Edgar Filing: Hollysys Automation Technologies, Ltd.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)

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

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

For the fiscal year ended June 30, 2010

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

For the transition period from ___________ to ___________.

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 transition period from ___________ to ___________.

Commission file number: 001-33602

HOLLYSYS AUTOMATION TECHNOLOGIES LTD.

(Exact name of Registrant as specified in its charter)

Not Applicable

(Translation of Registrant’s name into English)

British Virgin Islands

(Jurisdiction of incorporation or organization)

No. 2 Disheng Middle Road,

Beijing Economic-Technological Development Area,

Beijing, P. R. China 100176

(Address of principal executive offices)

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

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

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

None

(Title of Class)

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

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report (June 30, 2010): 54,449,129 ordinary shares.

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

¨Yes x No

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

¨Yes x No

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

xYes ¨ No

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

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

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

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

U.S. GAAP x

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

Other ¨

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

¨ Item 17 ¨ Item 18

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

¨Yes x No

HOLLYSYS AUTOMATION TECHNOLOGIES LTD.

ANNUAL REPORT ON FORM 20-F

FOR THE FISCAL YEAR ENDED JUNE 30, 2010

TABLE OF CONTENTS

		Page

PART I

ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	4

ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	4

ITEM 3.	KEY INFORMATION	4

ITEM 4.	INFORMATION ON THE COMPANY	18

ITEM 4A.	UNRESOLVED STAFF COMMENTS	32

ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	33

ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	55

ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	62

ITEM 8.	FINANCIAL INFORMATION	63

ITEM 9.	THE OFFER AND LISTING	63

ITEM 10.	ADDITIONAL INFORMATION	65

ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	75

ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	76

PART II

ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	76

ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITIES HOLDERS AND USE OF PROCEEDS	76

ITEM 15T.	CONTROLS AND PROCEDURES	77

ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	79

ITEM 16B.	CODE OF ETHICS	79

ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	79

ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	80

ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	80

ITEM 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	80

ITEM 16G.	CORPORATE GOVERNANCE	80

PART III

ITEM 17.	FINANCIAL STATEMENTS	80

ITEM 18.	FINANCIAL STATEMENTS	80

ITEM 19.	EXHIBITS	80

USE OF CERTAIN DEFINED TERMS

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

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

“Beijing Helitong” are references Beijing Helitong S&T Exploration Co., Ltd.;

“Beijing Hollycon” are references to Beijing Hollycon Med. & Tech. Co., Ltd.;

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

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

“Beijing Hollysys S&T” are references to Beijing Hollysys S&T Exploration Co., Ltd.;

“Beijing WoDeWeiye” are references to Beijing WoDeWeiye Technology Exploration Co., Ltd.;

“BVI” are references to the British Virgin Islands;

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

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

“Exchange Act” are references to the Securities Exchange Act of 1934, as amended;

“Gifted Time” are references to Gifted Time Holdings Limited, a BVI company;

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

“Hollysys” “we,” “us,” or “our,” and the “Company,” are references to the combined business of Hollysys Automation Technologies Ltd., a BVI company, and its consolidated subsidiaries, Singapore Hollysys, Gifted Time, Clear Mind, World Hope, Beijing Helitong, , Beijing Hollysys S&T, Hangzhou Hollysys, Hollysys Automation, Beijing Hollysys, Beijing Hollysys Electronics, Beijing Hollycon, Beijing Haotong and Beijing WoDeWeiye. ;

“Hollysys Automation” are references to Beijing Hollysys Automation & Drive Co., Ltd.;

“RMB,” are references to Renminbi, the legal currency of China and “U.S. dollars,” “$” and “US$” are to the legal currency of the United States;

“Securities Act,” are references to the Securities Act of 1933, as amended;

“Singapore Hollysys” are references to Hollysys (Asia Pacific) Pte Limited, a Singapore company; and

“World Hope” are references to World Hope Enterprises Limited, a Hong Kong company.

FORWARD-LOOKING INFORMATION

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

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

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

Selected Consolidated Financial Data

The following table presents selected financial data regarding our business. It should be read in conjunction with our consolidated financial statements and related notes contained elsewhere in this annual report and the information under Item 5, “Operating and Financial Review and Prospects.” The selected consolidated statement of income data for the fiscal years ended June 30, 2010, 2009 and 2008 and the consolidated balance sheet data as of June 30, 2010 and 2009 have been derived from the audited consolidated financial statements of Hollysys that are included in this annual report beginning on page F-1. The selected statement of income data for the fiscal years ended June 30, 2007 and 2006, and balance sheet data as of June 30, 2008, 2007 and 2006 have been derived from our audited financial statements that are not included in this annual report.

The audited consolidated financial statements for the years ended June 30, 2010, 2009 and 2008 are prepared and presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The selected financial data information is only a summary and should be read in conjunction with the historical consolidated financial statements and related notes of Hollysys contained elsewhere herein. The financial statements contained elsewhere fully represent our financial condition and operations; however, they are not indicative of our future performance.

	Years Ended June 30,
	2006		2007		2008			2009			2010
Statement of Income Data
Revenue	$	89,916,604		101,885,486		121,498,752			157,502,067			174,089,196
Operating income (loss)		23,349,801		25,711,773		5,844,538			(5,550,479	)		32,547,400
Income before income taxes		22,941,290		18,646,368		2,248,419			(5,603,121	)		35,219,424
Net income (loss)(1) attributable to Hollysys		18,051,255		13,084,751		(1,677,178	)		(13,851,064	)		25,704,538
Add: Amortization of discount and interest on notes payable related to bridge loan		-		6,401,975		3,244,434			-			-
Stock-based compensation cost for incentive shares		-		-		17,000,000			39,240,000			-
Stock-based compensation cost for options		-		-		84,473			319,026			524,076
Non-GAAP net income attributable to Hollysys		18,051,255		19,486,726		18,651,729			25,707,962			26,228,614
Weighted average ordinary shares		22,200,000		22,200,000		37,658,437			44,950,883			51,243,667
Weighted average number of diluted ordinary shares		22,200,000		22,883,836		37,658,437			44,950,883			51,838,294
Basic earnings per share(1)		0.81		0.59		(0.04	)		(0.31	)		0.50
Diluted earnings per share(1)		0.81		0.57		(0.04	)		(0.31	)		0.50
Non-GAAP basic earnings per share		0.81		0.88		0.50			0.57			0.51
Non-GAAP diluted earnings per share		0.81		0.85		0.50			0.57			0.51
Cash dividends declared per share		0.07		0.03		-			-			-

Balance Sheet Data
Total current assets		96,958,442		128,404,729		214,320,514			283,971,473			301,359,086
Total assets		120,024,159		154,930,570		252,734,095			345,443,522			384,730,251
Total current liabilities		60,032,366		101,419,000		71,028,772			101,121,574			135,917,248
Total liabilities		65,661,377		104,703,288		87,794,820			149,424,388			171,258,661
Non-controlling interest		9,801,634		13,200,169		17,645,377			22,479,241			774,865
Stockholders’ equity		44,561,148		37,027,113		147,293,898			173,539,893			212,696,725

(1) We have no discontinued operations. Therefore net income and net income per share have been provided in lieu of income from continuing operations and income (loss) from continuing operations per share.

In evaluating our results, the non-GAAP measures of “Non-GAAP G&A Expenses”, “Non-GAAP Income (loss) from Operations”, and “Non-GAAP Net income (loss) and Earnings (loss) per share” serve as additional indicators of our operating performance and not as a replacement for other measures in accordance with U.S. GAAP. We believe these non-GAAP measures are useful to investors, as they exclude amortization of discount and interest on notes payable related to bridge loan and stock-based compensation costs. The amortization of discount and interest on notes payable related to bridge loan is non-recurrent and non-operation-related in nature. The stock-based compensation is calculated based on number of shares granted and the stock price as of the grant date. It will not result in any cash inflows or outflows. We believes that using non-GAAP measures help our shareholders to have a better understanding of our operating results and growth prospects. In addition, given the business nature of Hollysys, it has been a common practice for investors and analysts to use such non-GAAP measures to evaluate the Company.

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

	Years Ended June 30,
	2006		2007		2008			2009			2010
G&A Expenses		6,515,929		7,135,221		26,588,771			48,981,078			13,914,091
Minus: Stock-based compensation cost for incentive shares		-		-		17,000,000			39,240,000			-
Minus: Stock-based compensation cost for options		-		-		84,473			319,026			524,076
Non-GAAP G&A Expenses		6,515,929		7,135,221		9,504,298			9,422,052			13,390,015

Net income (loss) attributable to Hollysys		18,051,255		13,084,751		(1,677,178	)		(13,851,064	)		25,704,538
Add: Amortization of discount and interest on notes payable related to bridge loan		-		6,401,975		3,244,434			-			-
Add: Stock-based compensation cost for incentive shares		-		-		17,000,000			39,240,000			-
Add: Stock-based compensation cost for options		-		-		84,473			319,026			524,076
Non-GAAP net income attributable to Hollysys		18,051,255		19,486,726		18,651,729			25,707,962			26,228,614

Weighted average common shares		22,200,000		22,200,000		37,658,437			44,950,883			51,243,667
Weighted average number of diluted common shares		22,200,000		22,883,836		37,658,437			44,950,883			51,838,294
Non-GAAP basic earnings per share		0.81		0.88		0.50			0.57			0.51
Non-GAAP diluted earnings per share		0.81		0.85		0.50			0.57			0.51

Capitalization and Indebtedness

Not applicable.

Reasons for the Offer and Use of Proceeds

Not applicable.

Risk Factors

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

RISKS RELATED TO OUR BUSINESS

We will need to commit greater resources to new product and service development in order to stay competitive, and we may fail to offset the increased cost of such development with a sufficient increase in net sales or margins.

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

Research and development activities on existing and potential product solutions;

Additional engineering and other technical personnel;

Advanced design, production and test equipment;

Manufacturing services that meet changing customer needs;

Technological changes in manufacturing processes; and

Expansion of manufacturing capacity.

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

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

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

We do not have long-term purchase commitments from our customers, so our customers are free to choose products from our competitors, which would result in a loss of revenue and profitability.

We are engaged in the design, production and installation of automation and process control systems. As a result, our revenues result from numerous individual contracts that, once completed, typically produce only a limited amount of ongoing revenues for maintenance and other services. Furthermore, customers may change or delay or terminate orders for products without notice for any number of reasons unrelated to us, including lack of market acceptance for the products to be produced by the process our system was designed to control. As a result, in order to maintain and expand our business, we must be able to replenish the orders in its pipeline on a continuous basis. It is possible that some of our potential customers could choose the products of our competitors. Should they do so, we would suffer a decline in revenues and profitability.

The success of our business depends heavily on securing a steady stream of new customers.

Our average contract is worth approximately $150,000. While some of those contracts are for upgrades and additions to existing control systems, most of them are for new installations. In order for our business to continue to succeed and grow, we need to secure contracts with new customers on a regular basis. We may not be successful in securing new contracts.

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

One of the competitive advantages that we enjoy is the relatively low cost of our engineering staff compared to those of our Western and Japan-based competitors. The plentiful supply of affordable engineering talent in China is a key element of our overall business strategy. However, if the available supply of engineers were to be absorbed by competing demands, then the cost of hiring, training and retaining capable engineers would likely increase. This could result in a reduction in our profitability and business prospects, or could even cause a change in our business strategy.

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

We manufacture spare parts for maintenance and replacement purposes after completion of integrated solution contracts to our customers’ requirements, which can be highly complex and may at times contain design or manufacturing errors or defects. Any defects in the spare parts we manufacture may result in returns, claims, delayed shipments to customers or reduced or cancelled customer orders. If these defects occur, we will incur additional costs, and if they occur in large quantity or frequently, we may sustain additional costs, loss of business reputation and legal liability. Moreover, we are in the process of entering both the nuclear power generation and railway control systems sectors. Each of these sectors poses a substantially higher risk of liability in the event of a system failure, than was present in the industrial process controls markets in which we traditionally compete.

We may not be able to obtain adequate insurance coverage to protect us against these and other risks associated with our business. The typical practice of the industries with which we are involved is for the customers to obtain insurance to protect their own operational risks. Therefore, we currently do not carry any insurance coverage to protect against the risks related to product failure. However, it is possible that such customers or their insurers could assert claims against us for any damages caused by a failure in one of our systems, and as a result, the failure of any of our products could result in a liability that would seriously impair our financial condition or even force us out of business.

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

Our business is based on a number of proprietary products and systems, some of which are patented, others of which we protect as trade secrets. We strive to strengthen and differentiate our product portfolio by developing new and innovative products and product improvements. As a result, we believe that the protection of our intellectual property will become increasingly important to our business as the functionality of automation systems increases to meet customer demand and as we try to open new markets for our products. Implementation and enforcement of intellectual property-related laws in China has historically been lacking due primarily to ambiguities in PRC intellectual property law. Accordingly, protection of intellectual property and proprietary rights in China may not be as effective as in the United States or other countries. Currently, we hold 111 PRC utility patents that relate to various product configurations and product components and 103 software copyrights and have 20 pending PRC patent applications. We will continue to rely on a combination of patents, trade secrets, trademarks and copyrights to provide protection in this regard, but this protection may be inadequate.

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

In addition, policing the unauthorized use of our proprietary technology can be difficult and expensive. Litigation may be necessary to enforce our intellectual property rights and given the relative unpredictability of China’s legal system and potential difficulties enforcing a court judgment in China, there is no guarantee litigation would result in an outcome favorable to us. Furthermore, any such litigation may be costly and may divert management attention away from our core business. An adverse determination in any lawsuit involving our intellectual property is likely to jeopardize our business prospects and reputation. We have no insurance coverage against litigation costs so we would be forced to bear all litigation costs if we cannot recover them from other parties. All of the foregoing factors could harm our business and financial condition.

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

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

RISKS RELATING TO THE INDUSTRY IN WHICH WE OPERATE

Our plans for growth rely on an increasing emphasis on railroad and nuclear power sectors, and these sectors present fewer business opportunities, so we may not be successful in growing these new markets.

While the principal focus of our business until recently has been to provide Distributed Control Systems to industrial and manufacturing companies, our plans for growth include an increasing emphasis on railroad control systems and nuclear power generation control systems. These sectors generally present fewer business opportunities during a given period relative to the industrial and manufacturing sectors. However, the average size of contracts in those sectors tends to be much larger, and as a result, the competition for such contracts is substantial. We may not be successful in entering these new markets and, if it were unable to do so, our revenues and profits would decline, resulting in a decreased value of our stock.

Many of our competitors have substantially greater resources than we do, allowing them to be able to reduce their prices, which would force us to reduce our prices.

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

A decrease in the rate of growth in Chinese industry and the Chinese economy in general may lead to a decrease in our revenues because industrial companies in China are the principal current source of revenues for us.

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

Our plans to enter the international automation market may not prove successful, and we may waste capital resources and needlessly divert management’s time and attention from our principal market.

To date we have conducted nearly all of our business within China and Southeast Asia. However, we have plans to further penetrate international markets in the near future. While the manner in which we plan to do so will likely not involve large expenditures of capital and resources, it will also require meaningful amounts of management time and attention. Our products and our overall approach to the automation and controls system business may not be accepted in other markets to the extent needed to make that effort profitable. In addition, the additional demands on our management from these activities may detract from our efforts in the domestic Chinese market and market of surrounding countries, causing the operating results in our principal markets to be adversely affected.

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

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

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

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

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the Company’s internal controls over financial reporting in their annual reports and the independent registered public accounting firm auditing a company’s financial statements to attest to and report on the operating effectiveness of such company’s internal controls. Although our independent auditor has provided a positive attestation as of June 30, 2010, we can provide no assurance that we will comply with all of the requirements imposed thereby and we will receive a positive attestation from our independent auditors in the future. In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner or we are unable to receive a positive attestation from our independent auditors with respect to our internal controls, investors and others may lose confidence in the reliability of our financial statements.

RISKS RELATED TO DOING BUSINESS IN CHINA

Substantially all of our operating assets are located in China and substantially all of our revenue will be derived from our operations in China so our business, results of operations and prospects are subject to the economic, political and legal policies, developments and conditions in China.

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

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

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

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

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

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

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

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

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

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

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

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

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

Notice on Issues Relating to Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice 75, was issued on October 21, 2005 by SAFE (that replaced two previously issued regulations on January 24, 2005 and April 8, 2005, respectively) that requires approvals from, and registrations with, PRC government authorities in connection with direct or indirect offshore investment activities by PRC residents and PRC corporate entities. The SAFE regulations require retroactive approval and registration of direct or indirect investments previously made by PRC residents in offshore companies. In the event that a PRC shareholder with a direct or indirect stake in an offshore parent company fails to obtain the required SAFE approval and make the required registration, the PRC subsidiaries of such offshore parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Further, failure to comply with the various SAFE approval and registration requirements described above, as currently drafted, could result in liability under PRC law for foreign exchange evasion.

Although SAFE issued an implementation Notice No. 106, or Notice 106, on May 29, 2007 to local branches or agencies, because of the uncertainty as to when and how the new procedure and requirements will take effect or be enforced, and uncertainty concerning the reconciliation of the new regulations with other approval requirements, it remains unclear how these existing regulations, and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. Although we are committed to complying with the relevant rules, we cannot assure you that we will never have shareholders or beneficial owners who are PRC citizens or residents, or that such persons have always complied with and will in the future make or obtain any applicable registrations or approvals required by SAFE Circular 75, Notice 106 or other related regulations. Failure by such shareholders or beneficial owners to comply with SAFE Circular 75 and Notice 106 could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiary’s ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.

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

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

Our management is unfamiliar with United States securities laws and will have to expend time and resources becoming familiar with such laws which could lead to various regulatory issues.

Many members of our management team are not familiar with United States securities laws and will have to expend time and resources becoming familiar with such laws. This could be expensive and time-consuming and could lead to various regulatory issues and a diversion of management attention, which may harm our operations.

The ability of our Chinese operating subsidiary to pay certain foreign currency obligations, including dividends, is subject to restrictions.

Our ability to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balances. Since substantially all of our operations are conducted in China and a majority of our revenues are generated in China, a significant portion of our revenue earned and currency received are denominated in RMB. The Chinese government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. RMB is currently not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, if any, on our ordinary shares or otherwise satisfy foreign currency denominated obligations. Under existing Chinese foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. The Chinese 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 certain of our expenses as they come due. In addition, current regulations in China permit Chinese subsidiaries to pay dividends to us only out of their accumulated distributable profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, Chinese subsidiaries are required to set aside at least 10% of its accumulated profits each year. Such reserve account may not be distributed as cash dividends.

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

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

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

Our manufacturing facility is located in China and virtually all of our assets are located in China. We generate our sales revenue only from customers located in China. Our results of operations, financial state of affairs and future growth are, to a significant degree, subject to China’s economic, political and legal development and related uncertainties. Our operations and results could be materially affected by a number of factors, including, but not limited to

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

changes in taxation,

changes in employment restrictions,

restrictions on imports and sources of supply,

import duties, and

currency revaluation.

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

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

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

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

Almost all of our operations are conducted in China and most of our revenues are generated from sales to businesses operating in China. Although the Chinese economy has grown significantly in recent years, such growth may not continue. we do not know how sensitive we are to a slowdown in economic growth or other adverse changes in Chinese economy which may affect demand for our products. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in China may materially reduce the demand for our products and in turn reduce our results of operations.

The implementation of the new PRC employment contract law and increases in the labor costs in China may hurt our business and profitability.

A new employment contract law became effective on January 1, 2008 in China. It imposes more stringent requirements on employers in relation to entry into fixed-term employment contracts, recruitment of temporary employees and dismissal of employees. In addition, under the newly promulgated Regulations on Paid Annual Leave for Employees, which also became effective on January 1, 2008, employees who have worked continuously for more than one year are entitled to paid vacation ranging from 5 to 15 days, depending on the length of the employee’s service. Employees who waive such vacation entitlements at the request of the employer will be compensated for three times their normal daily salaries for each vacation day so waived. As a result of the new law and regulations, our labor costs may increase. There is no assurance that disputes, work stoppages or strikes will not arise in the future. Increases in the labor costs or future disputes with our employees could damage our business, financial condition or operating results.

The Chinese government has been adopting increasingly stringent environmental, health and safety protection requirements, which could hurt our business.

The continuance of our operations depends upon compliance with the applicable environmental, health and safety, fire prevention and other regulations. Any change in the scope or application of these laws and regulations may limit our production capacity or increase our cost of operation and could therefore have an adverse effect on our business operations, financial condition and operating results. Our failure to comply with these laws and regulations could result in fines, penalties or legal proceedings. There can be no assurance that the Chinese government will not impose additional or stricter laws or regulations, compliance with which may cause us to incur significant capital expenditures, which it may not be able to pass on to our customers.

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

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

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

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

We do not expect any impact on our business and operations under the new EIT Law and its implementing rules as we do not have non-PRC income.

RISKS RELATED TO OUR SHARES

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

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

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

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

speculation about our business in the press or the investment community;

significant developments relating to our relationships with our customers or suppliers;

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

customer demand for our products;

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

the operating and stock performance of comparable companies;

general economic conditions and trends;

major catastrophic events;

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

changes in accounting standards, policies, guidance, interpretation or principles;

loss of external funding sources;

failure to maintain compliance with Nasdaq rules;

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

additions or departures of key personnel.

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

Moreover, securities markets may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. For example, from October until June 2009, securities markets in the United States, China and throughout the world experienced a historically large decline in share price. These market fluctuations may adversely affect the price of our ordinary shares and other interests in our company at a time when you want to sell your interest in us.

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

We are a foreign private issuer and, as a result, we are not subject to certain of the requirements imposed upon U.S. domestic issuers by the SEC. For example, we are not required to issue quarterly reports or proxy statements. Through the fiscal year ending June 30, 2011, we are allowed six months to file our annual report with the SEC and thereafter must file our annual report within four months of our fiscal year end. We are not required to disclose certain detailed information regarding executive compensation that is required from U.S. domestic issuers. Further, our directors and executive officers are not required to report equity holdings under Section 16 of the Securities Act. As a foreign private issuer, we are also exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. We are, however, still subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5. Since many of the disclosure obligations required of us as a foreign private issuer are different than those required by other U.S. domestic reporting companies, our shareholders should not expect to receive information about us in the same amount and at the same time as information is received from, or provided by, other U.S. domestic reporting companies. We are liable for violations of the rules and regulations of the SEC which do apply to us as a foreign private issuer. Violations of these rules could affect our business, results of operations and financial condition.

We do not intend to pay dividends on our ordinary shares for the foreseeable future.

We intend to retain any future earnings to fund the operation and expansion of our business and, therefore, we do not anticipate paying cash dividends on our ordinary shares in the foreseeable future.

You may have difficulty enforcing judgments obtained against us.

We are a BVI company and substantially all of our assets are located outside of the United States. Virtually all of our assets and a substantial portion of our current business operations are conducted in the PRC. In addition, almost all 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, many of whom are not residents in the United States and whose assets are located in significant part 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. In addition, it is uncertain whether such British Virgin Islands or PRC courts would be competent to hear original actions brought in the BVI or the PRC against us or such persons predicated upon the securities laws of the United States or any state.

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

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

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

We believe that we are not considered a “passive foreign investment company,” or PFIC, for United States federal income tax purposes for our tax year ended June 30, 2010. However, each year we must make a separate determination as to whether we are a PFIC. We cannot assure you that we will not be a PFIC for our tax year ending June 30, 2011 or any following tax year. If a non-U.S. corporation either (i) at least 75% of its gross income is passive income for a tax year or (ii) at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a tax year) is attributable to assets that produce or are held for the production of passive income, then the non-U.S. corporation will be deemed a PFIC. The market value of our assets may be determined to a large extent by the market price of our ordinary shares, which is likely to fluctuate after this offering. Furthermore, how we spend as well as how quickly we spend the proceeds from the offering will affect the composition of our income and assets. If we are treated as a PFIC for any tax year during which U.S. shareholders hold ordinary shares, certain adverse United States federal income tax consequences could apply to such U.S. holders.

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

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

ITEM 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

We were established under the laws of the BVI on February 6, 2006, as HLS Systems International, Ltd., in order to merge with Chardan, a Delaware special purpose acquisition company, originally established on March 10, 2005, with the primary purpose of effecting a business combination with an unidentified operating business that has its primary operating facilities located in China, in any city or province north of Yangtze River. On September 20, 2007, we acquired all of the issued and outstanding ordinary shares of Gifted Time, a BVI company. Simultaneously with the acquisition, Chardan merged with and into us, all of the common stock of Chardan was converted into our ordinary shares, on a one-to-one basis, and we assumed the then outstanding Chardan warrants. As a result of the foregoing transactions, we acquired a controlling interest in Beijing Hollysys and Hangzhou Hollysys, and an indirect interest in their majority and minority owned subsidiaries, and the consolidated financial statements of Beijing Hollysys and Hangzhou Hollysys became our historical financial statements for reporting purposes. On July 17, 2009, we changed our name to Hollysys Automation Technologies Ltd to more accurately reflect our core value of leveraging proprietary technologies to provide state-of-the-art automation and control solutions for our clients.

Gifted Time and Subsidiaries

Gifted Time was established under the laws of the BVI on September 21, 2005, as a holding company for our indirect PRC subsidiaries, Beijing Hollysys and Hangzhou Hollysys.

Beijing Hollysys was established in September 1996 as a domestic Chinese company based in Beijing, China. From inception, Beijing Hollysys has been engaged in designing, developing and manufacturing automation control systems for customers throughout China. Beijing Hollysys offers integrated automation solutions for many industries, including electric power generation, transmission and distribution, manufacturing (including metallurgy, construction materials, petrochemical and pharmaceutical industries), and railroad transportation. Beijing Hollysys’ integrated automation systems and solutions have enabled customers to improve the safety, reliability and efficiency of their manufacturing processes and significantly enhance the customers’ overall profitability. Hangzhou Hollysys was established as an equity joint venture under Chinese laws in September 2003. The operations of Hangzhou Hollysys focus on industrial automation and integrated solutions.

During the period from December 2007 to March 2008, we established a series of wholly owned subsidiaries, namely (i) Beijing Hollysys S&T, a Chinese domestic enterprise which acquired the original shareholders’ 74.11% equity interest in Beijing Hollysys; (ii) Beijing Helitong, a wholly foreign owned enterprise in China which acquired the original shareholders’ 100% equity interest in Beijing Hollysys S&T; (iii) World Hope, a Hong Kong company which acquired the original shareholders’ 100% equity interest in Beijing Helitong; (iv) Clear Mind, a BVI company which acquired the original shareholders’ 100% equity interest in World Hope. Through this series of ownership arrangement, we obtained the 74.11% legal ownership of Beijing Hollysys instead of through consignment agreements. However, there can be no assurance that the PRC authorities will not, in the future, challenge the appropriateness of the procedures of the transferring of the ownership of the PRC subsidiaries as the Company did not directly go through the procedures required by the M&A Regulations.

On July 1, 2009, the Company completed the acquisition of 1.78% equity interest in Beijing HollySys from the non-controlling interest holder for a consideration of RMB 18 million (approximately $2,638,793), and held 75.89% equity interest of Beijing HollySys upon the completion of the acquisition.

On December 23, 2009, we entered into a share sale and purchase agreement, or the Share Purchase Agreement, with Unionway Resources Limited, a business company incorporated in the BVI, or the Seller, pursuant to which, among other things, the Company acquired 100% equity interest in Maypower Limited, a business company incorporated in the BVI and owned 24.11% of Beijing Hollysys. As the consideration for the acquisition of the equity interest, we agreed to:

1) issue 4,413,948 ordinary shares, or the Shares, to the Seller, and

2) pay cash $9,917,062.5, or RMB 67,634,366.25 to the Seller.

The Shares were issued to the Seller and its designeee on March 16, 2010. As a result of the acquisition of the equity interest, we indirectly own 100% of Beijing Hollysys.

On September 1, 2009, Beijing Hollysys entered into an agreement with two equity owners of Beijing WoDeWeiYe to acquire 51% equity interest in of Beijing WoDeWeiYe for a cash consideration of RMB 2 million (approximately $294,477). Upon the acquisition, Beijing WoDeWeiYe became a subsidiary of the Company, and the operating result of Beijing WoDeWeiYe was included in the Hollysys’s consolidated financial statements effective from September 1, 2009. We acquired Beijing WoDeWeiYe to engage in the intelligent electric meter business and to further build up our foothold in subway automation sector.

On June 4, 2010, Beijing Hollysys S&T invested RMB 10 million (approximately $1,464,536) to establish a wholly owned subsidiary, Beijing Hollysys Electronics, which engages in the business of automation equipment manufacturing and assembly.

On June 4, 2010, Beijing Hollysys S&T invested RMB 5.10 million (approximately $746,913) to establish a subsidiary, Beijing Hollycon, which engages in the medical automation equipment manufacturing business.

Singapore Hollysys

On November 19, 2007, we entered into a sales and purchase agreement with Fulbond Systems Pte Ltd., or Fulbond Systems, a Singapore based company partially owned by Mr. Kiam Fee Yau, our ex-director, to acquire a 100% interest of Fulbond Systems for a price of SGD$1,066,234 (approximately $744,596). Pursuant to the sales and purchase agreement, the closing day of this acquisition was November 30, 2007 and after the ownership transfer, we changed the name of Fulbond Systems to “Hollysys (Asia Pacific) Pte Limited,” or Singapore Hollysys. The purchase price was paid in cash on December 11, 2007. As a result of the transaction, Singapore Hollysys becomes our wholly owned subsidiary and the operating results of Singapore Hollysys is included in our consolidated financial statements, effective from December 1, 2007. We acquired Singapore Hollysys to serve as our Asia Pacific headquarters to market our automation products within the region as well as in other overseas countries.

B. Business Overview

We are a leading provider of automation and control technologies and applications in China that enable our diversified industry and utility customers to improve operating safety, reliability, and efficiency. Founded in 1993, we have approximately 2,400 employees with 9 sales centers and 13 service centers in 21 cities in China and serve over 1,700 customers in the industrial, railway, subway & nuclear industries. Our proprietary technologies are applied in product lines including Distributed Control Systems, or DCS and Programmable Logic Controller, or PLC, for industrial sector, high-speed railway signaling system of Train Control Center, or TCC, and Automatic Train Protection, or ATP, subway supervisory and control platform, or SCADA, and nuclear conventional island automation and control system.

We have historically focused our efforts in the area of DCS, which are networks of controllers, sensors, actuators and other devices that can be programmed to control outputs based on input conditions and/or algorithms, which is mainly used to control continuous manufacturing process. Our DCS have been widely used in the industries involving continuous flow of material handling, such as power generation, petro-chemical, chemical, cement manufacturing, paper mills, waste water recycling. We subsequently entered PLC market, which is mainly used in discreet control applied to a wide array of industries. PLCs are usually integrated together into machines providing control for the unit. We also branched out of industrial automation domain to rail businesses leveraging on our core competency and strong research and development capabilities, and have already established our leading position in the high-speed rail signaling market and subway SCADA market. We also command a leading position in China’s nuclear automation and control market as the only proven local conventional island automation and control product provider. Through our 50/50 joint venture with China Guangdong Nuclear Power Holdings Co., Ltd., China Techenergy Co., Ltd., we have access to all the nuclear reactors being contracted to our joint venture partner, which is currently holding roughly 60% of China’s nuclear market share. We believe that our present leadership position in the high-growth segments is attributable to our vision, execution, and strong research and development capabilities.

We have a reputation in the industry for our comprehensive capabilities in the PRC domestic industrial automation market and have concentrated our focus on the development of this market. We sell our products and services to, or carry out engineering projects for, national or multi-provincial companies with subsidiaries located across 30 provinces in China. To date, we have served more than 1,700 industrial enterprise customers and have undertaken over 8,000 projects. We believe that the quality of our systems is unsurpassed by local Chinese competitors and is comparable to high-end foreign suppliers of DCS and the history of our projects supports that view. For example, after three years of review and analysis, BASF, a large multi-national company, has designated us as a potential qualified DCS vendor for the company, a distinction shared with large multinationals such as ABB and Emerson.

Our revenue increased from approximately $121.5 million in fiscal year 2008, to approximately $157.5 million in fiscal year 2009 and approximately $174.1 million in fiscal year 2010, representing a compounded annual growth rate of approximately 19.7%. These significant increases reflect our success in exploring new business areas and our increasing market penetration. We continually seek to broaden our market reach by introducing new technology and improving our profit margin through new business areas such as railway control systems and nuclear power plant control.

Strategy

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

To further establish our leadership position as a dominant automation and control technology and application provider across all the segments – We seek to be a potential industry consolidator in China as a dominant leading provider of industrial automation and control technology and application for clients in various industries, by presenting ourselves as a more total solution provider and expanded sales force and network across the country. We also seek to further penetrate the rail business with more proprietary products to enhance our leading position and market share. Since the majority of our customers operate in a wide range of industries, especially in the high-speed rail, subway, and nuclear sectors, we stand to be a prime beneficiary of China’s drive for environment protection, clean energy, lower carbon emission, national economic development model transformation from export oriented to domestic consumption oriented, and the rising labor cost due to demographics in China. We plan to aggressively expand our business to fully exploit the anticipated growing demand for automation and control in areas favored by government policy and the macro trend, such as clean energy and other environmentally friendly industries, and infrastructure industries. Our combination of patented technologies, strong research and development capabilities, ability to leverage strategic alliance to enter and penetrate new market segments, and a comprehensive understanding of the Chinese market should allow us to capitalize on these growth opportunities.

To continuously enhance our leadership position in technology – We have long been recognized as a pioneer in the development of industrial automation and control technology as well as applications. We are continuously seeking ways to improve our existing product lines while being committed to the development of new applications. In order to maintain our leadership position in technology, we have devoted and will continue to devote significant resources to the research and development process that is undertaken by a group of highly trained and skilled engineers. We plan to concentrate our research and development resources on our core end market related technologies and products, and new upcoming growth industries, including the 5th generation of proprietary DCS platform, subway signaling system, wind energy related control products and application, and high-speed rail products to compliment our existing high-speed product portfolio.

To expand our automation and control applications to a wider array of industries and actively explore and prepare for international market expansion– In addition to aiming for a global leadership position, our secondary goal is to carefully expand or migrate to adjacent industries that can share or strengthen our core business. We have successfully leveraged our technological foundation and strategic alliance and have expanded our end markets from industrial, to nuclear, to rail over the past 10 years. We plan to continue to leverage this successful strategy to enter some high-growth and high-margin end-markets, such as wind energy, alternative energy, and waste management. We also actively explore the international market to prepare ourselves for future full-scale international expansion.

Products and Services

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

Industrial Automation: Our major offering is a comprehensive suite of automation systems for a wide market. Our industrial market clientele ranges from petrochemical, thermal power industries, to cement production and paper making industries, and etc. The two mainstream products for this market segment are our DCS products and our PLCs. DCS are a network of controllers, sensors, actuators and other devices that can be programmed to control outputs based on input conditions through logic calculations. In an automated production line, sensors or so-called “instrumentations” are distributed across the production facility to monitor sub-systems like the robots, CNC machines, and logistic tools. These sensors are like human eyes, which monitor the process, and detect any abnormal situations. The information collected from those sensors is then transmitted to the DCS for centralized data processing through communication networks. The brain processes information and generates commands, based on sophisticated algorithm and pre-set parameters. These commands are then sent to actuators (muscles/bones) through communication devices to execute the orders and maintain production flow. PLCs are small computer devices installed on machines or equipment, for example, on a factory assembly line, for manufacturing automation.

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

Nuclear Automation and Control: As the only proven domestic automation control systems provider to the nuclear power industry in China, we provide our HOLLiAS NMS product to China’s nuclear power industry. In a nuclear station, the nuclear island operates to transform nuclear energy to heat energy, and pass on the steam generated by the steam generator to the conventional island, where steam drives the turbine to generate the electricity, and pass on to the transformer for loading onto the grid. Our HOLLiAS NMS proprietary control systems are now used in conventional islands for safety and operation control. The know-how was accumulated from our industrial DCS applications in high-end power plants, with much more sophisticated software and hardware specifications, and more stringent production and quality assurance process. Our nuclear joint venture China Techenergy Co., Ltd. has already successfully completed developing its proprietary nuclear island automation and control system, which is expected to be commercialized in 2012 or 2013, when the total automation and control for nuclear power stations will be fully localized for China.

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

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

Solution planning – We provide our customers with strategic and tactical reviews of their current operations and future requirements. We do much of this work before the customer awards the contract to assist the customer in developing an appropriate request for proposal and to improve Hollysys’ chances of winning the contract. The planning includes defining client business requirements, developing appropriate hardware and software and selecting preferred technology.

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

Solution implementation – We install the recommended systems to meet our customers' specific requirements. Key activities include project management, hardware procurement and production, software development, configuration and field installation and testing, and development of customized system and services management applications.

Maintenance and support services – We emphasize creating value for our clients by providing high quality tailored services. Our professional, prompt and long-term services include technical services, engineering services to specific industries, application development services and maintenance services. We provide maintenance and technical support in connection with all of our systems integration projects. These services currently include assistance with the implementation of new system platforms, configuration and programming services for new business processes, and assistance with technology upgrading. We believe that our policy of on-going maintenance and technical support will help foster long-term relationships with our customers and eventually create significant business opportunities.

Training – We also incorporate customer training and an ongoing service component into our product offerings. We provide technical training for our customers and strategic partners to increase their awareness and knowledge of DCS technologies in the Chinese industrial automation market and to support the operations of our customers' integrated automation systems. The training helps to ensure that customers derive the greatest amount of benefit possible from their new automation system. As a result, this training leads to increased value, which in turn generates customer satisfaction and loyalty.

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

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

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

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

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

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

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

Market for Automation and Controls Solutions

DCS Market

According to the ARC Advisory Group, or ARC, an industry research group, the DCS market in China, as measured by revenue, exceeded $780 million in 2005 and will grow at a compounded annual growth rate of approximately 12% through 2010. ARC further projects that the DCS market, as measured by revenue, will exceed $1,400 million by 2010. The chart below shows the forecast of the DCS market size in China.

Source: ARC Advisory Group

We agree with ARC’s assessment that, “China, in contrast to most other countries, provides robust growth prospects for the DCS suppliers. With new investments continuing to take place in its core process industry sector, the market has excellent growth potential in both the near and long-term. Almost a quarter of a billion people with their growing disposable income are generating an exploding demand for a wide range of products. Domestic and global manufacturers, lured by this opportunity, have created new, world-class production facilities in almost all vertical industries. They are going beyond the near term opportunity for obtaining low cost labor. They are pursuing the best available control system technology and attaining a sustainable competitive advantage.”

Currently, the vast majority of the global automation market is still controlled by a handful of multi-national companies, most of them with western roots. Our competition includes some very recognizable names: Honeywell (US); Siemens (Germany); General Electric (US); ABB (Sweden); Rockwell (US); Westinghouse (US); and Hitachi (Japan). The western roots of automation are not surprising, as that is also where industrialization began and progressed the farthest during the 19th and 20th centuries. However, a new focus of the automation market is China, where the tremendous growth of industrialization is by now a very familiar story. Manufacturing jobs in the US and other western economies over the past two decades have steadily decreased, while China’s industrial base has expanded at the rate of 8.5% annually since 1991. China’s shift from a developing country to one of the world’s leading manufacturers of industrial equipment and consumer goods has created a substantial and growing demand for the automation systems that help to make those manufacturing processes more efficient, reliable and safe.

From 2000 to 2008, the global automation industry grew, as measured by revenue, by about 4.5%, according to a research report by J.P.Morgan. We believe China’s industrial automation growth rate is far greater than this world average growth rate, in which we see PLC enjoying a more healthy growth rate than DCS given its relative lower penetration rate and the rising cost of labor. In the industrial side of our business, our current market share is 10.6%, which was measured by industrial customer brand name usage, from a third party report. Up to date we have implemented over 8,000 projects with over 1,700 customers. Clientele base for this segment includes large state-owned enterprises, multi-national companies, and other domestic companies. Our main competitors in this field are global players such as ABB, Siemens, and Emerson, as well as Supcon from China. We believe that the Hollysys brand recognition and market reputation and our strong research and development capabilities will enable us to enter and penetrate high-margin market segments currently dominated by foreign companies, and will ensure our revenue from this industrial market to grow at a rate continuously exceeding the industry average.

High-Speed Rail and Subway Market

Another promising end-market for Hollysys is high-speed rail market in China, where we command a leading position in providing high-speed rail signaling systems to ensure the safety of passenger train movement. High-speed rail is a relatively new development in China. The Ministry of Rail of China developed China national high-speed rail signaling technological standard, the China Train Control System, or the CTCS. Under the CTCS, the standard governing 200-250km/hour speed category is called C2, while C3 is governing the 300-350km/hour category. There are more than 7,000km of high-speed rail tracks in operation in China, with more than 10,000km high-speed rail tracks in construction, according to the Ministry of Rail. Majority of operational high-speed lines are in 200-250km/hour, with only 4 operational lines in 300-350km/hour, which include Wuhan-Guangzhou line, Zhengzhou-Xian line, Shanghai-Nanjing line, and Shanghai-Hangzhou line, of which Zhengzhou-Xian line was commissioned by us. We are also contracted to provide signaling system for another line in C3 category: Guangzhou-Shenzhen line which is under construction.

According to the official announcement from the Ministry of Rail, China is planning to have 13,000 kilometers of high-speed railways in operation in the year of 2012 and 20,000 kilometers of high-speed railways in operation in the year of 2020, far exceeding the current capacity of total high-speed railway kilometers of 11,345 kilometers in operation in 16 countries in the world. According to China’s Ministry of Rail, there are 54 high-speed rail lines planned to be built in China till 2012, among which 16 lines are in the C3 category and 38 lines in the C2 category. The lines are generally described as “4 Horizontals and 4 Verticals,” referring to their positions on the map of China. The Four Vertical lines include the Beijing-Guangzhou line, Beijing–Shanghai line, Harbin-Dalian-Shenyang-Beijing line, and Shanghai-Hangzhou-Shenzhen line. The Four Horizontal lines include the Lanzhou-Xian-Zhengzhou-Lianyungang line, Shanghai-Wuhan-Chongqing-Chengdu line, Hangzhou-Changsha-Kunming line, and Taiyuan-Shijiazhuang-Qingdao line. The high-speed rail build-out plan also includes inter-city high-speed lines for three regions of Zhu Jiang River Delta, Yangtze River Delta, and Beijing-Tianjin-Tangshan. The Ministry of Rail further proposed to have 40,000km of high-speed rail tracks in operation by the end of 2015, for China’s 12th five-year plan. As one of the five automation products providers in C2 category, and one of the only two automation products providers to C3 segment, we believe that we are well positioned to benefit from this unprecedented high-speed railway build-out in the world.

We also provide our proprietary software platform and solutions of SCADA to subway market. China subway market is expected to receive significant government investment due to urbanization and environmental concerns. According to China’s Ministry of Housing and Urban-Rural Development, China subway market will grow from 776 kilometers in 2008 to 4,189 kilometers in 2015, with government estimated investment amounting to $129 billion in the period. With our more than 8 years of experience in this market and well-recognized brand name, we are adopting a strategy to capture this fast-growing market.

Nuclear Market

We are well-positioned to benefit from China’s nuclear build-out. At present, China’s nuclear power sector is relatively underdeveloped, with the vast majority of power generated by coal-fired power plants. There are currently 11 nuclear stations in operation, providing approximately 9 GW of power, in comparison to the total electricity-generating capacity in China of approximately 700 GW. This represents a meager 1.3% of the total electricity generated by nuclear energy, lagging far behind the world average of 15% power generated from the nuclear energy, with France being the highest with 70% of its power generated from nuclear.

Driven by clean energy initiatives and China’s commitment of reducing its carbon emission by 45% per GDP unit by 2020, China’s installed nuclear power generating capacity is expected to reach 100 GW by 2020. Approximately, it is believed that one nuclear reactor generates 1GW electricity. During the fiscal year 2010, we formed a 50/50 joint venture, China Techenergy Co., Ltd., with China’s leading nuclear station operator, China Guangdong Nuclear Power Holdings Co., Ltd., to provide its proprietary non-safety automation and control products to the nuclear stations constructed by China Guangdong Nuclear Power Holdings Corporation. We believe this strategic alliance position us to be the dominant nuclear automation system provider in China. China Guangdong Nuclear Power Holdings Co., Ltd. currently owns approximately 60% of China’s nuclear market share.

Integrated Contracts

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

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

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

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

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

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

Warranty period - The integrated solution contracts customarily provide our customers with a one-year warranty (although sometimes the warranty period may be two years per the customers’ requests), which runs from the date of the final customer acceptance. The end of warranty period represents fulfillment of the entire contract.

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

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

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

Competition

We compete with various domestic and international producers offering automation systems to the Chinese market. We believe that our proprietary technology and products provide us with a strong competitive advantage over our domestic Chinese competitors. However, a number of multinational companies, some of whom have substantially greater financial and other resources than we currently have, have been offering first rate automation systems to Chinese customers before us. We believe that our primary competitors in the market for our products are ABB, Honeywell, Emerson and Siemens.

When compared to our competitors, we believe that we have the following competitive advantages:

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

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

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

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

Use of Engineering Sales Personnel. The use of trained engineers in product and system design is complemented by the use of engineers in the sales process as well. The advantages of doing so are substantial. They include the ability to understand from the beginning the needs of the customer and how to address them and the ability to convey that information to the team that will ultimately develop the system to be installed

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

Pace of Product Development. Another way that we keep ahead of our competitors is by our pace of development. HOLLiAS is the fourth generation of controller systems developed by us, and it took us only a little more than a decade after our first operational system to achieve this breakthrough. We believe that our competitors are frequently hampered by institutional factors that slow the product development process, and as a result, their products cannot incorporate the latest advances in electronics.

Maintenance Services. Automation systems require regular maintenance to operate within customer guidelines. Older analog systems were well within the capability of many customers to maintain on their own. However, as automation systems shift to electronic components utilizing custom software and digital signaling, their complexity has increased and have made it less easy for customers to maintain their systems independently. To meet this growing customer need we offer our customers maintenance services along with our products. Our regional sales and services offices place us within easy reach of a very high proportion of our customer and potential customer base, which makes it possible for a single maintenance technician to cover maintenance calls for several different customers each week. An added advantage to offering maintenance services is the benefits derived from the strengthened relationship with our customers. Effective maintenance services, leads to increased customer satisfaction, customer loyalty, and increased business opportunities. Offering ongoing services, which not only create the opportunity to generate additional revenue, but enable us to troubleshoot installations effectively, help to ensure that maximum benefit is derived from the system, and gives us the ability to identify the need for new products and services that will benefit the customer and generate additional business for us.

Manufacturing and Raw Materials

We assemble our products from subcomponents provided by others or we outsource the production to qualified vendors. We acquire advanced printed circuit board components from high quality suppliers. We rely on our manufacturing management department to coordinate the procurement of raw materials and outsourced processing, including the procurement of components and standard parts (such as cables and connectors), and outsourced processing of Polyvinyl Chloride (PVC) coating, shells, and printed circuit boards. Our products are subjected to rigorous testing in our facilities prior to shipment.

In 1997, Beijing Hollysys passed the ISO9001 international quality assurance system certification. In 2002, Beijing Hollysys obtained the ISO9001:2000 certificate, which covers all the processes including research and development, sales and distribution, manufacturing, engineering, technical support and repair service.

Seasonality

Our operating results and operating cash flows historically have not been subject to seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introductions. Revenues of our business as a whole do not fluctuate significantly by season, although compared to other quarters, like most of the Chinese companies, our third quarter which falls in January to March is relatively slow due to the Chinese New Year holidays.

Regulation

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

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

Taxation. On March 16, 2007, the National People’s Congress, the Chinese legislature, passed the new Enterprise Income Tax Law, or New EIT Law, which became effective on January 1, 2008. The New EIT Law applies a unified enterprise income tax, or EIT, rate at 25% to both FIEs and domestic invested enterprises. According to a grandfathering provision of the Notice on Transitional Preferential Policies of Enterprise Income Tax published by the State Council, enterprises that are subject to an EIT rate below 25% may continue to enjoy such lower rate which will be gradually transitioned to the new EIT rate within five years of the effective date of the New EIT Law, and enterprises that are currently entitled to exemptions from, or reductions in, applicable EIT for a fixed term may continue to enjoy such treatment until the fixed term expires. Under the New EIT Law, companies designated as High- and New-Technology Enterprises may enjoy a reduced national enterprise income tax of 15%. “Administrative Measures for Assessment of High-New Tech Enterprises,” or Measures, and “Catalogue of High/New Tech Domains Strongly Supported by the State,” or Catalogue (2008), jointly issued by the Ministry of Science and Technology and the Ministry of Finance and State Administration of Taxation set forth general guidelines regarding criteria as well as application procedures for qualification as a High- and New-Tech Enterprise under the New EIT Law. Both Beijing Hollysys and Hangzhou Hollysys have met the qualifications for the High- and New-Technology Enterprise designation and are accordingly subject to a reduced national enterprise income tax of 15%.

Dividend Distribution. Under PRC law, FIEs in China, including Hangzhou Hollysys, may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting principles. In addition, FIEs in China are required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year for their general reserves until the accumulative amount of such reserves reaches 50% of registered capital. These reserves are not distributable as cash dividends. The board of directors of a FIE has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, and expansion (development) funds which may not be distributed to equity owners except in the event of liquidation. In addition, under the new EIT Law, effective as of January 2008, dividends from Beijing Hollysys to us are subject to a withholding tax of 5%, whereas those from Hangzhou Hollysys are subject to a withholding tax of 10%.

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

Marketing, Sales and Customer Support

Our marketing and sales activities are focused on the Chinese domestic market where there is a growing demand for automation and control products, systems and services. Because our market strategy is to tailor products to specific customer needs, our sales teams consist of a complementary group of sales personnel and hardware and software engineers from a variety of disciplines. Employing a pool of skilled personnel at this early stage accelerates the design and the subsequent production of a particular customized solution, typically exceeding that of our competitors. Our sales teams possess significant hands-on, industry-specific experience which permit them to do on-site process analyses, which in turn, makes the design and implementation of upgrades simpler. The result is a system that is more effective, efficient and reliable, which in turn leads to a truly satisfied customer.

Our direct sales force is organized into three groups, as follows:

Department of Region Sales: there are 10 geographic sales regions covering 30 provinces in China. The direct sales professionals provide business consulting, promote pre-sale activity and serve as customer contacts.

Department of Customer Service is in charge of managing relations with all contracted customers, and improving customer satisfaction by coordinating responses to the client’s information request, sale of supplemental parts or components, and customer visits.

Department of Marketing Plan has been established to facilitate strategic cooperation with certain specialized manufacturers, in order to expand the specific fields, such as Digital Electro-Hydraulic Control Systems, air separation and desulphurization.

We identify and target market segments and select target sales opportunities on a national level, and we also conduct sales opportunity studies to ensure that adequate regional sales resources are available. Sales quotas are assigned to all sales personnel according to annual sales plans. We classify market segments and target opportunities on national and regional levels. This classification helps us to determine our primary sales targets and to prepare monthly and quarterly sales forecasts. Then, the sales team approves target projects, develops detailed sales promotion strategies and prepares reports on order forecasts, technical evaluation, sales budgeting expense, schedules and competition analysis. After the report has been approved, a sales team is appointed consisting of sales personnel and technicians.

Our market strategy focuses on building strategic cooperative relationships with its customers, educating them about technological developments and reflecting their interests in our products and services. We employ marketing personnel to conduct market research, to analyze user requirements and to organize marketing communications. Our marketing team engages in a variety of marketing activities, including:

publishing internal research reports and customer newsletters;

conducting seminars and conferences;

conducting ongoing public relations programs; and

creating and placing advertisements.

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

As of June 30, 2010, we employed 352 direct sales personnel who were assigned to three business areas: industrial automation, high-speed rail, and subway. Sales activities are coordinated from our offices in Beijing and Hangzhou. All sales staff are responsible for implementing the sales policies established at our headquarters.

C. Property, Plants and Equipment

Our principal executive offices are located at No. 2 Disheng Middle Road, Beijing Economic-Technological Development Area, Beijing, 100176, China. We own the land use rights to the properties at the following principal locations, each of which contains principal administrative offices, sales and marketing offices, research and development facilities, and manufacturing facilities:

Location		Approximate Sq. Meters
Beijing		90,000
Hangzhou		25,000

We leased a 4,937 square meter space in Beijing, pursuant to a five-year factory lease agreement, dated May 22, 2006, between Beijing Hollysys and Beijing Lighting Fixture Co., Ltd., for a monthly rent of approximately RMB100,000. The lease expired in August 2010. We moved into our newly constructed facility in the Beijing Yizhuang Exonomic Development Zone at the end of August 2010, where our dispersed personnel in Beijing have been relocated to the same campus location with production capacity doubled. At the new facility, we expect to have sufficient space to quadruple our production capacity if the production demand warrants it.

The manufacturing facilities at the above locations are used for the system integration production, including hardware testing instruments, auxiliary material processing, packaging and shipping, and for self-made product integration production, including inspection and testing.

D. Organizational Structure

The following diagram illustrates our corporate structure as of the date of this annual report. We are a holding company with no operations of our own. We conduct our operations in China mainly through our Chinese operating companies, Beijing Hollysys, Hangzhou Hollysys and Beijing Hollysys Automation & Drive Co., Ltd.

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

ITEM 4A.

UNRESOLVED STAFF COMMENTS

Not Applicable

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item 3. Key Information—D. Risk Factors” or in other parts of this annual report on Form 20-F.

Overview

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

The main channel through which we obtain our automation system business is the bidding process. Customers seeking bids propose their requirements and specifications in legal bidding documents and companies that are interested in obtaining these contracts make a bid in a written form. If we win the bidding, we get the integrated contract.

We derive our revenue mainly from the integrated contracts we have won through the bidding process, which accounts for over 90% of the total consolidated revenue. In addition, we sell spare parts and component products to customers for maintenance and replacement purposes after the completion of the integrated solution contract. Product sales are not part of the integrated contracts. Therefore, it is another stream of revenue but minor in volume.

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

	Years Ended June 30,
	2008			2009			2010
Number of new contracts won during the year			1,293			1,194			1,800
Total amount of new contracts (mm)		$	216.40		$	201.66		$	267.17
Average price per contract		$	167,364		$	168,892		$	148,428

	As of June 30,
Backlog Situation:	2008		2009		2010
Contracts newly entered and unfinished (mm)	$	124.42	$	115.52	$	145.91
Contracts started in the prior year and unfinished (mm)	$	54.03	$	73.42	$	106.95
Total amount of backlog (mm)	$	178.45	$	188.94	$	252.86

As indicated above, both the amount of new contracts won and the amount of backlog have been increasing steadily during the past three years.

As a growing company, we have achieved significant progress in the past three years. Our total consolidated revenues for the fiscal year ended June 30, 2010 was approximately $174.1 million, compared to approximately $157.50 million for the prior fiscal year, representing an increase of 10.5%, followed by a growth of 29.6% from approximately $121.50 million in fiscal 2008.

Recent Developments

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

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

Key Factors Affecting Our Growth, Operating Results and Financial Condition

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

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

The success in expanding our business in targeted emerging markets and overseas market, which may require us to overcome domestic competitions and any trade barriers.

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

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

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

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

The ability in securing and protecting our intellectual property rights will be critical, as our business is based on a number of proprietary products and systems, and we strive to strengthen and differentiate our product portfolio by developing new and innovative products and product improvements.

The success in penetrating into the railway and nuclear power market sectors can bring in revenues and margins. In addition to the traditional industrial automation business, our plan for future growth includes an increasing emphasis on rail control systems and nuclear power generation control systems.

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

The continued growth in Chinese industry and Chinese economy in general. This continued growth will create more business opportunities for us, as industrial companies in China are our principal source of revenues.

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

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

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

Critical Accounting Policies

Principles of Consolidation and Basis of Presentation

The completion of the Share Exchange Transaction enabled the shareholders of GTH to obtain a majority voting interest in Hollysys. Generally accepted accounting principles in the United States require that the company whose shareholders retain the majority interest in a combined business be treated as the acquirer for accounting purposes. Accordingly, the aforementioned Share Exchange Transaction was accounted for as a reverse acquisition of a private operating company (GTH) with a non-operating public company (Chardan) with significant amount of cash. The reverse acquisition process utilizes the capital structure of Hollysys and the assets and liabilities of GTH are recorded at historical cost. Although GTH is deemed to be the accounting acquirer for financial accounting and reporting purposes, the legal status of Hollysys as the surviving company do not change. Under the reverse acquisition accounting, the historical consolidated financial statements of Hollysys for the periods prior to September 20, 2007 are those of GTH and its subsidiaries. Since GTH is deemed as accounting acquirer, GTH’s fiscal year replaced Hollysys’ fiscal year.

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

Non-controlling interest

Effective July 1, 2009 the Company adopted an authoritative pronouncement issued by the Financial Accounting Standards Board (the “FASB”) regarding non-controlling interests in consolidated financial statements. The pronouncement requires non-controlling interests to be separately presented as a component of equity in the consolidated financial statements. The presentation regarding non-controlling interest was retroactively applied for all the presented periods.

Foreign Currency Translations and Transactions

The Renminbi (“RMB”), the national currency of PRC, is the primary currency of the economic environment in which the operations of the Company are conducted and is determined the functional currency of all PRC subsidiaries. The Company uses the United States dollar for financial reporting purposes.

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

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturity of three months or less to be cash equivalents.

Revenue Recognition

Revenues generated from designing, building, and delivering customized integrated industrial automation systems and providing relevant solutions are recognized over the contractual terms based on the percentage of completion method. The contracts for designing, building, and delivering customized integrated industrial automation systems are legally enforceable binding agreements between the Company and customers. Performance of these contracts will often extend over long periods, and the Company’s right to receive payments depends on its performance in accordance with these contractual agreements. The duration of contracts the Company performs is depending on the contract size in terms of dollar amounts. In general, the bigger the contract size is, the longer the duration of that contract is. The duration of a small contract is less than one year without including warranty period. The duration of a large contract is longer than one year without including warranty period. Including the warranty period, all of contracts have their duration longer than one year, ranging from 16 months to 61 months. The operating cycle of the Company is determined by a composite of many individual contracts in various stage of completion and is measured by the duration of the average time intervening between the acquisition of materials or service entering the construction process and the substantial completion of contracts. Based on the historical experience, the operating cycle of the Company exceeds one year.

In accordance with Accounting Standards Codification (“ASC”) 605-305 Revenue Recognition - Construction-Type and Production-Type Contracts recognition is based on an estimate of the income earned to date, less income recognized in earlier periods. Estimates of the degree of completion are based on the costs incurred to date comparing to the expected total costs for the contracts. Revisions in the estimated profits are made in the period in which the circumstances requiring the revision become known. Provisions, if any, are made currently for anticipated loss on the uncompleted contracts. Revenue in excess of billings on the contracts is recorded as costs and estimated earnings in excess of billings. Billings in excess of revenues recognized on the contracts are recorded as deferred revenue until the above revenue recognition criteria are met. Billings are rendered based on agreed milestones included in the contracts with customers. There are different milestones among the contracts the Company has won. In general, there are four milestones: 1) system manufacturing, 2) system delivery, 3) installation, trial-run, and customer acceptance, and 4) expiration of a warranty period. The amount to be billed when each of the specified milestones is reached has been specified in a contract. All contracts have the first milestone, but not all contracts have a prepayment.

The Company recognizes 100% of the contractual revenue at the end of customer acceptance stage as the Company estimates that no further major costs will incur under a contract, a signed customer acceptance document has been obtained, and a warranty period starts to count. Revenues are presented net of taxes collected on behalf of government.

Revenue generated from sales of electronic equipment is recognized when persuasive evidence of an arrangement exists, delivery of the products has occurred, customer acceptance has been obtained, which means the significant risks and rewards of the ownership have been transferred to the customer, the price is fixed or determinable and collectability is reasonably assured.

Inventories

Inventories are composed of raw materials and low value consumables, work in progress, and purchased and manufactured finished goods. Inventories are stated at the lower of cost or the market value.

On January 1, 2009, the Company elected to change the “costing method” for purchased inventories previously accounted for on the “weighted average basis” to the “first-in, first-out basis”. The percentage of purchased inventories accounted for under the weighted average method shared approximately 64% of the closing inventories at December 31, 2008. The Company believe that purchased inventories measured based on first-in first-out basis can better reflect the current value of purchased inventories on the Consolidated Balance Sheet and enhances the matching of future cost of sales with revenues. Since the change of the inventories costing method did not result in a material cumulative difference or a material difference in any one reporting period, and consequently the prior periods figures have not been restated. The cumulative effect of the accounting change, which was immaterial, was reflected in the results of operations in the year ended June 30, 2009.

The Company makes provisions for estimated excess and obsolete inventory based on its regular reviews of inventory quantities on hand and the latest forecasts of product demand and production requirements from its customers. The Company writes down inventories for not saleable, excess or obsolete raw materials, work-in-process and finished goods by charging such write-downs to cost of sales. In addition to write-downs based on newly introduced parts, statistics and judgments are used for assessing a provision on the remaining inventory based on salability and obsolescence.

Warranty

Warranty is a major term under an integrated contract, which will last, in general, for twelve months or be specified under a contract. The Company estimates a warranty liability under a contract using a percentage of revenue recognized, which is derived from its historical experience, in order to recognize a warranty cost for a contract in the proper period of time. In addition, at the end of each reporting period, the Company estimates whether or not the accrued warranty liabilities are adequate based on 1) the outstanding warranty time period of a contract which has entered into the warranty period, 2) the total revenue has recognized on a contract which has been under the warranty period, and 3) all contracts which have been under the warranty period. The Company adjusts the accrued warranty liabilities in line with the result of its assessment.

Accounts Receivable and Cost and estimated earnings in excess of billings

Performance of the contracts often will extend over long periods and the Company’s right to receive payments depends on its performance in accordance with these contractual agreements. The Company bills a customer in accordance with the amount specified under the contract from the cost and estimated earnings in excess of billings when the Company’s performance has reached a milestone. In general, among four milestones, each interval of two contiguous billings under a contract is within one year (under certain railway control system contracts, the interval of two contiguous billings is longer than one year) and the last billing to be issued for a contract is at the end of the warranty period. When a customer makes a prepayment at the start of a contract, the amount received will be recorded as deferred revenue. The deferred revenue would be recognized as revenue under the percentage of completion method along with the progress of a contract. If no prepayment is received by the Company, revenue would be recognized through cost and estimated earnings in excess of billings. Accordingly, when a particular milestone is reached, a particular amount of cost and estimated earnings in excess of billings will be transferred into accounts receivable. Cost and estimated earnings in excess of billings are usually billed within one year. The Company does not specify credit terms in its invoices and expect that its customers will make their payments upon receipt even though the contract terms say that a specific amount is due when a milestone is reached. The Company does not require collateral from its customers. Based on the prevailing collection practice in China, it is a reasonable expectation for the enterprises in automation industry to take over one year to collect accounts receivable.

As of June 30, 2009 and 2010, balance of $6,772,812 and $7,065,816 were related to contracts which have been completed but are still within the warranty period respectively.

The Company issues invoices to its customers without specifying credit terms and consequential interests charge for late payments by its customers. The Company reviews the status of contracts periodically and decided how much allowance for doubtful accounts should be made based on factors surrounding the credit risk of customers, as well as its historical experience. The Company set up bad debt allowance for an individual customer if there is a deterioration of the customer’s creditability and the assessed probability of default is higher than the historical experience.

Based on the information available to management, the Company believes that its allowance for doubtful accounts as of June 30, 2009 and 2010 were adequate, respectively.

The allowance for doubtful debts for the years ended June 30, 2008, 2009 and 2010 were $3,439,486, $1,145,770, and $2,790,078 respectively.

Property, Plant and Equipment

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

Land use right		49 years
Buildings		30 years
Machinery		5 - 10 years
Software		5 years
Vehicles and other equipment		5 years

Construction in progress represents construction of certain facilities which construction work has not been completed and which, upon completion, management intends to hold for production purpose. In addition to costs under construction contracts, external costs directly related to the construction of such facilities, including duty and tariff, equipment installation and shipping costs, and borrowing costs are capitalized. Depreciation is recorded at the time assets are placed in service.

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

Impairment of Long-Lived Assets

The Company adopts the provisions of ASC Topic 360 Property, Plant and Equipment, which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose.

The impairment loss on long-lived assets for the years ended June 30, 2008, 2009 and 2010 were nil, nil, and $715,246 respectively, which represented impairment loss on property, plant and equipment.

Shipping and Handling Cost

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

Goodwill and Impairment Test

Goodwill resulting from an acquisition is measured at the excess of the cost of the business combination over the fair value of the assets acquired and liabilities assumed. Goodwill will not be amortized, instead be tested for impairment at least annually as prescribed by ASC Topic 350 Intangibles - Goodwill and Other. If the fair value is less than its carrying value, an indication of goodwill impairment exists, then the carrying value of goodwill is written down, and an impairment loss is recognized for any excess of the carrying amount over the implied fair value of the goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. For the year ended June 30, 2008, 2009 and 2010, there was an impairment loss of $99,439, nil, and $286,610 respectively. The carrying value of goodwill was written down to $0 as of June 30, 2009 and 2010.

Income Taxes

The Company accounts for income taxes in accordance with ASC Topic 740 Income Taxes, which requires an entity to recognize deferred tax liabilities and assets. Deferred tax assets and liabilities are recognized for the future tax consequence attributable to the difference between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are measured using the enacted tax rate expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant tax authorities.

The Company adopted the “Accounting for Uncertainty in Income Taxes” which included in ASC Topic 740 Income Taxes. It clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. It prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. The Company’s policy on classification of all interest and penalties related to unrecognized tax benefits, if any, as a component of income tax provisions.

Value Added Tax

All the PRC subsidiaries of the Company are subject to value added tax (“VAT”) imposed by PRC government on its domestic product sales. The output VAT is charged to customers who purchase goods from the Company and the input VAT is paid when the Company purchases goods from its vendors. VAT rate is 17%, in general, depending on the types of product purchased and sold. The input VAT can be offset against the output VAT. VAT payable or receivable balance presented on the Company’s balance sheets represents either the input VAT less than or larger than the output VAT. The debit balance represents a credit against future collection of output VAT instead of a receivable.

Research and Development

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

VAT Refunds and Government Subsidies

Pursuant to the laws and regulations of the PRC, the Company remits 17% of its sales as VAT to the government, and then is entitled to a refund of the 14% VAT levied on all sales containing our internally developed software products. The Company recognizes the VAT refunds upon the completion of government approval process. Certain subsidiaries of the Company located in PRC have, respectively, received certain government subsidies from local PRC government agencies. Government subsidies are recognized when received and the conditions prescribed by the government have been fulfilled. VAT refunds and government subsidies are included as a credit in the operating expense in the consolidated statement of income, which is largely research and development tax credit in essence.

Appropriations to Statutory Reserve

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

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Comprehensive Income

The Company adopted ASC Topic 220 Comprehensive Income, which establishes standards for reporting and presentation of comprehensive income and its components in a full set of general-purpose financial statements. Accumulated other comprehensive income represents foreign currency translation adjustments and is included in the consolidated statement of income and comprehensive income.

Long Term Investments

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

Under the equity method, original investments are recorded at cost and adjusted by the Company's share of undistributed earnings or losses of these entities, by the amortization of any difference between the amount of the Company's investment and its share of the net assets of the investee, and by dividend distributions or subsequent investments. All unrealized inter-company profits and losses are eliminated under the equity method. When the estimated amount to be realized from the investments falls below its carrying value, an impairment charge is recognized in the consolidated statements of income when the decline in value is considered other than temporary.

The impairment loss on long term investments for the years ended June 30, 2008, 2009 and 2010 were nil, nil, and $152,732 respectively.

Earnings (Loss) Per Share

The Company presents earnings per share in accordance with the ASC Topic 260 Earnings Per Share, which defines that basic earnings (loss) per share include no dilution and are computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period whereas diluted earnings (loss) per share reflect the potential dilution of securities that could share in the earnings of an entity.

Share-based Compensation

The Company adopted ASC Topic 718 Compensation - Stock Compensation, which requires that share-based payment transactions with employees, such as share options, be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period, with a corresponding addition to equity. Under this method, compensation cost related to employee share options or similar equity instruments is measured at the grant date based on the fair value of the award and is recognized over the period during which an employee is required to provide service in exchange for the award, which is generally the vesting period.

Fair Value Measurements

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

Level 1 -

Quoted prices in active markets for identical assets or liabilities.

Level 2 -

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

Level 3 -

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

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

Recent Accounting Pronouncements

In June 2009, the FASB issued “Accounting for Transfers of Financial Assets” included in ASC 860 Transfer and Servicing. This pronouncement is intended to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. This pronouncement must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009. Earlier application is prohibited. This pronouncement must be applied to transfers occurring on or after the effective date. The Company does not expect the adoption of this pronouncement would have a significant effect on the Company’s financial position, result of operations and cash flow.

In June 2009, the FASB issued “Amendments to FASB Interpretation No. 46(R)” included in ASC 810 Consolidation. This pronouncement seeks to improve financial reporting by enterprises involved with variable interest entities. This pronouncement is applicable for annual periods that begins after November 15, 2009 and interim periods therein and thereafter. The Company does not expect the adoption of the adoption of this pronouncement would have a significant effect on the Company’s financial position, result of operations and cash flow.

In July 2009, the FASB issued ASU 2009-13 Revenue Recognition (Topic 605) Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”). This pronouncement was issued in response to practice concerns related to the accounting for revenue arrangements with multiple deliverables under existing pronouncement. Although the new pronouncement retains the criteria from exiting pronouncement for when delivered items in a multiple-deliverable arrangement should be considered separate units of accounting, it removes the previous separation criterion under existing pronouncement that objective and reliable evidence of the fair value of any undelivered items must exist for the delivered items to be considered a separate unit or separate units of accounting. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. The Company is currently evaluating the potential impact on the adoption of ASU 2009-13 may have on the Company’s financial position, result of operations and cash flow.

In October 2009, the FASB issued ASU No. 2009-14 Software (Topic 985) Certain Revenue Arrangements That Include Software Elements (“ASU No. 209-14”). The pronouncement provides that products containing both software and non-software components that function together to deliver the product’s essential functionality are excluded from the scope of current revenue recognition guidance for software products. The pronouncement includes factors that entities should consider when determining whether the software and non-software components function together to deliver the product’s essential functionality. ASU No. 209-14 is effective for fiscal years beginning on or after June 15, 2010. The Company is currently evaluating the potential impact on the adoption of ASU 2009-14 may have on the Company’s financial position, result of operations and cash flow.

In January 2010, the FASB issued ASU No. 2010-02 Consolidation (Topic 810) Accounting and Reporting for Decreases in Ownership of a Subsidiary (“ASU No. 2010-02”). This pronouncement is an authoritative guidance to clarify the scope of accounting and reporting for decreases in ownership of a subsidiary. The objective of this guidance is to address implementation issues related to changes in ownership provisions. This guidance clarifies certain conditions, which need to apply to this guidance, and it also expands disclosure requirements for the deconsolidation of a subsidiary or derecognition of a group of assets. ASU No. 2010-02 is effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. The Company does not expect the adoption of ASU No. 2010-02 would have a significant effect on the Company’s financial position, result of operations and cash flow.

In January 2010, the FASB issued ASU No. 2010-06 Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements (“ASU No. 2010-06”). This pronouncement is an authoritative guidance to improve disclosures about fair value measurements. This guidance amends previous guidance on fair value measurements to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurement on a gross basis rather than on a net basis as currently required. This guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. ASU No. 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the impact of ASU No. 2010-06 on the Company’s consolidated financial statements, but does not expect it to have a material impact.

Financial Position

The following are some financial highlights for the fiscal year ended June 30, 2010:

Total assets increased by approximately $39.29 million, from approximately $345.44 million as of June 30, 2009 to approximately $384.73 million as of June 30, 2010. The increase was mainly due to an increase of approximately $18.24 million in property, plant and equipment, an increase of approximately $9.83 million in cost and estimated earnings in excess of billings, an increase of approximately $7.84 million in accounts receivable, and an increase of approximately $4.72 million in inventories.

Accounts receivable at June 30, 2010 was approximately $64.38 million, an increase of approximately $7.84 million, or 13.9%, compared to approximately $56.55 million at June 30, 2009. The increase was mainly due to our increased revenues.

Cost and estimated earnings in excess of billings as of June 30, 2010 were approximately $60.93 million compared to approximately $51.10 million as of June 30, 2009, representing an increase of approximately $9.83 million, or 19.2%. The increase was mainly attributable to the increase in total revenues.

Inventory as of June 30, 2010 was approximately $23.55 million, an increase of approximately $4.72 million, or 25.0%, compared to approximately $18.84 million at June 30, 2009.

Property, plant and equipment increased by approximately $18.24 million, or 38.7%, from approximately $47.10 million at June 30, 2009, to approximately $65.35 million at June 30, 2010, mainly due to significant input in construction of the new facility, which has been substantially completed by the end of fiscal year 2010, and completed in August 2010.

Long-term investment at June 30, 2010 was approximately $17.35 million, an increase of approximately $3.77 million, or 27.8%, compared to approximately $13.57 million at June 30, 2009. The increase in long-term investment was mainly due to approximately $2.9 million of net gains of our nuclear joint venture, China Techenergy Co., Ltd., for this fiscal year.

Total liabilities at June 30, 2010 were approximately $171.26 million, increased by approximately $21.83 million, or 14.6%, compared to approximately $149.42 million at June 30, 2009. The increase in liabilities was mainly due to an increase of approximately $12.48 million in deferred revenue, an increase of $5.44 million in accrued liabilities, and an increase of approximately $4.57 million in income tax payable.

Deferred revenue increased by approximately $12.48 million, or 59.2%, from approximately $21.07 million at June 30, 2010, to approximately $33.55 million at June 30, 2010, mainly due to the increased advances received related to our subway automation contracts we signed during fiscal 2010.

Accrued liabilities amounted to $8.08 million and $2.63 million as of June 30, 2010 and 2009, respectively, representing an increase of $5.44 million, of 206.7%, mainly due to the RMB 27 million (approximately equivalent to $3.98 million) subsidy, related to the new facility construction. The subsidy was offset to the cost of the new facility when the construction was completed in August 2010.

Income tax payable at June 30, 2010 was approximately $5.97 million, representing an increase of approximately $4.57 million, or 327.2%, compared to approximately $1.40 million at June 30, 2009. The increase was mainly due to a one-time recognition of a $4.47 million tax liability related to Hollysys group re-organization, which we included a detail description in the following comparison of income tax expenses of fiscal years Ended June 30, 2010 and 2009.

Operating Results

Comparison of Fiscal Years Ended June 30, 2010 and 2009

Operating Revenues: For the fiscal year ended June 30, 2010, total revenues amounted to approximately $174.09 million, an increase of approximately $16.59 million, compared to approximately $157.50 million for the prior fiscal year, representing a significant increase of 10.5%.

Integrated contract revenue accounted for approximately $164.12 million of total revenues, an increase of approximately $14.81 million, or 9.9%, compared to approximately $149.30 million for the prior fiscal year. The increase in revenues was mainly attributable to an increase of approximately $12.71 million of revenues generated from the sale of our industrial automation products.

Approximately $9.97 million of total revenues related to product revenue, an increase of approximately $1.77 million, or 21.6%, compared to approximately $8.20 million in product revenue for the prior year. Product revenue depends on overall demand for the Company’s spare parts for customers’ maintenance and replacement purposes during the 2010 fiscal year.

Revenue Backlog: An important measure of the stability and growth of the Company’s business is the size of its backlog, which represents the total amount of unrecognized revenue associated with existing contracts. Any deferral of revenue recognition is reflected in an increase in backlog as of the end of current period. Our backlog as of June 30, 2010, amounted to approximately $252.86 million, representing an increase of approximately $63.92 million, or 33.83%, compared to approximately $188.94 million as of June 30, 2009.

Of the total backlog as of June 30, 2010, the unrecognized revenue associated with new contracts signed in the fiscal 2010 period was approximately $145.91 million and the carry forward amount of the outstanding contracts from the prior year was approximately $106.95 million. The total backlog as of June 30, 2009 comprised of approximately $115.52 million from new contracts signed in fiscal year 2009, and approximately $73.42 million from contracts carried forward from prior year.

Cost of Revenues: Cost of revenues can be divided into cost of integrated contracts and cost of products sold, in line with the categories of revenues. For the fiscal year ended June 30, 2010, the total cost of revenues amounted to approximately $113.94 million, an increase of approximately $11.01 million, or 10.70%, compared to approximately $102.92 million for the prior fiscal year. The increase was due to an approximately $10.84 million increase in the cost of integrated contracts, and an approximately $0.17 million year over year increase in the cost of products sold.

The cost of integrated contract revenue consists primarily of three components: cost of equipment and materials, labor costs and other manufacturing expenses incurred from designing, building and delivering customized automation solutions to customers. The total cost of integrated contracts was approximately $110.27 million for the fiscal year ended June 30, 2010, compared to approximately $99.42 million for the prior fiscal year, representing an increase of approximately $10.84 million, or 10.9%. The increase was primarily due to an increase of approximately $5.50 million in the cost of equipment and materials, and approximately $4.94 million in other manufacturing expenses. Labor cost accounted for 5.1% of the cost of integrated contract revenue for the fiscal 2010 period, compared to 4.8% for the prior fiscal year; cost of equipment and materials accounted for 76.0%, compared to 78.7% for the prior fiscal year; and other manufacturing expenses accounted for 18.9%, compared to 16.4% for the prior fiscal year. Labor cost accounted for 3.4% of the integrated contract revenue for the 2010 period, compared to 3.2% for the prior fiscal year. Cost of equipment and materials accounted for 51.0%, compared to 52.4% for the prior fiscal year. Other manufacturing expenses accounted for 12.7%, compared to 10.9% for the prior fiscal year. The cost components of integrated contracts were determined and varied according to requirements of different customers.

Sales of products represent sales of spare parts (either self-made or purchased from outside vendors) to customers for maintenance and replacement purposes. The products purchased from outside vendors have different functions and capabilities from our self-made products. We decide whether or not to purchase from outside vendors or make the necessary products ourselves, based on the needs and preferences of different customers and efficiency considerations. Therefore, as a percentage of the cost of products sold, the self-made products and outsourced products have varied significantly from time to time. As our self-made products generally contribute higher margins than products purchased from outside vendors, sales of a greater portion of self-made products generally result in lower costs of products sold. The cost of products sold for fiscal year ended June 30, 2010 was approximately $3.67 million, an increase of approximately $0.17 million, compared to approximately $3.50 million for the prior fiscal year.

Gross Margin: For the fiscal year ended June 30, 2010, as a percentage of total revenues, the overall gross margin was 34.6%, compared 34.7% for the prior fiscal year. The gross margin for integrated contracts was 32.8% for the year ended June 30, 2010, compared to 33.4% for the prior year. The decrease in gross margin for integrated contracts was due mainly to our different sales mix during the fiscal 2010 period. The gross margin for products sold was 63.2% for the fiscal year ended June 30, 2010, compared to 57.3% for the prior fiscal year.

Selling Expenses: Selling expenses mainly consist of compensation, traveling and administrative expenses related to marketing and sales and promotion activities of the Company’s marketing and credit departments. Selling expenses were approximately $12.15 million for the fiscal year ended June 30, 2010, an increase of 21.3%, or approximately $2.13 million, compared to approximately $10.02 million for the prior fiscal year, mainly due to the Company’s increased marketing activities. As a percentage of total revenues, selling expenses accounted for 7.0% and 6.4% for the fiscal year ended June 30, 2010 and 2009, respectively. The Company has established guidelines to monitor and evaluate sales performance for its products to customers in different industries and regions to control selling expenses.

General and administrative expenses: General and administrative expenses mainly include compensation, traveling and other administrative expenses of non-sales-related departments, such as the planning and finance department, information systems department and human resources department. General and administrative expenses amounted to approximately $13.91 million for the fiscal year ended June 30, 2010, representing an decrease of approximately $35.07 million, or 71.6%, compared to approximately $48.98 million for the prior fiscal year. The decrease in general and administrative expenses was mainly due to a decrease of approximately $39.03 million in the stock compensation expense on the modification of earn-out shares and granted options, an increase of approximately $1.6 million in bad debt allowance, an increase of approximately $1.2 million in staff salaries and bonus, and an increase of approximately $0.7 million in provision for fixed assets. Excluding stock compensation expenses and option expenses, general and administrative expenses should be approximately $13.39 million and approximately $9.42 million, or 7.7% and 6.0% as a percentage to total revenues, for the fiscal years ended June 30, 2010 and 2009, respectively.

Pursuant to the stock purchase agreement under the re-domestication merger, the Company agreed to issue 2 million shares to the original stockholders of Gifted Time if the Company achieves or exceeds an after-tax profit of $32 million for the 12 months ended December 31, 2008. After-tax profit was computed using US GAAP and referred to comprehensive income, excluding (i) any after-tax profits from any acquisition by the Company or its subsidiaries that involved the issuance of securities that had a dilutive effect on the holders of ordinary shares of the Company, and (ii) any expenses related to the issue of the aforesaid shares. Management determined that the Company achieved such earn-out target for the abovementioned period and the board approved the issuance of the earn-out shares. The Company has accounted for the fair value of the aforesaid shares to be issued for the year ended June 30, 2009 as stock compensation expenses and $17.0 million was recorded in the statement of income. On June 15, 2009, the Company and the original stockholders of Gifted Time agreed to amend the stock purchase agreement to cancel the remaining 7 million incentive shares issuable to the original Gifted Time stockholders under the stock purchase agreement for the calendar years ended December 31, 2009, 2010, and 2011, in exchange for the immediate issuance of 4 million shares to the original Gifted Time stockholders. The Company has accounted for the fair value of the aforesaid 4 million shares as stock compensation expenses and approximately $22.24 million was recorded in the statement of income for the fiscal years ended June 30, 2009.

Research and Development Expenses: Research and development expenses comprise mostly employee compensation, materials consumed and experiment expenses for specific new product research and development, and any expenses incurred for basic research on advanced technologies. For the fiscal year ended June 30, 2010, research and development expenses were approximately $13.07 million, compared to approximately $8.83 million for the prior fiscal year. The approximately $4.24 million, or 48.0%, increase was mainly due to increased research and development activities during the 2010 period. As a percentage of total revenues, research and development expenses was 7.5% and 5.6% for the fiscal years ended June 30, 2010 and 2009, respectively.

VAT Refunds and Government Subsidies: The local governments in Beijing and Hangzhou provide financial subsidies out of the value added tax they collect in order to encourage the research and development efforts of certain enterprises. Beijing HollySys and Hangzhou HollySys both received such refunds. All VAT refunds were accounted for based on hard evidence that the operations of those companies were entitled to receive these refunds or that cash had been received. For the fiscal year ended June 30, 2010, VAT refunds were approximately $8.97 million, compared to approximately $5.94 million for the prior fiscal year, increased by approximately $3.03 million, or 51.0%. As a percentage of total revenues, VAT refunds were 5.2% and 3.8% for the fiscal years ended June 30, 2010 and 2009, respectively.

The local governments in Beijing and Hangzhou also provide financial subsidies to encourage development of certain enterprises. Beijing HollySys and Hangzhou HollySys both received such subsidies. All subsidies were accounted for based on hard evidence that the operations of those companies were entitled to receive these subsidies or that cash had been received. Gross subsidy income received from the government amounted to approximately $2.56 million and approximately $1.76 million for the fiscal year ended June 30, 2010 and 2009, respectively, an increase of approximately $0.80 million, or 45.3%.

Income (loss) from Operations: Income from operations increased by approximately $38.10 million, from a loss of approximately $5.55 million for the fiscal year ended June 30, 2009, to an income of approximately $27.60 million for the fiscal year ended June 30, 2010. The increase in income from operations was primarily due to the decrease in stock compensation expenses related to 2009 incentive share issuance and option grants. Excluding stock compensation expenses, operating income as a percentage of total revenues for the fiscal year ended June 30, 2010 was approximately $33.07 million, or 19.0%, as compared to approximately $34.01 million, or 21.6% as a percentage of total revenues for the prior year, an decrease that was mainly due to the increase in research and development expenses.

Interest Expenses, Net: For the year ended June 30, 2010, net interest expenses increased by approximately $0.12 million, or 12.2%, from approximately $0.95 million for the prior year, to approximately $1.07 million for the current period. As a percentage of total revenue, net interest expense accounted for 0.6% and 0.6% for the fiscal years ended June 30, 2010 and 2009, respectively.

Income Tax Expenses: For the year ended June 30, 2010, the Company’s income tax expense was approximately $7.66 million for financial reporting purposes, an increase of approximately $4.60 million, as compared to a income tax expense of approximately $3.06 million for the prior year. The increase was mainly due to a one-time tax expense of $4.45 million related to Hollysys group re-organization as the follows:

In February 2010, Hollysys re-organized the group structure of its wholly owned PRC subsidiaries, or the Reorganization. Before the Reorganization, Hangzhou Hollysys was 60% owned by Gifted Time and 40% by Beijing Hollysys. To minimize the tax expenses arising from the Reorganization, Hangzhou Hollysys declared dividends pay-out for all the retained earnings of Hangzhou Hollysys as of December 31, 2009 to reduce its fair market value, and then conducted the ownership transfer within Hollysys group, as illustrated in the diagram below. The one-time re-organization related tax expense of $4.45 million is consisted of $3.08 million of dividend pay-out withholding tax and $1.37 million of investment income tax;

On February 1, 2010, the board of directors of Hangzhou Hollysys adopted a resolution of declaring dividends of $75.25 million, among which $30.10 million was to be paid to Beijing Hollysys, and the reaming $45.15 million to Gifted Time. Pursuant to China’s Corporate Income Tax Laws, domestic companies are required to withhold income tax on dividends pay-out to non-resident companies based on the earnings after January 1, 2008, $30.82 million out of $45.15 million dividends to Gifted Time falls into this category. According to the tax treaty between China and the BVI, 10% of $30.82 million was withheld by Hangzhou Hollysys;

On February 3, 2010, Beijing Hollysys S&T entered into a stock purchase agreement to purchase 20% and 40% ownership of Hangzhou Hollysys from Gifted Time and Beijing Hollysys, for RMB 24 million and RMB 48 million, respectively. Hangzhou Hollysys’ fair market value was appraised at US$109.99 million by Hangzhou Lixin Assets Appraisal Company, which rendered investment taxable income of $3.43 million and $6.86 million for Gifted Time and Beijing Hollysys, respectively, among which $0.34 million was withheld as investment income tax for Gifted Time, and $1.03 million was accrued as investment income tax by Beijing Hollysys based on a 15% tax rate. After the Reorganization, Hangzhou Hollysys has been 60% owned by Beijing Hollysys S&T and 40% owned by Gifted Time.

Net income attributable to non-controlling interest: The non-controlling interest of the Company includes other parties’ interests in each subsidiaries. For fiscal 2010, the non-controlling interest is an ownership interests of 49% in Beijing WodeWeiYe and Hollycon, respectively, as compared to 25.89%, 10.36% and 31.45% in Beijing Hollysys, Hangzhou Hollysys, and Beijing Haotong, respectively, for fiscal 2009. The decrease in non-controlling interest s mainly due to the acquisition of the remaining 24.11% interest of Beijing HollySys by the Company during the year. The net income attributable to non-controlling interest for the fiscal year ended June 30, 2010 was $1.85 million, a decrease of $3.34 million, or 64.3%, from $5.19 million for the prior year, primarily due to the decrease in non-controlling interests.

Net income (loss) and Earnings (loss) per share attributable to Hollysys: For the fiscal year ended June 30, 2010,net income attributable to Hollysys amounted to approximately $25.70 million or $0.50 per diluted share, an increase of approximately $39.56 million, or $0.80 per diluted share, as compared to a net loss of approximately $13.85 million, or $(0.31) per diluted share, for the prior year. Such increase was primarily due to an increase of approximately $5.60 million in gross profit, a decrease of approximately $39.56 million in stock compensation expenses related to incentive shares and granted options, and an increase of $4.60 million in income tax expenses..

Comparison of Fiscal Years Ended June 30, 2009 and 2008

Operating Revenues: For the year ended June 30, 2009, total revenues amounted to $157.50 million, an increase of $36.00 million, compared to $121.50 million for the prior fiscal year, representing a significant increase of 29.6%.

Integrated contract revenue accounted for $149.30 million of total revenues, an increase of $36.95 million, or 32.9%, compared to $112.36 million for the prior fiscal year. The increase in revenues was mainly attributable to a significant increase of $30.47 million in railway automation and control and system integration projects for subway systems. Such contracts were for larger contract amounts and at a higher gross profit rate.

Approximately $8.20 million of total revenues related to product revenue, a decrease of $0.94 million, or 10.3%, compared to $9.14 million in product revenue for the prior year. Product revenue depends on overall demand for the Company’s spare parts for customers’ maintenance and replacement purposes during the 2009 fiscal year.

Revenue Backlog: An important measure of the stability and growth of the Company’s business is the size of its backlog, which represents the total amount of unrecognized revenue associated with existing contracts. Any deferral of revenue recognition is reflected in an increase in backlog as of the end of current period. Our backlog as of June 30, 2009, amounted to $188.94 million, representing an increase of $10.49 million, or 5.9%, compared to $178.45 million as of June 30, 2008.

Of the total backlog as of June 30, 2009, the unrecognized revenue associated with new contracts signed in the 2009 period was $115.52 million and the carry forward amount of the outstanding contracts from the prior year was $73.42 million. The total backlog as of June 30, 2008 comprised of $124.42 million from new contracts signed in fiscal year 2008, and $54.03 million from contracts carried forward from prior year.

Cost of Revenues: Cost of revenues can be divided into cost of integrated contracts and cost of products sold, in line with the categories of revenues. For the year ended June 30, 2009, the total cost of revenues amounted to $102.92 million, an increase of $18.05 million, or 21.3%, compared to $84.87 million for the prior fiscal year. The increase was due to an $18.01 million increase in the cost of integrated contracts, and a $0.04 million year over year increase in the cost of products sold.

The cost of integrated contract revenue consists primarily of three components: cost of equipment and materials, labor costs and other manufacturing expenses incurred from designing, building and delivering customized automation solutions to customers. The total cost of integrated contracts was $99.42 million for the fiscal year ended June 30, 2009, compared to $81.41 million for the prior fiscal year, representing an increase of $18.01 million, or 22.1%. The increase was primarily due to an increase of $18.08 million in the cost of equipment and materials related to the higher cost of equipment imported for the railway automation and control projects and system integration projects for subway systems during the 2009 period. Labor cost accounted for 4.8% of the cost of integrated contract revenue for the 2009 period, compared to 7.5% for the prior fiscal year; cost of equipment and materials accounted for 78.7%, compared to 73.9% for the prior fiscal year; and other manufacturing expenses accounted for 16.4%, compared to 18.5% for the prior fiscal year. Labor cost accounted for 3.2% of the integrated contract revenue for the 2009 period, compared to 5.5% for the prior fiscal year, which the change was caused by the components of cost of integrated contracts which varied in accordance with customer specifications in the 2009 period. Cost of equipment and materials accounted for 52.4%, compared to 53.6% for the prior fiscal year. Other manufacturing expenses accounted for 10.9%, which decreased from 13.4% for the prior fiscal year, mainly due to the Company’s efficiency improved during the 2009 fiscal year. The cost components of integrated contracts were determined and varied according to requirements of different customers.

Sales of products represent sales of spare parts (either self-made or purchased from outside vendors) to customers for maintenance and replacement purposes. The products purchased from outside vendors have different functions and capabilities from our self-made products. We decide whether or not to purchase from outside vendors or make the necessary products ourselves, based on the needs and preferences of different customers and efficiency considerations. Therefore, as a percentage of the cost of products sold, the self-made products and outsourced products have varied significantly from time to time. As our self-made products generally contribute higher margins than products purchased from outside vendors, sales of a greater portion of self-made products generally result in lower costs of products sold. The cost of products sold for fiscal year ended June 30, 2009 was $3.50 million, an increase of $0.04 million, compared to $3.46 million for the prior fiscal year.

Gross Margin: For the year ended June 30, 2009, as a percentage of total revenues, the overall gross margin was 34.7%, compared 30.1% for the prior fiscal year, primarily because of the increase in gross margin for integrated contracts. The gross margin for integrated contracts was 33.4% for the year ended June 30, 2009, compared to 27.5% for the prior year. The increase in gross margin for integrated contracts was due mainly to our different sales mix during the 2009 period, as a higher proportion of railway automation and control projects generated a higher margin. The gross margin for products sold was 57.3% for the fiscal year ended June 30, 2009, compared to 62.2% for the prior fiscal year.

Selling Expenses: Selling expenses mainly consist of compensation, traveling and administrative expenses related to marketing and sales and promotion activities of the Company’s marketing and credit departments. Selling expenses were approximately $10.02 million for the fiscal year ended June 30, 2009, an increase of 3.5%, or $0.34 million, compared to $9.68 million for the prior fiscal year, mainly due to increase in payroll expense for sales personnel during the 2009 period. As a percentage of total revenues, selling expenses accounted for 6.4% and 8.0% for the fiscal year ended June 30, 2009 and 2008, respectively. The Company has established guidelines to monitor and evaluate sales performance for its products to customers in different industries and regions to control selling expenses.

General and administrative expenses: General and administrative expenses mainly include compensation, traveling and other administrative expenses of non-sales-related departments, such as the planning and finance department, information systems department and human resources department. General and administrative expenses amounted to $48.98 million for the fiscal year ended June 30, 2009, representing an increase of $22.39 million, or 84.2%, compared to $26.59 million for the prior fiscal year. The increase in general and administrative expenses was mainly due to the increase of $22.24 million in the stock compensation expense on the modification of earn-out shares and granted options. Excluding stock compensation expenses and option expenses, general and administrative expenses should be $9.42 million and $9.50 million, or 6.0% and 7.8% as a percentage to total revenues, for the fiscal years ended June 30, 2009 and 2008, respectively.

Pursuant to the stock purchase agreement under the re-domestication merger, the Company agreed to issue 2 million shares to the original stockholders of Gifted Time if the Company could achieve or exceed an after-tax profit of $32 million for the 12 months ended December 31, 2008. After-tax profit was computed using US GAAP and referred to comprehensive income, excluding (i) any after-tax profits from any acquisition by the Company or its subsidiaries that involved the issuance of securities that had a dilutive effect on the holders of ordinary shares of the Company, and (ii) any expenses related to the issue of the aforesaid shares. Management determined that the Company achieved such earn-out target for the abovementioned period and the board approved the issuance of the earn-out shares. The Company has accounted for the fair value of the aforesaid shares to be issued for the year ended June 30, 2009 as stock compensation expenses and $17.0 million was recorded in the statement of income. On June 15, 2009, the Company and the original stockholders of Gifted Time agreed to amend the stock purchase agreement to cancel the remaining 7 million incentive shares issuable to the original Gifted Time stockholders under the stock purchase agreement for the calendar years ended December 31, 2009, 2010, and 2011, in exchange for the immediate issuance of 4 million shares to the original Gifted Time stockholders. The Company has accounted for the fair value of the aforesaid 4 million shares as stock compensation expenses and $22.24 million was recorded in the statement of income for the fiscal year ended June 30, 2009..

Research and Development Expenses: Research and development expenses comprise mostly employee compensation, materials consumed and experiment expenses for specific new product research and development, and any expenses incurred for basic research on advanced technologies. For the fiscal year ended June 30, 2009, research and development expenses were $8.83 million, compared to $3.83 million for the prior fiscal year. The $5.0 million, or 130.3%, increase was mainly due to increased R&D activities during the 2009 period. As a percentage of total revenues, research and development expenses was 5.6% and 3.2% for the fiscal years ended June 30, 2009 and 2008, respectively.

VAT Refunds and Government Subsidies: The local governments in Beijing and Hangzhou provide financial subsidies out of the value added tax they collect in order to encourage the research and development efforts of certain enterprises. Beijing HollySys and Hangzhou HollySys both received such refunds. All VAT refunds were accounted for based on hard evidence that the operations of those companies were entitled to receive these refunds or that cash had been received. For the fiscal year ended June 30, 2009, VAT refunds were $5.94 million, compared to $6.16 million for the prior fiscal year, decreased by $0.22 million, or 3.5%. As a percentage of total revenues, VAT refunds were 3.8% and 5.1% for the fiscal years ended June 30, 2009 and 2008, respectively.

The local governments in Beijing and Hangzhou provide financial subsidies to encourage development of certain enterprises. Beijing HollySys and Hangzhou HollySys both received such subsidies. All subsidies were accounted for based on hard evidence that the operations of those companies were entitled to receive these subsidies or that cash had been received. Gross subsidy income received from the government amounted to $1.76 million and $3.16 million for the fiscal year ended June 30, 2009 and 2008, respectively, a decrease of $1.40 million, or 44.3%.

Income (loss) from Operations: Income from operations decreased by $11.40 million, or 195.0%, from $5.84 million for the fiscal year ended June 30, 2008, to a loss of $5.55 million for the fiscal year ended June 30, 2009. The decrease in income from operations was primarily due to the increase in stock compensation expenses related to 2009 incentive share issuance and option grants. Excluding stock compensation expenses, operating income as a percentage of total revenues for the fiscal year ended June 30, 2009 was $34.0 million, or 21.6%, as compared to $26.17 million, or 21.5% as a percentage of total revenues for the prior year.

Interest Expenses, Net: For the year ended June 30, 2009, net interest expenses decreased by $3.35 million, or 77.8%, from $4.30 million for the prior year, to $0.95 million for the current period. The decrease was primarily due to the recognition of $3.24 million in the amortization of discounts and interests on notes payable related to a bridge loan for prior fiscal year, as compared to nil for the current year. Excluding the interests and amortization of discounts on notes payable related to a bridge loan, net interest expense as a percentage of total revenue would be 0.6% and 0.9% for the fiscal year ended June 30, 2009 and 2008, respectively.

Income Tax Expenses: For the year ended June 30, 2009, the Company’s income tax expense was $3.06 million for financial reporting purposes, an increase of $1.97 million, as compared to a income tax expense of $1.09 million for the prior year. Such increase of income tax expenses was mainly due to a deferred tax adjustments recorded in the prior year.

Net income attributable to non-controlling interest: The non-controlling interests of the Company includes other parties’ interests in Beijing HollySys, Hangzhou HollySys and Beijing Haotong. The ownership interests of non-controlling interests in these operating entities were 25.89%, 10.36% and 31.45%, respectively, for fiscal 2009, as compared to 25.89%, 10.36% and 48.12%, respectively, for fiscal 2008. The decrease in non-controlling interest in Beijing Haotong is mainly due to the acquisition of the remaining 30% share capital of Beijing Haotong by the Company during the year. The net income attributable to non-controlling interests for the fiscal year ended June 30, 2009 was $5.19 million, an increase of $2.35 million, or 83.1%, from $2.83 million for the prior year. Such increase was primarily due to more profit contributed by Beijing HollySys and Hangzhou Hollysys for the current year.

Net income (loss) and Earnings (loss) per share attributable to Hollysys: For the fiscal year ended June 30, 2009, net loss attributable to Hollysys amounted to $(13.85) million or $(0.31) per diluted share, a decrease of $12.17 million, or $0.27 per diluted share, as compared to a net loss of $(1.68) million, or $(0.04) per diluted share, for the prior year. Such decrease was primarily due to the increase of $22.47 million in stock compensation expenses related to incentive shares and granted options, offset by the decrease of $3.24 million in amortization of discounts and interests on notes payable related to the bridge loan during the 2008 period.

Liquidity and Capital Resources

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

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

We estimate our liquidity needs for 2011 will be approximately $200 million, which will be primarily related to the repayment of long-term bonds payable, and repayment of bank borrowings. Our future working capital requirements will depend on many factors, including, among others, the rate of our revenue growth, the timing and extent of expansion of our sales and marketing activities, the timing of introductions of new products and/or enhancements to existing products, and the timing and extent of expansion of our manufacturing capacity.

Our long-term liquidity needs will relate primarily to working capital to pay our suppliers, and third-party manufacturers, as well as any increases in manufacturing capacity or acquisitions of third party businesses that we may seek in the future. We expect to meet these requirements primarily through our current cash holdings, revolving short-term bank borrowings, as well as our cash flow from operations. We currently do not have any plan to incur significant capital expenditures in 2011 and for the foreseeable future beyond 2011.

Cash Flow and Working Capital

As of June 30, 2008, 2009 and 2010, we had approximately $64.25 million, $128.89 million and $119.50 million, respectively, in cash and cash equivalents. As of June 30, 2010, we had total assets of $384.73 million, of which cash amounted to $119.50 million, accounts receivable amounted to $64.38 million and inventories amounted to $23.55 million. While working capital was approximately $165.44 million, equity amounted to $213.47 million and our current ratio was approximately 2.22.

The following table shows our cash flows with respect to operating activities, investing activities and financing activities for the 12-month periods ended June 30, 2008, 2009 and 2010:

Cash Flow Item	Fiscal Years Ended June 30,
	2008			2009			2010
Net cash (used in) provided by Operating activities	$	(3,931,073	)	$	40,127,458		$	30,145,816
Net cash used in investing activities	$	(11,865,752	)	$	(11,940,293	)	$	(21,478,441	)
Net cash provided by (used in) financing activities	$	59,208,327		$	35,882,189		$	(19,184,238	)
Effect of exchange rate changes on cash and cash equivalents	$	9,170,295		$	562,754		$	1,136,142
Net increase(decrease) in cash and cash equivalents	$	52,581,797		$	64,632,108		$	(9,380,721	)
Cash and cash equivalents, beginning of year	$	11,668,761		$	64,250,558		$	128,882,666
Cash and cash equivalents, end of year	$	64,250,558		$	128,882,666		$	119,501,945

Operating Activities

For the fiscal year ended June 30, 2010, net cash provided by operating activities was approximately $30.15 million, compared to approximately $40.13 million for prior fiscal year 2009. The net cash inflow from operating activities in fiscal year 2010 was primarily due to the net income of approximately $32.01 million, an increase in deferred revenue of approximately $12.48 million, an increase in accruals and other payables of approximately $5.95 million, an increase of accounts payable of approximately $5.03 million, and an increase of $4.97 million in income tax payable, all of which were partially offset by an increase in cost and estimated earnings in excess of billings of approximately $10.19 million, an increase in accounts receivable of approximately $10.13 million, and an increase of inventories of approximately $6.0 million.

For the fiscal year ended June 30, 2009, net cash provided by operating activities was approximately $40.13 million, compared to net cash used in operating activities of approximately $3.93 million for prior fiscal year 2008. The net cash inflow from operating activities in fiscal year 2009 was primarily due to a decrease in inventories of approximately $5.31 million, an increase in accounts payable of approximately $13.06 million, an increase in tax payable of approximately $3.02 million, and the reconciling item in net income of approximately $39.56 million in stock compensation expenses, all of which were partially offset by an increase in cost and estimated earnings in excess of billings of approximately $8.3 million, an increase in amount due from related parties of approximately $4.58 million. The decrease in inventories was mainly due to increase in revenues and costs, the increase in accounts payable was primarily due to better credit terms provided by suppliers. The increase in accounts receivable was consistent with the increase in revenues.

For the year ended June 30, 2008 net cash used in operating activities was $3.93 million, compared to net cash provided by operating activities of $3.77 million for prior fiscal year 2007. The net cash outflow from operating activities in fiscal year 2008 was primarily due to an increase in accounts receivables of $18.56 million, an increase in inventories of $11.0 million, which were partially offset by an increase in advance from customers of $9.05 million, and the reconciling item in net income of $17.0 million in stock compensation expenses. The increase in accounts receivables was primarily due to the increase in revenues, the increase in inventories was primarily due to higher products demand expected in future and the increase in procurement for imported equipment for subway projects. The increase in advance from customers was consistent with a higher revenue backlog at the fiscal year end.

Investing Activities

For the fiscal years ended June 30, 2010 and 2009, net cash used in investing activities was approximately $21.48 million and approximately $11.94 million, respectively. The net cash used in investing activities for the fiscal year 2010 consisted mainly of a cash outflow of approximately $20.92 million for the construction of our new facility.

The net cash used in investing activities for the fiscal year 2009 consisted mainly of a cash outflow of approximately $8.73 million in the purchase of fixed assets, a cash outflow of approximately $3.90 million in the acquisition of long term investments, a cash outflow of approximately $2.20 million prepaid for minority interest, and cash proceeds of approximately $2.10 million from disposal of an equity investee.

The net cash used in investing activities for the fiscal year 2008 consisted mainly of a cash outflow of $10.03 million in purchase of fixed assets and an increase in amounts due from related parties of $2.34 million in connection with an advance payment for the sourcing of construction materials for our new headquarters.

Financing Activities

For fiscal year ended June 30, 2010, net cash used in financing activities was approximately $19.18 million, as compared to approximately $35.88 million cash provided by financing activities for the prior year. The net cash outflow for fiscal year 2010 is composed of a cash outflow of $10.37 million in the acquisition of equity interest from non-controlling interest, an repayment of short-term bank loans of approximately $4.40 million, an repayment of long-term bank loans of approximately $5.13 million, and an capital injection from non-controlling interest of $0.72 million.

On March 31, 2009, the Company borrowed a seven-year bank loan of RMB 250 million (approximately $36,813,972) from Industrial and Commercial Bank of China, which matures on March 30, 2016, with an annual interest rate of 6.44%. The loan was secured by a security interest in our new facility in construction, with a building area of about 150,000 square meters. Principals of $736,280 and $736,279 will be due on March 31, 2011 and June 30, 2011, respectively.

The net cash inflow from financing activities in fiscal year 2009 primarily comprised proceeds from the above long-term bank loan relating to the ongoing construction of our new facility, with interest subsidized by the government.

The cash generated by financing activities in fiscal year 2008 consisted mainly of:

A cash inflow of $57.21 million raised from warrants exercised during the period from October 17 to December 17, 2007, in connection with the Company’s call of warrants issued by Chardan during the Chardan IPO process and the subsequent exercise of warrants to purchase 11,442,614 shares at $5.0 per share and the redemption of warrants to 57,386 shares at $0.01 per share, and the Company’s collection of cash proceeds of $57.21 million and paid $573.86 to the holders of 57,386 shares of warrants for redemption purposes;

A net cash inflow of $32.06 million related to proceeds from reorganization and recapitalization, as we completed our re-domestication merger with Hollysys on September 20, 2007, and Hollysys acquired the net assets of Chardan as of the acquisition date, which amounted to $32.06 million in cash.

A net cash inflow of $11.48 million raised from issuing bonds in connection with a RMB80 million three-year, 6.68% (payable semiannually) corporate bond issuance by Beijing HollySys on December 25, 2007, with maturity on December 28, 2010. In connection with the bond issuance, Beijing Zhongguancun Science and Technology Guaranty Co., Ltd. undertook joint and several guarantee liabilities in full in favor of Beijing HollySys. Concurrently, the China Development Bank has authorized its business department to undertake joint and several guarantee liability in respect of the guarantee liabilities of Beijing Zhongguancun Science and Technology Guaranty Co., Ltd. Beijing HollySys also pledged its property located in Beijing with a net book value of $5.4 million, as at June 30, 2008, to Beijing Zhongguancun Science and Technology Guaranty Co., Ltd. as a collateral;

A cash outflow of $29.987 million used to pay off the principal and related interest of the bridge loan, which was incurred prior to fiscal year 2007;

A net cash outflow of $12.92 million in repayments to short-term bank loans; and

A cash proceed of $4.76 million and repayments of $3.40 million from / to long-term bank loans.

Research and Development, Patents and Licenses, Etc.

Research and Development Efforts

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

Study phase

Requirement phase

Designing phase

Implementation phase

Testing Phase

Inspection Phase

Maintaining phase

We use standard project development life cycle models, including the waterfall model, increment model, iterative model and prototype. As a technology leader we continually develop and patent new automation technologies. We also continually review and evaluate technological changes affecting the automation and integrated system industries and invest substantially in application-based research and development. We currently employ over 660 staff in the research and development department or engaged in research and development work.

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

Large scale software platform architecture design;

Proprietary network design and development technologies;

Safety computer platform design and manufacturing;

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

Embedded system design and manufacturing.

We are committed to incorporating the latest advances in electronics and information system technology into its products and, whenever possible, developing state-of-the-art proprietary products based on its extensive internal expertise and research efforts. We currently spend approximately 3-6% of our annual revenues on research and development. Because part of our research and development efforts are paid for by government subsidies that aim to encourage research and development efforts of certain enterprises, the amount of our research and development spending shown on our financial statements (the total amount of spending less the amount of these subsidies) is only a portion of our total spending on research and development. Our recent major research and development focuses include:

Process Control;

Nuclear Power Automation System;

Transportation Automation; and

Manufacturing Automation.

Our research and development efforts have led to the invention of several proprietary systems in the fields of DCS and transportation automation systems. Our core technologies provide a platform that is designed to enable the rapid and efficient development of our technologies for specific applications that are quickly, efficiently and affordably tailored to particular industries and to the needs of our customers. Our software development tools enable us to custom program our systems rapidly, allowing us to apply digital technologies that take advantage of the tremendous advances in electronics and information technology to improve quality and reliability while reducing cost. The market for our products includes, not only the large number of factories that are continually under construction in China’s rapidly expanding industrial base, but also extends to the replacement and upgrading of outdated legacy systems to bring a higher degree of control and efficiency to the automation of processes, delivering increasing benefits to customers as they meet increased competition.

Intellectual Property Rights

We rely on a combination of copyright, patent, trademark and other intellectual property laws, nondisclosure agreements and other protective measures to protect our proprietary rights. We also utilize unpatented proprietary know-how and trade secrets and employ various methods to protect our trade secrets and know-how. As of June 30, 2010, we held 103 software copyrights, 111 authorized patents, 11 patent applications and 26 registered trademarks. Our earliest software copyrights will expire in 2048. Our invention patents have terms of 20 years (with the first issued patent expiring in 2010), and our utility patents and design patents have terms of 10 years (with the first issued patent expiring in 2010).

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

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

Market Trends

Other than as disclosed in the foregoing disclosures and elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the fiscal year 2011 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

Off-Balance Sheet Arrangements

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

Tabular Disclosure of Contractual Obligations

The following table sets forth our contractual obligations, including long-term and short-term loans and operating leases and capital and operational commitments as of June 30, 2010.

	Total		Less than 1 year		1-3 years		3-5 years		5-7 years
Short-Term Bank Loans		1,488,784		1,488,784		-		-		-
Long-Term Bank Loans		44,861,211		3,648,375		16,163,156		16,671,796		8,377,884
Long-Term Bonds Payable and Related Interests		12,134,592		12,134,592		-		-		-
Operating Lease Obligations		534,111		351,836		182,275		-		-
Purchase Obligations		114,457,834		114,457,834		-		-		-
Construction cost payable		12,562,565		12,562,565		-		-		-
Total		186,039,097		144,643,986		16,345,431		16,671,796		8,377,884

Other than the contractual obligations and commercial commitments set forth above, we did not have any other long-term debt obligations, operating lease obligations, capital commitments, purchase obligations or other long-term liabilities as of June 30, 2010.

Operating Lease Commitment

The Company leases premises under various operating leases. Rental expenses under operating leases included in the consolidated statement of income were $545,796, $1,105,473, and $1,002,666 for the years ended June 30, 2008, 2009 and 2010, respectively.

At June 30, 2010, the Company was obligated under operating leases requiring minimum rentals as follows:

Years Ending June 30,

2011	$	351,836
2012		119,050
2013		63,225

Total minimum lease payments	$	534,111

Purchase Commitment

As of June 30, 2010, the Company had approximately $114.5 million in purchase obligations for the coming fiscal year, for purchases of equipment, mainly for fulfillment of in-process or newly entered contracts resulting from the expansion of our operations. Other than the contractual obligation and commercial commitments set forth above, we do not have any other long-term debt obligations, operating lease obligations, purchase obligations or other long-term liabilities.

Safe Harbor

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

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

The following table sets forth certain information regarding our directors and senior management as of the date of this annual report.

Name	Age	Position

Changli Wang	46	Chief Executive Officer and Chairman
Peter Li	45	Chief Financial Officer
Colin Sung	43	Director
Jerry Zhang	38	Director
Jianyun Chai	48	Director
Qingtai Chen	72	Director

Dr. Changli Wang has been our director and Chief Executive Officer since September 2007 and has been our Chairman since May 2010. Since 1999, Dr. Wang has also been the Chief Executive Officer and Vice Chairman of our subsidiary, Beijing Hollysys. Prior to founding Beijing Hollysys in 1993, Dr. Wang worked for the No. 6 Institute of Electronic Industry Department, the predecessor of Beijing Hollysys. Dr. Wang also has been the Vice Chairman of the Chinese Automation Association since 2003. Dr. Wang received his Bachelor’s degree in Automation from Tianjin University in 1984 and his PhD in Automation from Lancaster University in 1988.

Mr. Peter Li has been our Chief Financial Officer since February 1, 2009. Mr. Li has served since November 2008, as an independent director and audit committee chairman for China Valves Technology, Inc. (NASDAQ: CVVT), a NASDAQ listed company of manufacturing metal valves in China; and has served since June 2008, as an independent director and audit committee chairman for Yuhe International Inc., a NASDAQ listed company (NASDAQ: YUII) in the day-old broiler breeding business in China. Prior to joining us, Mr. Li served Yucheng Technologies Ltd. ("Yucheng") (NASDAQ: YTEC), a leading IT service provider to banking industry in China as a Senior Advisor, from February 2008 to February 28, 2009, and as CFO from October 2004 through February 2008. Prior to his tenure at Yucheng, Mr. Li worked in corporate financial management with various companies, including as Internal Controller at Lenovo, one of the world’s largest makers of personal computers. Mr. Li graduated from Beijing Foreign Studies University with a B.A. and received a Master of Education from the University of Toronto. Mr. Li is a Certified General Accountant in Ontario, Canada, and is fluent in English and Mandarin.

Mr. Colin Sung has been our director and the Chair of our Audit Committee since February 2008. Mr. Sung is currently the Deputy Chief Executive Officer and Chief Financial Officer of Linktone Ltd., the leading provider of wireless media, entertainment and communications services in China, since June 2009. Mr. Sung served as the President and CFO of China Cablecom, a U.S. public company that provides provider cable television services in China, between April 2008 and May 2009. He previously served as Chief Financial Officer of Linktone Ltd. from June 2005 to January 2008. He also served as the acting Chief Executive Officer of Linktone from February 2006 to April 2006. From June 2004 until April 2005, Mr. Sung served as Corporate Controller of UTi United States, Inc., a subsidiary of UTi Worldwide Inc., a global integrated logistics company. From August 2001 until May 2004, he was the Vice President of Finance and Corporate Controller of USF Worldwide, Inc., a subsidiary of USF Corporation, a transportation industry leader, which was acquired by GPS Logistics in October 2002. Prior to that, he was Vice President and Corporate Controller of the US operations of Panalpina Inc. Mr. Sung is a Certified Public Accountant and has a Bachelor of Science degree from William Paterson University and a Master of Business Administration degree from American Intercontinental University.

Ms. Jerry Zhang has been our director since September 2007. Ms. Zhang is currently the China Business Director of FIL Investment Management (Hong Kong) Limited under Fidelity International since September 2008. She previously served as the Head of Investors & Intermediaries, Financial Institutions for the Standard Chartered Bank in China. In that role, she is responsible for relationship management of broker dealers, insurance companies, fund managers, development organizations, finance/trust companies and professional firms throughout China. Prior to that, Ms. Zhang was a senior relationship manager at Standard Chartered Bank, specializing in financial institution clients and regulators in China. She also worked to develop Standard Chartered Bank’s custody products in China from 2000 up to 2008. Over the years, Ms. Zhang has established an extensive network with both regulators and market players. Ms. Zhang received her Bachelor’s degree in electronic and mechanical engineering and obtained an MBA from Lancaster University in the United Kingdom in 2000.

Dr. Jianyun Chai has been our director since June 2, 2008. Dr. Chai is currently a professor and the head of the Institute of Power Electronic and Electrical Machine System at Tsinghua University in China. Before he joined Tsinghua University as an Associate Professor in 1999, Dr. Chai spent eight years working in the motor and information industries in Japan. Dr. Chai is also a member of various societies and organizations, including the China Renewable Energy Society, the Chinese Society for Electrical Engineering, and the Chinese Wind Energy Association. Dr. Chai received a Bachelors degree and a PhD in Electrical Engineering from Tsinghua University in 1984 and 1989, respectively.

Mr. Qingtai Chen has been our director since June 2, 2008. Mr. Chen has worked for the Dong Feng Motor Group for over 22 years and served as its General Manager prior to joining the Company. While employed by the Dong Feng Motor Group, Mr. Chen also served in various positions, including as a member of the First Session of the Monetary Policy Committee of the People’s Bank of China, as a deputy director of the State Council Economic and Trade Office, as a deputy director of the State Economic and Trade Commission, and as a deputy director of the Development Research Center of the State Council. Mr. Chen also served from 2000 to 2006 as an independent director of Sinopec Corp. Mr. Chen received his Bachelors of Science degree in power and dynamics engineering from Tsinghua University and has been recognized as a National Excellent Entrepreneur and National Economic Reform Talent in China. Mr. Chen currently serves as a standing member of National Committee of the Chinese People’s Political Consultative Conference and as the Dean of the School of Public Policy and Management at Tsinghua University. He also serves as an independent director for the Bank of Communications, which is listed on both Shanghai Stock Exchange and Hong Kong Stock Exchange, and as an independent director of Mindray Medical International Limited, which is listed on New York Stock Exchange.

B. Compensation

Executive Compensation

The aggregate cash compensation paid to our executive officers as a group was $480,000 for the fiscal year ended June 30, 2010. We did not grant any stock options or stock appreciation rights, any awards under long-term incentive plans, or any other non-cash compensation to any of our executive officers during this period.

Director Compensation

We pay each of our independent directors who are not employees a monthly fee as compensation for the services to be provided by them as independent directors. We pay $4,000 a month to Colin Sung, $3,000 to Jerry Zhang and $2,000 to each of other independent directors. We also reimburse our independent directors for out-of-pocket expenses incurred in attending meetings. As additional consideration, we grant to each of the independent directors an option to purchase a certain amount of shares of the Company’s ordinary shares, which vest in equal installments on a quarterly basis over a three-year period beginning on the grant date. Specifically, we granted a stock option to Colin Sun for the purchase of 45,000 shares of our ordinary shares, Jerry Zhang for the purchase of 36,000 shares of our ordinary shares and each of Dr. Jianyun Chai and Mr. Qingtai Chen for the purchase of 30,000 shares of our ordinary shares.

For the fiscal year ended June 30, 2010, the aggregate cash compensation paid to our directors as a group was approximately $198,000.

2006 Stock Plan

On September 7, 2007, our stockholders approved the 2006 Stock Plan, or the Plan. The Plan was assumed by us as of the closing of the merger of Chardan with and into us. The Plan reserves 3,000,000 ordinary shares for issuance in accordance with the Plan’s terms. A description of the Equity Plan is set forth in the Proxy Statement/Prospectus of our Registration Statement on Form S-4 (No. 333-132826), under the heading “Chardan 2006 Equity Plan”, and is incorporated herein by reference. The table below sets forth the options granted to our current and former directors and executive officers pursuant to the Plan:

Name	Number of Ordinary Shares Issuable upon Exercise of Options		Exercise Price per Ordinary Share		Date of Grant	Date of Expiration
Leonard Hafetz		30,000	$	7.9	1/1/2008	1/1/2018
Jerry Zhang		36,000	$	7.9	1/1/2008	1/1/2018
Yau Kiam Fee		30,000	$	7.9	1/1/2008	1/1/2018
Kerry Propper		30,000	$	7.9	1/1/2008	1/1/2018
Colin Sung		45,000	$	7.9	1/1/2008	1/1/2018
Jianyun Chai		30,000	$	5.85	6/2/2008	6/2/2018
Qingtai Chen		30,000	$	5.85	6/2/2008	6/2/2018
Peter Li		450,000	$	2.24	1/20/2009	1/20/2019

The options vest quarterly over a period of 3 years from their respective grant date.

Employment Agreements

We have entered into a three-year employment agreement with our Chief Executive Officer, Dr. Changli Wang on June 6, 2010. Dr. Wang is entitled to insurance benefits, five weeks vacation, a car and reimbursement of business expenses and, if necessary, relocation expenses. The agreement is terminable by us for death, disability and cause. Dr. Wang may terminate the employment agreement for good reason, which includes our breach, the executive’s not being a member of the board of directors, and change of control. The agreements contain provisions for the protection of confidential information and a three-year-after employment non-competition period within China.

On January 20, 2009, we also entered into a three-year employment agreement with Mr. Peter Li, pursuant to which Mr. Li agreed to serve as our Chief Financial Officer, effective as of February 1, 2009. In addition to management of our corporate finances, Mr. Li’s duties include oversight of our corporate strategy, investor relationship management and acquisitions. His compensation includes salaries, options, benefits, and bonuses.

C. Board Practices

Terms of Directors and Executive Officers

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

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

Independence of Directors

We have elected to follow the rules of NASDAQ to determine whether a director is independent. Our board will also consult with counsel to ensure that our board’s determinations are consistent with those rules and all relevant securities and other laws and regulations regarding the independence of directors. Rule 5605(a)(2) of Listing Rules of The Nasdaq Stock Market, Inc., or the Nasdaq Listing Rules, defines an “independent director” generally as a person, other than an officer of the Company, who does not have a relationship with the Company that would interfere with the director’s exercise of independent judgment. Consistent with these considerations, our board has affirmatively determined that, Messrs. Colin Sung, Jerry Zhang, Jianyun Chai and Qingtai Chen are our independent directors.

Board Committees

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

Audit Committee

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

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

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

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

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

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

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

reviewing and approving all proposed related-party transactions;

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

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

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

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

meeting separately and periodically with management and our internal and independent auditors; and

reporting regularly to the full board of directors.

Compensation Committee

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

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

approving and overseeing the compensation package for our executive officers;

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

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

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

Corporate Governance and Nominating Committee

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

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

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

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

monitoring compliance with our Corporate Governance Guidelines.

D. Employees

We had 2,185, 1,736 and 1,689 employees as of June 30, 2010, 2009 and 2008, respectively. Substantially all of our employees are located in China. The following table sets forth our employees as of June 30, 2010 based on their functional area within the Company:

Category	Number of Employees
Sales & Marketing		352
Research and development		660
Engineering		547
Production		338
Management		288
Total		2,185

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

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

E. Share Ownership

The following table sets forth information, as of December 20, 2010, with respect to the beneficial ownership of our ordinary shares by (i) each person who is known by us to beneficially own more than 5% of our ordinary shares; (ii) by each of our officers and directors; and (iii) by all of our officers and directors as a group. The address of each of the persons set forth below is in care of Hollysys Automation Technologies Ltd., No. 2 Disheng Middle Road, Beijing Economic-Technological Development Area, Beijing, P. R. China 100176.

Name & Address of Beneficial Owner	Office, if Any	Title of Class	Amount & Nature of Beneficial Ownership (1)			Percent of Class (2)
Officers and Directors
Changli Wang	CEO and Chairman	Ordinary Shares		8,935,840	(3)		16.44	%
Peter Li	Chief Financial Officer	Ordinary Shares		300,000	(4)		*
Colin Sung	Director	Ordinary Shares		45,000	(5)		*
Jerry Zhang	Director	Ordinary Shares		36,000	(6)		*
Qingtai Chen	Director	Ordinary Shares		25,000	(7)		*
Jianyun Chai	Director	Ordinary Shares		25,000	(8)		*
An Luo	Vice President	Ordinary Shares		6,057,303	(9)		11.14	%
All officers and directors as a group (6 persons named above)		Ordinary Shares		15,424,143			28.38	%(12)
5% Securities Holder
Changli Wang	CEO and Chairman	Ordinary Shares		8,935,840	(3)		16.44	%
Plus View Investments Limited		Ordinary Shares		6,057,303	(9)		11.14	%

Li Qiao		Ordinary Shares		3,807,516	(10)		7.00	%

Unionway Resources Limited		Ordinary Shares		4,113,948	(11)		7.57	%

Wenfu Wang		Ordinary Shares		4,113,948	(11)		7.57	%
All persons named above as a group		Ordinary Shares		27,200,483			50,04	%

* Less than 1%.

(1)

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

(2)	A total of 54,356,562 shares of our ordinary shares as of December 20, 2010 are outstanding pursuant to SEC Rule 13d-3(d)(1). For each beneficial owner above, any options or warrants exercisable within 60 days have been included in the denominator.

(3)

The securities reported as held by Dr. Wang represent 4,144,223 shares of our ordinary shares held indirectly through Ace Lead Profits Limited, 681,471 shares held indirectly through Billion Bright International Limited, 1,362,942 shares held indirectly through Excellent Link Enterprises Limited, 681,471 held indirectly through Golden Result Enterprises Limited, 1,000,000 held indirectly through Long Result Limited and 1,063,733 held indirectly through Sure Grow Profits Limited. The foregoing entities are all BVI entities that are wholly-owned and controlled by Dr. Wang therefore he may be deemed to be the beneficial owner of the ordinary shares held by them.

(4)	The securities reported as held by Mr. Li include options to purchase 300,000 ordinary shares that are vested or are to be vested within 60 days from the date hereof.

(5)	The securities reported as held by Mr. Sung include options to purchase 45,000 ordinary shares that are vested or are to be vested within 60 days from the date hereof.

(6)	The securities reported as held by Mr. Zhang include options to purchase 36,000 ordinary shares that are vested or are to be vested within 60 days from the date hereof.

(7)	The securities reported as held by Mr. Chen include options to purchase 25,000 ordinary shares that are vested or are to be vested within 60 days from the date hereof.

(8)	The securities reported as held by Mr. Chai include options to purchase 25,000 ordinary shares that are vested or are to be vested within 60 days from the date hereof.

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

(10)

The securities reported as held by Ms. Qiao represent 935,844 ordinary shares held by Faith Best Profits Limited, 717,918 shares held by OSCAF International Company Limited, 717,918 shares held by Glory Pearl International Limited, 717,918 shares held by Jumbo Growth International Limited, and 717,918 shares held by Pearl Success Investments Limited. The foregoing entities are all BVI entities that are wholly-owned and controlled by Ms. Qiao. Therefore Ms. Qiao may be deemed to be the beneficial owner of the ordinary shares held by them.

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

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

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major Shareholders

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

B. Related Party Transactions

Acquisition of Singapore Hollysys: On November 19, 2007, we entered into a sales and purchase agreement with Fulbond Systems, a Singapore based company partially owned by Mr. Yau Kiam Fee, a member of our Board of Directors, pursuant to which we agreed to acquire 100% interest of Fulbond Systems for a purchase price of SGD$1,066,234 (equivalent to $744,596). Pursuant to the sales and purchase agreement, the closing day of this acquisition was November 30, 2007 and after the ownership transfer, Fulbond System was renamed to Singapore Hollysys. The purchase price of $744,596 was paid in cash on December 11, 2007. Singapore Hollysys became our wholly owned subsidiary and its operating results were included in our consolidated financial statements, effective from December 1, 2007. We acquired Singapore Hollysys to establish an Asia Pacific headquarters from which to market our automation products within the region and other overseas countries.

Dismissal Agreement: On March 19, 2008, APH and Dr. Changli Wang, individually and on behalf of the parties which had previously been shareholders of Gifted Time, entered into a dismissal agreement, or Dismissal Agreement. The Dismissal Agreement resulted in: (i) the dismissal and termination of the agreement by which APH acquired the Gifted Time shares from the shareholders, (ii) the assignment to the former shareholders of Gifted Time of the shares of Hollysys stock held by APH and the rights to the earnout shares issuable under the stock purchase agreement, in the event specified after-tax operating profit goals are met, and (iii) the termination and cancellation of the $200 million note issued by APH in connection with its acquisition of the Gifted Time shares. As a result, our 22,200,000 ordinary shares held by APH have been transferred to Shengheng Xu (4,898,652), Qinglin Mei (1,224,552), An Luo (2,016,648), Dr. Changli Wang (6,441,108), Li Qiao (3,536,904) and Xuesong Song (4,082,136).

On June 5, 2009, the Company and the original shareholders of Gifted Time agreed to amend the amended and restated securities purchase agreement, dated February 9, 2007, between the Company and the original shareholders of Gifted Time, to terminate the Company’s obligation to issue up to 7 million remaining shares in aggregate to the original shareholders, if the Company achieves certain pre-determined performance thresholds for fiscal years 2009, 2010, and 2011. The original selling shareholders previously earned 4 million shares under this plan when the Company achieved the performance thresholds set for 2007 and 2008. As a condition to and as consideration for such termination of the Company’s obligation, the Company agreed to enter into a side letter agreement, dated as of June 5, 2009, with the original shareholders, pursuant to which the Company agreed to immediately issue 4 million shares to the original shareholders.

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

C. Interests of Experts and Counsel

Not applicable.

ITEM 8.

FINANCIAL INFORMATION

A. Consolidated Statements and Other Financial Information

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

Legal Proceedings

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

Dividend Policy

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

B. Significant Changes

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

ITEM 9.

THE OFFER AND LISTING

A. Offer and Listing Details

The common stock, warrants and units of Chardan, our predecessor, were quoted on the Over-the-Counter Bulletin Board maintained by the National Association of Securities Dealers, under the symbols of CNCA, CNCAW and CNCAU, respectively. Chardan units commenced public trading on August 3, 2005 and common stock and warrants commenced public trading on August 31, 2005. On September 20, 2007, we merged with and into Chardan simultaneously with our acquisition of Gifted Time. From September 20, 2007 to July 31, 2008, our ordinary shares were quoted on the OTCBB under the symbol “HLSYF.OB.” On August 1, 2008, our ordinary shares were approved to be listed on the Nasdaq Global Select Market, under the symbol “HOLI”.

The following table provides the high and low trading prices for our ordinary shares and the historical prices for our common stock/ordinary shares, warrants and units prior to the merger, for the periods indicated below.

	The OTCBB Price per Common Stock/Ordinary Shares				The OTCBB Price per Warrant				The OTCBB Price per Unit				Nasdaq (2) Price per Share
	High		Low		High		Low		High		Low		High		Low
Annual Market Prices(3)
Year 2006	$	12.90	$	5.74	$	7.45	$	1.65	$	27.50	$	9.10		N/A		N/A
Year 2007 (until September 20, 2007)	$	8.70	$	7.20	$	3.65	$	2.46	$	15.85	$	12.29		N/A		N/A
Year 2008 (from September 21, 2007 through June 30, 2008)(1)		N/A		N/A		N/A		N/A		N/A		N/A		N/A		N/A
Year 2009		N/A		N/A		N/A		N/A		N/A		N/A	$	7.30	$	2.03
Year 2010		N/A		N/A		N/A		N/A		N/A		N/A	$	13.09	$	5.52

Quarterly Market Prices
First Quarter 2009 ended September 30, 2008		N/A		N/A		N/A		N/A		N/A		N/A	$	7.30	$	3.50
Second Quarter 2009 ended December 31, 2008		N/A		N/A		N/A		N/A		N/A		N/A	$	4.24	$	2.03
Third Quarter 2009 ended March 31, 2009		N/A		N/A		N/A		N/A		N/A		N/A	$	3.30	$	2.17
Fourth Quarter 2009 ended June 30, 2009		N/A		N/A		N/A		N/A		N/A		N/A	$	6.78	$	3.08
First Quarter 2010 ended September 30, 2009		N/A		N/A		N/A		N/A		N/A		N/A	$	9.97	$	5.52
Second Quarter 2010 ended December 31, 2009		N/A		N/A		N/A		N/A		N/A		N/A	$	13.09	$	8.62
Third Quarter 2010 ended March 31, 2010		N/A		N/A		N/A		N/A		N/A		N/A	$	12.54	$	9.69
Fourth Quarter 2010 ended June 30, 2010		N/A		N/A		N/A		N/A		N/A		N/A	$	12.62	$	8.43
First Quarter 2011 ended September 30, 2010		N/A		N/A		N/A		N/A		N/A		N/A	$	11.19	$	8.33

Monthly Market Prices
June 2010		N/A		N/A		N/A		N/A		N/A		N/A	$	9.92	$	8.76
July 2010		N/A		N/A		N/A		N/A		N/A		N/A	$	9.80	$	8.33
August 2010		N/A		N/A		N/A		N/A		N/A		N/A	$	10.26	$	9.35
September 2010		N/A		N/A		N/A		N/A		N/A		N/A	$	11.19	$	9.80
October 2010													$	12.64	$	11.19
November 2010													$	14.40	$	12.87
December 2010 (through December 20, 2010)													$	15.51	$	13.71

(1) On September 20, 2007, we changed our fiscal year end from December 31 to June 30, in connection with the acquisition of Gifted Time and our redomestication to the BVI.

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

(3) All periods end June 30 of the stated year.

There were originally 11,500,000 warrants issued in connection with our August 2005 initial public offering. Each warrant entitled the holder to purchase one of our ordinary share at an exercise price of $5.00. Prior to redemption, a total of 11,442,614 warrants were exercised, equal to approximately 99.5% of all warrants originally issued. The remaining 57,386 warrants were cancelled at redemption on December 17, 2007 and the holders of those warrants were paid the sum of $0.01 per warrant.

In addition, we issued a unit purchase option to the representative of the underwriters of our August 2005 initial public offering, or the UPO. The UPO is exercisable for 250,000 units, comprised of 250,000 of our ordinary shares and 500,000 warrants, each warrant to purchase one ordinary share. The part of underlying warrants expired in 2009 pursuant to the terms of the UPO. In April 2010, the holders of the UPO exercised the UPO and we issued an aggregate of 92,567 ordinary shares to them.

C. Markets

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

ITEM 10.

ADDITIONAL INFORMATION

A. Share Capital

Not applicable

B. Memorandum and Articles of Association

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

The Company was incorporated in the BVI on February 6, 2006 under the BVI Business Companies Act, 2004, or the 2004 Act. The Company filed a Certificate of Change of Name to change its name from HLS Systems International, Inc. to Hollysys Automation Technologies Ltd. on July 17, 2009. The Company’s memorandum of association authorizes the issuance of up to 100,000,000 ordinary shares of $0.001 par value, and (ii) 1,000,000 preferred shares of $0.001 par value.

Objects and Purposes

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

Directors

A director must, immediately after becoming aware of the fact that he is interested in a transaction entered into or to be entered into by us, disclose such interest to the board of directors, unless (i) the transaction or proposed transaction is between the director and (ii) the transaction or proposed transaction is or is to be entered into in the ordinary course of our business and on usual terms and conditions. The director who is interested in a transaction entered into or to be entered into by the Company may (i) vote on a matter relating to the transaction; (ii) attend a meeting of directors at which a matter relating to the transaction arises and be included in the quorum; and (iii) sign a document on behalf of the company, or do any other thing in his capacity as a director, that relates to the transaction.

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

By a resolution of directors, the directors may exercise all our powers to borrow money, mortgage or charge our undertakings and property, issue debentures, denture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation occurred by us or of any third party.

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

A director shall not require a share qualification.

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

Rights and Obligations of Shareholders

Dividends

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

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

Voting Rights

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

Rights in the event of winding up

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

Redemption

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

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

Changes in the rights of shareholders

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

Meetings

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

A meeting of members is properly constituted if at the commencement of the meeting there are two members present in person or by proxy or (in the case of a member being a corporation) by its duly authorized representative representing not less than one third of the votes of the shares or class or series of shares entitled to vote on resolutions of members to be considered at the meeting.

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

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

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

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

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

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

Limitations on Ownership of Securities

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

Change in Control of Company

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

A special resolution of members is required for the Company to issue shares of the Company or securities convertible into shares of the Company resulting in a change of control of the Company. Additionally, the board of directors has the power to issue preferred shares with such rights attaching to them as they decide and that this power could be used in a manner that would delay, defer of prevent a change of control of our company.

Ownership Threshold

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

Changes in Capital

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

Differences in Corporate Law

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

Protection for minority shareholders

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

Powers of directors

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

Conflict of interests

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

Written consent and cumulative voting

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

Independent directors

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

Redemption

Our ordinary shares are not redeemable at a shareholder’s option. We may redeem our shares only with the consent of the shareholders whose shares are to be redeemed, except that the consent from the shareholders is not needed under the circumstances of compulsory redemption, which occurs at the request of the shareholders holding 90% of the votes of the outstanding ordinary shares entitled to vote, of the remaining issued shares.

Takeover provisions

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

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

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

Shareholder’s access to corporate records

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

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

Indemnification

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

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

Mergers and similar arrangements

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

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

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

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

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

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

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

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

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

Shareholders’ suits

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

The court of the BVI may, on the application of a shareholder of a company, grant leave to that shareholder to bring proceedings in the name and on behalf of that company, or intervene in proceedings to which the company is a party for the purpose of continuing, defending or discontinuing the proceedings on behalf of the company. In determining whether to grant leave, the High Court of the BVI must take into account (i) whether the shareholder is acting in good faith; (ii) whether the derivative action is in the interests of the company taking account of the views of the company’s directors on commercial matters; (iii) whether the proceedings are likely to succeed; (iv) the costs of the proceedings in relation to the relief likely to be obtained; and (v) whether an alternative remedy to the derivative claim is available.

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

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

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

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

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

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

C. Material Contracts

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

On December 23, 2009, we entered into the Share Purchase Agreement with Unionway Resources Limited, a business company incorporated in the BVI, or the Seller, pursuant to which, among other things, we acquired 100% equity interest in Maypower Limited, a business company incorporated in the BVI and owned 24.11% of Beijing Hollysys, from the Seller. As the consideration for the acquisition of the equity interest, we agreed to:

1) issue 4,413,948 ordinary shares, or the Shares, to the Seller, and

2) pay cash US$9,917,062.5, or RMB 67,634,366.25 to the Seller.

The Shares were issued to the Seller and its designeee on March 16, 2010. As a result of the acquisition of the equity interest, we indirectly owns 100% of Beijing Hollysys.

D. Exchange Controls

BVI Exchange Controls

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

Exchange Controls in China

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

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

E. Taxation

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

BVI Taxation

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

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

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

Taxation in China

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

United States Federal Taxation

The following is a discussion of the material U.S. federal tax consequences of the ownership of our ordinary shares by U.S. Holders (as described below). It does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s situation. The discussion applies to investors in shares that hold the shares as capital assets for U.S. federal income tax purposes and it does not describe all of the tax consequences that may be relevant to holders subject to special rules, such as:

certain financial institutions;

insurance companies;

dealers and traders in securities or foreign currencies;

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

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

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

persons liable for the alternative minimum tax;

tax-exempt organizations;

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

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

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

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

This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, or the Code, administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof. These laws are subject to change, and can change on a retroactive basis. “U.S. Holder” means a beneficial owner of shares that, for U.S. federal income tax purposes, is: a citizen or resident of the United States; a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States or any political subdivision thereof; or an estate or trust the income of which is subject to U.S. federal income taxation, regardless of its source. This discussion assumes that we are not, and will not become, a passive foreign investment company, or a PFIC, for U.S. federal income tax purposes, as described below.

Taxation of Dividends

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

If you are a non-corporate U.S. Holder, subject to applicable limitations, you may be eligible to be taxed at a maximum rate of 15% in respect of dividends received in taxable years beginning before January 1, 2011. Please consult your tax advisors to determine whether you are subject to any special rules that limit your ability to be taxed at this favorable rate.

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

Taxation of Capital Gains

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

Passive Foreign Investment Company Rules (PFIC)

We believe that we were not a PFIC for United States federal income tax purposes for our taxable year ended June 30, 2010. However, since PFIC status depends upon the composition of a company’s income and assets and the market value of its assets (including goodwill) from time to time, there can be no assurance that we will not be a PFIC for any taxable year.

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

Information Reporting and Backup Withholding

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

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

F. Dividends and Paying Agents

Not applicable

G. Statement by Expert

Not applicable

H. Documents on Display

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

We are subject to the informational requirements of the Exchange Act as a foreign private issuer and file reports and other information with the SEC. Reports and other information filed by us with the SEC, including this Annual Report on Form 20-F, may be inspected and copied at the public reference room of the SEC at 100 F. Street, N.E., Washington D.C. 20549. You can also obtain copies of this Annual Report on Form 20-F by mail from the Public Reference Section of the SEC, 100 F. Street, N.E., Washington D.C. 20549, at prescribed rates. Additionally, copies of this material may be obtained from the SEC’s Internet site at http://www.sec.gov. The SEC’s telephone number is 1-800-SEC-0330.

As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.

I. Subsidiary Information

Not applicable.

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We are exposed to interest rate risk primarily with respect to our short-term bank loans. Although the interest rates, which are based on the banks’ prime rates with respect to our short-term loans are fixed for the terms of the loans, the terms are typically three to twelve months for short-term bank loans and interest rates are subject to change upon renewal. There were no material changes in interest rates for short-term bank loans renewed during the fiscal year ended June 30, 2010.

A hypothetical 1.0% increase in the annual interest rates for all of our credit facilities under which we had outstanding borrowings as of June 30, 2010, would decrease net income before provision for income taxes by approximately $0.38 million for the fiscal year ended June 30, 2010. Management monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.

Foreign Exchange Risk

While our reporting currency is the U.S. Dollar, substantially all of our consolidated revenues and consolidated costs and expenses are denominated in RMB. All of our assets are denominated in RMB except for cash. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. Dollars and RMB. If the RMB depreciates against the U.S. Dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. Dollar financial statements will decline. Assets and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and shareholders’ equity is translated at historical exchange rates. Any resulting translation adjustments are not included in determining net income but are included in determining other comprehensive income, a component of shareholders’ equity. An average appreciation (depreciation) of the RMB against the U.S. dollar of 5% would increase (decrease) our comprehensive income by $0.8 million based on our outstanding revenues, costs and expenses, assets, and liabilities denominated in RMB as of June 30, 2010.

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

Inflation

Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

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

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

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

ITEM 15.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As required by Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act, our management has carried out an evaluation, with the participation and under the supervision of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2010.

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

Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based upon, and as of the date of this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2010.

Management’s Annual Report on Internal Control Over Financial Reporting

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

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2010. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment, management believes that, as of June 30, 2010, our internal control over financial reporting was effective based on those criteria.

Our independent registered public accounting firm has audited our internal control over financial reporting as of June 30, 2010 and has issued an attestation report set forth below.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Hollysys Automation Technologies Ltd

We have audited internal control over financial reporting of Hollysys Automation Technologies Ltd and its subsidiaries (the “Company”) as of June 30, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 15, Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

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

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

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

In our opinion, Hollysys Automation Technologies Ltd and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of June 30, 2010, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Hollysys Automation Technologies Ltd and its subsidiaries as of June 30, 2009 and 2010, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2010 and our report dated December 21, 2010 expressed an unqualified opinion thereon.

BDO Limited

Hong Kong

December 21, 2010

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the year ended June 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

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

ITEM 16B.

CODE OF ETHICS

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

ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by BDO Limited, our independent registered public accounting firm, for the fiscal years ended June 30, 2010 and 2009:

	2010		2009
Audit fees(1)	$	581,000	$	475,000
Audit-related fees		-		-
Tax fees		-		-
All other fees		-		-
Total		581,000		475,000

(1) Consists of the aggregate fees billed for each of the fiscal years ended June 30, 2010 and 2009 for professional services rendered by the principal accountant, BDO limited, for the audit of our annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the fiscal years ended June 30, 2010 and 2009 were $450,000 and $250,000, respectively. And the fees for limited review procedures of our quarterly review of our quarterly financial information in each of the fiscal years ended June 30, 2010 and 2009 were $[131,000] and $225,000, respectively.

Audit Committee Pre-Approval Policies and Procedures

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

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

We have not asked for nor have we been granted an exemption from the applicable listing standards for our audit committee.

ITEM 16E.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

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

ITEM 16F.

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

None.

ITEM 16G.

CORPORATE GOVERNANCE

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

PART III

ITEM 17.

FINANCIAL STATEMENTS

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

ITEM 18.

FINANCIAL STATEMENTS

Our Audited Financial Statements for the Years Ended June 30, 2010, 2009 and 2008 are included in this annual report.

ITEM 19.

EXHIBITS

Number		Description

1.1		Memorandum of Association of Registrant (Incorporated by reference to Annex B of the Proxy Statement/Prospectus contained in Registration Statement S-4 (file no. 333-132826) filed with the Securities and Exchange Commission on March 30, 2006).

1.2		Articles of Association of Registrant (Incorporated by reference to Annex C of the Proxy Statement/Prospectus contained in Registration Statement S-4 (file no. 333-132826) filed with the Securities and Exchange Commission on March 30, 2006).

1.3		Certificate of Change of Name (Incorporated by reference to Exhibit 1.3 of the Form 20-F filed with the Securities and Exchange Commission on September 30, 2009).

1.4		Amendment to Memorandum and Articles of Association of Hollysys Automation Technologies Ltd. (Incorporated by reference to Exhibit 1.1 of the Form 6-K filed with the Securities and Exchange Commission on September 21, 2010).

2.1		Rights Agreement, dated as of August 27, 2010, between Hollysys Automation Technologies Ltd. and Continental Stock Transfer & Trust Company, which includes the Form of Right Certificate as Exhibit A and the Summary of Rights to Purchase Preferred Shares as Exhibit B (Incorporated by reference to Exhibit 2.1 of the Form 6-K filed with the Securities and Exchange Commission on September 21, 2010).

4.1		Agreement and Plan of Merger between Chardan North China Acquisition Corporation and Registrant (Incorporated by reference to Exhibit 2.2 of the Registration Statement S-4 (file no. 333-132826) filed with the Securities and Exchange Commission on March 30, 2006).

4.2		Amended and Restated Stock Purchase Agreement, by and between Chardan North China Acquisition Corporation and Advance Pacific Holdings Limited, dated February 9, 2007 (Incorporated by reference to Annex A of the Proxy Statement/Prospectus contained in Registration Statement S-4 (file no. 333-132826) filed with the Securities and Exchange Commission on March 30, 2006).

4.3		Chardan North China Acquisition Corporation 2006 Stock Plan (Incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-8 (file no. 333-170811) filed with the Securities and Exchange Commission on November 24, 2010).

4.4		Form of Stock Consignment Agreement (Incorporated by reference to Exhibit 10.2 of the Registration Statement S-4/A (file no. 333-132826) filed with the Securities and Exchange Commission on June 28, 2006).

4.5		Form of Employment Agreement (Incorporated by reference to Exhibit 10.3 of the Registration Statement S-4 (file no. 333-132826) filed with the Securities and Exchange Commission on March 30, 2006).

4.6		Sale and Purchase Agreement in Relation to the Ownership Interest of Hangzhou Hollysys Automation Co., Ltd. between Team Spirit Industrial Limited and Gifted Time Holdings Limited, dated July 12, 2006 (Incorporated by reference to Exhibit 10.6 of the Registration Statement S-4/A(file no. 333-132826) filed with the Securities and Exchange Commission on July 2, 2007).

4.7		Sale and Purchase Agreement in Relation to the Ownership Interest of Hangzhou Hollysys Automation Co., Ltd. between OSCAF International Co., Ltd. and Gifted Time Holdings Limited , dated January 12, 2006 (Incorporated by reference to Exhibit 10.7 of the Registration Statement S-4/A (file no. 333-132826) filed with the Securities and Exchange Commission on July 2, 2007).

4.8		Reorganization Agreement between Cheng Wusi, Wang Changli, Lou An, Shanghai Jingqiaotong Industrial Development Co., Ltd., Team Spirit Industrial Limited and OSCAF International Co., as amended (Incorporated by reference to Exhibit 10.12 of the Registration Statement S-4/A (file no. 333-132826) filed with the Securities and Exchange Commission on July 2, 2007).

4.9		Financial Advisory Agreement by and among Beijing Hollysys Co., Ltd., Hangzhou Hollysys Automation Co., Ltd. and their shareholders and Upper Mix Investments Limited and Time Keep Investment Limited. (Incorporated by reference to Exhibit 10.14 of the Registration Statement S-4/A (file no. 333-132826) filed with the Securities and Exchange Commission on February 15, 2007).

4.10		Letter Agreement between Jianyun Chai and HLS Systems International Ltd., dated June 2, 2008 (Incorporated by reference to Exhibit 10.1 of the Form 6-K filed with the Securities and Exchange Commission on June 27, 2008).

4.11		Letter Agreement between Qingtai Chen and HLS Systems International Ltd., dated June 2, 2008 (Incorporated by reference to Exhibit 10.2 of the Form 6-K filed with the Securities and Exchange Commission on June 27, 2008).

4.12		Letter of Transmittal for Exchange Offer (Incorporated by reference to Exhibit 10.15 of the Registration Statement S-4/A (file no. 333-132826) filed with the Securities and Exchange Commission on February 15, 2007).

4.13		Form of promissory note used in bridge loan (Incorporated by reference to Exhibit 10.16 of the Registration Statement S-4/A (file no. 333-132826) filed with the Securities and Exchange Commission on May 11, 2007).

4.14		Guarantee of Advance Pacific Holdings Limited (Incorporated by reference to Exhibit 10.17 of the Registration Statement S-4/A (file no. 333-132826) filed with the Securities and Exchange Commission on May 11, 2007).

4.15		Voting Agreement between Advance Pacific Holdings, Ka Wa Cheng and Qiao Li, dated July 5, 2007 (Incorporated by reference to Exhibit 10.18 of the Registration Statement S-4/A (file no. 333-132826) filed with the Securities and Exchange Commission on July 23, 2007).

4.20*		Share Sale and Purchase Agreement, by Unionway Resources Limited and the Company, dated December 23, 2009.

8.1*		List of subsidiaries

11.1		Code of Ethics (included as Annex G to the Proxy Statement/Prospectus contained in Registration Statement 333-132826 and incorporated by reference herein)

12.1*		CEO Certification Pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)) (17 CFR 240.13a-14(a)) or Rule 15d-1(a) (17 CFR 240.15d-14(a))

12.2*		CFO Certification Pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule 15d-1(a) (17 CFR 240.15d-14(a))

13.1*		CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

13.2*		CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

15.1		HLS Systems International, Ltd. Audit Committee Charter, adopted June 20, 2008 (Incorporated by reference to Exhibit 99.1 of the Form 6-K filed with the Securities and Exchange Commission on June 27, 2008).

15.2		HLS Systems International, Ltd. Compensation Committee Charter, adopted June 20, 2008 (Incorporated by reference to Exhibit 99.2 of the Form 6-K filed with the Securities and Exchange Commission on June 27, 2008).

15.3		HLS Systems International, Ltd. Governance and Nominating Committee Charter, adopted June 20, 2008 (Incorporated by reference to Exhibit 99.3 of the Form 6-K filed with the Securities and Exchange Commission on June 27, 2008).

15.4		Consent of BDO Limited*

* Filed with this annual report on Form 20-F

SIGNATURE

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

	HOLLYSYS AUTOMATION TECHNOLOGIES LTD.

	/s/ Changli Wang
	Changli Wang
December 21, 2010	Chief Executive Officer

HOLLYSYS AUTOMATION TECHNOLOGIES LTD.

Index to Consolidated Financial Statements

		Page

Reports of Independent Registered Public Accounting Firms		F-2

Consolidated Balance Sheets as of June 30, 2009 and 2010		F-3

Consolidated Statements of Income and Comprehensive Income for years ended June 30, 2008, 2009 and 2010		F-5

Consolidated Statements of Cash Flows for years ended June 30, 2008, 2009 and 20010		F-6

Consolidated Statement of Stockholders’ Equity for years ended June 30, 2008, 2009 and 2010		F-8

Notes to Consolidated Financial Statements		F-10

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Hollysys Automation Technologies Ltd

We have audited the accompanying consolidated balance sheets of Hollysys Automation Technologies Ltd and its subsidiaries (the “Company”) as of June 30, 2009 and 2010 and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hollysys Automation Technologies Ltd and its subsidiaries at June 30, 2009 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2010, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of June 30, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated December 21, 2010 expressed an unqualified opinion thereon.

BDO Limited

Hong Kong

December 21, 2010

F-2

HOLLYSYS AUTOMATION TECHNOLOGIES LTD.

CONSOLIDATED BALANCE SHEETS

(In US Dollars)

	June 30,
	2009		2010
ASSETS
Current Assets
Cash and cash equivalents	$	128,882,666	$	119,501,945
Contract commitment deposit in banks		5,504,375		4,383,684
Accounts receivable, net of allowance for doubtful accounts of $6,276,670 and $8,408,318		56,548,509		64,384,519
Cost and estimated earnings in excess of billings, net of allowance for doubtful accounts of $744,113 and $1,102,016 (note 5)		51,094,660		60,928,056
Other receivables, net of allowance for doubtful accounts of $178,532 and $214,789		4,148,842		4,102,136
Advance to suppliers		7,867,856		10,676,175
Amount due from related parties (note 18)		7,203,058		10,764,828
Inventories, net of provision of $1,114,140 and $2,393,546 (note 4)		18,837,270		23,554,331
Prepaid expenses		1,368,918		1,022,803
Income tax recoverable		-		1,083,640
Deferred tax assets (note 16)		319,737		956,969
Deposit for acquisition of equity interest from minority interest		2,195,582		-
Total current assets		283,971,473		301,359,086

Property, plant and equipment, net (note 6)		47,102,749		65,345,618
Long term investments (note 7)		13,570,578		17,348,159
Long term deferred expenses		91,779		-
Deferred tax assets (note 16)		706,943		677,388

Total assets	$	345,443,522	$	384,730,251

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Short-term bank loans (note 9)	$	5,854,887	$	1,472,559
Current portion of long-term bank loans (note 12)		5,123,026		1,472,559
Current portion of long-term bonds payable (note 11)		-		11,780,471
Accounts payable		37,421,717		41,479,662
Construction cost payable		10,929,116		12,562,565
Deferred revenue		21,072,540		33,552,968
Accrued payroll and related expense		4,162,851		4,386,681
Income tax payable		1,397,706		5,971,136
Warranty liabilities (note 8)		1,631,407		1,916,654
Other tax payables		9,152,197		10,632,611
Accrued liabilities		2,634,107		8,078,783
Amounts due to related parties (note 18)		1,464,683		2,610,599
Deferred tax liabilities (note 16)		277,337		-
Total current liabilities		101,121,574		135,917,248

Long-term bank loans (note 12)		36,593,041		35,341,413
Long-term bonds payable (note 11)		11,709,773		-

Total liabilities		149,424,388		171,258,661

F-3

HOLLYSYS AUTOMATION TECHNOLOGIES LTD.

CONSOLIDATED BALANCE SHEETS

(In US Dollars)

	June 30,
	2009		2010

Commitments and contingencies (note 21)		-		-

Equity
Common stock, par value $0.001 per share, 100,000,000 shares authorized, 49,942,614 and 54,449,129 shares issued and outstanding (note 13)		49,943		54,450
Additional paid-in capital		131,220,209		138,751,162
Appropriated earnings		15,135,442		17,396,777
Retained earnings		13,232,254		38,936,792
Accumulated comprehensive income - translation adjustments		13,902,045		17,557,544
Total Hollysys Automation Technologies Ltd. stockholder’s equity		173,539,893		212,696,725

Non-controlling interests		22,479,241		774,865
Total equity		196,019,134		213,471,590

Total liabilities and equity	$	345,443,522	$	384,730,251

See accompanying notes to consolidated financial statements

F-4

HOLLYSYS AUTOMATION TECHNOLOGIES LTD.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In US Dollars)

	Year Ended June 30,
	2008			2009			2010
Revenues
Integrated contract revenue	$	112,357,126		$	149,303,309		$	164,118,183
Products sales		9,141,626			8,198,758			9,971,013
Total revenues		121,498,752			157,502,067			174,089,196

Cost of integrated contracts		81,414,648			99,423,487			110,268,475
Cost of products sold		3,456,398			3,500,471			3,668,899
Gross profit		36,627,706			54,578,109			60,151,882

Operating expenses
Selling		9,680,284			10,021,832			12,152,019
General and administrative		26,588,771			48,981,078			13,914,091
Research and development		3,833,925			8,829,402			13,071,318
VAT refunds and government subsidies		(9,319,812	)		(7,703,724	)		(11,533,006	)
Total operating expenses		30,783,168			60,138,588			27,604,422

Income (loss) from operations		5,844,538			(5,550,479	)		32,547,460

Other income (expense), net		14,936			723,269			(215,277	)
Share of net income of equity investees		693,115			178,167			3,958,073
Interest expense, net		(4,304,170	)		(954,078	)		(1,070,772	)
Income (loss) before income taxes		2,248,419			(5,603,121	)		35,219,424

Income taxes expenses (note 16)		1,092,477			3,061,141			7,663,433
Net Income (loss)		1,155,942			(8,664,262	)		27,555,991

Less: Net income attributable to non-controlling interest		2,833,120			5,186,802			1,851,453
Net income (loss) attributable to Hollysys Automation Technologies Ltd.	$	(1,677,178	)	$	(13,851,064	)	$	25,704,538

Other comprehensive income (loss)
Net income (loss)	$	1,155,942		$	(8,664,262	)	$	27,555,991
Translation adjustments		13,935,840			605,582			1,219,809
Comprehensive income (loss)	$	15,091,782		$	(8,058,680	)	$	28,775,800

Less: Comprehensive income attributable to non-controlling interest		7,278,328			5,254,351			1,876,297
Comprehensive income (loss) attributable to Hollysys Automation Technologies Ltd.	$	7,813,454		$	(13,313,031	)	$	26,899,503

Net income (loss) per share (note 17)
Weighted average number of common shares		37,658,437			44,950,833			51,243,667
Weighted average number of diluted common shares		37,658,437			44,950,833			51,838,294
Basic earnings (loss) per share attributable to Hollysys Automation Technologies Ltd.	$	(0.04	)	$	(0.31	)	$	0.50
Diluted earnings (loss) per share Hollysys Automation Technologies Ltd.	$	(0.04	)	$	(0.31	)	$	0.50

See accompanying notes to consolidated financial statements

F-5

HOLLYSYS AUTOMATION TECHNOLOGIES LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In US Dollars)

	Year ended June 30,
	2008			2009			2010
Cash flows from operating activities:
Net income (loss)	$	1,155,942		$	(8,664,262	)	$	27,555,991
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		1,817,657			2,241,344			2,683,042
Allowance for doubtful accounts		3,439,486			1,145,770			2,790,078
Provision for inventories		207,660			517,694			1,279,406
Loss on disposal of property, plant and equipment		47,123			58,133			14,112
Impairment loss on goodwill		99,439			-			286,610
Impairment loss on property, plant and equipment		-			-			715,246
Impairment loss on long-term investment		-			-			152,732
Share of net gains from equity investees		(693,115	)		(178,167	)		(3,958,073	)
Gain on disposal of long term investments		(112,113	)		(400,556	)		-
Dividend income		(160,599	)		-			-
Amortization of expenses accrued for bond payable		30,472			61,222			61,281
Amortization of discount to notes payable		2,420,064			-			-
Stock-based compensation		17,084,473			39,559,026			524,076
Deferred tax assets (liabilities), net		(1,752,773	)		530,229			(885,014	)
Loss on deemed acquisition of a subsidiary		-			18,962			-
Changes in operating assets and liabilities:
Accounts receivable		(18,558,732	)		2,517,399			(10,131,840	)
Cost and estimated earnings in excess of billings		(366,146	)		(8,301,687	)		(10,191,299	)
Inventories		(11,009,643	)		5,311,489			(5,996,365	)
Advance to suppliers		1,140,427			(861,429	)		(2,598,327	)
Other receivables		(670,490	)		(573,733	)		(93,051	)
Deposits and other assets		(1,037,802	)		(1,975,917	)		1,497,584
Due from related parties		(2,079,884	)		(4,581,972	)		(3,143,615	)
Accounts payable		851,596			13,056,177			5,032,941
Deferred revenue		9,054,759			397,735			12,480,428
Accruals and other payable		(3,832,166	)		(2,748,314	)		5,953,753
Due to related parties		713,573			(17,671	)		1,145,916
Tax payable		(1,720,281	)		3,015,986			4,970,204
Net cash provided by (used in) operating activities		(3,931,073	)		40,127,458			30,145,816

Cash flows from investing activities:
Purchase of property, plant and equipment		(10,030,305	)		(8,728,334	)		(20,918,968	)
Proceeds from disposal of property, plant and equipment		181,416			13,271			9,251
Receipt from short-term investment, net		926,016			-			-
Repayment from (Advance to) related parties		(2,338,112	)		1,134,090			653,325
Acquisition of long term investments		(693,980	)		(3,895,781	)		(1,001,569	)
Proceeds from disposal of long term investments		225,487			2,103,136			-
Dividends from long term investments		160,599			69,568			58,640
Acquisition of a subsidiary, net of cash acquired		(296,873	)		(439,374	)		(279,120	)
Deposit for acquisition of equity interest from non-controlling interest		-			(2,196,869	)		-
Net cash used in investing activities		(11,865,752	)		(11,940,293	)		(21,478,441	)

F-6

HOLLYSYS AUTOMATION TECHNOLOGIES LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS – Continued

(In US Dollars)

	Year ended June 30,
	2008			2009			2010
Cash flows from financing activities:
Repayments of notes payable		(29,987,000	)		-			-
Proceeds from short-term loans		8,840,049			5,858,317			-
Repayments of short-term loans		(21,760,122	)		(4,393,738	)		(4,397,989	)
Proceeds from long-term bank loans		4,760,027			36,614,479			-
Repayments of long-term bank loans		(3,400,019	)		(2,196,869	)		(5,130,987	)
Proceeds from issuance of bonds		11,480,507			-			-
Cash injected by non-controlling interest		-			-			718,338
Proceeds from exercise of warrants, net		57,212,497			-			-
Net cash inflow from the Share Exchange Transaction		32,062,388			-			-
Acquisition of equity interest from non-controlling interest		-			-			(10,373,600	)
Net cash provided by (used in) financing activities		59,208,327			35,882,189			(19,184,238	)

Effect of foreign exchange rate changes		9,170,295			562,754			1,136,142
Net increase (decrease) in cash and cash equivalents	$	52,581,797		$	64,632,108		$	(9,380,721	)

Cash and cash equivalents, beginning of year		11,668,761			64,250,558			128,882,666
Cash and cash equivalents, end of year	$	64,250,558		$	128,882,666		$	119,501,945

Supplementary disclosures of cash flow information:
Cash paid during the year for:
Interest, net of capitalized interest cost	$	3,970,009		$	2,576,444		$	2,227,667
Income tax	$	4,129,065		$	2,758,695		$	5,074,938

Supplementary disclosures of significant non-cash transactions:
Deemed collection of note receivable from the sole stockholder	$	30,000,000		$	-		$	-
Issuance of common stock in connection of acquisition of equity interest in a subsidiary from non-controlling interest	$	-		$	-		$	53,011,515
Issuance of additional common stock upon exercise of UPO	$	-		$	-		$	93

See accompanying notes to consolidated financial statements.

F-7

HOLLYSYS AUTOMATION TECHNOLOGIES LTD.

CONSOLIDATED STATEMENTS OF EQUITY - Continued

(In US Dollars)

	Common Stock				Preferred Stock						Additional Paid-in Capital			Note Receivable			Appropriated Earnings		Retained Earnings			Accumulated Comprehensive Income		Total Hollysys Automation Technologies Ltd. Stockholder’s Equity			Non- controlling Interest		Total Equity
	Shares		Amount		Shares			Amount

Balance at June 30, 2007		22,200,000	$	22,200		1,300,000		$	1,300		$	19,234,295		$	(30,000,000	)	$	8,768,174	$	35,127,764		$	3,873,380	$	37,027,113		$	13,200,169	$	50,227,282

Recapitalzation in connection with Share Exchange Transaction		7,000,000		7,000		-			-			28,149,361			-			-		-			-		28,156,361			-		28,156,361
Deemed collection of note receivable from sole stockholders		-		-		-			-			-			30,000,000			-		-			-		30,000,000			-		30,000,000
Deemed distribution		-		-		-			-			(30,000,000	)		-			-		-			-		(30,000,000	)		-		(30,000,000	)
Incentive stock compensation		2,000,000		2,000		-			-			17,082,473			-			-		-			-		17,084,473			-		17,084,473
Conversion of preferred stock into common stock		1,300,000		1,300		(1,300,000	)		(1,300	)		-			-			-		-			-		-			-		-
Issuance of common stock upon exercise of warrants		11,442,614		11,443		-			-			57,201,054			-			-		-			-		57,212,497			-		57,212,497
Net loss for the year		-		-		-			-			-			-			-		(1,677,178	)		-		(1,677,178	)		2,833,120		1,155,942
Appropriation		-		-		-			-			-			-			2,908,102		(2,908,102	)		-		-					-
Translation adjustments		-		-		-			-			-			-			-		-			9,490,632		9,490,632			1,612,088		11,102,720
Balance at June 30, 2008		43,942,614	$	43,943		-		$	-			91,667,183		$	-		$	11,676,276	$	30,542,484		$	13,364,012	$	147,293,898		$	17,645,377	$	164,939,275

F-8

HOLLYSYS AUTOMATION TECHNOLOGIES LTD.

CONSOLIDATED STATEMENTS OF EQUITY – Continued

(In US Dollars)

	Common Stock				Preferred Stock				Additional Paid-in Capital			Appropriated Earnings		Retained Earnings			Accumulated Comprehensive Income		Total Hollysys Automation Technologies Ltd. Stockholder’s Equity			Non- controlling Interest			Total Equity
	Shares		Amount		Shares		Amount

Balance at June 30, 2008		43,942,614	$	43,943		-	$	-	$	91,667,183		$	11,676,276	$	30,542,484		$	13,364,012	$	147,293,898		$	17,645,377		$	164,939,275

Incentive stock compensation		6,000,000		6,000		-		-		39,553,026			-		-			-		39,559,026			-			39,559,026
Acquisition of additional equity interest in a subsidiary from non-controlling interest		-		-		-		-		-			-		-			-		-			(420,487	)		(420,487	)
Net loss for the year		-		-		-		-		-			-		(13,851,064	)		-		(13,851,064	)		5,186,802			(8,664,262	)
Appropriation		-		-		-		-		-			3,459,166		(3,459,166	)		-		-			-			-
Translation adjustments		-		-		-		-		-			-		-			538,033		538,033			67,549			605,582
Balance at June 30, 2009		49,942,614	$	49,943		-	$	-	$	131,220,209		$	15,135,442	$	13,232,254		$	13,902,045	$	173,539,893		$	22,479,241		$	196,019,134

Incentive stock compensation		-		-		-		-		524,076			-		-			-		524,076			-			524,076
Acquisition of additional equity interest in a subsidiary from non-controlling interest		4,413,948		4,414		-		-		7,006,970			2,261,335		-			2,460,534		11,733,253			(24,305,847	)		(12,572,594	)
Acquisition of a subsidiary		-		-		-		-		-			-		-			-		-			7,548			7,548
Capital contribution from non-controlling interests		-		-		-		-		-			-		-			-		-			717,626			717,626
Issuance of common stock upon exercise of UPO		92,567		93		-		-		(93	)		-		-			-		-			-			-
Net Income for the year		-		-		-		-		-			-		25,704,538			-		25,704,538			1,851,453			27,555,991
Translation adjustments		-		-		-		-		-			-		-			1,194,965		1,194,965			24,844			1,219,809
Balance at June 30, 2010		54,449,129	$	54,450		-	$	-	$	138,751,162		$	17,396,777	$	38,936,792		$	17,557,544	$	212,696,725		$	774,865		$	213,471,590

See accompanying notes to consolidated financial statements.

F-9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

NOTE 1 - ORGANIZATION AND BUSINESS BACKGROUND

Hollysys Automation Technologies Ltd. (“Hollysys” or the “Company”), formerly known as HLS Systems International Ltd. was established under the laws of the British Virgin Islands (“BVI”) on February 6, 2006 for the purpose to merge with Chardan North China Acquisition Corporation (“Chardan”), and to hold 100% interest in Gifted Time Holdings Limited (“GTH”) upon the completion of a share exchange transaction (the “Share Exchange Transaction”) as details described in Note 2 to the consolidated financial statements.

On September 7, 2007, the shareholders of Chardan held a special meeting to vote for the Share Exchange Transaction. Of the 7 million shares of common stock outstanding, the holder of only two shares voted against for the Share Exchange Transaction. In terms of the voting result, Chardan merged with and into Hollysys finishing the re-domestication merger and Hollysys consummated the Share Exchange Transaction with GTH.

Upon completion of the Share Exchange Transaction, Hollysys owns 100% interest in GTH, which held 74.11% beneficiary interest of Beijing Hollysys Co., Ltd. (“Beijing HollySys”) and 60% equity interest of Hangzhou HollySys Automation Co., Ltd. (“Hangzhou HollySys”). Beijing Hollysys held the remaining 40% equity interest of Hangzhou Hollysys.

The Company is principally engaged in manufacture, sale and provision of integrated automation systems and services in the PRC mainly through its Chinese operating subsidiaries, Beijing Hollysys, Hangzhou Hollysys and Beijing HollySys Automation & Drive Co., Ltd. (“Hollysys Automation”).

Beijing Hollysys was established on September 25, 1996 under the laws of PRC with a registered capital of RMB100 million and a 30-year operation life. Beijing HollySys has conducted its business focusing on industrial automation systems which are used in many industries including power generating, electric grid, computer controlled manufacturing, chemistry, cement, petrochemical, glass manufacturing, pharmaceutical, etc. and integrated automation control systems including monitoring systems, signal distributing systems and other control systems mainly used in city railway transportation.

Hangzhou Hollysys, a foreign investment enterprise, was set up on September 24, 2003. Hangzhou HollySys uses the technologies provided by Beijing HollySys and mainly manufactures the integrated system automation products in Southern PRC for expanding market share and market presence purpose.

Hollysys Automation was established on May 13, 2008. Hollysys Automation is engaged in the automation and drive businesses, with core products including industrial control motor, servo and encoder, inverter, numeric and motion controls, with a view to sustain future business growth of Hollysys and to expand its product lines.

During the period from December 2007 to March 2008, Hollysys has established a series of wholly owned subsidiaries, namely (i) Beijing Hollysys S&T Exploration Co., Ltd. (“Hollysys S&T”), a established Chinese domestic enterprise which took up 74.11% ownership of Beijing Hollysys; (ii) Beijing He Li Tong S&T Exploration Co., Ltd. (“BJHLT”), a established wholly foreign owned enterprise in China which took up 100% ownership of Hollysys S&T; (iii) World Hope Enterprises Limited, a established Hong Kong company which took up 100% ownership of BJHLT; (iv) Clear Mind Limited, a established BVI company which took up 100% ownership of World Hope Enterprises Limited, and Clear Mind Limited is 100% owned by GTH. Through this series of ownership arrangement, Hollysys obtained the 74.11% legal ownership of Beijing Hollysys instead of through consignment agreements. However, there can be no assurance that the PRC authorities will not, in future, challenge the appropriateness of the procedures completed in transferring the ownership of the PRC subsidiaries as the Company did not directly go through the procedures required by the “Regulation of Merger and Acquisition of PRC Enterprises by Foreign Investors”.

On November 19, 2007, Hollysys entered into a sale and purchase agreement with Fulbond Systems Pte Ltd (the “Fulbond Systems”), which is a Singapore based company and partially owned by Mr. Yau Kiam Fee, who was a member of Board of Directors of Hollysys prior to May 14, 2010, to acquire 100% interest of Fulbond Systems for a price of SGD$1,066,234 (equivalent to $744,596). Pursuant to the sale and purchase agreement, the closing day of this acquisition was November 30, 2007 and after the ownership transfer, Fulbond System was renamed to HollySys (Asia Pacific) Pte Ltd. The purchase price of $744,596 was paid in cash on December 11, 2007. HAP becomes the wholly owned subsidiary of Hollysys and the operating result of HAP was included in the Hollysys’s consolidated financial statements with effective from December 1, 2007. Hollysys acquired HAP and to establish the latter as an Asia Pacific headquarter to market its automation products within the region and other overseas countries.

F-10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

The Company hired a third party valuation service provider to provide a valuation report about the fair value of the assets acquired and liabilities assumed. Based on that valuation report, the purchase price was allocated as follows:

November 30, 2007

Property, plant and equipment, net	$	18,092
Goodwill		99,439
Inventories		66,502
Trade receivables		84,626
Other receivables		58,087
Cash and cash equivalents		447,723
Trade payables		(21,052	)
Other payables		(8,821	)

Total purchase price	$	744,596
Satisfied by:
Cash paid	$	744,596

Analysis of net outflow of cash and cash equivalents in respect of the purchase of the subsidiary:

Cash consideration paid	$	744,596
Cash and bank balances acquired on consolidation		(447,723	)

Total net cash paid in the acquisition	$	296,873

The goodwill from the acquisition of HAP is expected to be non-deductible for tax purposes.

On May 13, 2008, Hollysys S&T invested RMB 70 million (equivalent to $10,205,421) to establish HollySys Automation.

On October 6, 2008, Beijing Hollysys and the 30% non-controlling interest holder of Beijing Haotong Science & Technology Development Company Limited(“Haotong”) agreed to reduce paid-in capital of Haotong from RMB 10 million (equivalent to $1,464,579) to RMB 7 million (equivalent to $1,025,205). Haotong reduced the paid-in capital by paying RMB 3 million (equivalent to $439,374) to the 30% minority interest holder. Upon completion of the reduction in capital, Haotong became a wholly owned subsidiary of Beijing HollySys. The Company’s effective equity interest in Haotong therefore increased from 51.88% to 74.11%.

On July 1, 2009, Hollysys S&T acquired 1.78% equity interest on Beijing Hollysys from the non-controlling interest holder, at a cash consideration of RMB 18 million (equivalent to $2,638,793). On January 1, 2010, Hollysys S&T acquired 24.11% equity interest on Beijing Hollysys from the non-controlling interest holder, by issuing 4,413,948 shares of common stock of the Company, with fair value of $53,011,515 and making cash payment of RMB 67.63 million (equivalent to $9,936,203). Upon completion of the acquisition from non-controlling interests, the Company held 100% equity interest in Beijing Hollysys. As a result, Hangzhou Hollysys and Haotong also became the Company’s wholly owned subsidiaries.

According to ASC Topic 810-10 Consolidation, these non-controlling interests acquisitions were recognized as equity transactions, and the difference between the consideration paid and the carrying amount of the 1.78% and 24.11% equity interest in Beijing Hollysys amounted approximately to $1,414,108 and US$ 44,586,023 was recognized in additional paid in capital in July 2009 and January 2010 respectively.

On September 1, 2009, Beijing Hollysys acquired 51% equity interest of Beijing WoDe WeiYe Technology Limited (WoDeWeiYe”), which was principally engaged in intelligent electric meter business, at a cash consideration of RMB2 million (equivalent to $294,422), to further build up its foothold in subway automation sector. The identifiable net assets of acquiree was insignificant and a goodwill of $286,567, comprised the value of expected synergy arising from acquisition, was recognized and impaired during the year. The total net cash paid in this acquisition was $279,120. The amounts of WoDeWeiYe’s revenue and earnings included in the Company’s consolidated statement of income for the year ended June 30, 2010, and the revenue and earnings of WoDeWeiYe had the acquisition date been July 1, 2008, or July 1, 2009, are insignificant to the Company’s result of operations.

F-11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

In February 2010, Hollysys re-organized the group structure of its PRC wholly owned subsidiaries (the “Group Re-organization”). GTH and Beijing Hollysys, each held 60% and 40% equity interest of Hangzhou Hollysys respectively, transferred the equity interest of 20% and 40% equity interest of Hangzhou Hollysys, respectively to Hollysys S&T at cost on February 3, 2010. As a result, GTH and Beijing S&T held 40% and 60% equity interest of Hangzhou, without any change in the effective interest held by the Company before and after the equity transfer.

Prior to the equity transfer, on February 1, 2010, the board of directors of Hangzhou Hollysys approved the resolution of dividend declaration amounted to RMB 513.27 million (equivalent to $75.25 million), on a one-off basis, , among which RMB 205.31 million(equivalent to $30.10 million) was distributable to Beijing Hollysys, and RMB 307.96 million (equivalent to $45.15 million) distributable to GTH.

Pursuant to PRC Enterprise Income Tax Law, Hangzhou Hollysys, a foreign investment enterprise, is obligated to withhold income tax on dividends pay-out to GTH, a foreign enterprise and non-resident, for the earnings retained after January 1, 2008. Out of the total dividends of RMB 307.96 million (equivalent to $45.15 million) million distributable to GTH, RMB 210.24 million (equivalent to $30.82 million) has been retained after January 1, 2008. As a result, Hangzhou Hollysys withhold RMB 21.04 million (equivalent to $3.08 million) income tax for the dividends distributable to GTH based on the tax rate of 10% in accordance to the tax treaty between the PRC and BVI.

Hangzhou Hollysys is also obligated to withhold the income tax for the gain on disposal of equity interest. Pursuant to PRC Enterprise Income Tax Law, the consideration of equity transfer shall be adjusted to fair value for taxation purpose. The Company engaged a third party valuer, to value the equity interest of Hangzhou Hollysys as of February 3, 2010, the date of transfer. The fair value of the equity interest in Hangzhou was approximately $34.85 million.

As a result, Hangzhou Hollysys withholds RMB2.34 million (equivalent to $0.34 million) income tax for GTH in respect of the gain on disposal of equity interest based on the tax rate of 10% in accordance to the tax treaty between the PRC and BVI. Beijing Hollysys accrued RMB7.02 million (equivalent to $1.03 million) income tax in respect of the gain on disposal of equity interest based on Beijing Hollysys’ applicable enterprise income tax rate.

On June 4, 2010, Hollysys S&T invested RMB 10 million (equivalent to $1,464,536) to establish a wholly owned subsidiary, Beijing Hollysys Electronics Technology Co., Ltd. (“Hollysys Electronics”), to engage in automation equipment manufacturing and assembly.

On June 4, 2010, Hollysys S&T invested RMB 5.10 million (equivalent to $746,913) to establish a subsidiary, Beijing Hollycon Med. & Tech. Co., Ltd. (“Hollycon”), to engage in medical automation equipment business.

F-12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

As of June 30, 2010, details of the Company’s subsidiaries are as follows:

Name of company

Place of

incorporation

Date of

incorporation

Percentage of ownership

interest attributable to the

Company

Principal activities

Directly

Indirectly

GTH

BVI

September 21, 2005

100

Investment holding

HollySys (Asia Pacific) Pte. Limited (“HAP”)

Singapore

October 23, 1997

100

Sale of integrated automation products

Clear Mind Limited

BVI

November 29, 2007

100

Investment holding

World Hope Enterprises Limited

Hong Kong

September 17, 2007

100

Investment holding

BJHLT

People’s Republic of China (“PRC”)

January 25, 2008

100

Investment holding

Hollysys S&T”

PRC

December 17, 2007

100

Investment holding

Hollysys Automation

PRC

May 13, 2008

100

Manufacture and sale of integrated automation products

Hangzhou HollySys

PRC

September 24, 2003

100

Provision of integrated industrial automation products and services

Hollysys Electronics

PRC

June 4, 2010

100

Manufacture and sale of automation equipment

Hollycon

PRC

June 4, 2010

Manufacture and sale of medical automation equipment

Beijing HollySys

PRC

September 25, 1996

100

Provision of integrated automation systems and services

Haotong

PRC

October 26, 2000

100

Dormant

WoDeWeiYe

PRC

December 31, 1997

Manufacture and sale of electric components

F-13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

NOTE 2 - COMPLETION OF SHARE EXCHANGE TRANSACTION

Chardan Acquisition Corp. II (“Chardan II”) was incorporated in Delaware on March 10, 2005 as a blank check company whose objective is to acquire an operating business that has its primary operating facilities in the PRC in any city or province north of the Yangtze River. Effective July 14, 2005, Chardan II’s board of directors and initial stockholders authorized an amendment to the Chardan II’s Certificate of Incorporation to change its name from Chardan China Acquisition Corp. II to Chardan North China Acquisition Corporation.

On February 2, 2006, Chardan entered into a stock purchase agreement (the “Stock Purchase Agreement”) with GTH to acquire 100% equity interest of GTH. The agreement was amended subsequently, details are noted under Reorganization of GTH prior to the completion of Share Transfer Transaction below. Pursuant to the amended Stock Purchase Agreement, Chardan was to effect re-domestication merger by establishing a wholly-owned subsidiary on February 6, 2006 under the laws of BVI, Hollysys. Chardan was then merged with and into Hollysys for the purpose of re-domestication out of the United States to secure future tax benefits. The re-domestication merger was achieved by a one-for-one exchange of all the outstanding common stock of Chardan for common stock of Hollysys and the assumption of all the rights and obligations of Chardan by Hollysys, including assumption of the outstanding 11.5 million warrants of Chardan on the same terms as they were originally issued. Each warrant entitles the holder to purchase one share of Hollysys common stock at a price of $5.00 being exercisable immediately since September 20, 2007 and will expire on December 17, 2007 or earlier upon redemption. In addition, Chardan also granted the Unit Purchase Option (“UPO”) to the only underwriter pursuant to which the underwriter can exercise such option to purchase an extra 250,000 unit at $7.50 per unit. Each unit represents one share of Chardan’s common stock together with two warrants. The exercise price of these warrants was $6.65 per share.

Concurrent with the re-domestication merger, Hollysys acquired 100% equity interest of GTH by issuing 23.5 million of Hollysys’ common shares and making cash payment of $30 million; which made GTH a wholly owned subsidiary of Hollysys. Of the 23.5 million common shares, 22.2 million shares were issued to the owners of GTH and the remaining 1.3 million shares were issued to the holders of 1.3 million preferred shares of GTH who already converted the preferred shares into common stock of GTH on October 17, 2007. Those 1.3 million preferred share were issued in conjunction with the bridge loan of $30 million. See details in Reorganization of GTH prior to the completion of Share Transfer Transaction.

As additional purchase price, according to the latest amendment of the agreement dated February 9, 2007, the stockholders of GTH and their designees will be issued, on an all or none basis per year, an aggregate of 11 million common shares of Hollysys (2 million shares each year for the first four years and 3 million shares for the fifth year), if, on a consolidated basis, Hollysys has after-tax profits (excluding after-tax operating profits from any subsequent acquisitions of securities that have a dilutive effect) in the following amounts for the indicated 12-month periods ending December 31 below (the “Future Annual Incentive Share Plan”):

12-Month Periods Ending December 31,	After Tax Profit

2007	$	23,000,000
2008		32,000,000
2009		43,000,000
2010		61,000,000
2011		71,000,000

The after-tax profits will be determined based on the accounting principles generally accepted in the United States, adjusted to exclude after-tax operating profits from any subsequent acquisition for securities that have a dilutive effect and any charge to earnings that results from the issuance of such shares for a prior year.

The Company achieved the pre-determined after tax profit during the 12-month periods ending December 31, 2007 and 2008, as a result, 2 million shares for each year had been issued to the stockholders of GTH and their designees. In June 2009, the Company has cancelled the Future Annual Incentive Share Plan for the remaining terms of 12-month periods ending December 31, 2009, 2010 and 2011. Further details have been set out in note 13 to the consolidated financial statements.

F-14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

Under the reverse acquisition accounting, the historical consolidated financial statements of Hollysys for the periods prior to September 20, 2007 are those of GTH and its subsidiaries. Since GTH is deemed as accounting acquirer, GTH’s fiscal year replaced Hollysys’ fiscal year. The financial statements of Hollysys reflect the aforementioned stock purchase transaction in the stockholders’ equity statement through a line of reorganization and recapitalization to present the net assets of Chardan as of September 20, 2007 and a line of deemed distribution to present the $30 million cash payment. The net assets of Chardan as of September 20, 2007 were as follows:

September 20, 2007
Net assets acquired
Cash		$	32,062,388
Other current assets			60,000
Accounts payable and accrued liabilities			(2,266,112	)
Tax effect due to the re-domestication transaction	Note (a)		(1,699,915	)

		$	28,156,361

Note (a)

The $1,699,915 of tax effect due to the re-domestication transaction was actually based on the evidence and facts presented on the U.S. federal and state income returns filed by Chardan for the year ended December 31, 2007. An estimated amount of $1,903,509 was disclosed in previously filed Form 6-K. Change of this tax effect had no impact on the Company’s consolidated statement of income for fiscal year ended June 30, 2008.

Reorganization of GTH prior to the completion of Share Transfer Transaction

In order to effect the Share Exchange Transaction, the Stock Purchase Agreement entered into between Chardan and GTH on February 2, 2006, which was amended on March 25, 2006, June 5, 2006, December 20, 2006, and February 9, 2007, respectively.

In November 2006, GTH and Chardan recognized that the closing of the Share Exchange Transaction was going to be delayed far beyond what had been expected when the Stock Purchase Agreement was originally signed in early February 2006. The stockholders of GTH had obligations that required to be satisfied by the end of 2006, and they discussed with Chardan ways to make that cash consideration available. Because Chardan believed that the contemplated stock purchase was still in the best interest of its stockholders, Chardan was willing to revise some aspects of the Stock Purchase Agreement to accommodate the request from the stockholders of GTH. As a result, during the period from December 18 to 20, 2006, GTH, the owners (Seven BVI Companies) of GTH and certain third parties completed a series of transactions described below to change the ownership of GTH and to provide the former stockholders of GTH with needed capital. Chardan and Advance Pacific Holdings Limited (“APH”), which became the sole stockholder of all of the issued and outstanding ordinary shares of GTH as a result of these transactions, reached consensus to amend the Stock Purchase Agreement to reflect the changed stock ownership and the stock structure of GTH.

The first transaction was the transfer by the Seven BVI Companies of their interests in GTH to OSCAF International Limited (“OSCAF”), which is a related party and is owned by Madame Qiao Li, who is the chairperson of Beijing HollySys.

F-15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

According to the stock purchase agreement entered into among the Seven BVI Companies and OSCAF on December 18, 2006, in exchange for GTH common stock, OSCAF will grant the following consideration to the Seven BVI Companies: (a) upon the receipt by OSCAF of cash payment of $30 million from APH, OSCAF shall make the payment of $30 million and the accrued interest (if any) to the Seven BVI Companies according to their respective proportion of shares in GTH; and (b) upon the receipt by OSCAF of cash payment of $200 million from APH, OSCAF shall make the payment of $200 million and the accrued interest (if any) to the Seven BVI Companies in accordance with their stock proportion. This transfer was in exchange for proportional interests in any consideration received by OSCAF (including the principal and any interest payments on the promissory notes issued by APH, as described below) on its sale of interests in GTH.

The second transaction was the sale by OSCAF of 100% of the issued and outstanding common stock of GTH, to APH, a BVI company, which is solely owned and controlled by Mr. Cheng Ka Wa, a resident of Canada, on December 20, 2006.

APH issued two notes, in exchange for the interest of GTH that it acquired both, payable to OSCAF: (i) a note of $30 million and (ii) a note of $200 million. In accordance with the stock purchase agreement between two parties, APH expected to repay the notes from the combination of a bridge loan of $30 million raised by GTH and the value of 22.2 million shares of the common stock of Hollysys it would received upon closing of the contemplated stock purchase transaction with Chardan. The amount of $200 million was derived from the estimated value of 22.2 million shares of the common stock of Hollysys. However, the closing price of Chardan’s stock on December 20, 2006 was $7.34, which was below the price of $9.01 per share needed to pay the debt in full (assuming that share price could be realized on all 22.2 million shares).

Other than its ownership of GTH’s shares, APH does not have any other material assets, and Mr. Cheng did not provide any personal guarantee of payment of these two notes issued to OSCAF. In the event that APH defaults on the $30 million note, the GTH stock owned by APH would be returned through OSCAF to the individual owners of the Seven BVI companies, and these two notes would be cancelled.

If the default occurs with respect to the $200 million note after the $30 million note has been paid, which means that the value of 22.2 million shares of Hollysys’ stock is lower than $200 million, APH will be obligated to return the 22.2 million shares of Hollysys through OSCAF to the individual owners of the Seven BVI Companies. By design, APH intended to use the proceeds of the loan that it obtained from GTH (as discussed below under Bridge Loan Transaction) to pay the $30 million note to OSCAF. As a result, only the $200 million note issued by APH would remain outstanding, which was originally matured on September 15, 2007, and was then extended to October 20, 2007 in accordance with the terms contained in the $200 million note. As of October 19, 2007, the maturity of the aforementioned $200 million note was further extended to April 19, 2008. In March 2008, the $200 million note was terminated and cancelled as a result of a dismissal agreement (the “ Dismissal Agreement”) further described below.

As a result of these transactions, APH became the sole stockholder of GTH. As agreed between Madame Qiao Li and Mr. Cheng Ka Wa prior to the consummation of these transactions, GTH adopted board resolutions to recapitalize GTH as follows: (i) the authorized common shares of GTH were increased from 50,000 shares with par value of $1.00 per share to 33.5 million shares with par value of $0.01 per share, (ii) preferred shares were created with an authorization of 1.5 million shares at par value of $0.01 per share; and (iii) all of the then outstanding common shares with par value of $1.00 per share held by APH were split into 5 million shares with par value of $0.01 per share and GTH issued an additional 17.2 million ordinary shares to APH, resulting in a total of 22.2 million common shares issued and outstanding. GTH then issued 1.3 million preferred shares to 15 outside investors in connection with the $30 million Bridge Loan Transaction described below. On October 17, 2007, the holders of 1.3 million GTH’s preferred shares exercised their rights to convert their 1.3 million shares of GTH’s preferred shares into 1.3 million Hollysys’ common shares. After that conversion, GTH had a total of 23.5 million common shares issued and outstanding as of October 17, 2007.

As a result of the above series of transactions, APH, received the $30 million cash consideration, 22.2 million common shares issued by Hollysys to acquire GTH.

On March 19, 2008, APH and Dr. Wang Changli, individually and on behalf of the parties which had previously been stockholders of GTH, entered into a Dismissal Agreement. The Dismissal Agreement resulted in (i) the dismissal and termination of the agreement by which APH acquired the GTH shares from the former stockholders of GTH; (ii) the assignment to the former stockholders of GTH of the shares of Hollysys stock held by APH and the rights to earnout shares issuable under the amended Stock Purchase Agreement between APH and Chardan in the event specified after-tax profits goals are met; and (iii) the termination and cancellation of the $200 million note issued by APH in connection with its acquisition of the GTH shares.

F-16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

Bridge Loan Transaction

To provide the funds required by GTH’s original stockholders, on December 20, 2006, GTH issued 15 notes with an aggregate principal amount of $29.987 million to 15 outside investors. Chardan Capital, a related party to Chardan, assisted in identifying potential investors, but did not receive any compensation for such services. APH agreed to guarantee repayment of these notes and pledged all of 22.2 million shares of GTH’s stock to secure that guarantee. As part of this transaction, GTH issued 1.3 million preferred shares to these outside investors for $0.01 per share. The notes issued to the investors bear interest at 10% per annum. The repayment terms are: (i) an aggregate principal amount of $25 million, together with any then unpaid and accrued interest thereon and other amounts payable under the notes, is due and payable on the earlier to occur of (a) ten business days following the closing of acquisition of the shares of GTH by Hollysys (the “Business Combination”), (b) the Tranche B Maturity Date (as defined below), or (c) when, upon or after the occurrence of an event of default under the note, such amounts are declared due and payable to the investors or made automatically due and payable in accordance with the terms of the notes; and (ii) the remaining principal, plus all accrued and unpaid interest thereon and all other amounts due under the notes, is due and payable on (a) the date (the “Tranche B Maturity Date”) that is the earliest of (1) one year following the date that Hollysys acquires all or substantially all of the shares of GTH; (2) 60 days following the redemption (as provided in the warrant agreement) of the publicly traded warrants to be assumed by Hollysys concurrently with the closing of the Business Combination in substitution for the warrants issued by Chardan; or (3) September 30, 2008, or (b) when, upon or after the occurrence of an event of default, such amounts are declared due and payable by the investors or made automatically due and payable in accordance with the terms of the note. If any payment of interest or any other amount under these notes is not made within ten days after the due date, GTH is required to pay a late payment fee equal to the lesser of 5% of the amount of such late payment or the maximum amount permitted by the applicable law. After the occurrence and during the continuance of an event of default, the notes shall bear interest at a rate equal 12% per annum.

GTH loaned the $30 million of proceeds to APH on December 22, 2006 in return for a note of $30 million payable to GTH. The note receivable from APH bears an interest at 10% per annum. The repayment terms of this $30 million note issued by APH are as follows: (i) upon the closing of a stock purchase transaction between APH and Chardan (the “Chardan Transaction”), pursuant to which APH is to receive a cash payment of $30 million, APH shall make an initial payment of not less than $24 million. In the event that APH receives cash consideration upon the closing of the Chardan transaction sufficient to repay more than $24 million, then, such larger amount will be due and payable in its entirety. The balance of the principal sum not covered by the initial payment made by APH shall be repaid upon APH’s receipt of the balance of the cash consideration due to APH in connection with the Chardan transaction. If the Chardan transaction occurs, all amounts are paid to GTH, the obligation of repayment of the appropriate amount of principal and accrued interest shall be discharged. (ii) If Chardan transaction does not close prior to the expiration of the agreements governing the borrowing, and GTH enters into an agreement to effect another business combination, pursuant to which APH will be entitled to receive cash consideration in exchange for its ownership interest in GTH, the interest due on the note will be forgiven in the same manner as if the Chardan transaction had closed. (iii) In the event that agreement governing the Chardan transaction expires and the Chardan transaction has not closed prior to September 30, 2008, then the entire principal sum then remaining unpaid, together with all accrued but unpaid interest, shall be due and payable on that date. After receiving the proceeds of $30 million, APH in return paid the note of $30 million payable to OSCAF discussed above.

If the Share Exchange Transaction does not take place, the default provisions contained in the $29.987 million notes payable to the 15 investors who are also the holders of 1.3 million preferred shares of GTH will be triggered, which allows the 15 investors to sell a portion or all the interest of GTH pledged by APH in order for them to recover the outstanding principal and interest then due under the notes payable. If there is any remaining interest available after selling by the 15 investors, the remaining interest will be returned to OSCAF, which should return the remaining interest to the individual owners of the Seven BVI Companies. Among the original beneficial individual owners of the Seven BVI Companies and Chardan, a consensus was reached that paying dividends through Beijing HollySys and Hangzhou HollySys to satisfy the urgent capital need was almost impractical because of Chinese government foreign exchange regulations and individual income tax consequences related to these potential dividends. If the value of 22.2 million shares of Hollysys is lower than $200 million, APH is obligated to return the 22.2 million shares of Hollysys’ stock to the original beneficial individual owners of the Seven BVI Companies. The original beneficial individual owners of the Seven BVI Companies believed that it was more likely than not that APH would return the 22.2 million shares of Hollysys’ common stock to them instead of the cash proceeds of $200 million because it would be difficult for APH to generate the necessary $200 million in cash within the time frame aforementioned. In March 2008, the return of 22.2 million shares of Hollysys common stock held by APH to the former stockholders of GTH was made based on the above mentioned Dismissal Agreement.

F-17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

During the year ended June 30, 2008, the 15 notes payable in aggregate of $29,987 million to 15 investors had been fully repaid. Details please refer to note 10 to the consolidated financial statements for more details.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

Non-controlling interest

Foreign Currency Translations and Transactions

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturity of three months or less to be cash equivalents.

F-18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

Revenue Recognition

Inventories

Inventories are composed of raw materials and low value consumables, work in progress, and purchased and manufactured finished goods. Inventories are stated at the lower of cost or the market value.

F-19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

Warranty

Accounts Receivable and Cost and estimated earnings in excess of billings

As of June 30, 2009 and 2010, balance of $6,772,812 and $7,065,816 were related to contracts which have been completed but are still within the warranty period respectively.

Based on the information available to management, the Company believes that its allowance for doubtful accounts as of June 30, 2009 and 2010 were adequate, respectively.

The allowance for doubtful debts for the years ended June 30, 2008, 2009 and 2010 were $3,439,486, $1,145,770, and $2,790,078 respectively.

Property, Plant and Equipment

Land use right	49 years
Buildings	30 years
Machinery	5 - 10 years
Software	5 years
Vehicles and other equipment	5 years

F-20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

F-21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

Impairment of Long-Lived Assets

The impairment loss on long-lived assets for the years ended June 30, 2008, 2009 and 2010 were nil, nil, and $715,246 respectively, which represented impairment loss on property, plant and equipment.

Shipping and Handling Cost

Goodwill and Impairment Test

Income Taxes

F-22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

Value Added Tax

Research and Development

VAT Refunds and Government Subsidies

Appropriations to Statutory Reserve

Use of Estimates

Comprehensive Income

Long Term Investments

F-23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

The impairment loss on long term investments for the years ended June 30, 2008, 2009 and 2010 were nil, nil, and $152,732 respectively.

Earnings (Loss) Per Share

Share-based Compensation

Fair Value Measurements

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

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

Recent Accounting Pronouncements

F-24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

In June 2009, the FASB issued “Amendments to FASB Interpretation No. 46(R)” included in ASC 810 Consolidation. This pronouncement seeks to improve financial reporting by enterprises involved with variable interest entities. This pronouncement is applicable for annual periods that begins after November 15, 2009 and interim periods therein and thereafter. The Company does not expect the adoption of this pronouncement would have a significant effect on the Company’s financial position, result of operations and cash flow.

F-25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

NOTE 4 - INVENTORIES

Components of inventories are as follows:

	June 30,
	2009			2010

Raw materials	$	8,048,588		$	7,126,042
Work in progress		3,851,689			5,491,687
Finished goods		8,025,219			13,274,854
Low value consumables		25,914			55,294
Less: Provision		(1,114,140	)		(2,393,546	)

	$	18,837,270		$	23,554,331

NOTE 5 – COST AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS

	June 30,
	2009			2010

Contracts costs incurred plus estimated earnings	$	311,865,312		$	320,014,935
Less: Progress billings		(260,770,652	)		(259,086,879	)

Cost and estimated earnings in excess of billings, net	$	51,094,660		$	60,928,056

NOTE 6 - PROPERTY, PLANT AND EQUIPMENT

A summary of property, plant and equipment at cost is as follows:

	June 30,
	2009			2010

Land use right	$	7,238,446		$	7,282,148
Buildings		13,520,841			13,608,227
Machinery		2,873,789			3,118,451
Software		797,327			1,206,719
Vehicles and other equipment		8,008,915			12,005,119
Construction in progress		23,343,595			39,329,699

	$	55,782,913		$	76,550,363

Less: Accumulated depreciation and amortization		(8,680,164	)		(11,204,745	)
	$	47,102,749		$	65,345,618

Construction in progress consists of capital expenditures and capitalized interest charges relating to the construction of facilities and assembly lines projects. Interest of nil, $206,595 and $1,102,772 during the period of construction for the years ended June 30, 2008, 2009 and 2010 respectively have been capitalized.

During the year ended June 30, 2009, the Company commenced the construction of a new facility with building area of about 150,000 square meters. As of June 30, 2010, the construction in progress of the new facility was $39 million. The Company completed this new facility and related construction project in August 2010, and the whole construction cost amounted to approximately $44 million including the cost of land use right of $5 million which had been acquired during the year ended June 30, 2008.

The depreciation and amortization for the years ended June 30, 2008, 2009 and 2010 were $1,817,657, $2,241,344 and $ 2,683,042 respectively.

F-26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

NOTE 7 - LONG-TERM INVESTMENTS

The following long-term investments were accounted for under either equity method or cost method.

June 30, 2009	Interest held			Long-term investment, at cost		Share of undistributed profits			Advance to investee company		Total

Equity Method
HollySys Information Technology Co., Ltd		49.00	%	$	3,012,508	$	38,650		$	649,423	$	3,700,581
HollySys Electric Machinery Co., Ltd		40.00	%		775,208		1,199,076			-		1,974,284
New Huake Electric Technology Co., Ltd		37.50	%		219,558		(21,329	)		-		198,229
China Techenergy Co., Ltd.		50.00	%		6,586,747		(1,260,619	)		43,152		5,369,280
IPE Biotechnology Co., Ltd		31.15	%		1,756,466		(160,122	)		-		1,596,344
				$	12,350,487	$	(204,344	)	$	692,575	$	12,838,718

Cost Method
Beijing HollySys Equipment Technology Co., Ltd		20.00	%	$	58,549	$	-		$	-	$	58,549
Zhongjijing Investment Consulting Co., Ltd		5.00	%		439,116		-			-		439,116
Zhejiang Sanxing Technology Co., Ltd		10.00	%		146,372		-			-		146,372
Zhejiang Sanxing Engineering Co., Ltd		6.00	%		87,823		-			-		87,823
				$	731,860	$	-		$	-	$	731,860

				$	13,082,347	$	(204,344	)	$	692,575	$	13,570,578

F-27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

June 30, 2010	Interest held			Long-term investment, at cost, less impairment		Share of undistributed profits			Advance to investee company		Total

Equity Method
HollySys Information Technology Co., Ltd		49.00	%	$	3,063,366	$	371,738		$	27	$	3,435,131
HollySys Electric Machinery Co., Ltd		40.00	%		779,888		1,571,979			-		2,351,867
New Huake Electric Technology Co., Ltd		37.50	%		220,884		(153,428	)		-		67,456
China Techenergy Co., Ltd.		50.00	%		6,626,515		1,201,756			43,412		7,871,683
IPE Biotechnology Co., Ltd		31.15	%		1,613,655		266,035			-		1,879,690
				$	12,304,308	$	3,258,080		$	43,439	$	15,605,827

Cost Method
Beijing HollySys Equipment Technology Co., Ltd		20.00	%		58,902		-			-		58,902
Zhongjijing Investment Consulting Co., Ltd		5.00	%		441,768		-			-		441,768
Zhejiang Sanxing Technology Co., Ltd		10.00	%		147,256		-			-		147,256
Zhejiang Sanxing Engineering Co., Ltd		6.00	%		88,354		-			-		88,354
Heilongjiang Ruixing Technology Co., Ltd		8.31	%		1,006,052		-					1,006,052
				$	1,742,332	$	-		$	-	$	1,742,332

				$	14,046,640	$	3,258,080		$	43,439	$	17,348,159

In July 2008, the Company acquired 6% of equity interest of Zhejiang Sanxing Engineering Co., Ltd, and in October 2008, the Company acquired 10% of equity interest of Zhejiang Sanxing Technology Co., Ltd, The Company adopted cost method to account for investments in the two investee companies.

In May 2009, the Company made further capital injection of RMB 35 million (equivalent to $5,126,027) into China Techenergy Co., Ltd,. The injection was contributed by cash consideration of RMB 25 million (equivalent to $3,661,448) and re-investment of retained earnings of RMB 10 million (equivalent to $1,464,579). As the other equity interest owner also made the same amount of capital injection, the equity interest in China Techenergy Co., Ltd, remained 50% as of June 30, 2009 and 2010.

In November 2009, the Company acquired 8.31% equity interest on Heilongjiang Ruixing Technology Co., Ltd, and adopted cost method to account for the investment in this investee company.

NOTE 8 - WARRANTY LIABILITY

	June 30,
	2009			2010

Beginning balance	$	2,051,397		$	1,631,407
Expense accrued		522,640			949,111
Expense incurred		(951,048	)		(674,939	)
Exchange difference		8,418			11,075

	$	1,631,407		$	1,916,654

F-28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

NOTE 9 - SHORT-TERM BANK LOANS

On June 30, 2009 and 2010, the Company’s short-term bank borrowings consisted of revolving bank loans of $5,854,887 and $1,472,559 respectively from several banks.

As of June 30, 2009, the short-term borrowing of $5,854,887 is subject to an annual interest rate ranging from 5.31% to 7.20%, without any guarantee or pledge of assets.

As of June 30, 2010, the short-term borrowing of $1,472,559 is subject to an annual interest rate of 4.779%, without any guarantee or pledge of assets.

NOTE 10 - NOTES PAYABLE

As mentioned in Note 2, GTH and the initial beneficial owners of Beijing Hollysys and Hangzhou Hollysys entered into a series of agreements with Chardan, APH and 15 investors who provided a bridge loan and purchased 1.3 million preferred shares in the aggregate amount of $30 million in order to satisfy the urgent needs from the original Chinese owners of GTH.

On December 20, 2006, GTH issued 15 notes in aggregate of $29.987 million payable to 15 investors and 1.3 million preferred shares with a par value of $0.01 per share in exchange for the proceeds of $30 million. The detailed terms of the notes issued to the 15 investors has been mentioned in Note 2 under Bridge Loan Transaction.

As part of the Bridge Loan Transaction, the 15 investors who were issued with 1.3 million shares of GTH’s preferred stock are fully informed of the Share Exchange Transaction between GTH and Chardan and have the rights to accept the Exchange Offer tendered by Chardan to convert each outstanding share of preferred stock into one common share of the successor company of Chardan, which is Hollysys.

GTH identified the fact that the closing price of Chardan’s common share was $7.34 per share on December 20, 2006 and believed that this price was the most objective indicator of the fair value of these 1.3 million preferred shares. GTH allocated the entire $30 million proceeds between the $29.987 million notes payable and 1.3 million preferred shares, resulting in a discount of $7,239,390 to the $29.987 million notes payable. GTH estimated that the life of these notes payable will be about nine months with the expectation that the Share Exchange Transaction would be consummated before September 20, 2007. With such estimated life of the bridge loan, GTH adopted the effective interest method to amortize the discount of $7,239,390 over the nine-month period.

During the year ended June 30, 2008, the notes payable had been fully repaid and the outstanding balance is nil.

The notes interest charged for the years ended June 30, 2008, 2009 and 2010 were $824,370, nil, and nil respectively. The amortization of discount on notes payable which charged to interest expenses were $2,420,064, nil, and nil for the years ended June 30, 2008, 2009 and 2010 respectively.

NOTE 11 - LONG TERM BONDS PAYABLE

In December 2007, Beijing Hollysys and three independent third parties entered into an agreement with the underwriters to issue a bond to institutional and public investors in PRC with an aggregate principal amount of RMB 305 million. Pursuant to the agreement, Beijing Hollysys issued a RMB 80 million (equivalent to $11.7 million) bond (the“Bond”) for the purpose of technology improvement and industrial implementation of certain technology. The Bond carries interest at a rate of 6.68% per annum, which is payable semiannually and will mature in December 2010. For the purpose of the Bond, Beijing Zhongguancun Science and Technology Guaranty Co., Ltd. has undertaken joint and several guarantee liabilities in full in favour of Beijing Hollysys. Concurrently, the China Development Bank has authorized its business department to undertake general guarantee liability in respect of the guarantee liabilities of Beijing Zhongguancun Science and Technology Guaranty Co., Ltd..

Bond issuing costs was RMB 1,254,054 (equivalent to $183,559). Such issuing costs will be amortized during the three-year term of the bonds and any unamortized issuing cost is presented as long-term deferred expenses on the balance sheet.

F-29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

For the year ended June 30, 2008, 2009, and 2010, bond interest of $378,575, $782,671 and $792,510 were charged to interest expenses, respectively.

NOTE 12 - LONG-TERM BANK LOANS

		June 30,
		2009			2010

RMB-denominated loan from Bank of China	(i)		5,123,026			-
RMB-denominated loan from Industrial and Commercial Bank of China	(ii)		36,593,041			36,813,972
			41,716,067			36,813,972

Less: Current portion			(5,123,026	)		(1,472,559	)

		$	36,593,041		$	35,341,413

(i)	The borrowing of $5,123,026 was effective from August 29, 2007 to August 28, 2009, with an annual interest of 6.48%. The borrowing is without any guarantee or pledge of assets. Such borrowing was due and settled on August 28, 2009.

(ii)

The borrowing of $36,813,972 is effective from March 31, 2009 to March 30, 2016, with an annual interest rate of 6.44%. The borrowing are pledged with the new facility in construction, with building area of about 150,000 square meters, amounted to $20,043,222 and $39,302,147 as of June 30, 2009 and 2010, respectively.

Scheduled principal payments for all outstanding borrowings on June 30, 2010 are as follows:

Year Ending June 30,
2011	$	1,472,559
2012		5,153,956
2013		7,362,794
2014		7,362,794
2015 and onward		15,461,869

	$	36,813,972

For the years ended June 30, 2008, 2009, and 2010, loans interest including short-term and long-term bank loans of $1,342,407, $1,192,485 and $2,537,929 was incurred and $1,342,407, $985,890 and $1,435,157 was charged to interest expenses respectively.

F-30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

NOTE 13 – COMMON STOCK

As of September 20, 2007, the net assets of Chardan were $28,156,361 representing by the outstanding 7,000,000 shares of common stock, which were presented in the stockholders’ equity under the line item of recapitalization in connection with Share Exchange Transaction.

In accordance with the terms of the Future Annual Incentive Share Plan described in Note 2, the original shareholders of GTH and their designees would entitle to receive additional shares of 2 million shares of common stock for each 12-month periods if the Company’s profit for twelve months periods ended December 31, 2007 and 2008 met the US$23,000,000 and US$32,000,000 threshold respectively.

During the year ended June 30, 2008 and 2009, the Company determined the after-tax profit (in terms of comprehensive income concept) target for the 12-month ended December 31, 2007 and 2008 was met respectively.

The Company accounted for the transactions of issuing these incentive stock based on the fair value on the grant date, which is the date when the shareholders of Chardan held a special meeting to vote for the Share Exchange Transaction on September 7, 2007 when the common stock of Hollysys was at $8.5 each.

Therefore, the fair value of incentive stock compensation of $17 million and $17 million was recorded in the consolidated statement of income for the year ended June 30, 2008 and 2009. These incentives shares were issued on July 25, 2009.

On June 15, 2009, the Company agreed to immediately issue 4 million shares of common stock to the original shareholders of GTH and their designees for the cancellation of the Future Annual Incentive Share Plan for the 12-month periods ending December 31, 2009, 2010 and 2011. In accordance with ASC Topic 718 Compensation - Stock Compensation, the modification of the incentive stock compensation resulted in an incremental incentive stock compensation of $22 million which is charged to the consolidated statement of income for the year ended June 30, 2009. These incentives shares were issued on February 29, 2010.

On December 23, 2009, the Company entered into the Share Purchase Agreement with Unionway Resources Limited, to acquire 24.11% equity interest of Beijing Hollysys, by issuing 4,413,948 shares of common stock of the Company with fair value of $53,011,515 and making cash payment of RMB 67.63 million (equivalent to $9,936,203). The 4,413,948 shares of common stock of the Company were issued on March 16, 2010.

In August 2005, Chardan issued 11.5 million warrants to the investors who purchased Chardan’s common stock. In accordance with the terms of these warrants, all warrants should be exercised or redeemed on or before June 30, 2008. The exercise price of these warrants was $5 per share and the redemption price was $0.01 per share. During the period from October to December 2007, a total of 11,442,614 warrants were exercised while 57,386 warrants were redeemed. Consequently, Hollysys received cash proceeds of $57.21 million from the exercise of warrant and paid $574 to the holders of 57,386 warrants for redemption purpose.

In April 2010, the UPO holders exercised 250,000 UPO at a cashless basis, and 92,567 shares of common stock were issued to the UPO holders on June 3, 2010. As of June 30, 2010, no UPO was outstanding.

NOTE 14 - SHARE OPTION PLAN

On September 20, 2007, the Company adopted the “2006 Stock Plan” (the “Plan”) which allows the Company to offer a variety of incentive awards to employees, officers, directors and consultants. Options to purchase 3,000,000 ordinary shares are authorized under the Plan.

On February 1, 2008 and June 2, 2008, options to purchase 186,000 and 60,000 ordinary shares were granted under the terms of the Plan. 186,000 and 60,000 options were priced at $7.9 and $5.85 per share respectively, in which 231,000 options with expiry period of 5 years from the date of grant and vest over a period of 3 years, and 15,000 options with expiry period of 1 year from the date of grant with immediate vesting. The 15,000 options were not exercised and have been expired as of June 30, 2009.

On January 20, 2009, options to purchase 450,000 ordinary shares were granted under the terms of the Plan. They were priced at $2.24 per share, with expiry period of 10 years from the date of grant and vest over a period of 3 years.

F-31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

A summary of the share option activity under the Plan is as follows:

	Options outstanding			Weighted average exercise price
Options outstanding at June 30, 2008		246,000			7.40

Options granted		450,000			2.24
Options exercised		-			-
Options cancelled/forfeited/expired		(15,000	)		7.90

Options outstanding at June 30, 2009		681,000			3.98

Options granted		-			-
Options exercised		-			-
Options cancelled/forfeited/expired		-			-
Options outstanding at June 30, 2010		681,000			3.98

Options vested and exercisable
At June 30, 2009		185,500			5.34
At June 30, 2010		412,500			3.98

The following table summarizes information with respect to options outstanding at June 30, 2010:

	Options outstanding and exercisable
	Number outstanding		Weighted average remaining contractual life years		Weighted average fair value as of the grant date
Exercise price:
US$7.90		171,000		2.5	$	2.34
US$5.85		60,000		2.9		2.21
US$2.24		450,000		8.6		2.31

Total		681,000		6.6	$	2.31

The aggregate intrinsic value as of June 30, 2009 and 2010 is $1,602,000 and $3,425,910 respectively . No options have been exercised during the year ended June 30, 2008, 2009, and 2010.

The fair value of each option granted is estimated on the date of grant using the Black-Scholes Option Pricing Model.

	Year Ended June 30,
	2008	2009	2010
Options granted (weighted average)
Average risk-free rate of return	2.77% - 3.24%	1.85%	-
Expected option life	3 years	6 years	-
Volatility rate	37% - 40%	116%	-
Dividend yield	-	-	-

Average risk-free rate of return for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected option life is derived from the simplified method in accordance to ASC Topic 718 Compensation - Stock Compensation as no historical exercise pattern could be studied for reference, Volatility rate is based on historical volatility of the Company’s stock. Dividend yield is estimated by the Company at zero for the expected option life.

F-32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

The Company recorded share option compensation expense of $84,473, $319,026 and $524,076 for the year ended June 30, 2008, 2009 and 2010. As of June 30, 2009 and 2010, there were $1,182,841 and $658,765 of total unrecognized compensation expense related to non-vested share-based compensation arrangement under the Plan. The unrecognized compensation expense is expected to be recognized over a weighted-average vesting period of 1.3 years.

F-33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

NOTE 15 - EMPLOYEE BENEFITS

The Company contributes to a state pension scheme run by the Chinese government in respect of its employees in China. The expense related to this plan was $3,136,409, $4,467,855 and $6,378,917 for the years ended June 30, 2008, 2009 and 2010, respectively.

NOTE 16 - INCOME TAX

Hollysys, and its subsidiary, GTH, are incorporated in the BVI and are not subject to income tax under the relevant jurisdiction. Its major operating subsidiaries are incorporated in the PRC and are subject to income taxes as described below.

Prior to December 31, 2007, the statutory tax rate of PRC Enterprise Income tax (“EIT”) was 33% (30% of national income tax plus 3% local income tax).

On March 16, 2007, the National People’s Congress passed the new Enterprise Income Tax law (the “new EIT law”) which imposes a single income tax rate of 25% for most domestic enterprises and foreign investment enterprise. The new EIT law was effective as of January 1, 2008. The new EIT law provides a five-year transition period from its effective date for those enterprises which were established before March 16, 2007 and which were entitled to a preferential lower tax rate under the then effective tax laws or regulations, as well as grandfathering tax holidays. Further, according to the new EIT law, entities that qualify as “High-tech Enterprises” are entitled to the preferential EIT rate of 15%.

Beijing Hollysys is registered in a high-tech zone located in Beijing and was deemed as a High-tech Enterprise by Beijing Commission of Science and Technology. According to the preferential regulations specified by State Council, Beijing Hollysys had entitled to a favorable EIT rate of 15% from October 1, 2002 to December 31, 2007. During the calendar year ended December 31, 2008, Beijing Hollysys was certified as a High-tech Enterprise for three years commencing from January 1, 2008. Therefore, the EIT tax rate applicable to Beijing Hollysys is 15% for the calendar years ended December 31, 2008, 2009 and 2010.

Hangzhou Hollysys is registered as a foreign investment enterprise in China and was entitled to tax holidays of 100% exemption of income tax for two years followed by 50% exemption of income tax for the next three years since the first profitable calendar year ended December 31, 2004. During the calendar year ended December 31, 2006, Hangzhou Hollysys enjoyed preferential EIT rate of 16.5% (i.e. 15% of national income tax plus 1.5% local income tax) in accordance with relevant regulations regarding Hangzhou Hollysys located in a development zone recognized by the Ministry of Land and Resource in China. This preferential EIT rate benefit, together with the 50% exemption of income tax holiday, entitled Hangzhou Hollysys with applicable EIT rate of 8.25% for the calendar years ended December 31, 2006 and 2007. During the calendar year ended December 31, 2008, Hangzhou Hollysys was certified as a High-tech Enterprise and entitled to the preferential EIT rate of 15% for three years commencing from January 1, 2008. In addition, Hangzhou Hollysys was also certified as “Major Software Enterprises” for the calendar year ended December 31, 2008 and 2009 and is entitled to a concessionary tax rate of 10%. In accordance with the new EIT law, the EIT tax rate applicable to Hangzhou Hollysys for the calendar year ended December 31, 2008, 2009, and 2010 is therefore 10%, 10%, and 15% respectively.

Hollysys Automation is registered in a high-tech zone located in Beijing and was deemed as a High-Tech Enterprise by Beijing Commission of Science and Technology. In addition, Hollysys Automation was certified as “Software Enterprises” for the calendar year ended December 31, 2009, and 2010, and is entitled to tax holidays of 100% exemption of income tax for two years followed by 50% exemption of income tax for the next three years since the first profitable calendar year, which is expected to be the calendar year ended December 31, 2010. In accordance with the new EIT law, the EIT tax rate applicable to HollySys Automation for the calendar year ended December 31, 2008, 2009, and 2010 is therefore 25%, 25%, and 0% respectively.

F-34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

For other PRC operating subsidiaries, the applicable tax rate is 25% starting from January 1, 2008.

Income tax expense, which is all incurred in the PRC, consists of:

	Year Ended June 30,
	2008			2009		2010

Current income tax expense	$	2,798,920		$	2,525,416	$	8,540,774
Deferred income tax expense (benefit)		(1,706,443	)		535,725		(877,341	)

	$	1,092,477		$	3,061,141	$	7,663,433

A reconciliation between the provisions for income taxes computed by applying the statutory tax rate in PRC of 25% for the fiscal years ended June 30, 2008, 2009, and 2010 for the income before income taxes and the actual provision for income taxes is as follows:

	Year Ended June 30,
	2008			2009			2010

Income (loss) before income taxes	$	2,248,419		$	(5,603,121	)	$	35,219,424

Expected income tax expense at statutory tax rate in PRC		562,104			(1,400,780	)		8,804,856
Effect of different tax rate in various jurisdictions		141,756			32,590			15,555
Effect of preferential tax treatment		(4,237,165	)		(4,004,659	)		(10,813,294	)
Effect of income for which no income tax is chargeable		(742,063	)		(1,447,910	)		(1,394,901	)
Effect of additional deductible research and development expense		(346,788	)		(770,383	)		(197,472	)
Effect of non-deductible expenses		5,694,332			10,585,029			883,415
Under/(over) provision of income tax in previous years		(348,399	)		(34,818	)		(86,171	)
Change in valuation allowance		348,936			113,096			63,397
Effect of deemed profit arisen in re-ogranization		-			-			2,573,061
Withholding tax on capital repayment		-			-			7,705,250
Others		19,764			(11,024	)		109,737

Effective income tax expense	$	1,092,477		$	3,061,141		$	7,663,433

Had the all above tax holidays and concessions not been available, the tax charge would have been higher by $4,237,165, $4,004,659 and $10,813,294 and the basic net income per share would have been lower by, $0.11, $0.09 and $0.21 for the years ended June 30, 2008, 2009 and 2010 respectively, and diluted net income per share for the years ended June 30, 2008, 2009 and 2010 would have been lower by $0.11, $0.09 and $0.21, respectively.

F-35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

The temporary differences that have given rise to the deferred tax liabilities consist of the following:

	June 30,
	2009			2010
Deferred tax assets
Doubtful debt provision	$	1,076,484		$	1,449,386
Inventory provision		182,993			309,047
Impairment on long-term assets		-			129,955
Deferred revenue		1,151,302			1,804,203
Warranty provision		247,981			285,800
Recognition of intangible assets		719,996			628,215
Accrued payroll		227,896			406,988
Net operating loss carry forward		524,234			519,683

		4,130,886			5,533,277

Less: Valuation allowances		(462,032	)		(519,683	)

	$	3,668,854		$	5,013,594

Deferred tax liabilities
Cost and estimated earnings in excess of billings	$	(2,919,511	)	$	(3,379,237	)

Deferred tax assets, net	$	749,343			1,634,357

Deferred tax assets - current	$	319,737		$	956,969
Deferred tax assets – non-current		706,943			677,388
Deferred tax liabilities – current		(277,337	)		-

	$	749,343		$	1,634,357

The Company operates through the PRC subsidiaries and the valuation allowance is considered on each individual basis. Where a valuation allowance was not recorded, the Company expects to generate sufficient taxable income in the future.

Under the New EIT Law and the implementation rules, profits of the PRC subsidiaries earned on or after January 1, 2008 and distributed by the PRC subsidiaries to foreign holding company are subject to a withholding tax at a rate of 10% unless reduced by tax treaty. Aggregate undistributed earnings of the Company’s subsidiaries located in the PRC that are available for distribution to the Company of approximately $15,333,000 at June 30, 2010 are intended to be reinvested, and accordingly, no deferred taxation has been made for the PRC dividend withholding taxes that would be payable upon the distribution of those amounts to the Company. Distributions made out of pre January 1, 2008 retained earnings will not be subject to the withholding tax.

As a result of the Share Exchange Transaction, pursuant to the Internal Revenue Code Section 367 (“§367”), the merger portion of the transaction may not be considered a tax-free exchange and thus the Company would be taxed on the gain of its assets at the time of the merger. The management of the Company consulted independent tax experts regarding the tax effect on the re-domestication merger and assessed that the Company should undertake a tax liability of $1,699,915. As of completion date of Share Exchange Transaction on September 20, 2007, tax on re-domestication amounted to $1,699,915 was charged against equity because the assumption of such tax is part of the recapitalization in connection with the Stock Exchange Transaction. In June 2008, Hollysys filed 2007 tax returns and made payment of $1,636,154. The Company does not expect to incur further material tax liabilities in this connection.

In accordance with ASC Topic 704 Income Taxes, the Company’s liability for income taxes includes the liability for unrecognized tax benefits, interest and penalties which relate to tax years still subject to review by taxing authorities.

F-36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

Determining income tax provisions involves judgement on the future tax treatment of certain transactions. The Company performed a self-assessment and concluded that there was no significant uncertain tax position requiring recognition in its financial statements. The tax treatment of such transactions is reconsidered periodically to take into account all changes in tax legislations. Where the final tax outcome of these transactions is different from the amounts that were initially recorded, such difference will impact the income tax and deferred tax provisions in the year in which such determination is made.

There were no material interest or penalties incurred for the years ended June 30, 2008, 2009 and 2010.

NOTE 17 – EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted net earnings (loss) per share attributable to Hollysys for the years indicated:

	Year Ended June 30,
	2008			2009			2010

Net income (loss) attributable to Hollysys- numerator
Basic and diluted	$	(1,677,178	)	$	(13,851,064	)	$	25,704,538

Shares - denominator:
Weighted average ordinary shares
outstanding used in computing basic
net earnings (loss) per share attributable to Hollysys		37,658,437			44,950,833			51,243,667
Option
Effect of dilutive securities
Stock option		-			-			251,062
UPO		-			-			343,565
Weighted average ordinary shares
outstanding used in computing
diluted net earnings per share attributable to Hollysys		37,658,437			44,950,833			51,838,294

Net earnings (loss) per share attributable to Hollysys - basic	$	(0.04	)	$	(0.31	)	$	0.50

Net earnings (loss) per share attributable to Hollysys - diluted	$	(0.04	)	$	(0.31	)	$	0.50

For the year ended June 30, 2008, potential common shares of 246,000 shares related to stock options granted under the terms of the Plan, 750,000 shares related to UPO and 1,002,740 shares related to contingent issuance of common stock in accordance with the Share Exchange Transaction were excluded from the computation of diluted net loss per share as they had an anti-dilutive effect.

For the years ended June 30, 2009, potential common shares of 681,000 shares related to stock options granted under the terms of the Plan, 750,000 related to UPO and 4,991,781 shares related to contingent issuance of common stock related in accordance with the Share Exchange Transaction were excluded from the computation of diluted net loss per share as they had an anti-dilutive effect.

F-37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

NOTE 18 - RELATED PARTY TRANSACTIONS

Related Party Relationships

Name of Related Parties		Relationship with the Company

HollySys Information Technology Co., Ltd.	6.	7.49% owned by Beijing HollySys
New Huake Electronic Technology Co., Ltd.	9.	10.37.5% owned by Beijing HollySys
ChinaTechenergy Co., Ltd.	12.	13.50％owned by Beijing HollySys
HollySys Electric Tech Co., Ltd.	15.	16.40% owned by Beijing HollySys
HollySys Equipment Technology Co., Ltd.	18.	19.20% owned by Beijing HollySys
Zhejiang Sanxing Technology Co., Ltd	21.	22.10% owned by Hangzhou HollySys

Due from Related Parties

	June 30,
	2009		2010

HollySys Information Technology Co., Ltd.	$	618,785	$	998,113
China Techenergy Co., Ltd.		6,562,318		9,749,715
HollySys Electric Tech Co., Ltd.		13,857		9,234
HollySys Equipment Technology Co. Ltd.		8,098		4,565
Zhejiang Sanxing Technology Co., Ltd.		-		3,201

	$	7,203,058	$	10,764,828

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

Due to Related Parties

	June 30,
	2009		2010

HollySys Information Technology Co., Ltd		827,573		1,853,162
New Huake Electronic Technology Co., Ltd.		35,142		73,191
HollySys Equipment Technology Co. Ltd.		1,978		1,696
China Techenergy Co., Ltd		588,383		673,966
HollySys Electric Tech Co., Ltd		11,607		8,584

	$	1,464,683	$	2,610,599

Purchases and Sales with Related Parties

Purchases
	Year Ended June 30,
	2008		2009		2010

HollySys Electric Tech Co., Ltd.	$	71,019	$	24,709	$	41,757
China Techenergy Co., Ltd.		1,075,530		1,531,058		70,368
HollySys Information Technology Co., Ltd.		1,630,574		728,897		4,857,416
New Huake Electronic Technology Co., Ltd.		842,824		431,693		493,203

	$	3,619,947	$	2,716,357	$	5,462,744

F-38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

Lease Expenses
	Year Ended June 30,
	2008		2009		2010

HollySys Information Technology Co., Ltd.	$	731	$	-	$	32,069

	$	731	$	-	$	32,069

Sales
	Year Ended June 30,
	2008		2009		2010

HollySys Electric Tech Co., Ltd.	$	4,995	$	13,865	$	11,038
China Techenergy Co., Ltd.		1,535,446		5,721,797		4,189,366
HollySys Information Technology Co., Ltd		37,496		920,333		2,184,844
Zhejiang Sanxing Technology Co., Ltd.		-		-		8,337
Beijing HollySys Equipment Technology Co., Ltd		-		30,794		1,385

	$	1,577,937	$	6,686,789	$	6,394,970

Lease Income
	Year Ended June 30,
	2008		2009		2010

China Techenergy Co., Ltd.	$	77,583	$	27,835	$	-
HollySys Information Technology Co., Ltd.		52,832		-		-
HollySys Equipment Technology Co., Ltd.		2,974		3,351		-

	$	133,389	$	31,186	$	-

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

Note Receivable from the stockholder

GTH raised $30 million cash by using the Bridge Loan Transaction mentioned in Note 2, GTH then loaned the $30 million cash to APH, in order for it to pay off its first $30 million note payable to OSCAF, in exchange for a note receivable of $30 million from APH. On December 22, 2006, the entire proceeds of $30 million were wired to the original Chinese owners’ bank accounts through Chardan Capital, Inc. The note receivable bears an interest at 10% per annum. The repayment terms of this note receivable was disclosed in Note 2. Because APH, being the sole stockholder, was only a holding company with no stand-alone operations and no material assets available to repay the note, the note receivable from APH was presented in the stockholder’s equity section on the balance sheet as of June 30, 2007. Based on the deemed distribution of $30 million derived from the Share Transfer Transaction between GTH and Chardan, the balance of the note receivable from the stockholder has been reduced to zero after a deemed collection of $30 million from this note receivable.

Acquisition of HAP from a Related Party

On November 19, 2007, Hollysys entered into a Stock Purchase Agreement with Fulbond Systems Pte Ltd, which is a Singapore based company and partially owned by Mr. Yau Kiam Fee, who was a member of Board of Directors of Hollysys prior to May 14, 2010, to acquire 100% interest of Fulbond Systems for a total consideration of SGD$1,066,234 (equivalent to $744,596). After the ownership transfer, Fulbond System changed its name to HollySys (Asia Pacific) Pte Ltd. The purchase price of $744,596 was paid in cash on December 11, 2007.

F-39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008, 2009 AND 2010

NOTE 19 - OPERATING RISK

The Company has significant investments in China. The operating results of the Company may be adversely affected by changes in the political and social conditions in China, and by changes in Chinese government policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods taxation, among other things. There can be no assurance, however, those changes in political and other conditions will not result in any adverse impact.

Most of the Company’s customers are located in the PRC. The Company had no customer that individually comprised 10% or more of revenue for the years ended June 30, 2008, 2009 and 2010.

The Company has no customer that individually comprised 10% or more of the outstanding balance as of June 30, 2009 and 2010.

NOTE 20 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash and cash equivalents, contract commitment deposit in banks, accounts receivable, other receivables, amount due to or from related parties, accounts payable and accrued liabilities are reasonable estimates of their fair value because of the short maturity of these items. The carrying amount of the Company’s long term debts approximates at their fair value due to the interest rates on the debts approximating at current rates.

NOTE 21 - COMMITMENT

At June 30, 2010, the Company was obligated under operating leases requiring minimum rentals as follows:

Years Ending June 30,

2011	$	351,836
2012		119,050
2013		63,225

Total minimum lease payments	$	534,111

Other than the details set out in the note 6 to the consolidated financial statements, there was no significant capital commitment as of June 30, 2010.

NOTE 22 - SUBSEQUENT EVENTS

On July 8, 2010, the Company entered into an agreement to transfer 29% equity interest in HollySys Information Technology Co. Ltd. (“Hollysys Information”) to its major equity owner, at a cash consideration of RMB 23,377,700 (approximately equivalent to $3,427,162). As a result, the Company owns 20% equity interest of Hollysys Information upon the completion of the transfer.

On July 8, 2010, the Company entered into an agreement with HollySys Information to purchase the fourth and fifth floors of the Company’s office building, located in Xisanqi, Beijing, PRC which were formerly injected to Hollysys Information as initial investment from Hollysys, at a cash consideration of RMB 23,353,900 (approximately equivalent to $3,423,673).

F-40