regardless of whether we remain a PFIC, on (i) any excess distribution that we make to the U.S. Holder (which generally means any distribution paid during a taxable year to a U.S. Holder that is greater than 125 percent of the average annual distributions paid in the three preceding taxable years or, if shorter, the U.S. Holder’s holding period for the ADSs or ordinary shares), and (ii) any gain realized on the sale or other distribution, including a pledge, of ADSs or ordinary shares.  Under these PFIC rules:

· such excess distribution or gain would be allocated ratably over the U.S. Holder’s holding period for the ADSs or ordinary shares;  

· such amount allocated to the current taxable year and any taxable year prior to the first taxable year in which we are classified as a PFIC (a “pre-PFIC year”) would be taxable as ordinary income;  

· such amount allocated to each other taxable year, other than the current taxable year or a pre-PFIC year, would be subject to tax at the highest tax rate in effect applicable to the U.S. Holder for that year; and  

· an interest charge generally applicable to underpayments of tax would be imposed on the tax attributable to each other taxable year, other than the current taxable year or a pre-PFIC year.

If we are a PFIC for any taxable year during which you hold our ADSs or ordinary shares and any of our non-United states subsidiaries is also a PFIC, a U.S. Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules.  U.S. Holders should consult their tax advisors regarding the application of the PFIC rules to any of our subsidiaries.

If we are a PFIC for any taxable year during which a U.S. Holder holds our ADSs or ordinary shares, and unless the U.S. Holder makes a mark-to-market election (as described below), we will continue to be treated as a PFIC with respect to such holder for all subsequent years during which such holder holds the ADSs or ordinary shares (“PFIC-Tainted Shares”), unless we cease to be a PFIC and such holder makes a “deemed sale” election or, in certain circumstances, a “deemed dividend” election with respect to the ADSs or ordinary shares, as applicable.  If a deemed sale election is made, the U.S. Holder will be deemed to have sold the ADSs or ordinary shares held by such holder at their fair market value and any gain from such deemed sale would be subject to the PFIC rules described above.  If a deemed dividend election is made, the U.S. Holder must include in income as a dividend its pro rata share of certain of our earnings and profits, and such deemed dividend would be treated as an excess distribution for purposes of the PFIC rules described above.  After the deemed sale election or deemed dividend election, so long as we do not become a PFIC in a subsequent taxable year, the U.S. Holder’s ADSs or ordinary shares with respect to which such election was made will not be treated as shares in a PFIC.  Each U.S. Holder should consult its tax advisor regarding the advisability of relying on a deemed sale or deemed dividend election to avoid owning PFIC-Tainted Shares instead of a mark-to-market election, as described below.

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As an alternative to the foregoing rules, a U.S. Holder of “marketable stock” in a PFIC may make a mark-to-market election with respect to such stock.  Marketable stock is stock that is traded in other than de minimus quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange (such as the NYSE) or other market as defined in applicable United States Treasury Regulations.  We anticipate that our ADSs should qualify as being regularly traded on the NYSE, but no assurances may be given in this regard.  If a U.S. Holder makes this election, the holder will generally (i) include as income for each taxable year the excess, if any, of the fair market value of ADSs held at the end of the taxable year over the adjusted tax basis of such ADSs and (ii) deduct as a loss the excess, if any, of the adjusted tax basis of the ADSs over the fair market value of such ADSs held at the end of the taxable year, but only to the extent of the amount previously included in income as a result of the mark-to-market election.  The U.S. Holder's adjusted tax basis in the ADSs would be adjusted to reflect any income or loss resulting from the mark-to-market election.  If a U.S. Holder makes a mark-to-market election in respect of a corporation classified as a PFIC and such corporation ceases to be classified as a PFIC, the holder will not be required to take into account the gain or loss described above during any period that such corporation is not classified as a PFIC.

Because a mark-to-market election cannot be made for any lower-tier PFICs that we may own, you may continue to be subject to the PFIC rules with respect to your indirect interest in any investments held by us that are treated as an equity interest in a PFIC for United States federal income tax purposes.

The “QEF election” regime, which serves as a further alternative to the foregoing rules, is not available because we do not intend to provide the information necessary to enable a U.S. Holder to make such election.

If a U.S. Holder holds ADSs or ordinary shares in any year in which a non-United States corporation is treated as a PFIC with respect to such U.S. Holder, the U.S. Holder may be required to file Internal Revenue Service Form 8621 and such other forms as may be required by the United States Treasury Department.  Each U.S. Holder is advised to consult with its tax advisor regarding the application of the PFIC rules if we become classified as a PFIC, including the possibility of making a mark-to-market election.

Dividends

Subject to the PFIC rules discussed above, any cash distributions (including the amount of any PRC tax withheld) paid on ADSs or ordinary shares out of our earnings and profits, as determined under United States federal income tax principles, will be includible in the gross income of a U.S. Holder as dividend income on the date of actual or constructive receipt by the depositary, in the case of ADSs, or by the U.S. Holders, in the case of ordinary shares. Because we do not intend to determine our earnings and profits on the basis of United States federal income tax principles, any distribution paid will generally be reported as a “dividend” for United States federal income tax purposes.

For dividends received in taxable years beginning before January 1, 2013, a non-corporate recipient will be subject to tax at the lower capital gain tax rate applicable to “qualified dividend income,” provided that certain conditions are satisfied, including that (1) the ADSs or ordinary shares, as applicable, are readily tradable on an established securities market in the United States, or, in the event that the Company is deemed to be a PRC resident enterprise under the PRC tax law, the Company is eligible for the benefits of the United States-PRC income tax treaty, (2) we are neither a passive foreign investment company nor treated as such with respect to a U.S. Holder (as discussed above) for the taxable year in which the dividend was paid and the preceding taxable year, and (3) certain holding period requirements are met. Although no assurance may be given, the ADSs are expected to be readily tradable on the NYSE, which is an established securities market in the United States. Provided we are not a PFIC for the taxable year in which the dividend is paid or the preceding taxable year, we believe the dividends we pay on our ADSs should meet the conditions required for the reduced tax rate. There can be no assurance that our ADSs will be considered readily tradable on an established securities market in the United States in later years. Since we do not expect that our ordinary shares will be listed on an established securities market in the United States, it is unclear whether the dividends that we pay on our ordinary shares that are not backed by ADSs currently meet the conditions required for the reduced tax rate.  If, however, we are deemed to be a PRC “resident enterprise” under PRC tax law, see “Item 10. Additional Information – Taxation – People’s Republic of China Taxation,” we may be eligible for the benefits of the United States-PRC tax treaty and if we are eligible for such benefits, dividends we pay on our ordinary shares could be eligible for the reduced rate of taxation, regardless of whether such shares are represented by ADSs.  Dividends received on our ADSs or ordinary shares will not be eligible for the dividends received deduction.

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Dividends generally will be treated as income from foreign sources for United States foreign tax credit purposes. A U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on ADSs or ordinary shares. A U.S. Holder who does not elect to claim a foreign tax credit for foreign tax withheld, may instead claim a deduction, for United States federal income tax purposes, in respect of such withholdings, but only for a year in which such holder elects to do so for all creditable foreign income taxes.  The rules governing the foreign tax credits are complex.  Accordingly, each U.S. Holder is advised to consult with its tax advisor regarding the availability of a foreign tax credit under its particular circumstances.

Sale or Other Disposition of ADSs or Ordinary Shares

Subject to the PFIC rules discussed below, a U.S. Holder will generally recognize capital gain or loss upon the sale or other disposition of ADSs or ordinary shares in an amount equal to the difference between the amount realized upon the disposition and the holder’s adjusted tax basis in such ADSs or ordinary shares. Any capital gain or loss will be long-term if the ADSs or ordinary shares have been held for more than one year and will generally be United States source gain or loss for United States foreign tax credit purposes. If gains were subject to PRC tax and a U.S. Holder is eligible for the benefits of the United States-PRC treaty, such gain might be resourced under the treaty as PRC source income. See “ Item 10. Additional Information— Taxation — People’s Republic of China Taxation.” The deductibility of a capital loss may be subject to limitations. Each U.S. Holder is advised to consult with its tax advisor regarding the tax consequences if a foreign withholding tax is imposed on a disposition of the ADSs or ordinary shares, including the availability of a foreign tax credit.

Backup Withholding and Information Reporting

Certain U.S. Holders are required to report information to the Internal Revenue Service relating to an interest in “specified foreign financial assets,” including shares issued by a non-United States corporation, for any year in which the aggregate value of all specified foreign financial assets exceeds $50,000 (or a higher dollar amount prescribed by the Internal Revenue Service), subject to certain exceptions (including an exception for shares held in custodial accounts maintained with a United States financial institution). These rules also impose penalties if a holder is required to submit such information to the Internal Revenue Service and fails to do so. In addition, U.S. Holders may be subject to information reporting to the Internal Revenue Service with respect to dividends on and proceeds from the sale or other disposition of our ADSs or ordinary shares. Dividend payments with respect to our ADSs or ordinary shares and proceeds from the sale or other disposition of our ADSs or ordinary shares are not generally subject to U.S. backup withholding (provided that certain certification requirements are satisfied). U.S. Holder should consult their tax advisors regarding the application of the United States information reporting and backup rules to their particular circumstances.

F. DIVIDENDS AND PAYING AGENTS

Not applicable.

G. STATEMENT BY EXPERTS

Not applicable.

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H. DOCUMENTS ON DISPLAY

We previously filed with the SEC a registration statement on Form F-1 under the Securities Act with respect to the initial public offering and the follow on offering of our ordinary shares represented by ADSs.

We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F (1) within six months after the end of each fiscal year, which is December 31, for fiscal years ending before December 15, 2011; and (2) within four months after the end of each fiscal year for fiscal years ending on or after December 15, 2011. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. Copies of reports and other information, when filed, may also be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the SEC at 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.

We will furnish Citibank, N.A., the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us.

I. SUBSIDIARY INFORMATION

See “Item 4.  Information on the Company – C. Organizational Structure.”

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Exchange Risk

A majority of revenues and a significant majority of expenses from our operating subsidiaries are denominated in Renminbi. A significant portion of our revenues are denominated in currencies other than the Renminbi, such as the U.S. dollar, New Taiwan dollar and Japanese Yen. For the year ended December 31, 2011, our net revenues denominated in Renminbi, New Taiwan Dollar, Japanese Yen and other currencies accounted for  78.2%,4.0%,17.0% and 0.8% respectively, of our total net revenues. The value of the Renminbi against the U.S. dollar, New Taiwan Dollar, Japanese Yen 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, is based on rates set by the People's Bank of China. The PRC government allowed the Renminbi to appreciate by more than 20% against the U.S. dollars between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. As a consequence, the Renminbi fluctuated significantly during that period against other freely traded currencies, in tandem with U.S. dollar. Since June 2010, the PRC government has allowed the Renminbi to appreciate slowly against the U.S. dollar again. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.

There remains significant international pressure on the Chinese government to adopt a substantial liberalization of its currency policy, which could result in further appreciation in the value of the Renminbi against the U.S. dollar. To the extent that we need to convert U.S. dollars into Renminbi for capital expenditures and working capital and other business purposes, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would 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 ordinary shares or ADSs, strategic acquisitions or investments or 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.

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The results of our operations can be adversely affected as Renminbi appreciates against the U.S. dollar. Our exchange rate risk primarily arises from our foreign currency revenues, receivables, costs and expenses, payables and other foreign currency assets and liabilities. In addition, to the extent that we need to convert U.S. dollars 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. Based on the results of our operations for the year ended December 31, 2011, a 0.8% appreciation of the Renminbi against the U.S. dollar will result in an estimated increase of approximately US$0.1 million in net income, and a 0.8% appreciation of the U.S. dollar against the Renminbi will result in an estimated decrease of approximately US$0.1 million in net income. We have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange risk.

Interest Risk

Our exposure to interest rate risk primarily relates to interest expenses incurred by our short-term and long-term borrowings and interest income generated by excess cash which is mostly held in interest-bearing bank deposits. We have not used any derivative financial instruments to manage our interest rate risk exposure. As of December 31, 2011, we had outstanding short-term bank borrowings of US$8.8 million with  interest rates ranging from 3.39% to 7.22% and outstanding long-term bank borrowings of $0.4 million with fixed interest rate of 6.53% per annum payable in arrears. We are currently not engaged in any interest rate hedging activities.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

A. DEBT SECURITIES

Not applicable.

B. WARRANTS AND RIGHTS

Not applicable.

C. OTHER SECURITIES

Not applicable.

D. AMERICAN DEPOSITARY SHARES

Fees and Charges our ADS Holders May Have to Pay

As an ADS holder, you will be required to pay the following service fees to the depositary bank:

	Service	Fees
●	Issuance of ADSs	Up to U.S.5¢ per ADS issued
●	Cancellation of ADSs	Up to U.S.5¢ per ADS canceled
●	Distribution of cash dividends or other cash distributions	Up to U.S.5¢ per ADS held
●	Distribution of ADSs pursuant to stock dividends, free stock distributions or exercise of rights.	Up to U.S.5¢ per ADS held
●	Distribution of securities other than ADSs or rights to purchase additional ADSs	Up to U.S.5¢ per ADS held
●	Depositary services	Up to U.S.5¢ per ADS held on the applicable record date(s) established by the depositary bank
●	Transfer of ADSs	U.S.$1.50 per certificate presented for transfer

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As an ADS holder you will also be responsible to pay certain fees and expenses incurred by the depositary bank and certain taxes and governmental charges such as:

· fees for the transfer and registration of ordinary shares charged by the registrar and transfer agent for the ordinary shares in the British Virgin Islands ( i.e. upon deposit and withdrawal of ordinary shares);  

· expenses incurred for converting foreign currency into U.S. dollars;  

· expenses for cable, telex and fax transmissions and for delivery of securities;  

· taxes and duties upon the transfer of securities ( i.e. when ordinary shares are deposited or withdrawn from deposit); and  

· fees and expenses incurred in connection with the delivery or servicing of ordinary shares on deposit.

Depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary bank by the brokers (on behalf of their clients) receiving the newly issued ADSs from the depositary bank and by the brokers (on behalf of their clients) delivering the ADSs to the depositary bank for cancellation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary bank to the holders of record of ADSs as of the applicable ADS record date.

The Depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., stock dividend, rights), the depositary bank charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary bank sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via DTC), the depositary bank generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary banks.

In the event of refusal to pay the depositary fees, the depositary bank may, under the terms of the deposit agreement, refuse the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder.

Note that the fees and charges you may be required to pay may vary over time and may be changed by us and by the depositary. You will receive prior notice of such changes.

Fees and Other Payments Made by the Depositary to Us

The depositary bank may reimburse us for certain expenses incurred by us in respect of the ADR program established pursuant to the deposit agreement, by making available a portion of the depositary fees charged in respect of the ADR program or otherwise, upon such terms and conditions as we and the Depositary may agree from time to time.  For the year ended December 31, 2011 (from our initial public offering that year), we received approximately US$1.8 million from the depository as reimbursement for our expenses incurred in connection with the establishment and maintenance of the ADS program.

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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

See “Item 10. Additional Information” for a description of the rights of security holders, which remain unchanged.

The following "Use of Proceeds" information related to the registration statement on Form F-1, as amended (file number: 333-167791) for our initial public offering of  9,166,667 ADSs, representing 36,666,668 ordinary shares, which registration statement was declared effective on July 20, 2010 and the registration statement on Form F-1, as amended (file number: 333-170825 ) for our follow-on public offering of 7,160,206 ADSs representing 28,640,824 ordinary shares which were offered by our selling shareholders, which registration statement was declared effective on December 9, 2010. We granted to the underwriters an option to purchase up to an additional 1,074,030 ADSs from us, which was exercised by the underwriters in December 2010.  We received net proceeds (after deducting underwriting discounts and commissions and other expenses related to the offering) of approximately US$90.8 million from the offering and sale of 13,333,334 ADSs in July 2010 and received US$19.8 million from the offering and sale 1,074,030 ADSs in December 2010. We did not receive any proceeds from the sale of the ADSs by the selling shareholders.

For the period from the effective date of the Form F-1 to December 31, 2011, we used US$62.9 million proceeds for several acquisitions and general operating activitiesand as of December 31, 2011, we had approximately US$50.8 million left from the net proceeds we received from our initial public offering and our secondary public offering in 2010.

ITEM 15. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we carried out an evaluation of the effectiveness of our disclosure controls and procedures, which is defined in Rules 13a-15(e) of the Exchange Act, as of the period covered by this annual report. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this annual report.

(b) Management's Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such item is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, for our company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with U.S. GAAP and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that a company’s receipts and expenditures are being made only in accordance with authorizations of a company’s management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of a company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management, including our chief executive officer and chief financial officer, has conducted an assessment, including testing of the design and the effectiveness of our internal control over financial reporting as of December 31, 2011. In making its assessment, management used the criteria in “Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.” Based on this evaluation, our management concluded that our internal control over financial reporting as of December 31, 2011 was not effective due to three material weaknesses, as defined by Auditing Standard 5, “An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements.” The material weaknesses identified were: (1) lack of sufficient skilled resources with U.S. GAAP knowledge for the purposes of financial reporting and lack of continuing professional training on U.S. GAAP and SEC regulations and rules for accounting personnel; (2) insufficient segregation of duties in relation to the (a) review and calculation of payroll expense and (b) initiation and approval of payments by a subsidiary;  and (3) lack of policies and procedures on selection of subcontractors, lack of documented approval of cash flows forecast by the board of directors, and insufficient IT security controls in relation to (a) system login, anti-virus scans, and system backup and (b) access, changes and version controls over certain spread sheets used in consolidation process.

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We have subsequently implemented measures to address these material weaknesses. We have plans to recruit additional financial personnel with American Institute of Certified Public Accountant qualification by mid-2012. We have also requested that our senior accounting and financial personnel enhance their professional capabilities by taking training courses, especially online classes, provided by the American Institute of Certified Public Accountants or other institutes specializing in U.S. GAAP and SEC rules and regulations on a regular basis.  In addition, we have encouraged our existing finance team members to sit for the U.S. Certified Public Accountant exams.

We have completed the restructuring of internal controls for both enterprise application services and financial industry IT services service line to streamline the control activities and better define roles and responsibilities. The milestones are being closely tracked by our chief executive officer and chief financial officer weekly to ensure quality execution through the organization with monthly reviews in 2012.

We are in the process of conducting training to our business line executives and have established a special task force under the chief financial officer to assess job functions in the context of improving segregation of duties.

We are in the process of updating or establishing formal company-wide written policies and procedures for all key business processes and transactions, including subcontractor approval and documentation of review of cash flows forecast. Such written policies and processes will be circulated to employees through periodical email reminders, face-to-face workshops and written self-declarations to ensure that the employees have a thorough understanding of the policies and procedures in question.

We are also in the process of upgrading our operational system and have plans to modify our existing financial accounting and reporting system in 2012, in order to design and implement automated controls of proper review and approval process in the operating process flow.

(c)Attestation Report of the Registered Public Accounting Firm

The effectiveness of our internal control over financial reporting as of December 31, 2011 has been audited by Deloitte Touche Tohmatsu CPA Ltd., an independent registered public accounting firm, who has audited the financial statements for the year ended December 31, 2011 included in this annual report.

TO THE BOARD OF DIRECTORS AND

STOCKHOLDERS OF CAMELOT INFORMATION SYSTEMS INC.

We have audited the internal control over financial reporting of Camelot Information Systems Inc. (the “Company”) and its subsidiaries (collectively, the “Group”) as of December 31, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

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

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

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management's assessment: (1) lack of sufficient skilled resources with U.S. GAAP knowledge for the purposes of financial reporting and lack of continuing professional training on U.S. GAAP and SEC regulations and rules for accounting personnel; (2) insufficient segregation of duties in relation to the (a) review and calculation of payroll expense and (b) initiation and approval of payments by a subsidiary;  and (3) lack of policies and procedures on selection of subcontractors, lack of documented approval of cash flows forecast by the board of directors, and insufficient IT security controls in relation to (a) system login, anti-virus scans, and system backup and (b) access, changes and version controls over certain spread sheets used in consolidation process.

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These material weaknesses were considered in determining the nature, timing, extent of audit tests applied in our audit of the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2011 of the Group and this report does not affect our report on such financial statements and financial statement schedules.

In our opinion, because of the effect of the material weaknesses identified above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2011 of the Company and our report dated April 26, 2012, expressed an unqualified opinion on those financial statements and financial statement schedule.

/s/ Deloitte Touche Tohmatsu CPA Ltd.

Deloitte Touche Tohmatsu CPA Ltd.

Beijing, the People’s Republic of China

April 26, 2012

(d)Changes in Internal Control Over Financial Reporting

There were no adverse changes in our internal controls over financial reporting that occurred during the year ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. 

In order to address the material weaknesses mentioned above, we have set forth plans to recruit additional financial personnel with American Institute of Certified Public Accountant qualification by mid-2012. We have also requested that our senior accounting and financial personnel enhance their professional capabilities by taking training courses, especially online classes, provided by the American Institute of Certified Public Accountants or other institutes specializing in U.S. GAAP and SEC rules and regulations on a regular basis.  In addition, we have encouraged our existing finance team members to sit for the U.S. Certified Public Accountant exams.

We have completed the restructuring of internal controls for both enterprise application services and financial industry IT services service line to streamline the control activities and better define roles and responsibilities. The milestones are being closely tracked by our chief executive officer and chief financial officer weekly to ensure quality execution through the organization with monthly reviews in 2012.

We are in the process of conducting training to our business line executives and have established a special task force under the chief financial officer to assess job functions in the context of improving segregation of duties.

We are in the process of updating or establishing formal company-wide written policies and procedures for all key business processes and transactions, including subcontractor approval and documentation of review of cash flows forecast. Such written policies and processes will be circulated to employees through periodical email reminders, face-to-face workshops and written self-declarations to ensure that the employees have a thorough understanding of the policies and procedures in question.

We are also in the process of upgrading our operational system and have plans to modify our existing financial accounting and reporting system in 2012, in order to design and implement automated controls of proper review and approval process in the operating process flow.

ITEM 16. RESERVED

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Our board of directors has determined that Shang-Wen Hsiao is an “audit committee financial expert” under the applicable rules of the SEC. Our board of directors has determined that Mr. Hsiao is “independent” under Section 303A of the Corporate Governance Rules of the New York Stock Exchange and meets the independence standards under 10A-3 under the Exchange Act.  

ITEM 16B. CODE OF ETHICS

Our board of directors has adopted a code of ethics that applies to our directors, officers, director and president, employees and agents, including certain provisions that specifically apply to our chief executive officer, chief financial officer, chief operating officer, chief technology officer, vice presidents and any other persons who perform similar functions for us. We have posted a copy of our code of business conduct and ethics on our website at:   http://www.mzcan.com/canpanel/us/listco/CIS/images/Code_of_Business Conduct_and_Ethics.pdf.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Deloitte Touche Tohmatsu CPA Ltd. has acted as the independent public accountants of our company and its subsidiaries for the years ended December 31, 2009, 2010 and 2011, respectively. The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by Deloitte Touche Tohmatsu CPA Ltd. for the periods indicated.

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	Year Ended December 31,
	(U.S. dollars in thousands)
	2010		2011
Audit Fees (1)		478		2,350
Audit-Related Fees(2)		30		31
Tax fees(3)		-		-
All Other Fees		-		-
Total		508		2,381

_____

(1)  “Audit Fees” are the aggregate fees billed or to be billed by our independent auditors for the audit of our consolidated annual financial statements and review of our quarterly financial statements.

(2)  “Audit related fees” are the aggregate fees billed or to be billed by our independent auditors for professional services rendered other than the services covered in footnote (1) above.

(3)  “Tax fees” represents the aggregated fees billed for professional services rendered by our independent auditors for tax compliance, tax advice, and tax planning.

Our audit committee is responsible for the retention of our independent registered public accounting firm. Our audit committee has adopted an audit committee charter that includes the committee’s rules of procedure. The audit committee’s rules of procedure provide for a process with respect to the prior approval of all non-audit services to be performed by our independent auditors. Our audit committee reports to our board of directors regarding the scope and results of our annual audits, compliance with our accounting and financial policies and management’s procedures and policies related to the adequacy of our internal accounting controls.

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

Not applicable.

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

On May 26, 2011, our Board authorized a share repurchase program of up to US$20 million worth of our outstanding ADSs throughout 2011. This share repurchase program expired on December 31, 2011. The following tables set forth some additional information about our repurchases made in the fiscal years ended December 31, 2011. The ordinary shares underlying the repurchased ADSs have been reserved as treasury shares as permitted under BVI laws.

Period	Total Number of ADS Purchased	Weighted Average Price paid per ADS	Total Number of ADS Purchased as Part of Publicly Announced Plans or Programs	Maximum Dollar Value of ADSs that May Yet be Purchased Under the Plans or Programs (US$)
Month #1 (from January 1 2011 to January 31, 2011)	—	N/A	—	—
Month #2 (from February 1 2011 to February 28, 2011)	—	N/A	—	—
Month #3 (from March 1 2011 to March 31, 2011)	—	N/A	—	—
Month #4 (from April 1 2011 to April 30, 2011)	—	N/A	—	—

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Month #5 (from May 1 2011 to May 31, 2011)	—	N/A	—	US$20,000,000
Month #6 (from June 1 2011 to June 31, 2011)	210,500	US$14.12	210,500	US$17,027,706
Month #7 (from July 1 2011 to July 31, 2011)	224,800	US$13.50	224,800	US$13,992,209
Month #8 (from August 1 2011 to August 31, 2011)	1,178,500	US$4.84	1,178,500	US$8,283,652
Month #9 (from September 1 2011 to September 30, 2011)	504,600	US$5.18	504,600	US$5,670,063
Month #10 (from October 1 2011 to October 31, 2011)	—	N/A	—	US$5,670,063
Month #11 (from November 1 2011 to November 30, 2011)	—	N/A	—	US$5,670,063
Month #12 (from December 1 2011 to December 31, 2011)	—	N/A	—	US$5,670,063

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

Not applicable.

ITEM 16G. CORPORATE GOVERNANCE

As a foreign private issuer with shares listed on the NYSE, we are subject to corporate governance requirements imposed by the NYSE. Under Section 303A of the NYSE’s Listed Company Manual, NYSE listed non-US companies may, in general, follow their home country corporate governance practices in lieu of some of the NYSE corporate governance requirements.

As a British Virgin Island company, the following are ways in which our current corporate governance practices, as permitted by our charter documents and applicable law, differ from NYSE corporate governance requirements:

· Under NYSE listing standards, listed companies are required to hold an annual shareholders’ meeting during each fiscal year. Under BVI law, the Company is not obliged to hold an annual general meeting of shareholders.  

· Section 303A.08 of the NYSE Listed Company Manual requires a listed company to obtain its shareholders’ approval of all equity-compensation plans, and any material revisions to the terms

93

	of such plans. Under BVI law, we are not required to obtain shareholders’ approval for amendments to our existing equity incentive plan.
·	The NYSE standards for domestic companies require that non-management directors meet at regularly scheduled executive sessions without management. Our non-management directors have not met in executive sessions without management, and there is no requirement under BVI law that our non-management directors meet in executive sessions.

 In addition, different from the NYSE corporate governance standards for U.S. domestic companies, the BVI law does not require us to:

· have a majority of the board be independent (other than due to the requirements for the audit committee under the United States Securities Exchange Act of 1934, as amended, or the Exchange Act);  

· have a minimum of three members on our audit committee;  

· have a compensation committee, a nominating or corporate governance committee;  

· provide annual certification by our chief executive officer that he or she is not aware of any non-compliance with any corporate governance rules of the NYSE;  

· have a majority of the board be independent (other than due to the requirements for the audit committee under the United States Securities Exchange Act of 1934, as amended, or the Exchange Act);  

· have a minimum of three members on our audit committee;  

· have a compensation committee, a nominating or corporate governance committee;  

· provide annual certification by our chief executive officer that he or she is not aware of any non-compliance with any corporate governance rules of the NYSE;  

· have at least one executive session of solely independent directors each year;  

· seek shareholder approval for (i) the implementation and material revisions of the terms of share incentive plans, (ii) the issuance of more than 1% of our outstanding ordinary shares or 1% of the voting power outstanding to a related party, (iii) the issuance of more than 20% of our outstanding ordinary shares, and (iv) an issuance that would result in a change of control;  

· adopt and disclose corporate governance guidelines; or  

· adopt and disclose a code of business conduct and ethics for directors, officers and employees.

Other than those described above, we are not aware of any significant ways in which our corporate governance practices differ from those followed by U.S. domestic companies under the New York Stock Exchange listing rules.

We currently intend to rely on all such exemptions provided by the New York Stock Exchange to a foreign private issuer, except that we have accepted and disclosed a code of business conduct and ethics for directors, officers, employees and agents. As a result, our investors may not be provided with the benefits of certain corporate governance requirements of the New York Stock Exchange.

ITEM 16H. MINE SAFETY DISCLOSURE

Not applicable

94

PART III

ITEM 17. FINANCIAL STATEMENTS

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

ITEM 18. FINANCIAL STATEMENTS

Our consolidated financial statements are included at the end of this annual report.

ITEM 19. EXHIBITS

1.1*	Form of Third Amended and Restated Memorandum and Articles of Association of the Registrant
2.1	Form of Registrant’s American Depositary Receipt (included in Exhibit 4.3) (incorporated herein by reference to Exhibit 4.1 to the registration statement on Form F-1, as amended (File No. 333-167791))
2.2	Registrant’s Specimen Certificate for Ordinary Shares (incorporated herein by reference to Exhibit 4.2 to the registration statement on Form F-1, as amended (File No. 333-167791))
2.3	Form of Deposit Agreement among the Registrant, the depositary and Owners and Beneficial Owners of the American Depositary Shares issued thereunder (incorporated herein by reference to Exhibit 4.3 to the registration statement on Form F-1, as amended (File No. 333-167791))
4.1	Amended and Restated 2006 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the registration statement on Form F-1, as amended (File No. 333-167791))
4.2	Form of Employment Agreement between the Registrant and each Executive Officer of the Registrant (incorporated herein by reference to Exhibit 10.4 to the registration statement on Form F-1, as amended (File No. 333-167791))
4.3	Camelot Information Systems Inc. Registration Right Agreement among the Registrant and other parties thereto dated as of December 27, 2007 (incorporated herein by reference to Exhibit 4.4 to the registration statement on Form F-1, as amended (File No. 333-167791))
4.4	Amendment to the Registration Right Agreement among the Registrant and other parties thereto dated as of May 22, 2010 (incorporated herein by reference to Exhibit 4.5 to the registration statement on Form F-1, as amended (File No. 333-167791))
4.5	An English summary of the Share Transfer Agreement between Alpower Investment Ltd and Camelot Information Systems Inc. dated January 1, 2011 (incorporated herein by reference to Exhibit 4.5 to the annual report on Form 20-F filed on June 9, 2011 (File No. 001-34797))
4.6	An English summary of the Share Transfer Agreement by and among Zhao Xumin, Liu Tao and Camelot Information Systems Inc. dated January 1, 2011 (incorporated herein by reference to Exhibit 4.6 to the annual report on Form 20-F filed on June 9, 2011 (File No. 001-34797))
4.7	Technical Services Agreement Base Agreement, dated May 31, 2011 between IBM Dalian Global Delivery Co Ltd, IBM Solution & Service (SZ) Co., Ltd and Beijing Camelot Technology Co., Ltd (incorporated herein by reference to Exhibit 4.7 to the annual report on Form 20-F filed on June 9, 2011 (File No. 001-34797))
4.8	Participation Agreement, dated May 30, 2011, among IBM Dalian Global Delivery Co Ltd., IBM Solution & Services (SZ) Co., Ltd.. and Kunshan Castle  Information consulting Co., Ltd. (incorporated herein by reference to Exhibit 4.8 to the annual report on Form 20-F filed on June 9, 2011 (File No. 001-34797))
4.9	Technical Service Agreement Master Statement of Work, dated May 20,2011, among IBM Dalian Global Delivery Co Ltd., IBM Solution & Service (SZ) Co. Ltd. And Beijing Camelot Technology Co. Ltd. and Beijing Camelot Technology Co., Ltd. (incorporated herein by reference to Exhibit 4.9 to the annual report on Form 20-F filed on June 9, 2011 (File No. 001-34797))

95

4.10	Supplementary Agreement, dated May 20,2011, among IBM Dalian Global Delivery Co., Ltd. (incorporated herein by reference to Exhibit 4.10 to the annual report on Form 20-F filed on June 9, 2011 (File No. 001-34797))
4.11	Technical Services Agreement, dated March 24, 2008, among IBM Global Services (China) Co. Ltd. and Camelot Information Systems (China) Corp. Ltd. (incorporated herein by reference to Exhibit 10.2 to the registration statement on Form F-1, as amended (File No. 333-167791))
4.12	Participation Agreement, dated June 15, 2008, between IBM Global Services (China) Co. Ltd. and Shanghai Camelot Information Technology Co. Ltd. (incorporated herein by reference to Exhibit 10.3 to the registration statement on Form F-1, as amended (File No. 333-167791))
8.1*	List of Subsidiaries
11.1	Code of Business Conduct and Ethics of the Registrant (incorporated herein by reference to Exhibit 99.1 to the registration statement on Form F-1, as amended (File No. 333-167791))
12.1*	Certification by Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2*	Certification by Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1*	Certification by Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2*	Certification by Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
15.1*	Consent of Deloitte Touche Tohmatsu CPA Ltd., Independent Registered Public Accounting Firm
15.2*	Consent of American Appraisal China Limited, Independent Third Party Valuation Firm
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema Document
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document

*	Filed with this annual report on Form 20-F.
**	XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

96 

CAMELOT INFORMATION SYSTEMS INC.

Consolidated Financial Statements

For the years ended December 31, 2009, 2010 and 2011

CAMELOT INFORMATION SYSTEMS INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

CONTENTS	PAGE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	F-2
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2010 AND 2011	F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011	F-5
CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011	F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011	F-7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011	F-9
ADDITIONAL FINANCIAL INFORMATION - FINANCIAL STATEMENT SCHEDULE I	F-53

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND

STOCKHOLDERS OF CAMELOT INFORMATION SYSTEMS INC.

We have audited the accompanying consolidated balance sheets of Camelot Information Systems Inc. (the “Company”) and its subsidiaries (collectively, the “Group”) as of December 31, 2010 and 2011, and the related consolidated statements of operations, equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2011, and the related financial statement schedule included in Schedule I. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2010 and 2011, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to such consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 26, 2012 expressed an adverse opinion on the Company's internal control over financial reporting because of  three material weaknesses.

/s/ Deloitte Touche Tohmatsu CPA Ltd.

Beijing, the People’s Republic of China

April 26, 2012

 

F-2

CAMELOT INFORMATION SYSTEMS INC.

Consolidated Balance Sheets

(in U.S. dollars in thousands, except share data)

	As of December 31,
	2010		2011
Assets
Current assets:
Cash and cash equivalents		140,356		57,128
Restricted cash		6,932		4,626
Billed accounts receivable, net of allowance for doubtful accounts of US$14 and US$2,726 as of December 31, 2010 & 2011, respectively		43,072		47,834
Unbilled accounts receivable, net of allowance for doubtful accounts of US$390 and US$927 as of December 31,2010 & 2011, respectively		62,624		87,212
Term deposits		160		45,318
Inventories		1,634		576
Deferred costs		32		1,396
Deferred tax assets-current		1,088		1,930
Prepaid expenses and other current assets		11,420		15,757
Total current assets		267,318		261,777
Property and equipment, net		4,680		4,673
Intangible assets, net		26,631		18,250
Deferred tax assets-noncurrent		71		1,197
Project deposits		79		74
Rental deposits and other noncurrent assets		1,457		1,427
Goodwill		41,229		27,998
Total assets		341,465		315,396
Liabilities
Current liabilities:
Short term borrowings		11,566		8,847
Accounts payable		18,610		20,041
Deferred revenue		5,598		8,391
Income taxes payable		9,580		10,548
Accrued expenses and other payables		19,088		23,272
Consideration payable in connection with business
Consideration payable in connection with business acquisitions and debt extinguishment		15,594		5,132
Total current liabilities		80,036		76,231
Borrowings, less current portion		403		378
Deferred tax liabilities		4,303		2,871
Contingent consideration in relation to business acquisitions		2,307		2,822
Other non-current liabilities		1,139		1,006
Total liabilities		88,188		83,308

F-3

CAMELOT INFORMATION SYSTEMS INC.

Consolidated Balance Sheets - continued

(in U.S. dollars in thousands, except share data)

	As of December 31,
	2010		2011
Commitments and contingencies (Note 21)
Equity:
Camelot Information Systems Inc. shareholders' equity:
Ordinary shares (451,925,654 shares authorized as of December 31, 2010 and 2011; 179,610,128 shares issued and outstanding as of December 31, 2010; 182,762,475 shares issued and 177,621,367 shares outstanding as of December 31, 2011, respectively)		-		-
Additional paid-in capital		177,467		189,094
Statutory reserves		8,241		10,527
Retained earnings		53,550		10,440
Accumulated other comprehensive income		13,456		21,684
Total Camelot Information Systems Inc. shareholders' equity		252,714		231,745
Noncontrolling interest		563		343
Total equity		253,277		232,088
Total liabilities and equity		341,465		315,396

The accompanying notes are an integral part of these consolidated financial statements.

F-4

CAMELOT INFORMATION SYSTEMS INC.

Consolidated Statements of Operations

(in U.S. dollars in thousands, except share and per share data)

	For the year ended December 31,
	2009			2010			2011
Net revenues		118,003			192,863			227,120
Cost of revenues (including share-based compensation of US$147, US$136 and US$1,463 for the years ended December 31, 2009, 2010 and 2011 respectively)		(81,976	)		(130,862	)		(167,520	)
Gross profit		36,027			62,001			59,600
Operating expenses:
Selling and marketing expenses (including share-based compensation of US$158, US$354 and US$7,427 for the years ended December 31, 2009, 2010 and 2011 respectively)		(6,199	)		(11,138	)		(20,263	)
General and administrative expenses (including share-based compensation of US$938, US$2,434 and US$10,476 for the years ended December 31, 2009, 2010 and 2011 respectively)		(12,627	)		(21,605	)		(45,065	)
Research and development costs		(1,496	)		(2,741	)		(5,956	)
Loss on impairment of intangible assets		-			-			(8,552	)
Loss on impairment of goodwill		-			-			(21,457	)
Changes in fair value of contingent consideration for business acquisitions		(549	)		(3,880	)		(1,669	)
Total operating expenses		(20,871	)		(39,364	)		(102,962	)
Government subsidies		56			123			255
Income (loss) from operations		15,212			22,760			(43,107	)
Interest expense		(96	)		(475	)		(935	)
Interest income		118			498			1,194
Gain on short-term investment		44			-			-
Income (loss)  before provisions for income taxes		15,278			22,783			(42,848	)
Provisions for income taxes (benefit)		(2,241	)		(4,100	)		1,791
Net income (loss)		13,037			18,683			(41,057	)
Less: Net (income)loss attributable to noncontrolling interest		(71	)		(86	)		233
Net income (loss) attributable to Camelot Information Systems Inc.		12,966			18,597			(40,824	)
Net income (loss) per ordinary share:
Net income (loss) attributable to Camelot Information Systems Inc. ordinary shareholders
Basic		0.10			0.12			(0.23	)
Diluted		0.10			0.11			(0.23	)
Weighted average shares used in calculating net income/(loss) per ordinary share
Basic		82,035,859			128,663,415			179,954,056
Diluted		133,017,168			165,258,030			179,954,056

The accompanying notes are an integral part of these consolidated financial statements.

F-5

CAMELOT INFORMATION SYSTEMS INC.

Consolidated Statements of Equity and Comprehensive Income

(in U.S. dollars in thousands, except share data)

	Camelot Information Systems Inc.'s Shareholders
	Series A preferred shares				Series B preferred shares						Ordinary shares					Shares to			Additional paid-in			Statutory		Retained			Accumulated other compre-hensive		Total Camelot Information Systems Inc. shareholders'			Non-controlling			Total			Total compre-hensive income (loss)
	Shares		Amount		Shares			Amount			Shares outstanding			Amount		be issued			capital			reserves		earnings			income		equity			interest			equity			for the year
Balance as of January 1, 2009		44,055,018		28,725		4,019,328			5,000			76,774,814			-		3,270			11,643			2,964		27,264			7,191		86,057			436			86,493
Issuance of ordinary shares in connection with business acquisition of Yinfeng		-		-		-			-			1,000,000			-		(1,218	)		1,218			-		-			-		-			-			-
Issuance of ordinary shares in connection with business acquisition of Agree		-		-		-			-			4,866,180			-		-			6,095			-		-			-		6,095			-			6,095
Ordinary shares to be issued in connection with settlement of contingent consideration for acquisition of Yinfeng		-		-		-			-			-			-		3,223			-			-		-			-		3,223			-			3,223
Ordinary shares to be issued in connection with business acquisition of Tansun		-		-		-			-			-			-		5,760			-			-		-			-		5,760			-			5,760
Share based compensation		-		-		-			-			-			-		-			1,243			-		-			-		1,243			-			1,243
Transfer to statutory reserve		-		-		-			-			-			-		-			-			1,439		(1,439	)		-		-			-			-
Dissolution of Ruiyin		-		-		-			-			-			-		-			-			-		-			-		-			(63	)		(63	)
Foreign currency translation adjustment		-		-		-			-			-			-		-			-			-		-			156		156			13			169			169
Net income		-		-		-			-			-			-		-			-			-		12,966			-		12,966			71			13,037			13,037
Balance as of December 31, 2009		44,055,018		28,725		4,019,328			5,000			82,640,994			-		11,035			20,199			4,403		38,791			7,347		115,500			457			115,957			13,206
Issuance of ordinary shares in connection with business acquisitions and debt extinguishment		-		-		-			-			7,932,000			-		(11,035	)		11,035			-		-			-		-			-			-
Conversion of preferred shares upon the initial public offering ("IPO")	（44,055,018)		(28,725）			(4,019,328	)		(5,000	)		48,074,346			-		-			33,725			-		-			-		-			-			-
Issuance of ordinary shares upon IPO net of issuance cost of US$4,140		-		-		-			-			36,666,668			-		-			89,635			-		-			-		89,635			-			89,635
Issuance of ordinary shares upon the follow-on public offering net of issuance cost of nil		-		-		-			-			4,296,120			-		-			19,949			-		-			-		19,949			-			19,949
Share based compensation		-		-		-			-			-			-		-			2,924			-		-			-		2,924			-			2,924
Transfer to statutory reserve		-		-		-			-			-			-		-			-			3,838		(3,838	)		-		-			-			-
Foreign currency translation adjustment		-		-		-			-			-			-		-			-			-		-			6,109		6,109			20			6,129			6,129
Net income		-		-		-			-			-			-		-			-			-		18,597			-		18,597			86			18,683			18,683
Balance as of December 31, 2010		-		-		-			-			179,610,128			-		-			177,467			8,241		53,550			13,456		252,714			563			253,277			24,812
Issuance of ordinary shares in connection with business acquisitions		-		-		-			-			1,152,352			-		-			5,341			-		-			-		5,341			-			5,341
Repurchase of ordinary shares		-		-		-			-			(8,473,600	)		-		-			(14,415	)		-		-			-		(14,415	)		-			(14,415	)
Options exercised		-		-		-			-			5,332,492			-		-			1,335			-		-			-		1,335			-			1,335
Share based compensation		-		-		-			-			-			-		-			19,366			-		-			-		19,366			-			19,366
Transfer to statutory reserve		-		-		-			-			-			-		-			-			2,286		(2,286	)		-		-						-
Dissolved   of Yantai																																	32			32
Foreign currency translation adjustment		-		-		-			-			-			-		-			-			-		-			8,228		8,228			(19	)		8,209			8,209
Net loss		-		-		-			-			-			-		-			-			-		(40,824	)		-		(40,824	)		(233	)		(41,057	)		(41,057	)
Balance as of December 31, 2011		-		-		-			-			177,621,372			-		-			189,094			10,527		10,440			21,684		231,745			343			232,088			(32,848	)

The accompanying notes are an integral part of these consolidated financial statements.

F-6

CAMELOT INFORMATION SYSTEMS INC.

Consolidated Statements of Cash Flows

(in U.S. dollars in thousands)

	For the year ended December 31,
	2009			2010			2011
Cash flows from operating activities:
Net income (loss)		13,037			18,683			(41,057	)
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation of property and equipment		634			962			1,087
Amortization of intangible assets		3,860			6,309			5,285
Deferred income taxes		(738	)		(1,324	)		(4,060	)
Share-based compensation		1,243			2,924			19,366
Provision for bad debts		106			15			3,235
Impairment loss on intangible assets		-			-			8,552
Impairment loss on goodwill		-			-			21,457
(Gains)/loss on disposal of property and equipment		13			(1	)		20
Loss on short-term investment		(44	)		-			-
Changes in fair value of contingent consideration for acquisition of Tansun and Dimension		549			3,880			1,669
Changes in operating assets and liabilities:
Accounts receivable		(12,849	)		(33,937	)		(23,364	)
Inventories		57			(740	)		1,094
Deferred cost		299			562			(1,385	)
Prepaid expenses and other current assets		(1,513	)		(4,336	)		(3,296	)
Project deposits		(68	)		519			9
Rental deposits and other noncurrent assets		(644	)		(480	)		75
Accounts payable		3,857			7,500			(406	)
Deferred revenue		1,116			(2,200	)		2,535
Income taxes payable		1,464			3,866			459
Accrued expenses and other payables		1,172			6,554			3,985
Other non-current liabilities		-			1,139			(61	)
Net cash  provided by (used in) operating activities		11,551			9,895			(4,801	)
Cash flows from investing activities:
Maturity (purchase) of term deposits, net		(299	)		139			(44,785	)
Deposit (release) of restricted cash, net		730			(4,365	)		2,743
Purchases of businesses, net of cash acquired of US$3,470, nil and US$1,506 in 2009, 2010 and 2011, respectively		(6,458	)		(8,359	)		(11,430	)
Purchase of property and equipment		(408	)		(1,439	)		(867	)
Repayment of loan to unrelated parties		242			248			13
Proceeds from disposal of property and equipment		-			29			29
Proceeds from sales of short-term investment		206			-			-
Net cash used in investing activities		(5,987	)		(13,747	)		(54,297	)

F-7

CAMELOT INFORMATION SYSTEMS INC.

Consolidated Statements of Cash Flows - continued

(in U.S. dollars in thousands)

	For the year ended December 31,
	2009			2010			2011
Cash flows from financing activities:
Distribution to noncontrolling interest shareholder upon dissolution of Ruiyin		(63	)		-			-
Proceeds from borrowings		8,830			11,691			9,205
Repayment of borrowings		(3,976	)		(9,311	)		(12,230	)
Proceeds from initial public offering		-			93,775			-
Payment of issuance cost related to initial public offering		(264	)		(2,957	)		(1,242	)
Proceeds from follow-on offering		-			19,949			-
Reimbursed issuance cost from follow-on offering		-						836
Proceeds from exercise of share options		-			-			1,335
Repurchase of ordinary shares		-			-			(14,415	)
Payment of deferred consideration for acquisitions		-			(4,252	)		(7,961	)
Payment of reimbursable issuance cost related to follow-on offering					(141	)		(694	)
Net cash provided by (used in) financing activities		4,527			108,754			(25,166	)
Effect of exchange rate changes		813			1,634			1,036
Net increase in cash and cash equivalents		10,904			106,536			(83,228	)
Cash and cash equivalents, beginning of year		22,916			33,820			140,356
Cash and cash equivalents, end of year		33,820			140,356			57,128
Supplemental disclosure of cash flow information:
Income taxes paid		(1,515	)		(1,837	)		(1,860	)
Interest paid		(96	)		(475	)		(935	)
Non-cash investing activities:
Ordinary shares issued in connection with business acquisitions of VLife, Harmonation, Yinfeng, Agree, Dimension (Note 16)		7,313			-			5,341
Ordinary shares to be issued in connection with business acquisitions of Yinfeng and Tansun (Note 16)		5,760			-			-
Ordinary shares to be issued in connection with settlement of contingent consideration for acquisition of Yinfeng (Note 16)		3,223			-			-
Consideration payable in connection with business acquisitions		8,790			-			3,145

The accompanying notes are an integral part of these consolidated financial statements.

F-8

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

1.	ORGANIZATION AND PRINCIPAL ACTIVITIES
	Camelot Information Systems Inc. (the "Company") was incorporated in the British Virgin Islands ("BVI") on November 28, 2000 as a limited liability company under the International Business Companies Act.
	The Company and its subsidiaries (collectively, the "Group") are primarily engaged in the provision of information technology services ("IT services").  As of December 31, 2011, the Company's subsidiaries included the following:

		Later of
	Place of	incorporation/	Percentage of
Name of Subsidiary	establishment	acquisition date	legal ownership
			%
Nanjing Camelot Information Systems Engineering Co. Ltd.	People's Republic of China	January 18, 2000	100
("NCIS")	("PRC" or "China")
Beijing Camelot Technology Co., Ltd. ("Camelot Beijing")	PRC	March 12, 2001	100
Beijing Heng En Technology Co., Ltd. ("Beijing Heng En")	PRC	December 31, 2002	100
Shanghai Camelot Software Co., Ltd. ("Shanghai Camelot")	PRC	September 30, 2004	100
Entoh Digital Co., Ltd. ("Entoh")	Japan	January 1, 2006	100
Dalian Yuandong Digital Co., Ltd. ("Dalian Yuandong")	PRC	January 1, 2006	100
Bayshore Consulting & Services Co., Ltd. ("Bayshore")	PRC	January 1, 2006	100
Triumph Consulting & Services Co., Ltd. ("Triumph")	BVI	January 1, 2006	100
Konwell Technologies Ltd. ("Konwell")	BVI	January 1, 2006	100
Beijing Faceita Information System Ltd. ("Faceita")	PRC	January 1, 2006	100
Asialink Information Technologies (Shanghai) Co., Ltd. ("Asialink")	PRC	January 1, 2006	100
Kings Consulting Services Limtied	Hong Kong	January 1, 2006	100
(Formerly King's Trading Co) ("King's")
Taiwan Camelot Information Inc. ("Taiwan Camelot")	Taiwan	September 28, 2006	100
Hwawei Digital Financial Technologies Co., Ltd. ("Hwawei")	Taiwan	January 1, 2007	100
Jiaxing Camelot Software Company Limited ("Jiaxing Camelot")	PRC	July 17, 2007	100
Beijing Red River Valley Information Technology Co., Ltd.	PRC	February 1, 2008	100
("Red River Valley")
Beijing Yinfeng Technology Development Co., Ltd. ("Yinfeng")	PRC	April 1, 2008	100
VLife Technology Co., Ltd. ("VLife")	Taiwan	April 7, 2008	100
VLife Technology (Shang Hai) Co., Ltd. ("Weisong")	PRC	April 7, 2008	100
Vlife International Corp. Ltd. ("Samoa")	Samoa	April 7, 2008	100
Shanghai Camelot Information Technology Co., Ltd ("SCIT")	PRC	May 8, 2008	100
Harmonation Inc. ("Harmonation")	Taiwan	July 7, 2008	85.47
Camelot Information Technology. Co., Ltd. ("Huaqiao")	PRC	June 29, 2009	100
Kunshan Kesuo Information Consulting Co., Ltd. ("Kunshan")	PRC	August 13, 2009	100
Zhuhai Agree Technology Co., Ltd. ("Agree Zhuhai")	PRC	July 1, 2009	100
Beijing Agree Technology Development Co., Ltd. ("Agree Beijing")	PRC	July 1, 2009	100
Shanghai Agree Technology Development Co., Ltd. ("Agree Shanghai")	PRC	July 1, 2009	100
Beijing Tansun Software Technology Co., Ltd. ("Tansun Beijing")	PRC	December 30, 2009	100
Xiamen Rella Software Technology Development Co., Ltd.	PRC	December 30, 2009	100
("Xiamen Rella")
Kunshan Asialink Information Technology Co., Ltd. ("Asialink Kunshan")	PRC	March 22, 2010	100
Dimension Information Technology Co., Ltd. ("Dimension")	PRC	January 1, 2011	100
Camelot Information Technology Consulting (Wuxi) Co., Ltd ("Wuxi")	PRC	July 14, 2011	100
Camelot Financial Information Technology Services Co., Ltd ("CFITS")	PRC	December 19, 2011	100

F-9

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

1.	ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
	In 2011, to streamline the Corporate Structure, the Company dissolved Yantai Q.B. Eleven Outsourcing Service Company (“Yantai”) and Camelot Japan Co., Ltd. (“Across Japan”) since bothsubsidiaries did not have substantive business operations.
2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
	Basis of presentation
	The consolidated financial statements of the Group were prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").
	Basis of consolidation
	The consolidated financial statements include the financial statements of the Company and its wholly owned and majority owned subsidiaries.  All inter-company transactions and balances have been eliminated upon consolidation.
	Use of estimates
	The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses in the financial statements and accompanying notes.  Actual results could differ from those estimates.  Significant accounting estimates reflected in the Group's consolidated financial statements include revenue recognition, valuation allowance for deferred tax assets, collectability of accounts receivable, estimated useful lives and impairment of property and equipment, goodwill and other intangible assets, and fair value of share options and ordinary shares.
	Cash and cash equivalents
	Cash and cash equivalents consist of cash on hand and highly liquid investments, which are unrestricted from withdrawal or use, or which have remaining maturities of three months or less when purchased.
	Term deposits
	Term deposits consist of deposits placed with financial institutions with original maturity terms of greater than three months but less than one year.
	Restricted cash
	The Group is required to maintain certain deposits with banks so that bank guarantee letters can be issued to the Group for the purpose of trading transactions.  Cash held in such accounts is normally restricted for a period of three months.

F-10

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
	Fair value

The Company follows the provisions of ASC 820, Fair Value Measurements and Disclosures in determining and disclosing certain fair value measurements. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market‑based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three‑tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level I - Observable inputs such as quoted prices in active markets for identical, unrestricted assets, or liabilities.

Level II - Quoted prices for similar assets or liabilities, or inputs other than quoted prices in active markets that are observable, either directly or indirectly.

Level III - Unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions about the assumptions market participants would use in pricing the asset or liability. Valuation techniques include use of option‑pricing models, discounted cash flows models, and similar techniques.

Financial instruments

The Group's financial instruments include cash and cash equivalents, restricted cash, short-term investment, accounts receivable, term deposits, accounts payable, and bank borrowings.

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, term deposits, and accounts payable approximate their fair values due to short-term maturities.

The carrying amounts of bank borrowings approximate their fair values as the bank borrowings bear variable interest rates which approximate the market interest rate.

F-11

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
	Allowance for doubtful accounts
	Accounts receivables represent those receivables derived in the ordinary course of business.  The Group establishes an allowance for doubtful accounts  based upon estimates, historical experience and other factors surrounding the credit risk of specific customers.
	Inventories
	Inventories are stated at the lower of cost or market value.  Cost is determined using the weighted average method.  Inventories include raw materials and consumables and hardware purchased from third party vendors.
	Property and equipment, net
	Property and equipment are stated at cost less accumulated depreciation and amortization.  Depreciation and amortization are provided using the straight-line method over the following estimated useful lives:

Building	30 years
Furniture and office equipment	5 years
Motor vehicles	5 years
Leasehold improvements	Shorter of the lease terms or estimated useful lives

Acquired intangible assets with definite lives

Acquired intangible assets, other than goodwill, are initially measured and recorded at their fair values.  Customer relationships, SAP certificate and contract backlogs are amortized based on the estimated attrition pattern of the acquired intangibles. System software, completed technology and non-compete agreement are amortized based on straight-line method or sum of the years digits method over the following estimated economic lives:

Customer relationships	3-10 years
SAP certificate	3.8 years
Contract backlogs	0.3-3.5 years
System software	10 years
Completed technology	2.25-10 years
Non-compete agreement	3 years

F-12

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
	Impairment of long-lived assets with definite lives
	The Group reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable.  When these events occur, the Group measures impairment by comparing the carrying values of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition.  If the sum of the expected undiscounted cash flows is less than the carrying amounts of the assets, the Group would recognize an impairment loss based on the fair values of the assets.
	Impairment of goodwill and indefinite-lived intangible assets
	The Group reviews the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist annually or more frequently if events and circumstances indicate that they might be impaired. Specifically, goodwill impairment is determined using a two-step process. The first step compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being a discounted cash flow.
	The impairment test for other intangible assets not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

F-13

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
	Project deposits
	Project deposits represent the amounts paid by the Group to certain customers to guarantee fulfillment of all the terms of contracts.  The deposits will be refunded by the customers once the contract terms are fulfilled.  Historically, deposits were returned as the Group met defined performance goals, service levels and completion schedules as set forth in the contracts.
	Research and development
	Research and development costs consist of expenditures incurred in the development of new software modules and products, either as part of the internally used software or in conjunction with anticipated customer projects.  Technological feasibility for the Company's software products is reached shortly before the products are released for sale.  To date, costs incurred after technological feasibility was established and prior to completion of software development have not been material, and accordingly, the Group has expensed all research and development costs when incurred.
	Revenue recognition
	The Group provides its services through two services lines: (i) enterprise application services and (ii) financial industry IT services.  Enterprise application services primarily consist of packaged software implementation, software application development, support and maintenance services.  Financial industry IT services primarily consist of system software support and maintenance, application software development and implementation services as well as consulting services in the financial industry, principally for banks and insurance companies.
	Revenues are generated from either fixed-price or time-and-expense contracts.  Revenue is considered realizable and earned when all of the following criteria are met: persuasive evidence of a sales arrangement exists; delivery has occurred or services have been rendered; the price is fixed or determinable; and collectability is reasonably assured.
	Time-and-expense contracts
	Revenues from time-and-expense contracts are recognized as the related services are rendered assuming all other basic revenue recognition criteria are met.  Under time-and-expense contracts, the Group is reimbursed for actual hours incurred at negotiated hourly billing rates.  Customers may terminate the contracts at any time before the work is completed but are obligated to pay the actual service hours incurred through the termination date at the contract billing rate.  The rights to software developed by the Group on behalf of its customers belong to the customers and the Group does not have the option to acquire such rights from its customers.  Net revenues recognized for time-and-expense contracts totaled US$59,667, US$99,071 and US$121,762 for the years ended December 31, 2009, 2010 and 2011, respectively.

F-14

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
	Revenue recognition - continued
	Fixed-price contracts
	Revenues from service-only fixed-price contracts require the Group to perform services for systems design, planning and consulting throughout the contractual period, which is generally less than one year.  Revenues from this type of arrangements are generally recognized using the proportional performance method based on the proportion of actual service hours incurred to the budgeted total service hours.  All of the Group's service offerings are similar in nature and the Group has a long history of providing these services resulting in its ability to reasonably estimate the service hours expected to be incurred on each project, and there are no retention provisions.
	To date, the Group has not incurred a material loss on any contracts.  However, as a policy, provisions for estimated losses on such engagements will be made during the period in which a loss becomes probable and can be reasonably estimated.
	The Group, under some contracts, is subject to payment penalties if it fails to complete the projects within a specified period of time.  To date, the Company has not incurred a material penalty on any contracts.  However, as a matter of policy, the Group considers contract provisions for penalties when estimating the total revenue on a contract and evaluates such provisions throughout the life of the contract.
	The Group also enters into multiple-element fixed-price arrangements, in which the deliverables mainly include licenses of self-developed core software and third-party software, and related services such as customization, modification, implementation and integration ("project services") and support and maintenance services which include bug fixes, technical support via telephone and site visit, and unspecified upgrades on a when-and-if-available basis.
	The Group accounts for a deliverable in an arrangement of multiple elements as a separate unit of accounting when the following criteria are met.
	•	The functionality of the delivered element(s) is not dependent on the undelivered element(s);
	•	There is vendor-specific objective evidence (VSOE) of fair value of the undelivered element(s).  VSOE of fair value is based on the price charged when the deliverable is sold separately by the Group on a regular basis; and
	•	Delivery of the delivered element(s) represents the culmination of the earnings process for that element(s).

F-15

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
	Revenue recognition - continued
	Fixed-price contracts - continued
	In some cases, the VSOE of fair value of the support and maintenance services, which is the last element to be delivered, is established based on standalone sales, however, no such evidence exists for other elements.  For these arrangements, under the residual method, the amount of consideration allocated to elements other than the support and maintenance services equals the total arrangement consideration less the VSOE of fair value of the support and maintenance services, which is deferred and recognized as revenue using the proportional performance method over the project services period.  The proportional performance is determined based on the proportion of actual service hours incurred to the budgeted service hours.  When revenue is deferred, the related cost is also deferred.  The arrangement consideration allocated to the support and maintenance services is recognized as revenue ratably over the support and maintenance services period, which is usually one to two years.
	When the VSOE of fair value of the support and maintenance services does not exist, the entire arrangement is accounted for as one accounting unit resulting in revenue being recognized on a straight line basis over the support and maintenance services period once the support and maintenance services are the only undelivered element.  Accordingly, the accumulated contract cost is deferred and recognized as cost of revenue ratably over the same period as revenue is recognized.
	Net revenues recognized for fixed-price contracts totaled US$58,336, US$93,792 and US$105,358 for the years ended December 31, 2009, 2010 and 2011, respectively.
	The Group reports revenues net of applicable business taxes and the related surcharges.  The Company's subsidiaries in the PRC are subject to a 5% business tax and related surcharges on the revenues earned from providing services, except for that Camelot Nanjing qualified for business tax at 3%.  Business taxes and the related surcharges for the years ended December 31, 2009, 2010 and 2011 were US$3,865, US$6,391 and US$7,017 respectively, and were recorded as a reduction of revenues.
	The Group receives value added taxes ("VAT") rebates from tax authority as an incentive to encourage certain high-tech industries. VAT rebates are recorded as revenue when the Group pays the relevant VAT and properly files the rebate application to tax authority when the related rebates become receivable. The Group has recorded US$11, US$430, and US$271of VAT rebate in revenue for the years ended December 31, 2009, 2010 and 2011, respectively. The VAT rebate revenues are classified into the relevant revenue categories.

F-16

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
	Government subsidies
	Subsidies are recorded as a liability when received and recognized as other operating income over the periods in which the Group recognizes the related costs for which the subsidies are intended to compensate.  If the costs for which the subsidy is intended to compensate have already been incurred, the Group reports the subsidies as other operating income when received.
	Advertising costs
	Advertising costs are expensed as incurred and such expenses were minimal for the periods presented.  Advertising costs have been included as part of selling and marketing expenses.
	Operating leases
	Leases where the rewards and risks of ownership of assets primarily remain with the leasing company are accounted for as operating leases.  Payments made under operating leases are charged to the consolidated statements of operations on a straight-line basis over the lease periods.
	Income taxes
	Current income taxes are provided for in accordance with the laws of the relevant tax authorities.  Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements.  Net operating loss carry forwards and credits are applied using enacted statutory tax rates applicable to future years.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that a portion of or all of the deferred tax assets will not be realized.  The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics.
	The impact of an uncertain income tax position on the income tax return is recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority.  An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.  Interest and penalties on income taxes will be classified as a component of the provisions for income taxes.  The Group did not identify significant unrecognized tax benefits for years ended December 31, 2009, 2010 and 2011.  The Group did not incur any interest and penalties related to potential underpaid income tax expenses and also believed that the Group's unrecognized tax benefits did not change significantly within 12 months from December 31, 2011.

F-17

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
	Foreign currency translation
	The functional and reporting currency of the Company is the United States dollar ("U.S. dollar").  The financial records of the Company's subsidiaries located in the PRC, Japan, Taiwan and Hong Kong are maintained in their local currencies, the Renminbi ("RMB"), Japanese Yen ("Yen"), Taiwan Dollars ("NT$") and Hong Kong Dollars ("HK$"), respectively, which are also the functional currencies of these entities.
	Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at the rates of exchange ruling at the balance sheet date.  Transactions in currencies other than the functional currency during the year are converted into functional currency at the applicable rates of exchange prevailing when the transactions occurred.  Transaction gains and losses are recognized in the statements of operations.
	The Group's entities with functional currency of RMB, Yen, NT$ and HK$ translate their operating results and financial position into the U.S. dollar, the Company's reporting currency.  Assets and liabilities are translated using the exchange rates in effect on the balance sheet date.  Revenues, expenses, gains and losses are translated using the average rate for the year.  Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of other comprehensive income.
	Comprehensive income
	Comprehensive income includes net income and foreign currency translation adjustments.  Comprehensive income is reported in the consolidated statements of equity and comprehensive income.
	Significant risks and uncertainties
	Foreign currency risk
	RMB is not freely convertible into other currencies.  All foreign exchange transactions involving RMB must take place through the People's Bank of China or other institutions authorized to trade foreign currency.  The exchange rate adopted for the foreign exchange transactions are the rates of exchange quoted by the People's Bank of China that are determined largely by supply and demand.  The Group's cash, term deposit and restricted cash balances in RMB as of December 31, 2009, 2010 and 2011 were RMB186, 999,368, RMB202, 722,790 and RMB436, 430,586 respectively.
	During the presented periods, the Group also incurred foreign currency risk on sales denominated in U.S. dollars and Japanese Yen.

F-18

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
	Significant risks and uncertainties- continued
	Concentration of credit risk
	Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash, accounts receivable and term deposits.  The Group places the majority of its cash and term deposits with financial institutions located in the PRC and the United States of America.  The Group conducts credit evaluations of customers and generally do not require collateral or other security from their customers.
	Details of customers accounting for 10% or more of total net revenues were as follows:

	Years ended December 31,
	2009		%		2010		%		2011		%
Customer A		37,315		32		64,987		34		77,387		34

Details of customers accounting for 10% or more of accounts receivable were as follows:

	As of December 31,
	2010		%		2011		%
Customer A		35,843		34		50,528		37

Net income per share

Basic net income per ordinary share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.  Diluted net income per ordinary share reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised or converted into ordinary shares.

The Group's convertible preferred shares were participating securities as the preferred shares participated in undistributed earnings on an as-converted basis.  Accordingly, the Group used the two-class method of computing net income per share, for ordinary and preferred shares according to their participation rights in undistributed earnings.  Under this method, undistributed net income was allocated on a pro rata basis to the ordinary and preferred shares to the extent that each class would share net income for the period.

The Group had convertible preferred shares and employee share options which could potentially dilute basic earnings per share for the periods presented.  To calculate the number of shares for diluted net income per share, the effect of the convertible preferred shares was computed using the as-converted method and the effect of the employee share options was computed using the treasury stock method.

The net income per share information for all periods presented has reflected the 4-for-1 stock split effected in May 2010 (See Note 16 "Ordinary shares ").

F-19

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
	Share-based compensation
	Share-based payment transactions with employees, such as share options are measured based on the grant date fair value of the equity instrument.  The Group recognizes the compensation costs net of a forfeiture rate on a straight-line basis, over the requisite service period of the award, which is generally the vesting period of the award.  The amount of compensation expenses recognized for any period is not less than the portion of the grant date fair value of the options vested during that period.  The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates.  Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.
	A change in any of the terms or conditions of share options is accounted for as a modification of the share incentive plan. Therefore, the Group calculates incremental compensation cost of a modification as the excess of the fair value of the modified option over the fair value of the original option immediately before its terms are modified, measured based on the share price and other pertinent factors at the modification date. For vested options, the Group would recognize incremental compensation cost in the period of the modification occurred and for unvested options, the Group would recognize, over the remaining requisite service period, the sum of the incremental compensation cost and the remaining unrecognized compensation cost for the original award on the modification date.
	Segment reporting
	The Group's chief operating decision maker has been identified as the Chief Executive Officer ("CEO"), who reviews consolidated results when making decisions about allocating resources and assessing performance of the Group.  The Group has one operating segment.  The Group's revenue and net income are substantially derived from enterprise application services and financial industry IT services.
	The following table summarizes the Group's net revenues and long-lived assets in different geographic locations in U.S. dollars:

	Years ended December 31,
	2009		2010		2011
Net revenues
PRC		88,790		160,897		195,076
Taiwan		16,777		14,963		9,036
Japan		11,642		14,663		21,120
Others		794		2,340		1,888
Total		118,003		192,863		227,120

F-20

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
	Segment reporting - continued

	As of December 31,
	2010		2011
Long-lived assets
PRC		66,213		49,042
Taiwan		6,098		1,649
Others		1,765		1,731
Total		74,076		52,422

Geographic area information for net revenues is summarized based on the countries in which the customers are located.

The following table summarizes the Group’s net revenues by service line:

	Years ended December 31,
	2009		2010		2011
Enterprise application services		78,525		126,396		158,733
Hardware and software product		898		159		448
Total enterprise application services		79,423		126,555		159,181
Financial industry services		34,920		59,012		59,486
Hardware and software product		3,660		7,296		8,453
Total financial industry services		38,580		66,308		67,939
Total net revenues		118,003		192,863		227,120

Business combinations

Business combinations are recorded using the acquisition method of accounting. The assets acquired, the liabilities assumed, and any noncontrolling interest of the acquiree at the acquisition date, if any, are measured at their fair values as of that date.  Goodwill is recognized and measured as the excess of the total consideration transferred plus the fair value of any noncontrolling interest of the acquiree, if any, at the acquisition date over the fair values of the identifiable net assets acquired.  Common forms of the consideration made in acquisitions include cash and common equity instruments.  Consideration transferred in a business acquisition is measured at the fair value as at the date of acquisition.  For shares issued in a business combination, the Company has estimated the fair value as of the date of acquisition.

Where the consideration in an acquisition includes contingent consideration the payment of which depends on the achievement of certain specified conditions post-acquisition, the contingent consideration is recognized and measured at its fair value at the acquisition date and if recorded as a liability it is subsequently carried at fair value with changes in fair value reflected in earnings.

F-21

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
	Recently issued accounting standards not yet adopted
	In May 2011, the FASB issued an authoritative pronouncement on fair value measurement. The guidance is the result of joint efforts by the FASB and International Accounting Standards Board to develop a single, converged fair value framework. The guidance is largely consistent with existing fair value measurement principles in US GAAP. The guidance expands the existing disclosure requirements for fair value measurements and makes other amendments, mainly including:
	•	Highest-and-best-use and valuation-premise concepts for nonfinancial assets—the guidance indicates that the highest-and-best-use and valuation-premise concepts only apply to measuring the fair value of nonfinancial assets.
	•	Application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk—the guidance permits an exception to fair value measurement principles for financial assets and financial liabilities (and derivatives) with offsetting positions in market risks or counterparty credit risk when several criteria are met. When the criteria are met, an entity can measure the fair value of the net risk position.
	•	Premiums or discounts in fair value measure—the guidance provides that premiums or discounts that reflect size as a characteristic of the reporting entity’s holding (specifically, a blockage factor that adjusts the quoted price of an asset or a liability because the market’s normal daily trading volume is not sufficient to absorb the quantity held by the entity) rather than as a characteristic of the asset or liability (for example, a control premium when measuring  the fair value of a controlling interest) are not permitted in a fair value measurement.
	•	Fair value of an instrument classified in a reporting entity’s stockholders’ equity—the guidance prescribes a model for measuring the fair value of an instrument classified in stockholders’ equity; this model is consistent with the guidance on measuring the fair value of liabilities.
	•	Disclosures about fair value measurements—the guidance expands disclosure requirements, particularly for Level 3 inputs. Required disclosures include:
		(i)	For fair value measurements categorized in Level 3 of the fair value hierarchy: (1) a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, (2) a description of the valuation process in place (e.g., how the entity decides its valuation policies and procedures, as well as changes in its analyses of fair value measurements, from period to period), and (3) a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs.

F-22

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
		(ii)	The level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair value must be disclosed.
	The guidance is to be applied prospectively and is effective for interim and annual periods beginning after December 15, 2011, for public entities. Early application by public entities is not permitted. The Company does not expect the adoption of this guidance to have a significant effect on its consolidated financial statements.
	In June 2011, the FASB issued an authoritative pronouncement to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The guidance does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The guidance should be applied retrospectively. For public entities, the guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. In December 2011, the FASB issued an authoritative pronouncement related to deferral of the effective date for amendments to the presentation of reclassifications of items out of accumulated other comprehensive income. This guidance allows the FASB to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before update the pronouncement issued in June 2011. The Company does not expect the adoption of these pronouncements to have a significant effect on its consolidated financial statements.
	In September 2011, the FASB issued an authoritative pronouncement related to testing goodwill for impairment. The guidance is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. The guidance permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company does not expect the adoption of this pronouncement to have a significant effect on its consolidated financial statements.

F-23

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued
	In December 2011, the FASB has issued an authoritative pronouncement related to Disclosures about Offsetting Assets and Liabilities. The guidance requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not expect the adoption of the guidance to have a material effect on its consolidated financial statements.
3.	ACQUISITIONS
	Agree
	In July 2009, the Group acquired 100% equity interest of Agree Zhuhai and its affiliates (collectively, "Agree").  The initial consideration included US$7,320 in cash and 4,866,180 ordinary shares of the Company with a fair value of US$1.25 per share estimated by American Appraisal, an independent valuation firm, on the acquisition date.  In addition, the Group agreed to pay a performance-based consideration to Agree in cash between RMB63,000,000 (approximately US$9,265) and RMB75,000,000 (approximately US$11,029) no later than January 1, 2012 as determined using a specified formula based on Agree's earnings in 2009 and 2010, of which the fair value on the acquisition date was US$8,303 estimated by American Appraisal.  Therefore the total consideration was US$21,718.  The cash portion was fully paid in July 2009 and the ordinary shares were issued in September 2009.  Agree provides comprehensive software solutions for automating teller systems and branch operations to customers in the financial services industry in China through developing financial software platforms and applications.  The transaction was accounted for as a business combination using the acquisition method of accounting.  The operating results of Agree have been included in the Group's consolidated financial statements since the date of acquisition. US$8,082 of net revenues generated by Agree in the year of 2009 was included in the Group's consolidated statement of operations for 2009.
	The purchase consideration of US$21,718 was allocated as follows as of the acquisition date:

				Weighted average
	Amounts			useful lives
Cash		1,635
Restricted Cash		739
Accounts receivable		6,656
Inventory		55
Other current assets		785
Property and equipment, net		426
Intangible assets:
Trade name		4,285		Indefinite
Contract backlogs		642		1 year
Customer relationships		5,239		4.5 years
Other current liabilities		(2,619	)
Deferred tax liabilities		(1,026	)
Goodwill		4,901
Total		21,718

F-24

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

3.	ACQUISITIONS - continued
	Tansun
	On December 30, 2009, the Group acquired 100% equity interest of Tansun Beijing and its affiliates (collectively "Tansun").  The initial consideration included US$8,790 in cash and 3,932,000 ordinary shares of the Company with a fair value of US$1.47 per share estimated by American Appraisal, an independent valuation firm, on the acquisition date.  In addition, the Group agreed to pay a performance-based consideration in cash up to RMB40,000,000 (approximately US$5,860) as determined using a specified formula based on Tansun's earnings in 2010 and 2011, of which the fair value on the acquisition date was US$3,969 estimated by American Appraisal.  Therefore the total consideration was US$18,519.  The cash portion US$ 8,359 was paid during 2010 and the ordinary shares were issued in May 2010. Tansun provides core business and enterprise software solutions and services for the financial services industry in China, including the consultation, design, development, implementation, testing and maintenance for key functions, such as corporate loan, risk management, supply chain financing, commercial loan, cash management, and internal collaboration and workflow.  The transaction was accounted for as a business combination using the acquisition method of accounting.  The operating results of Tansun have been included in the Group's consolidated financial statements since the date of acquisition.
	The purchase consideration of US$18,519 was allocated as follows as of the acquisition date:

				Weighted average
	Amounts			useful lives
Cash		1,835
Accounts receivable		3,539
Other current assets		705
Property and equipment, net		1,088
Intangible assets:
Trade name		3,024		Indefinite
Contract backlogs		584		3.5 year
Customer relationships		2,580		4 years
Completed technology		3,602		5 years
Bank borrowings		(1,428	)
Other current liabilities		(3,978	)
Bank borrowings, less current portion		(374	)
Deferred tax liabilities		(1,379	)
Goodwill		8,721
Total		18,519

As of December 31, 2011, the Company had paid RMB7,500,000 (approximately US$1,176) in the year of 2011, and the remaining RMB12,500,000 (approximately US$1,986) was reflected in consideration payable in connection with business acquisition as of December 31, 2011 (see note 14).

F-25

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

3.	ACQUISITIONS - continued
	Dimension
	On January 1, 2011, the Company acquired 100% equity interest of Dimension InfoTech Co. Ltd and its affiliates (collectively, "Dimension"), which provide SAP project implementation and SAP-based customized solutions. The initial consideration includes US$4,000 in cash and 1,152,352 ordinary shares of the Company with a fair value of US$5,341 based on the closing market price of the Company's ADSs on the acquisition date. 30% of the ordinary shares are restricted from transfer or sale for one year from the acquisition date and 70% are restricted from transfer or sale for two years from the acquisition date. In addition, the Company agreed to pay a performance-based contingent consideration to Dimension in cash as determined using a specified formula based on Dimension’s earnings in 2011 and 2012, of which the fair value on the acquisition date was US$5,155 estimated by American Appraisal. As a result, the total consideration as of the date of acquisition was US$14,496. The cash portion US$ 4,000 was paid during 2011 and the ordinary shares were issued in August 2011.
	The transaction was accounted for as a business combination using the acquisition method of accounting.  The operating results of Dimension have been included in the Group’s consolidated financial statements since the date of acquisition.
	The purchase consideration of US$14,496 was allocated as follows as of the acquisition date:

				Weighted average
	Amounts			useful lives
Cash		1,506
Term deposits		303
Accounts receivable		3,593
Prepaid expenses and other receivable		1,021
Property and equipment, net		146
Intangible assets:
Trade name		2,197		Indefinite
Contract backlogs		641		1 year
Customer relationships		727		5 years
Non-compete agreement		782		3 years
Accounts payable		(1,091	)
Deferred revenue		(129	)
Income taxes payable		(79	)
Accrued expenses and other payables		(982	)
Deferred tax liabilities		(652	)
Goodwill		6,513
Total		14,496

F-26

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

3.	ACQUISITIONS - continued
	Dimension - continued
	As of December 31, 2011, since Dimension reached the aforementioned earnings requirement for 2011, RMB19,800,000 (approximately US$3,147) was reflected in consideration payable in connection with business acquisition as of December 31, 2011 (see note 14).
	No supplemental information on a pro forma basis has been presented for the above acquisitions as such information is not available without unreasonable effort and cost.
4.	ACCOUNTS RECEIVABLE
	Accounts receivable consisted of the following:

	As of December 31,
	2010			2011
Billed receivable		42,584			48,719
Notes receivable		502			1,841
Less: Allowance for doubtful accounts		(14	)		(2,726	)
Billed accounts receivable, net		43,072			47,834
Unbilled receivable		63,014			88,139
Less: Allowance for doubtful accounts		(390	)		(927	)
Unbilled accounts receivable, net		62,624			87,212

F-27

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

4.	ACCOUNTS RECEIVABLE - continued
	Notes receivable represents bank acceptance bills, which are transferable and has short term maturity.
	Unbilled receivables represent amounts earned under contracts in progress but not billable at the respective balance sheet dates.  These amounts become billable according to the contract terms, which usually consider the achievement of certain milestones or the completion of the project.
	An analysis of the allowance for doubtful accounts is as follows:

	As of December 31,
	2010			2011
Balance at beginning of year		795			404
Provision for doubtful accounts		15			3,235
Write-offs		(403	)		(25	)
Exchange rate differences		(3	)		39
Balance at end of year		404			3,653

5.	INVENTORIES
	Inventory consisted of the following:

	As of December 31,
	2010		2011
Raw material and consumables		110		115
Third-party hardware		1,524		461
Total		1,634		576

F-28

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

	As of December 31,
	2010		2011
Advances to suppliers		6,115		10,617
Advances to employees		2,687		2,678
Tender and other utility deposit		948		758
Reimbursable follow-on offering costs		836		-
Prepaid rental		301		353
Interest receivable		-		335
Tax refund		-		435
Others		533		581
		11,420		15,757

As of December 31, 2010 and 2011, tender and other utility deposit mainly consisted of deposit which was made as part of the bidding process on projects.

Reimbursable follow-on offering costs represent costs incurred for the follow-on offering completed in December 2010 which was reimbursed by selling shareholders in 2011.

7. PROPERTY AND EQUIPMENT, NET

	As of December 31,
	2010			2011
Building		2,443			2,561
Leasehold improvements		615			493
Furniture and office equipment		4,792			5,879
Motor vehicles		1,157			1,170
		9,007			10,103
Less: Accumulated depreciation		(4,327	)		(5,430	)
Property and equipment, net		4,680			4,673

Depreciation expenses for the years ended December 31, 2009, 2010 and 2011 were US$634, US$962, and US$1,087 respectively.

F-29

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

8.	INTANGIBLE ASSETS
	Intangible assets and their related accumulated amortization as of December 31, 2010 and 2011 were as follows:

	As of December 31,
	2010			2011
Intangible assets not subject to amortization:
Trade names		15,849			18,655
Intangible assets subject to amortization:
Customer relationships		19,239			20,739
Contract backlogs		1,813			2,555
SAP certificate		18			19
System software		925			820
Completed technology		4,566			4,871
Non-compete agreement		-			970
		42,410			48,629
Less: Accumulated amortization
Customer relationships		(12,410	)		(16,164	)
Contract backlogs		(1,450	)		(2,365	)
SAP certificate		(18	)		(19	)
System software		(346	)		(273	)
Completed technology		(1,555	)		(2,547	)
Non-compete agreement		-			(459	)
		(15,779	)		(21,827	)
Accumulated impairment loss of intangible assets		-			(8,552	)
Intangible assets, net		26,631			18,250

Amortization expenses were US$3,860, US$6,309 and US$5,285 for years ended December 31, 2009, 2010 and 2011, respectively.  The Group expects to record amortization expenses of approximately US$2,256, US$1,406, US$409, US$282, US$152 and US$97 for each year of 2012, 2013, 2014, 2015, 2016 and thereafter, respectively.

Due to departures of the Company's previous chief executive officer of Agree and some of his team members, the Company performed an assessment of the carrying value of intangible assets as of September 30, 2011. Based on that assessment, the Company recorded an impairment loss of $8,552 associated with the acquired trade names, customer relationship and completed technology of Agree, Tansun, Harmonation, Vlife and Huawei due to management's estimation that the expected future cash flows associated with these assets were insufficient to recover their carrying values.

F-30

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

9.	GOODWILL
	The changes in the carrying amount of goodwill by reporting units for the years ended December 31, 2010 and 2011 were as follows:

	2010						2011
	Enterprise		Financial				Enterprise		Financial
	Application		Industry		Total		Application		Industry			Total
	Services		IT Services				Services		IT Services
Gross amount:
Beginning balance		14,602		25,281		39,883		15,061		26,168			41,229
Goodwill arising from acquisitions		-		-		-		6,513		-			6,513
Exchange differences		459		887		1,346		1,000		942			1,942
Ending balance		15,061		26,168		41,229		22,574		27,110			49,684
Accumulated goodwill impairment loss:
Beginning balance		-		-		-		-		-			-
Addition Impairment		-		-		-		-		(21,457	)		(21,457	)
Exchange differences		-		-		-		-		(229	)		(229	)
Ending balance		-		-		-		-		(21,686	)		(21,686	)
Goodwill, net		15,061		26,168		41,229		22,574		5,424			27,998

The Group tested its goodwill for impairment at the following reporting units' level.

Enterprise application services - This reporting unit provides similar IT services to its customers located in China.  It includes all subsidiaries of the Group except for Bayshore, Yinfeng, Hwawei, VLife, Harmonation, Agree and Tansun.  The goodwill arising from the acquisitions of the entities under this reporting unit is fully allocated to this reporting unit.

Financial industry IT services - This reporting unit provides similar system development and maintenance services to its customers within the financial industry located in China.  It includes Bayshore, Yinfeng, Agree, Tansun, Harmonation, Taiwan Camelot, Hwawei, Vlife.  The goodwill arising from the acquisitions of the entities under this reporting unit is fully allocated to this reporting unit.

The Company had three reporting units:  China enterprise application services, China financial industry IT services ("China FIS"), and Taiwan financial industry IT services ("Taiwan FIS") as of December 31, 2009.  During 2010, upon the signing of the Economic Cooperation Framework Agreement between Mainland China and Taiwan, the Company's China FIS entities and Taiwan FIS entities started exploring opportunities in both areas. In anticipation of the synergy of between China FIS and Taiwan FIS, the Company has combined both businesses for future development of the financial industry IT services. The resources and technologies held by China FIS and Taiwan FIS are utilized to serve customers in both mainland China and Taiwan. Consequently, China FIS and Taiwan FIS are managed as one business and the combined financial information of the financial industry IT services is reviewed by the management for performance evaluation and decision making.  As a result, the Group had two reporting units as of December 31, 2010 and 2011: enterprise application services and financial industry IT services. The goodwill of US$1,837 acquired with the acquisitions of Hwawei, Vlife, and Harmonation, which was allocated to the reporting unit of Taiwan FIS as of December 31, 2009, was included in

F-31

the reporting unit of financial industry IT services to retrospectively reflect the change in reporting units.

Due to the significant decline in its stock price and departures of the Company's previous chief executive officer of Agree and some of his team members, the Company performed impairment tests on the two reporting units as of September 30, 2011. The tests resulted in an impairment loss of $21,457 for Financial industry IT services. And no impairment loss needs to be recognized for Enterprise application services.

As of December 31, 2011, the Company performed its annual goodwill impairment tests and concluded that there was no goodwill impairment as of December 31, 2011.

In the goodwill impairment test, the Company used the income approach, which was believed to be more reliable than the market approach in determining the fair value of the Company’s reporting unit. Accordingly, it adopted a discounted cash flow (“DCF”) method under the income approach, which considers a number of factors that include expected future cash flows, growth rates, and discount rates, and requires the Company to make certain assumptions and estimates regarding industry economic factors and future profitability of its business unit. The assumptions are inherently uncertain and subjective.

When applying the DCF method for the reporting unit, the Company incorporated the use of projected financial information and a discount rate developed using market participant based assumptions. The cash flow projections were based on five-year financial forecasts developed by management that included revenue projections, capital spending trends, and investments in working capital to support anticipated revenue growth. With the consideration of the risk and nature of the reporting unit’s cash flows and the rates of return market participants would require to invest their capital in the reporting unit, the discount rate selected was 20.0% and 21.0% and terminal value growth rate was 3% and 3% for Enterprise application services and Financial industry IT services, respectively.

F-32

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

10.	BORROWINGS
	The borrowings were repayable as follows:

	As of December 31,
	2010		2011
Borrowing within one year		11,566		8,847
Borrowing over one year		403		378
Total borrowings		11,969		9,225

Borrowing within one year:

Huaqiao, Tansun Xiamen and Harmonation obtained short-term loans from banks to meet their temporary working capital needs. As of December 31, 2011, the outstanding short-term loans of Huaqiao, Tansun Xiamen and Harmonation are US$7,420, US$44, US$1,383. The short-term loans bore interest rates ranging from 3.392% to 7.22% per annum payable in arrears.

At the end of 2010, Bayshore obtained a short-term loan of US$1,439 from Shenzhen Yushang Microfinance Co., Ltd. to meet an immediate need of cash, which bore a fixed interest rate of 1.80% per month. The loan and the related interest were fully repaid in January 2011.

Borrowing over one year:

Xiamen Rella obtains a ten-year loan of US$ 407 from Agricultural Bank of China in 2009.  The bank loans bore fixed interest rate 6.53% per annum payable in arrears.  The loan was secured by a property owned by Xiamen Rella. The pledged property as of December 31, 2011 had a net book value of US$980.

Interest expense and the weighted average effective interest rate for 2009, 2010 and 2011 were US$96 and 4.86%, US$475 and 6.09%, and US$935 and 5.72% respectively.

F-33

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

11. ACCRUED EXPENSES AND OTHER PAYABLES

	As of December 31,
	2010		2011
Accrued employee payroll and welfare		8,395		11,542
Business taxes payable		4,363		4,639
Other taxes payable		1,713		1,230
Reimbursable employee travelling expenses		1,480		1,255
Professional service fees		1,956		2,207
Other liabilities		1,181		2,399
		19,088		23,272

	Other taxes payable includes unpaid VAT and withholding individual income tax.
12.	INCOME TAXES
	The current and deferred components of income tax expense (benefit) were as follows:

	Years ended December 31,
	2009			2010			2011
Current
PRC		1,780			5,224			2,269
Others		1,199			200			-
Total current income taxes		2,979			5,424			2,269
Deferred
PRC		(558	)		(1,276	)		(3,031	)
Others		(180	)		(48	)		(1,029	)
Total deferred income taxes		(738	)		(1,324	)		(4,060	)
Total income taxes		2,241			4,100			(1,791	)

F-34

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

12.	INCOME TAXES - continued
	British Virgin Islands
	The Company and its subsidiaries that were incorporated in the BVI are not subject to taxation in their country of incorporation.  The Group has certain business activities conducted in the PRC which is only subject to PRC income taxes.  Subsidiaries incorporated in the BVI include Triumph and Konwell.
	Hong Kong
	King’s was established in Hong Kong and is subject to Hong Kong profit tax at 16.5%.
	Japan
	Entoh was established in Japan and is subject to Japanese income taxes at 43%.
	Taiwan
	Taiwan Camelot, Hwawei, VLife and Harmonation were subject to Taiwan income taxes at 25%, 17% and 17% for 2009, 2010 and 2011.
	PRC
	The Group’s PRC entities are subject to an enterprise income tax rate at 25% tax rate pursuant to the PRC Enterprise Income Tax (EIT), other than the preferential tax treatment enjoyed by certain entities described below.

Subsidiaries	0%	10%	12.5%	15%	20%	22%	24%
Camelot Beijing	-	-	-	2009 - 2013	-	-	-
Red River Valley	-	-	-	2009 - 2013	-	-	-
Yinfeng	-	-	-	2009 - 2013	-	-	-
Agree Zhuhai	-	-	-	2009 - 2013	-	-	-
Tansun Beijing	-	-	-	2009 - 2011	-	-	-
Faceita	-	-	-	2009 - 2011	-	-	-
Bayshore	-	-	-	2009 - 2011	-	-	-
Dimension	-	-	-	2011-2013	-	-	-
Jiaxing Camelot	2009	-	2010-2012	-	-	-	-
Shanghai Camelot	-	2009	-	-	-	2010	2011
Asialink	-	-	-	-	2009	2010	2011
Dalian Yuandong	-	2009	2010-2011	-	-	-	-
Agree Shanghai	2010-2011	-	2012-2014	-	-	-	-
Huaqiao	2010-2011	-	2012-2014	-	-	-	-
Kunshan	2011-2012	-	2013-2015	-	-	-	-
Beijing Heng En		2011

An enterprise which qualifies as a high and new technology enterprise ("HNTE") is entitled to a tax rate of 15%. In 2008 Camelot Beijing, Red River Valley, Yinfeng, and Agree Zhuhai obtained the new HNTE status, which was renewed by these companies in 2011.  Therefore, they were entitled to the preferential income tax rate of 15% till 2013.  Bayshore, Faceita and Tansun Beijing obtained the HNTE status in

F-35

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

12.	INCOME TAXES - continued
	2009. Dimension obtained the HNTE status in 2011. The Group believes it is highly likely that its qualifying entities will continue to obtain the renewal in the future.
	Jiaxing Camelot qualified as a "manufacturing foreign-invested enterprise" and therefore was entitled to a two-year EIT exemption from the earlier of its first tax-profitable year 2008 and followed by a 50% reduction in tax rate for the succeeding three years.  Accordingly, Jiaxing Camelot was entitled to EIT exemption for 2008 and 2009 and a preferential tax rate of 12.5% for 2010 to 2012.
	Shanghai Camelot and Asialink were entitled to preferential tax rates based on their qualifications as "Software Enterprise of Pu Dong District of Shanghai" and subjected to a 24% tax rate in 2011 and Dalian Yuandong was subjected to a 12.5% tax rate in 2011.
	Agree Shanghai and Huaqiao qualified as "Software Enterprise" in 2010 and were entitled to a two-year EIT exemption for 2010 and 2011, followed by a 50% reduction in tax rate for the succeeding three years.
	Kunshan qualified as "Software Enterprise" in 2011 and was entitled to a two-year EIT exemption for 2011 and 2012, followed by a 50% reduction in tax rate for the succeeding three years.  Beijing Heng En was subject to 10% tax rate in 2011 verified by local tax authority.

F-36

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

12.	INCOME TAXES - continued
	PRC - continued
	The principal components of deferred income taxes were as follows:

	December 31,
	2010			2011
Current deferred tax assets:
Provision for doubtful accounts		81			560
Accrued payroll		1,007			1,370
Current deferred tax assets, net		1,088			1930
Non-current deferred tax assets:
Net operating losses		511			2,758
Research and development cost deferred for tax purposes		421			509
Less: Valuation allowance		(861	)		(2,070	)
Deferred tax assets, net		1,159			3,127
Non-current deferred tax liabilities:
Intangible assets acquired in business acquisitions		4,303			2,871
Non-current deferred tax liability, net		4,303			2,871

The net operating loss carry forwards generated by a particular entity in the Group cannot be transferred or utilized by other entities within the Group. The net operating loss carry forwards for the PRC subsidiaries was US$7,246 as of December 31, 2011 and will expire on various dates through 2016.

Valuation allowances have been established because the Group believes that it is more likely than not that its deferred tax assets will not be realized as it is not expected to generate sufficient taxable income in future. As of December 31, 2010 and 2011, valuation allowance was US$861 and US$2,070, respectively.

F-37

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

12.	INCOME TAXES - continued
	PRC - continued
	Reconciliation between the statutory PRC enterprise income tax rate of 25% and the effective tax rate is as follows:

	Years ended December 31,
	2009			2010			2011
Statutory income tax under PRC		3,878			5,789			(10,704	)
Effect of income not taxable for tax purposes		(15	)		(160	)		(43	)
Effect of expenses not deductible for tax purposes		382			1,618			1,399
Different tax jurisdictions		489			569			11,693
Effect of income tax holiday and relief		(3,043	)		(3,713	)		(5,842	)
Effect of deemed income for tax purpose		92			228			497
Changes in valuation allowance		458			(231	)		1,209
Effective tax amount		2,241			4,100			(1,791	)

If the tax holidays granted to Camelot Beijing, Red River Valley, Yinfeng, Jiaxing Camelot, Shanghai Camelot, Asialink, Beijing Heng En, Bayshore, Faceita, Dalian Yuandong, Agree Zhuhai, Agree Shanghai, Kunshan, Dimension, Huaqiao and Tansun Beijing were not available, provisions for income taxes and net income per share would be as follows:

	Years ended December 31,
	2009		2010		2011
Provisions for income taxes		5,289		7,813		4,051
Net income per ordinary share - basic		0.08		0.10		(0.25	)
Net income per ordinary share - diluted		0.08		0.09		(0.25	)

F-38

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

12.	INCOME TAXES - continued
	PRC - continued
	The Group did not identify significant unrecognized tax benefits for years ended December 31, 2009, 2010 and 2011.  The Group did not incur any interest and penalties related to potential underpaid income tax expenses and does not anticipate any significant charge in the unrecognized tax benefits within 12 months from December 31, 2011.
	Uncertainties exist with respect to how the current income tax law in the PRC applies to the Group’s overall operations, and more specifically, with regard to tax residency status. The EIT Law includes a provision specifying that legal entities organized outside of the PRC will be considered residents for Chinese Income tax purposes if the place of effective management or control is within the PRC. The implementation rules to the New EIT Law provide that non-resident legal entities will be considered PRC residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting and properties occurs within the PRC. On April 22, 2009, the State Administration of Taxation (the ‘‘SAT’’) issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, which provides certain specific criteria for determining whether the ‘‘de facto management body’’ of a Chinese-controlled offshore-incorporated enterprise is located in China. In addition, on August 3, 2011, the SAT issued a bulletin to make clarification in the areas of resident status determination, post-determination administration, as well as competent tax authorities. The Group does not believe that the legal entities organized outside of the PRC within the Group should be treated as residents for EIT law purposes. However, if the PRC tax authorities subsequently determine that the Company and its subsidiaries registered outside the PRC should be deemed resident enterprises, the Company and its subsidiaries registered outside the PRC will be subject to the PRC income taxes, at a rate of 25%.
	According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of income taxes is due to computational errors made by the taxpayer. The statute of limitations will be extended to five years under special circumstances, which are not clearly defined, but an underpayment of income tax liability exceeding US$15 (RMB100,000) is specifically listed as a special circumstance. In the case of a transfer pricing related adjustment, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion. The relevant tax authorities of the Group’s subsidiaries have not conducted a tax examination on the PRC entities. In accordance with relevant PRC tax administration laws, tax years from 2007 to 2011 of the Group’s PRC subsidiaries remain subject to tax audits as of December 31, 2011, at the tax authority’s discretion.
	Aggregate undistributed earnings of the Company's subsidiaries located in the PRC that are available for distribution to the Company of approximately US$70,742 at December 31, 2011 are considered to be indefinitely reinvested and accordingly, no provision has been made for the PRC dividend withholding taxes that would be payable upon the distribution of those amounts to the Company.  The Chinese tax authorities have also clarified that distributions made out of pre January 1, 2008 retained earnings will not be subject to the withholding tax.

F-39

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

13. NET INCOME PER SHARE

	Years ended December 31,
	2009		2010		2011
Net income (loss) attributable to Camelot Information Systems Inc.		12,966		18,597		(40,824	)
Numerator used in basic and diluted net income per share:
Net income attributable to Camelot Information Systems Inc. allocated to Series A convertible preferred share (i)		4,390		2,920		-
Net income attributable to Camelot Information Systems Inc. allocated to Series B convertible preferred share (i)		401		266		-
Net income (loss) attributable to Camelot Information Systems Inc. allocated for computing net income per ordinary share-basic (i)		8,175		15,411		(40,824	)
Net income (loss) attributable to Camelot Information Systems Inc. allocated for computing net income per ordinary share-diluted		12,966		18,597		(40,824	)
Shares (denominator) (ii):
Weighted average ordinary shares outstanding used in computing net income per ordinary share-basic (iii)		82,035,859		128,663,415		179,954,056
Employee share options (treasury effect)		2,906,963		9,989,086		-
Weighted average ordinary shares outstanding used in computing net income per ordinary share-diluted(iv)		133,017,168		165,258,030		179,954,056
Net income (loss) attributable to Camelot Information Systems Inc. per ordinary share-basic		0.10		0.12		(0.23	)
Net income (loss) attributable to Camelot Information Systems Inc. per ordinary share-diluted		0.10		0.11		(0.23	)

(i)	The net income attributable to holders of ordinary shares was allocated between ordinary shares and preferred shares on pro rata basis based on the dividend participation right.  Since each Series A convertible preferred shares and Series B convertible preferred shares has the same participating right as each ordinary share, the allocation was based on the number of ordinary shares, Series A convertible preferred shares and Series B convertible preferred shares issued.
(ii)	The net income per share information for all periods presented has reflected the 4-for-1 stock split effected in May 2010 (See Note 16 "Ordinary shares").
(iii)	The calculation of the weighted average number of ordinary shares for the purpose of basic net income per share for 2009 included the effect of the 1,800,000 ordinary shares issuable in connection with the extinguishment of liability with Red River Valley, the 3,932,000 ordinary shares issuable in connection with the business acquisition of Tansun, and the 2,200,000 ordinary shares issuable in connection with the settlement of the performance-based contingent consideration for business acquisition of Yinfeng. These ordinary shares were all issued in May 2010 (see Note 16).
(iv)	As of December 31, 2009, 2010 and 2011, the Group has 12,354,400, 2,690,000 and 16,059,328 employee share options outstanding that can potentially dilute net income per share in the future but were excluded in computation of diluted net income per share in 2009, 2010 and 2011 as their effect would be anti-dilutive.

F-40

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

14. CONSIDERATION PAYABLE IN CONNECTION WITH BUSINESS ACQUISITIONS AND DEBT EXTINGUISHEMENT

	Opening @2009/12/31		Move from contingent consideration payable		Payment			Ex. Diff.		Bal. @2010/12/31		Addition from Acquisition		Move from contingent consideration payable		Payment			Ex. Diff.		Bal @2011/12/31
Yinfeng		4,249				(4,252	)		3		-											-
Red River Valley		1,200									1,200						(1,200	)				-
Agree				11,364							11,364						(11,415	)		51		-
Tansun		8,790		3,030		(8,844	)		54		3,030				3,162		(4,245	)		40		1,987
Dimension													4,000		3,147		(4,034	)		32		3,145
Total		14,239		14,394		(13,096	)		57		15,594		4,000		6,309		(20,894	)		123		5,132

15.	FAIR VALUE MEASUREMENTS
	Measured on recurring basis The Group’s financial assets and liabilities measured at fair value on a recurring basis consist of the contingent considerations in connection with business acquisitions, as presented in the following table.

	Liabilities at carrying values		Total fair value		Active market for identical liabilities (Level 1)		Other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
As of December 31, 2011
Liabilities - Contingent acquisition consideration payable		$2,822		$2,822		$-		$-		$2,822

The following table summarized the movement of the balances of the Group’s financial liabilities measured at fair value with level 3 inputs on a recurring basis:

	Balance at December 31, 2009		Change in fair value		Move to consideration payable			Balance at December 31, 2010		Addition due to acquisition		Change in fair value		Move to consideration payable			Balance at December 31 2011
Contingent consideration:
Agree		8,852		2,512		(11,364	)		-		-		-		-			-
Tansun		3,969		1,368		(3,030	)		2,307		-		855		(3,162	)		-
Dimension		-		-		-			-		5,155		814		(3,147	)		2,822
Total		12,821		3,880		(14,394	)		2,307		5,155		1,669		(6,309	)		2,822

As of December 31, 2011, the contingent consideration amounts determined based on the earnings for 2011 have been presented as consideration payable in connection with business acquisitions in the consolidated balance sheet as of December 31, 2011.

Measured at fair value on a non-recurring basis

The Group measured fair value of assets and liabilities acquired in business acquisitions using various valuation methods, primarily consisting of the "cost," "income approach-excess earnings" and "with & without" valuation methods.  These purchased assets and liabilities are considered Level 3 assets and liabilities because the Company used unobservable inputs, reflecting the Company's assessment of the assumptions that market participants would use in valuing these assets and liabilities (Note 3).

The Group measured the intangible assets at fair value on a nonrecurring basis when the carrying amount of an asset may no longer be recoverable as results of the impairment assessment (Note 8). The fair value was determined using models with significant unobservable inputs (Level 3 inputs), primarily the management projection on the discounted future cash flow and the discount rate.

The Group measured the goodwill at fair value on a nonrecurring basis when it is annually evaluated or whenever events or changes in circumstances indicate that carrying amount of a reporting unit exceeds its fair value as a result of the impairment assessments(Note 9). The fair value was determined using models with significant unobservable inputs (Level 3 inputs), primarily the management projection on the discounted future cash flow and the discount rate.

F-41

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

16.	ORDINARY SHARES
	In September 2009, the Company issued 250,000 ordinary shares with fair value of US$4.88 per share and 1,216,545 ordinary shares with fair value of US$ 5.00 per share as part of the consideration for the acquisitions of Yinfeng and Agree, respectively.
	The May 2010 shareholders meeting approved a 4-for-1 stock split for all ordinary shares, Series A and Series B convertible preferred shares.  While the stock split increased the number of shares for each stockholder, the percentage of their ownership in the Company was not affected. The Series A Shares and Series B Shares remain convertible into ordinary shares at a 1:1 ratio. This share split has been retrospectively reflected for all periods presented. After the stock split, the Company issued a total of 7,932,000 ordinary shares which consisted of 1,800,000 ordinary shares in connection with the debt extinguishment with Red River Valley, 3,932,000 ordinary shares with fair value of US$ 1.47 per share in connection with the acquisition of Tansun, and 2,200,000 ordinary shares with fair value of US$ 1.47 per share as a settlement contingent consideration of US$3,200 in connection with the acquisition of Yinfeng. These shares were reflected as shares to be issued in equity on the consolidated balance sheet as of December 31, 2009.

F-42

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

16.	ORDINARY SHARES - continued
	On July 21, 2010, the Company completed the initial public offering (“IPO”) on the New York Stock Exchange and issued 9,166,667 American Depositary Shares ("ADS") representing 36,666,668 ordinary shares. At the same time, 44,055,018 of Series A Convertible Preferred Shares and 4,019,328 of Series B Convertible Preferred Shares were automatically converted into 48,074,346 ordinary shares.
	On December 10, 2010, the Company completed a follow-on public offering and issued 1,074,030 ADSs, representing 4,296,120 ordinary shares as part of the offering.
	On August 2011, the Company issued 1,152,352 ordinary shares as part of the consideration for the acquisition of Dimension.
	As of December 31, 2011, the Company had 451,925,654 ordinary shares authorized, and 182,762,475 and 177,621,367 ordinary shares issued and outstanding, respectively.
	On May 26, 2011, the Company’s board of directors approved a share repurchase program effective May 26, 2011. Under the approved program, the Company is authorized to repurchase up to US$20 million worth of its issued and outstanding ADSs f from time to time, depending on market conditions and other factors. During the years ended December 31, 2011, the Company repurchased 8,473,600 ordinary shares for total considerations of US$14,415. The repurchased shares were recorded as a reduction of additional paid in capital.

F-43

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

17.	EMPLOYEE BENEFIT PLAN
	Full time employees of the Group located in the PRC (mainland) and Taiwan participate in a government-mandated defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees.  The Group accrues for these benefits based on certain percentages of the employees' salaries.
	The total provision for such employee benefits were US$4,122, US$6,462 and US$10,643 for the years ended December 31, 2009, 2010 and 2011, respectively.
18.	STATUTORY RESERVE
	In accordance with the Regulations on Enterprises with Foreign Investment of China and their articles of association, the Company's subsidiaries located in the PRC (mainland), being foreign invested enterprises established in the PRC (mainland), are required to provide for certain statutory reserves, namely general reserve, enterprise expansion reserve, and staff welfare and bonus reserve, all of which are appropriated from net profit as reported in their PRC statutory accounts.  The Company's subsidiaries are required to allocate at least 10% of their after-tax profits to the general reserve until such reserve has reached 50% of their respective registered capital.  In accordance with the Company Act of Taiwan, the Company's subsidiaries located in Taiwan are required to provide for statutory reserve which is 10% of their after-tax profit until such reserve has reached their registered capital.
	Appropriations to the enterprise expansion reserve and the staff welfare and bonus reserve are to be made at the discretion of the board of directors of each of the Company's subsidiaries.  The appropriations to these reserves by the Group's PRC (mainland) and Taiwan subsidiaries were US$1,439, US$3,838 and US$2,286 for the years ended December 31, 2009, 2010 and 2011, respectively.  As of December 31, 2011, the aggregate amounts of capital and reserves restricted which represented the amount of net assets of the relevant subsidiaries in the Group not available for distribution was US$59,789.

F-44

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

19.	SHARE-BASED COMPENSATION
	2006 Equity Incentive Plan
	On June 26, 2006, the Group adopted the 2006 Equity Incentive Plan, which was amended and restated in May 2010 (collectively, the "2006 Plan").  The 2006 Plan allows the Group to grant options to its employees and directors to purchase up to 10,872,000 ordinary shares subject to vesting requirement.  In March 2008, November 2008, and May 2010, the Company increased the total number of ordinary shares available for issuance under the 2006 Plan by 3,200,000, 5,426,012, and 4,000,000 shares, respectively, resulting in a total of 23,498,012 options available for grant under the 2006 Plan.  The share option information for all periods presented has reflected the 4-for-1 stock split in May 2010 pursuant to the anti-dilution provisions under the 2006 Plan.
	On July 1, 2009, the Company granted 3,162,200 options with an exercise price of US$1.50 per share, of which 20% vest on the first anniversary of the grant date, 5% vest each quarter over the second year, and 7.5% vest each quarter over the next two years thereafter.  The contractual life is 8 years from the date of grant.
	On November 2, 2009, the Company granted 1,800,000 options with an exercise price of US$1.29 per share, of which 33.33% vest on the first anniversary of the grant date, and 8.33% vest each quarter over the next two years thereafter.  The contractual life is 8 years from the date of grant.
	On November 2, 2009, the Company granted 80,000 employee options with an exercise price of US$1.29 per share, of which 20% vest on the first anniversary of the grant date, 5% vest each quarter over the second year, and 7.5% vest each quarter over the next two years thereafter.  The contractual life is 8 years from the date of grant.
	On February 28, 2010, the Company granted 140,000 employee options with an exercise price of US$1.47 per share, of which 25% vest on the first anniversary of the grant date, 6.25% vest each quarter over the next three years thereafter. The contractual life is 8 years from the date of grant.

F-45

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

19.	SHARE-BASED COMPENSATION - continued
	2006 Equity Incentive Plan - continued
	On May 18, 2010, the Company granted 600,000 employee options with an exercise price of US$1.29 per share, of which 50% vested on July 6, 2010 upon pricing on the date of the prospectus of an initial public offering and the remaining 50% vested on November 2, 2010. The contractual life is 8 years from the date of grant.
	On August 16, 2010, the Company granted 2,400,000 options with an exercise price of US$2.66 per share for 2,360,000 options and US$1.47 per share for 4,000 options respectively. 2,300,000 options vested on the filing date of the Company's 2010 annual report on Form 20-F as the net revenues for the year ended December 31, 2010 met US$176.4M. The contractual life is 1 years from the date of grant. In addition, 60,000 options vest over four years where 25% vest on the first anniversary of the grant date, and 6.25% vest each quarter over the next three years thereafter. The contractual life is 8 years from the date of grant. The remaining 40,000 options vest over four years, where 20% vest on the first anniversary of the grant date, 5% vest each quarter over the second year, and 7.5% vest each quarter over the next two years thereafter. The contractual life is 8 years from the date of grant.
	On December 17, 2010, the Company granted 150,000 employee options with an exercise price of US$2.50 per share, of which 33.33% vest on the first anniversary of the grant date, and 8.33% vest each quarter over the next two years thereafter.  The contractual life is 8 years from the date of grant.
	On April 7, 2011, the Company granted to employees 240,000 options, which vested immediately on the grant date. The contract life of the nonvested shares is 8 years from the date of grant.
	On April 15, 2011, the Company granted options on 320,000 shares with an exercise price of US$1.25 per share to employees. 50% of the options vest on the first and second anniversary of the grant date respectively. The contract life is 8 years from the date of grant.
	On April 15, 2011, the Company granted options on 1,052,000 shares with an exercise price of US$3.75 per share to employees. The vesting of the options will be on the filing date of the company's 2011 annual report on Form 20-F, and contingent upon the achievement of certain profit targets for the year ended December 31, 2011 which is considered probable.  The exercise price will be adjusted if the actual profits for 2011 exceed the profit targets. The contract life is 8 years from the date of grant.

F-46

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

19.	SHARE-BASED COMPENSATION - continued
	2006 Equity Incentive Plan - continued
	On September 1, 2011 (the “repricing date”), the Company's board of directors and compensation committee approved to amend the terms of certain stock options granted to employees to reduce the exercise price of all outstanding share options to US$0.0025 or US$0.245 per share based on the closing price of the Company's ADSs on NYSE on September 1, 2011. The amendments did not change the vesting provisions or the number of shares subject to any of the option awards. This was accounted for as a share option modification and required the remeasurement of the fair value of these share options. This remeasurement resulted in a total incremental share-based compensation of US$15,092, of which US$13,221was recognized in the year ended December 31, 2011, and the remaining is recognized ratably over the remaining vesting period of the award.
	On October 1, 2011, the Company granted 800,000 options with an exercise price of US$0.75 per share. The options vested immediately on the grant date. The contractual life is 4 years from the date of grant.

F-47

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

19.	SHARE-BASED COMPENSATION - continued
	2006 Equity Incentive Plan - continued
	A summary of option activity under the Plan as of December 31, 2011, and changes during the year then ended is presented below:

				Weighted		Weighted-average	Aggregate
				average		remaining	intrinsic
Options	Shares			exercise price		contractual term	value
Outstanding at January1, 2011		19,401,820		$	US1.27
Granted		23,185,820		$	US0.34
Exercised		(5,168,492	)	$	US0.26
Forfeited		(586,000	)	$	US0.02
Cancelled		(20,773,820	)	$	US1.40
Outstanding at December 31, 2011		16,059,328		$	US0.20	3.4 years		8,334
Exercisable at December 31, 2011		12,478,792		$	US0.15	2.8 years		7,034

The weighted average grant date fair values of the options granted during the years ended December 31, 2009, 2010 and 2011 were US$0.54, US$0.88 and US$1.25, respectively.  9,989,568, 12,241,415 and 17,647,285 share options were vested during the years ended December 31, 2009, 2010 and 2011, respectively.  Nil, Nil and 5,168,492 share options were exercised in 2009, 2010 and 2011, respectively.

The fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants during the applicable period.

	Years ended December 31,
	2009	2010	2011
Weighted average risk-free interest rate	4.04%	1.49%	1.35%
Weighted average expected term	5.8 years	1.4 years	2.2 years
Weighted average volatility	42.7%	41.1%	45.5%
Weighted average dividend yield	-	-	-
Weighted fair value of underlying ordinary shares	1.26	2.90	1.01

F-48

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

19.	SHARE-BASED COMPENSATION - continued
	2006 Equity Incentive Plan - continued
	(a)	Risk-free interest rate
		Risk-free interest rate was estimated based on the yield to maturity of China international government bonds with a maturity period close to the expected term of the options.
	(b)	Expected term
		As the Company did not have historical share option exercise experience, it estimated the expected term base on a consideration of factors including contractual term, vesting period and empirical study on exercise behavior of employee share option.
	(c)	Volatility
		Volatility of the underlying ordinary shares during the life of the options was estimated based on the historical stock price volatility of listed comparable companies over a period similar to the expected term of the options.
	(d)	Dividend yield
		The dividend yield was estimated by the Company based on its expected dividend policy over the expected term of the employee share options.
	(e)	Fair value of underlying ordinary shares
		Prior to the completion of IPO in July 2010, the estimated fair value of the ordinary shares underlying the options as of the respective grant dates was determined based on a retrospective valuation.  When estimating the fair value of the ordinary shares on the grant dates, management has considered a number of factors, including the valuation result of a third-party appraisal by American Appraisal China Limited and equity transactions of the Company, while taking into account standard valuation methods and the achievement of certain events.  After the completion of IPO, the closing market price of ordinary shares of the Company as of the grant date was used as the fair value of the ordinary shares on that date.
		The Group recorded share-based compensation of US$1,243, US$2,924 and US$19,366 during the years ended December 31, 2009, 2010 and 2011, respectively, based on the fair value on the grant dates over the requisite service period of award according to the graded vesting schedule.
		As of December 31, 2011, total unrecognized compensation expense relating to unvested share options was US$4,157.  The amount is expected to be recognized over a weighted average period of 1.16 years according to the graded vesting schedule.

F-49

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

20. NONCONTROLLING INTEREST

	Harmonation			Yantai			Total
Balance as of December 31, 2009		484			(27	)		457
Foreign currency translation adjustment		21			(1	)		20
Net income		86			-			86
Balance as of December 31, 2010		591			(28	)		563
Dissolution of Yantai (note i)		-			32			32
Foreign currency translation adjustment		(15	)		(4	)		(19	)
Net income		(233	)		-			(233	)
Balance as of December 31, 2011		343			-			343

i. In 2011, to streamline the Corporate Structure, the Company dissolved Yantai Q.B. Eleven Outsourcing Service Company (“Yantai”) since the subsidiary did not have business operations.

21.	COMMITMENTS AND CONTINGENCIES
	Operating lease commitments
	The Group has entered into operating lease agreements principally for its office spaces. Rental expenses under operating leases were US$2,398, US$2,842 and US$2,541 for the years ended December 31, 2009, 2010 and 2011, respectively.
	Future minimum lease payments under such non-cancelable leases as of December 31, 2011 are as follows:

2012	1,819
2013	1,014
2014	896
2015	896
2016 and thereafter	3,247
Total	7,872

F-50

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

21.	COMMITMENTS AND CONTINGENCIES - continued
	Legal contingencies
	The Company initially acquired its Hong Kong operation (“Previous HK Operations”) in 2006 through the Company and Triumph. Under applicable Hong Kong law, the Company and Triumph were deemed to have established a place of business and carrying on business in Hong Kong, and therefore, both were required to obtain business registration certificates from the Business Registration Office of the Hong Kong government and to be registered with the Companies Registry of the Hong Kong government within one month of their acquisition of its Previous HK Operations. The Company did not obtain such certificates or undertake such registration and accordingly, the Company's Previous HK Operations were not fully compliant with registration requirements in Hong Kong. As a result of such non-compliance, the Company could be subject to a fine for each day of non-compliance and a maximum one-time fine. As of December 31, 2011, no losses with respect to this contingency were accrued. There has been no prosecution initiated by the relevant authorities. If such action were to be taken, the penalty that the Company would incur could be in the range from zero to a maximum of US$264 up to November 5, 2010. The Company is unable to reasonably estimate the actual amount that it may have to pay if the authorities were to become aware of the non-compliance and were to commence proceedings.
	In addition, as an employer, The Company’s Previous HK Operations were required to comply with legal obligations with regard to mandatory provident funds and compensation insurance for its employees under the Mandatory Provident Fund Schemes Ordinance (Cap. 485), or MPFSO, and under the Employees’ Compensation Ordinance (Cap. 282), or ECO, of the Hong Kong laws, respectively. The Company's Previous HK Operations were not compliant with certain provisions of the MPFSO for a duration of approximately 10 months between 2006 and 2007 by failing to ensure, in relation to one employee at the time that such employee becomes a member of a registered mandatory provident fund scheme and to make and deduct the respective employer and employee mandatory provident fund contributions in a total amount of HK$20,000 to the employee’s account of such scheme. The Company's Previous Hong Kong Operations were also not compliant with certain provisions of the ECO by failing to take out worker’s compensation insurance in relation to the said one employee.
	As a result of the foregoing, the Company may be subject to fines, penalties and/or prosecutions under local laws and regulations. In recent enforcement cases under the MPFSO, defaulting employer(s) have been ordered to repay all unpaid contributions, and a surcharge or a penalty of the higher of HK$5,000 or 5% of the total unpaid amount. The Company's Previous HK Operations have made up these default contributions into the relevant employee's mandatory provident fund scheme account and have been in compliance with its legal obligations under the MPFSO since October 2007. Furthermore, with respect to the failure to take out compensation insurance, any fines, penalties and/or prosecutions may include but not be limited to facing a maximum fine of HK$100,000 (US$13). Up to November 5, 2010, none of the Company's Previous HK Operations' employees have been injured whilst at work and the Company's Previous HK Operations have been in full compliance with the ECO since March 2010. There has been no prosecution initiated by the relevant authorities or employees and the Company believes that if such action were to be taken, the actual penalty that the Company could incur would be insignificant. As of December 31, 2010 and December 31, 2011, no losses with respect to this contingency were accrued.

F-51

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(in U.S. dollars in thousands, except share and per share data)

21.	COMMITMENTS AND CONTINGENCIES - continued
	Securities Class Action:
	Several securities class action lawsuits have been filed in the United States District Court for the Southern District of New York on behalf of purchasers of Company's ADS between July 21, 2010 and August 17, 2011 (the "Class Period"), including those who acquired our ADSs pursuant or traceable to the Company's secondary public offering on December 10, 2010 ("Offerings"). The complaint charges the company, certain of officers and directors, and the underwriters involved in our Offerings with violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. The complaint alleges that during the Class Period, the Company issued materially false and misleading statement regarding its business practices and financial results. The deadline of making motions for lead plaintiff was March 5, 2012 and as of the date of this report, no lead plaintiff has been appointed.
22.	SUBSEQUENT EVENT
	On January 31, 2012, the Company granted 752,000 employee options with an exercise price of US$0.25 per share, of which 20% will vest on the first anniversary of the grant date, and 5% will vest each quarter in the second year, and 7.5% will vest each quarter over the next two years thereafter. The contractual life is 8 years from the date of grant. The fair value of the employee options as of grant date was estimated to be US$0.48 per share based on the market closing price of the Company's ADSs on the grant date. The total estimated compensation cost of US$350, after the adjustment of estimated forfeitures, will be recognized over the vesting period based on the graded vesting schedule.

F-52

CAMELOT INFORMATION SYSTEMS INC.

Additional Information-Financial Statement Schedule I

Financial Information of Parent Company

Balance Sheets

(in U.S. dollars in thousands, except share data)

	Years ended December 31,
	2010		2011
Assets
Current assets:
Cash and cash equivalents		100,703		4,849
Term deposits		-		40,854
Accounts receivable		126		152
Amounts due from related parties		5,875		20,747
Prepaid expenses and other current assets		1,183		669
Total current assets		107,887		67,271
Investment in subsidiaries		181,488		190,190
Other Non-current assets		352		352
Total assets		289,727		257,813
Liabilities and shareholders'' equity
Current liabilities:
Amounts due to related parties		14,700		12,995
Accrued expenses and other payables		3,322		4,158
Consideration payable in connection with business acquisitions		15,594		5,132
Total current liabilities		33,616		22,285
Contingent consideration payable-non-current		2,307		2,822
Other Non-current liabilities		1,090		961
Total liabilities		37,013		26,068
Shareholders' equity:
Ordinary shares (No par value; 451,925,654 shares authorized  as of December 31, 2010 and 2011; 179,610,128 shares issued and outstanding as of December 31, 2010;  182,762,475 shares issued and 177,621,367 shares outstanding as of December 31, 2011, respectively))		-		-
Additional paid-in capital		177,467		189,094
Retained earnings		61,791		20,967
Accumulated other comprehensive income		13,456		21,684
Total shareholders'' equity		252,714		231,745
Total liabilities and shareholders'' equity		289,727		257,813

F-53

CAMELOT INFORMATION SYSTEMS INC.

Financial Information of Parent Company

Statements of Operations

(in U.S. dollars in thousands, except share and per share data)

	Years Ended December 31,
	2009			2010			2011
Net revenues		152			130			178
Cost of revenues (including share-based compensation of US$147, US$136 and US$1,463 in 2009, 2010 and 2011, respectively)		(147	)		(300	)		(1,622	)
Gross profit (loss)		5			(170	)		(1,444	)
Selling and marketing expenses (including share-based compensation of US$158, US$354 and US$7,427 in 2009, 2010 and 2011, respectively)		(158	)		(354	)		(7,427	)
General and administrative expenses (including share-based compensation of US$938, US$2,434 and US$10,476 in 2009, 2010 and 2011, respectively)		(1,484	)		(2,504	)		(16,706	)
Change in fair value of contingent consideration for business acquisitions		(549	)		(3,880	)		(1,669	)
Loss on impairment of goodwill and intangible assets		-			-			(30,009	)
Total operating expenses		(2,191	)		(6,738	)		(55,811	)
Loss from operations		(2,186	)		(6,908	)		(57,255	)
Other income (expenses), net		(185	)		381			1,624
Loss on disposal of a subsidiary		-			-			(23	)
Equity in earnings of subsidiaries		15,337			25,124			14,830
Income before provisions for income taxes		12,966			18,597			(40,824	)
Provisions for income taxes		-			-			-
Net income (loss)		12,966			18,597			(40,824	)

F-54

CAMELOT INFORMATION SYSTEMS INC.

Financial Information of Parent Company

Parent Company Statements of Shareholders Equity and Comprehensive Income

(in U.S. dollars in thousands, except share data)

	Series A preferred shares						Series B preferred shares						Ordinary shares					Shares to			Additional paid-in			Retained			Accumulated other comprehensive		Shareholders''			Total Comprehensive
	Shares			Amount			Shares			Amount			Shares outstanding			Amount		be issued			capital			earnings			income		equity			income
Balance as of January 1, 2009		44,055,018			28,725			4,019,328			5,000			76,774,814			-		3,270			11,643			30,228			7,191		86,057
Issuance of ordinary shares in connection with business acquisition of Yinfeng		-			-			-			-			1,000,000			-		(1,218	)		1,218			-			-		-
Issuance of ordinary shares in connection with business acquisition of Agree		-			-			-			-			4,866,180			-		-			6,095			-			-		6,095
Ordinary shares to be issued in connection with settlement of contingent consideration for acquisition of Yinfeng		-			-			-			-			-			-		3,223			-			-			-		3,223
Ordinary shares to be issued in connection with business acquisition of Tansun		-			-			-			-			-			-		5,760			-			-			-		5,760
Share based compensation		-			-			-			-			-			-		-			1,243			-			-		1,243
Foreign currency translation adjustment		-			-			-			-			-			-		-			-			-			156		156			156
Net income		-			-			-			-			-			-		-			-			12,966			-		12,966			12,966
Balance as of December 31, 2009		44,055,018			28,725			4,019,328			5,000			82,640,994			-		11,035			20,199			43,194			7,347		115,500			13,122
Issuance of ordinary shares		-			-			-			-			7,932,000			-		(11,035	)		11,035			-			-		-
Conversion of preferred shares upon the initial public offering ("IPO")		(44,055,018	)		(28,725	)		(4,019,328	)		(5,000	)		48,074,346			-		-			33,725			-			-		-
Issuance of common shares upon IPO		-			-			-			-			36,666,668			-		-			89,635			-			-		89,635
Issuance of common shares upon the follow-on public offering		-			-			-			-			4,296,120			-		-			19,949			-			-		19,949
Share based compensation		-			-			-			-			-			-		-			2,924								2,924
Foreign currency translation adjustment																												6,109		6,109			6,109
Net income		-			-			-			-			-			-		-			-			18,597			-		18,597			18,597
Balance as of December 31, 2010		-			-			-			-			179,610,128			-		-			177,467			61,791			13,456		252,714			24,706
Issuance of ordinary shares in connection with business acquisition of Dimension		-			-			-			-			1,152,352			-		-			5,341			-			-		5,341
Repurchase of ordinary shares		-			-			-			-			(8,473,600	)		-		-			(14,415	)		-			-		(14,415	)
Options exercised		-			-			-			-			5,332,492			-		-			1,335			-			-		1,335
Share based compensation		-			-			-			-			-			-		-			19,366								19,366
Foreign currency translation adjustment																												8,228		8,228			8,228
Net loss		-			-			-			-			-			-		-			-			(40,824	)		-		(40,824	)		(40,824	)
Balance as of December 31, 2011		-			-			-			-			177,621,372			-		-			189,094			20,967			21,684		231,745			(32,596	)

F-55

CAMELOT INFORMATION SYSTEMS INC.

Financial Information of Parent Company

Statements of Cash Flows

(in U.S. dollars in thousands)

	Years Ended December 31,
	2009			2010			2011
Cash flows from operating activities:
Net income		12,966			18,597			(40,824	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in earnings of subsidiaries		(15,337	)		(25,124	)		(14,830	)
Loss on disposal of subsidiary		-			-			23
Share-based compensation		1,243			2,924			19,366
Change in fair value of contingent consideration for acquisitions of Tansun and Dimension		549			3,880			1,669
Loss on impairment of goodwill and intangible assets		-			-			30,009
Changes in operating assets and liabilities:
Accounts receivable		(15	)		(6	)		(27	)
Amounts due from related parties		1,297			(1,757	)		(14,872	)
Prepaid expenses and other current assets		49			(769	)		(825	)
Other non-current assets		-			(352	)		-
Accrued expenses and other payables		(69	)		1,153			3,501
Other long term payable		-			1,090			(59	)
Net cash (used in) provided by operating activities		683			(364	)		(16,869	)
Cash flows from investing activities:
Maturity (purchase) of term deposits, net		-			-			(40,854	)
Purchases of businesses		(9,928	)		(13,359	)		(12,936	)
Investment in subsidiaries Wuxi								(2,015	)
Dividend received from subsidiaries		2,702			-			-
Net cash used in investing activities		(7,226	)		(13,359	)		(55,805	)
Cash flows from financing activities:
Repurchase of ordinary shares		-			-			(14,415	)
Amounts due to related parties		7,320			6,713			(1,039	)
Payment of professional fee related to initial public offering		(264	)		-			(1,242	)
Proceeds from issuance of initial public offering, net of issuance cost		-			90,818			-
Proceeds from follow-on offering		-			19,948			-
Reimbursed issuance cost from follow-on offering		-			-			836
Payment of reimbursable issuance cost related to follow-on offering		-			(141	)		(694	)
Payment of deferred consideration for acquisitions of Dimension and Tansun					(4,252	)		(7,961	)
Proceeds from exercise of share options		-			-			1,335
Net cash provided by financing activities		7,056			113,086			(23,180	)
Net increase (decrease) in cash and cash equivalents		513			99,363			(95,854	)
Cash and cash equivalents, beginning of year		827			1,340			100,703
Cash and cash equivalents, end of year		1,340			100,703			4,849

F-56

CAMELOT INFORMATION SYSTEMS INC.

NOTES TO ADDITIONAL INFORMATION

FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011

(In U.S. dollars in thousands)

1.	BASIS FOR PREPARATION
	The condensed financial information of the Company has been prepared using the same accounting policies as set out in the Group’s consolidated financial statements except that the Company used the equity method to account for investments in its subsidiaries.  The parent-only financial statements are presented as the restricted net assets of the consolidated subsidiaries exceed 25% of the consolidated net assets as of December 31, 2011.
2.	INVESTMENTS IN SUBSIDIARIES
	The Company and its subsidiaries were included in the consolidated financial statements where inter-company balances and transactions were eliminated upon consolidation.  For purpose of the Company’s stand- alone financial statements, its investments in subsidiaries were reported using the equity method of accounting.  The Company’s share of income and losses from its subsidiaries were reported as equity in earnings of subsidiaries in the accompanying parent company financial statements.
3.	INCOME TAXES
	The Company is a British Virgin Islands company, therefore, is not subjected to income taxes for all years presented.
4.	RELATED PARTY BALANCE
	The following represented related party balances as of December 31, 2010 and 2011:

	As of December 31,
	2010			2011
Amount due from related parties
Triumph		575			575
King’s		379			729
Taiwan Camelot		1,410			1,410
Shanghai Camelot		5			5
Beijing Camelot		3,079			13,746
Asialink		15			31
Bayshore		412			4,147
Yinfeng		-			104
Total		5,875			20,747
Amount due to related parties
Across Japan		(667	)		-
Beijing Camelot		-			-
Huaqiao		(14,033	)		(12,995	)
Total		(14,700	)		(12,995	)

F-57

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.

Camelot Information Systems Inc.
By:	/s/ Yiming Ma
	Name: Yiming Ma
	Title:  Chief Executive Officer

Date: April 26, 2012