ZST Digital Networks, Inc. - FORM 10-K/A

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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANE - ZST Digital Networks, Inc.	v230333_ex31-1.htm
EX-32.2 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT T - ZST Digital Networks, Inc.	v230333_ex32-1.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANE - ZST Digital Networks, Inc.	v230333_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

Amendment No. 1

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

For the fiscal year ended December 31, 2010

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

For the transition period from _____________________ to ______________

Commission File Number: 001-34488

ZST DIGITAL NETWORKS, INC.

(Exact name of small business issuer as specified in its charter)

Delaware	20-8057756
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

206 Tongbo Street, Boyaxicheng Second Floor

Zhengzhou City, Henan Province

People’s Republic of China 450007

(Address of principal executive offices)

(86) 371-6771-6850

(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $0.0001 par value		NASDAQ Global Market

SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:

None.

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

Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ¨ No x

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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

Large accelerated filer ¨		Accelerated filer ¨

Non-accelerated filer ¨		Smaller reporting company x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on June 30, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter), was approximately $32.2 million based on the closing price of the registrant’s common stock on The Nasdaq Global Market of $4.84 per share.

There were 11,710,442 shares of common stock outstanding as of March 2, 2011.

Documents Incorporated by Reference: None.

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-K/A (this “Amendment”) amends information in the Form 10-K filed by the ZST Digital Networks, Inc. (the "Company") with the Securities and Exchange Commission (the “SEC”) on March 4, 2011 (the “Original Filing”). This Amendment only amends information in the following:

Item 1 (Business),

Item 1A (Risk Factors),

Item 7 (Management's Discussion and Analysis of Financial Condition and Results of Operations),

Item 10 (Directors, Executive Officers and Corporate Governance), and

Item 11 (Executive Compensation).

Item 8 (Financial Statements and Supplementary Data) and other Items of the Original Filing are not being amended. As a result of this Amendment No. 1, the certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 filed as exhibits to our Original Filing have been revised, as applicable to the disclosures that are amended by this Amendment, re-executed and re-filed as of the date of this Amendment.

This Amendment includes information contained in the Original Report, and we have made no attempt in the Amendment to modify or update the disclosures presented in the Original Report. The disclosures in this Amendment continue to speak as of the date of the Original Report, and do not reflect events occurring after the filing of the Original Report. Accordingly, this Amendment should be read in conjunction with our other filings made with the SEC subsequent to the filing of the Original Report. The filing of this Amendment shall not be deemed to be an admission that the Original Report, when made, included any untrue statement of a material fact or omitted to state a material fact necessary to make a statement not misleading.

ZST DIGITAL NETWORKS, INC.

TABLE OF CONTENTS TO ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010

ITEM		PAGE

PART I

Item 1	Business	4
Item 1A	Risk Factors	15

PART II
		37
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations

PART III

Item 10	Directors, Executive Officers and Corporate Governance	48
Item 11	Executive Compensation	51

PART IV

	Exhibits, Financial Statement Schedules	57

SIGNATURES		61

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The information contained in this Annual Report on Form 10-K, including in the documents incorporated by reference into this Annual Report on Form 10-K, includes some statements that are not purely historical and that are “forward-looking statements.” Such forward-looking statements include, but are not limited to, statements regarding the Company and its management’s expectations, hopes, beliefs, intentions or strategies regarding the future, including its financial condition and results of operations. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,” “potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” and similar expressions, or the negatives of such terms, may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.

The forward-looking statements contained in this Annual Report on Form 10-K are based on current expectations and beliefs concerning future developments. There can be no assurance that future developments actually affecting the Company will be those anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements, including the following:

●	our ability to maintain and increase revenues and sales of our products;

●	our ability to develop and market new products;

●	our reliance on access to the China Unicom wireless network for providing our GPS services;

●	competitive nature of our industry;

●	market acceptance of our products;

●	our reliance on intellectual property, some of which is owned by an affiliated party and licensed to us;

●	our strategic investments and acquisitions;

●	potential negative media reports that focused on differences between the financial information set forth in our filings with the US SEC and filings with the PRC’s SAIC;

●	compliance and changes in the laws of the PRC that affect our operations;

●	continued maintenance of certificates, permits and licenses required to conduct business in China;

●	vulnerability of our business to general economic downturn, especially in the PRC; and

●	the other factors referenced in this Annual Report on Form 10-K, including, without limitation, under the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business.”

These risks and uncertainties, along with others, are also described below under the heading “Risk Factors.” Should one or more of these risks or uncertainties materialize, or should any of the parties’ assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

PART I

ITEM 1. BUSINESS.

Our company, ZST Digital Networks, Inc., operates through our wholly-owned subsidiary, World Orient Universal Limited (“World Orient”) and its wholly-owned subsidiaries Global Asia Universal Limited (“Global Asia”), Everfair Technologies, Ltd. (“Everfair”) and Zhengzhou Shenyang Technology Company Limited (“Zhengzhou ZST”).

The terms “ZST,” “Company,” “we,” “our” or “us” in this Annual Report refer to ZST Digital Networks, Inc. and its subsidiaries, unless the context suggests otherwise. Additionally, unless we indicate otherwise, references in this Annual Report to:

“China” and the “PRC” are to the People’s Republic of China, excluding, for the purposes of this Annual Report only, Taiwan and the special administrative regions of Hong Kong and Macau;

“RMB” and “Renminbi” are to the legal currency of China; and

“$,” “US$” and “U.S. dollars” are to the legal currency of the United States.

Overview

ZST, founded in 1996, is a supplier of digital and optical network equipment to cable system operators and provider of GPS location and tracking services in the Henan Province. We have developed a line of internet protocol television (“IPTV”) set-top boxes that are used to provide bundled cable television, Internet and telephone services to residential and commercial customers. Our main clients are broadcasting TV bureaus and cable network operators serving various cities and counties. We have over 30 main customers, including the broadcasting TV bureaus and cable network operators of the cities/counties of Mengzhou, Pingdingshan, Kaifeng, Xieye, Yuanyang, Yiyang, Xixia, Nanzhao, and Gushi. In addition, our customers include logistics companies that include Henan Chang Tong Logistics, ltd; Zhengzhou Yuan Tong Logistics, ltd; and Henan Wan Li Car Trading ltd.

Since the fourth quarter of 2009, we have been providing GPS location and tracking services to third parties, primarily logistics and transportation companies. In March 2009, we entered into a network access right agreement with the Henan Subsidiary of China Unicom that allows us to use the China Unicom wireless network for providing GPS location and tracking services to third parties. In December 2010, our vehicle-embedded GPS products received “transportation product certification” issued by the National Transportation Ministry, which we believe will facilitate the expansion of our GPS projects.

We expect that for the foreseeable future that the source of revenue for our business will be from (i) selling network system equipment and set-top boxes to cable system operators and residential users and (ii) providing GPS location and tracking services primarily to logistics and transportation companies. For the year ended December 31, 2010, sales of network equipment and set-top boxes accounted for approximately 80% of our revenue and sales of GPS products and services account for 20% of our revenue.

Our services and products have been recognized with various certifications, including “high-tech enterprise” issued by the Henan Province government, a certificate of “ISO9001: 2000 Quality System Authentication”, “integrated computer information system qualification”, “communication user cable construction enterprise qualification”, “Henan Province Security Technology Prevention Engineering Qualification”, “Henan Province Broadcasting and Cable TV Network Design and Installation Certification”, “Henan Province Satellite TV and Broadcasting Ground Receiving Equipments Installation Certification”, “Value-added Telecommunication Business Certification”, and the “Transportation Product Certification.”

Corporate History

We were incorporated in the State of Delaware on December 7, 2006 under the name SRKP 18, Inc., which was originally organized as a “blank check” shell company to investigate and acquire a target company or business seeking the perceived advantages of being a publicly held corporation. On January 9, 2009, SRKP 18, Inc. closed a share exchange transaction (the “Share Exchange”) pursuant to which SRKP 18, Inc. (i) issued 806,408 shares of its common stock to acquire 100% equity ownership of World Orient Universal Limited World Orient, which is the 100% parent of Global Asia, which is the 100% parent of Everfair, which is the 100% parent of Zhengzhou ZST, (ii) assumed the operations of World Orient and its subsidiaries, and (iii) changed its name from SRKP 18, Inc. to ZST Digital Networks, Inc.

Subsequent to the closing of the Share Exchange, on January 14, 2009, Zhong Bo, our Chief Executive Officer and Chairman of the Board, Wu Dexiu, Huang Jiankang, Sun Hui and Li Yuting (the "ZST Management"), each entered into a Common Stock Purchase Agreement pursuant to which we issued and the ZST Management agreed to purchase an aggregate of 5,090,315 shares of our common stock at a per share purchase price of $0.6907 and obtained control of our company. The purchase consideration for the 5,090,315 shares came from the proceeds raised through a private investment in a public entity (“PIPE”) transaction and the conversion of shareholder loans lent to Zhengzhou ZST. The purchase price for the shares was paid in full on May 25, 2009.

Our operations are primarily conducted through Zhengzhou ZST, which was established on May 20, 1996 as a private domestic corporation located in Zhengzhou City, Henan Province, PRC. Our other directly and indirectly held subsidiaries were established primarily for tax and reorganization purposes, as more fully described below.

Pursuant to PRC rules and regulations relating to mergers of PRC companies with foreign entities, an offshore company controlled by PRC citizens that intends to merge with a PRC company will be subject to strict examination by the relevant PRC foreign exchange and security authorities. To enable Zhengzhou ZST to go public in the US through the Share Exchange, Zhengzhou ZST made the following restructuring arrangements:

(i)

established Everfair in August 2008 as a Hong Kong holding company owned by a non-PRC citizen and indirectly controlled the operations of Everfair,

(ii)

had Everfair enter into an equity transfer agreement with Zhengzhou ZST by paying RMB12 million to ZST Management,

(iii)

established World Orient in August 2008 as a British Virgin Islands (“BVI”) holding company owned by a non-PRC citizen,

(iv)

had World Orient and its wholly-owned subsidiary Global Asia, its subsidiary Everfair, and its subsidiary Zhengzhou ZST enter into a share exchange agreement with us,

(v)

conducted a PIPE transaction that closed concurrently with the Share Exchange, and

(vi)

used proceeds from the PIPE transaction to pay RMB12 million to ZST Management pursuant to an ownership transfer agreement.

In November 2008, World Orient acquired 100% ownership of Global Asia. In October 2008, Global Asia acquired 100% ownership of Everfair. In October 2008, Everfair entered an equity transfer agreement with the original owners of Zhengzhou ZST. Pursuant to the equity transfer agreement, Everfair agreed to pay the original owners RMB12 million for the equity transfer within three months of the approval from competent government agency. After this equity transfer, Zhengzhou ZST became a foreign investment company with the operating life of 30 years since the approval of its establishment on November 10, 2008.

Upon consummation of the Share Exchange and the ownership transfer transactions, described above, ZST Management owned a majority of our issued and outstanding shares of common stock and Mr. Zhong Bo was appointed as our Chairman of the Board and Chief Executive Officer.

The organization and ownership structure of our company is as follows:

Industry

Over the past decade, technological advancements in the electronics industry have greatly expanded the capabilities of cable TV devices and cable systems. Cable network devices include amplifiers, optical receivers, IPTV set-top boxes and other related products. The popularity of these devices benefits from reductions in cost, size and weight, and improvements in functionality and reliability.

China’s market share of cable TV devices and electronics is expected to increase, especially with the analog to digital conversion taking place over the next several years. Owing to the extensive use of cable TV and the rapid growth of internet and broadband applications in China, we believe that the market for delivery of Internet service through cable modem or set-top box is promising in China in the near future.

China’s consumer market for cable TV devices and electronics has been growing; due in part to the country’s rapid growing electronic industry. Economic growth in China has led to greater levels of personal disposable income and increased spending among China’s expanding middle-class consumer base. Notwithstanding China’s economic growth, China’s economic output and consumption rates are still relatively low on a per capita basis compared to developed countries. As China’s economy develops, we believe that disposable income and consumer spending levels will continue to become closer to that of developed countries like the United States.

GPS tracking products and services for the transportation and logistics industry in China has experienced significant growth over the past decade. Companies in the commercial transport and logistics industry are often required to make substantial investments and purchases, including large transportation vehicles, equipment, and rising fuel costs. The aggregate cost for equipment, drivers, fuel, insurance, maintenance, and support personnel can be substantial, and the value of efficient operation of each vehicle and the vehicle fleet can result in substantial savings. Therefore, companies in the transport and logistics industry seek ways to collect accurate and timely data and analysis to identify inefficiencies, reduce their operating costs, utilize assets more efficiently and improve delivery times. The use of GPS location and tracking devices and services enables fleet operators reach these goals. Advances in technology have resulted in higher demand for GPS tracking products and services as a result of increased affordability and functionality of GPS tracking products and services.

China has a number of benefits in the manufacture of electronic devices, which are expected to drive this growth:

●

Low Costs. China continues to have a relatively low cost of labor as well as easy access to raw materials and land.

●

Proximity to Electronics Supply Chain. Electronics manufacturing in general continues to shift to China, giving China-based manufacturers a further cost and cycle time advantage.

●

Proximity to End-Markets. China has focused in recent years on building its research, development and engineering skill base in all aspects of higher end manufacturing, including electronic devices.

Competitive Strengths

Experienced Management Team

Our senior management team has extensive business and industry experience, including an understanding of changing market trends, consumer needs and technologies, which we believe enables us to capitalize on the opportunities resulting from these market changes. Our Chief Executive Officer, Zhong Bo, has over 15 years of experience in the design and installation of cable television systems.

Design Capabilities and Manufacturing Oversight

We employ a rigorous and systematic approach to product design and manufacturing oversight. We employ a well-educated senior design team with members having an average of 8 to 10 years of experience. Our design team develops and tracks new concepts and ideas from a variety of sources, including direct customer feedback, trade shows, domestic research institutions and our key core suppliers. We are able to rapidly modify our design function to accommodate new customer requests, designs and specifications. We subcontract all manufacturing on a turnkey basis, with our suppliers delivering fully assembled and tested products based on our proprietary designs. Our contract manufacturers are located in Hang Zhou, Shen Zhen and Zheng Zhou, China. We also achieve quality control over products manufactured under our contract manufacturing arrangements by sending our technicians on site to supervise the production and testing of our products. We believe that the use of this model allows us to focus substantially all of our resources on determining customer requirements and on the design, development and support of our products.

Well-Established Distribution Channels

We sell our products through a well-established network of distributors and resellers that allows us to access the customer markets of the Henan Province. We also attend various trade fairs for electronic products throughout China, including China Hi-tech Fair (Shenzhen) and Canton Fair, to continuously improve our existing distribution channels and explore new potential distribution channels.

Our Strategy

Our goal is to be a domestic leader in the development and manufacturer of cable television systems devices and related electronic products and provider of GPS tracking products and services through the following strategies:

Enhance Brand Awareness. We believe that continuing to strengthen our brand will be critical to increasing demand for, and achieving widespread acceptance of, our cable TV network devices and electronics and GPS products and services. We believe a strong brand offers a competitive advantage and so we intend to devote additional resources to strategic marketing promotion in an effort to increase brand awareness and product recognition and heighten consumer loyalty.

Expand Sales Network and Distribution Channels. We continue to seek additional penetration into existing markets as well as commencing sales in additional domestic markets. We intend to expand our sales and customer service networks of agents and dealers in China and into new markets. We also intend to develop relationships with a broader set of wholesalers, distributors and resellers, all in order to expand the market availability of our products.

Pursue Strategic Partnerships, Joint Ventures and Acquisitions. We intend to selectively pursue partnerships, joint ventures and strategic acquisition opportunities that we believe may allow us to increase our existing market share, expand into new markets, broaden our portfolio of products and intellectual property, and strengthen our relationships with our customers.

Offer Comprehensive Network Infrastructure Solutions. Our expertise in the design and installation of cable television systems has afforded us the ability to offer customized telecommunications systems for a variety of customers. For example, we offer a customer the ability to deliver a fully integrated video programming solution, customized set-top boxes and network design and management. We intend to devote additional resources towards expanding this segment of our business.

Act on the Set-top Box Replacement Cycle. The broader adoption of high definition televisions by consumers will require more advanced compression (e.g., MPEG-4) and security technologies within set-top boxes. This may launch a replacement cycle, particularly among direct-to-home and cable providers with substantial bases of legacy equipment, which may create additional market opportunities for us.

Products

We offer a range of branded cable television devices and related networking products including set-top boxes, optical receivers, optical transmitters and cable transmission amplifiers. We also provide GPS tracking device products.

Set-top Boxes and Related Products

Our line of internet protocol television (“IPTV”) set-top boxes integrate Internet, multi-media, and communication technologies, provides residential customers with high definition digital multi-media service, and provides extensive freedom to choose video programs offered by the network video providers on broadband IP network. These devices allow consumers who subscribe to television service from multi-channel video distributors to access encrypted digital video and audio content and make use of a variety of interactive applications. These applications include an on-screen interactive program guide, pay-per-view offerings, games and shopping and parental control.

In addition to the functionality of a basic digital set-top box, these devices enable subscribers to pause, stop, reverse, fast forward, record and replay live or recorded digital television content using a built-in hard drive capable of storing up to 200 hours of content. They also include the ability to support video-on-demand services. Our devices also enable subscribers to access the enhanced picture quality and sound of high-definition content, in addition to the functionality of a standard-definition digital set-top box. In addition, our line of IPTV devices can also deliver customized multi-media service functions according to user configurations, and delivers performance and additional value to customers through network and applications software upgrades.

In addition to set-top boxes we also design and develop related products such as power supplies, remote controls and other devices and accessories.

Digital Network Equipment

We offer a line of fiber-optic receivers and transmitters, cable transmission amplifiers and other network products which provide the flexibility, speed and clarity necessary in communications systems. Our optical receivers, amplifiers and power supply products have been recognized by the Ministry of Broadcasting and TV and the Henan Municipality Bureau of Broadcasting and TV. We have implemented stringent quality control systems covering each phase of production, from the purchase of materials and components through oversight of each step in the manufacturing process. Quality and reliability is monitored in accordance with the requirements of ISO 9001 systems. We have also passed stringent quality reviews and our products meet digital electronic product standards in China, the United States and Europe.

●

Optical Receivers. Our optical receivers convert a fiber-optic transmission into digital RF signals that are amplified and distributed through a 750 – 1000MHz optical cable system.

●

Optical Transmitters. We have developed a range of optical transmitters, including the 1310nm and 1550nm series products, used in the transmission of cable system front optical fiber signal.

●

Cable Transmission Amplifiers. Our main bus amplifier and end user amplifier products are used to improve the signal quality in cable networks.

GPS Products

We provide a complete package and solution to our customers, including hardware, software and services. The product utilizes Global Positioning Systems ("GPS") technology for vehicle tracking and fleet management. Once a vehicle is equipped with our GPS tracking device, a user is able to optimize the use of their assets and increase the productivity of fleet operations across the entire supply chain and reduce costs. Our products are intended to allow logistics companies to more effectively manage shipments by utilizing real-time tracking information to improve on-time delivery and estimated arrival times, respond to and resolve unforeseen problems, and reduce the risk of theft or loss. Benefits from GPS monitoring of transport vehicles also include the ability to improve employee productivity, driver safety, and reduce labor and fuel costs.

Our GPS products generally consist of the main terminal unit, GSM antenna, GPS antenna, microphone, T supporter, functional wire, and central control wire. Our line currently includes two models: the SY-A601 and the SY-A602. The SY-601 provides national satellite positioning, GSM communication, alarm in emergency, alarm in robbery, information assistance, and speed alarm. The SY-A602 provides additional features such as meter checking and remote set/reset.

Net revenues for each of our revenue segments as a percentage of net revenues are set forth below:

	Year Ended December 31,
	2008			2009			2010
Products
IPTVs (1)		56	%		54	%		47	%
Optical devices (2)		22	%		27	%		18	%
Cable devices (3)		3	%		8	%		3	%
Others (4)		15	%		8	%		12	%
GPS		—	%		3	%		15	%
Subtotal		96	%		100	%		95	%
Technical Support		2	%		—	%		—	%
Construction		2	%		—	%		—	%
GPS related services		—	%		—	%		5	%
Total		100	%		100	%		100	%

(1) Includes IPTV set-top boxes.

(2) Includes optical transmitters, optical workstations, optical receivers and optical power meters.

(3) Includes power supply cables, optical cables and pigtails

(4) Includes security and monitoring devices, which include coding and decoding devices, digital cameras and matrix exchanges, and network products, which include welding machines, optical digital audio machines and audio and video distributors.

Services

We offer a range of monitoring and cable services and services packaged with our personal and vehicle tracking GPS systems.

Monitoring and Cable Services

We offer security and monitoring services which involves the installation of monitoring systems in buildings, including the design and implementation of various devices, such as coding and decoding devices, digital cameras and matrix exchanges. We also offer cable services and provide networking throughout buildings with proper devices and components, such as welding machines, optical digital audio machines, and audio and video distributors.

GPS Tracking Services

We entered into a network access right agreement in March 2009 with the Henan Subsidiary of China Unicom that allows the Company to use the China Unicom wireless network for providing GPS location and tracking services to third parties. Through use of this wireless network, our GPS tracking devices that installed in vehicle fleets are able to provide critical, real-time location and security information. Our services include installation of our GPS tracking devices, which are mounted on the interior of a vehicle, protecting the GPS product from weather, theft, and vandalism. Our logistics and transportation customers in China are able to track their vehicle fleets through our software platform which is designed to be powerful yet user-friendly. Our tracking service provides our customers with an ability to access real-time vehicle location, comprehensive vehicle and driver performance information, real-time asset tracking, route management information, and trip optimization. We also staff a 24/7 call center to handle subscriber queries and emergency calls. Currently, the system has approximately 400 test users and receives about 20 subscriber calls per day.

Manufacturing and Suppliers

Manufacturing

Our manufacturing operations consist of the procurement and inspection of materials and components, final system quality control testing and packaging. We subcontract all manufacturing on a turnkey basis, with our suppliers delivering fully assembled and tested products based on our proprietary designs. The use of this model allows us to focus substantially all of our resources on determining customer requirements and on the design, development and support of our products. This model also allows us to have significantly reduced capital requirements. The assembled products are then delivered to our facilities for final system quality control testing against product specifications and product configuration, including software installation.

We subcontract our manufacturing to a number of manufacturers. Our manufacturers were selected based on the breadth of available technology, quality, manufacturing capacity and support for design tools that we use. None of our products are currently manufactured by more than one supplier. However, in the event one of our suppliers notifies us that it intends to cease manufacturing a product, we expect that we will have an adequate opportunity to order sufficient quantities of the affected products so that shipments to customers will not be adversely affected while we qualify a new manufacturer.

For the foreseeable future, we intend to continue to rely on our contract manufacturers for substantially all of our manufacturing and assembly and the substantial portion of our test requirements. All of our contract manufacturers produce products for other companies. We do not have long-term manufacturing agreements with any of our contract manufacturers. Our contract manufacturers are not obligated to supply products to us for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order that has been accepted by one of our contract manufacturers.

We generally place orders approximately 3 to 4 weeks in advance of expected delivery. We work closely with our contract manufacturers to manage costs and delivery times, and we have never experienced material delays in the delivery of our products from our contract manufacturers. However, we have only a limited ability to react to fluctuations in demand for our products, which could cause us to have an excess or a shortage of inventory of a particular product.

Suppliers

We subcontract all manufacturing on a turnkey basis, with our suppliers delivering fully assembled and tested products based on our proprietary designs. The materials used in our product include LCDs, ICs, flash memories, WiFi modules, GPS modules, capacitors, resistors, switches, connectors and batteries. Our contract manufacturers are located in Hang Zhou, Shen Zhen and Zheng Zhou, China. We believe that we are able to achieve quality control over products manufactured under our contract manufacturing arrangements by sending our technicians on site to supervise the production and testing of our products. We believe that the use of this model allows us to focus substantially all of our resources on determining customer requirements and on the design, development and support of our products.

Four suppliers, Sichuan Jinwangtong Technology Co. Ltd., Farway Electronics Factory, Guangzhou Beidou Dasantong Navigation Technology Co., Ltd., and Hangzhou Jingbao Electronic Ltd., are our largest suppliers of components of our products, each of which accounted for more than 10% of our purchases of components for our products for the fiscal year ended December 31, 2010. Three suppliers, Hangzhou Jingbao Electronic Ltd., Farway Electronics Factory and Henan Hui-ke Electronics Co., Ltd., each accounted for more than 10% of our purchases of components for our products for the fiscal years ended December 31, 2009 and 2008. We believe that the raw materials and components used in manufacturing our products are available from enough sources to be able to satisfy our needs. Presently, our relationships with our current suppliers are generally good and we expect that our suppliers will be able to meet the anticipated demand for our products in the future.

At times, the pricing and availability of raw materials can be volatile, attributable to numerous factors beyond our control, including general economic conditions, currency exchange rates, industry cycles, production levels or a supplier’s tight supply. To the extent that we experience cost increases we may seek to pass such cost increases on to our customers, but cannot provide any assurance that we will be able to do so successfully or that our business, results of operations and financial condition would not be adversely affected by increased volatility of the cost and availability of raw materials.

Quality Control

We consider quality control an important element of our business practices. We have stringent quality control systems that are implemented by various Company-trained staff members to ensure quality control over the production process, from the purchase of raw materials through oversight of each stage of the manufacturing process. Our quality control department executes the following functions:

●

testing samples of raw materials from suppliers;

●

implementing sampling systems and sample files;

●

setting internal controls and regulations for the testing of finished products; and

●

articulating the responsibilities of quality control staff.

We also achieve quality control over products manufactured under our contract manufacturing arrangements by sending our technicians on site to supervise the production and testing of our products.

Sales and Marketing

We have a broad sales network throughout the Henan Province. Our distribution network includes exclusive provincial and regional distributors, resellers and brand-name counters.

We are highly dependent upon sales of our products to certain of our customers. During our fiscal year ended December 31, 2010, two customers, Yiyang Radio & Television Bureau and Huaxian Radio & Television Bureau, each accounted for approximately 6% and 5% of our net revenues. During our fiscal year ended December 31, 2009, five customers, Nanyang Radio & Television Bureau, Kaifeng Radio & Television Bureau, Pingding Radio & Television Bureau, Mengzhou Radio & Television Bureau, and Anyang Radio & Television Bureau, each accounted for approximately 7%, 6%, 6%, 6%, and 6% of our net revenues. During our fiscal year ended December 31, 2008, two customers, Neihuang Radio & Television Bureau and Kaifeng Radio & Television Bureau, each accounted for approximately 10% of our net revenues. No other customer accounted for greater than 5% of our net revenues during these periods. All purchases of our products by customers are made through purchase orders and we do not have long-term contracts with any of our customers. The loss of any customers to which we sell a significant amount of our products, or from which we receive significant portion of orders, or any material adverse change in the financial condition of such customers could negatively affect our revenues and decrease our earnings.

The focus of our marketing plan is print advertising and participation in tradeshows and exhibitions. With a targeted approach, our print advertisements appear regularly in popular consumer and industry publications and trade journals. To better showcase our diverse products to potential customers, we regularly exhibit at leading trade shows and exhibitions. Our dynamic, state-of-the-art trade show exhibits are developed internally to showcase our latest product offerings.

For our GPS products and services, we provide a complete package and solution to our customers in China that include hardware, software and services. We sell the subscription services to customers with terms of the service contracts offered ranging from 12 to 24 months and, which are payable in full upon activation of the related unit or renewal of a previous service contract. The services include use of our tracking software and access to our 24/7 customer support. Our installation and services fees are generally charged on a per-vehicle basis, which we believe allows us to not only market effectively to large fleet operators but also smaller fleet operators that are not required to have a minimum size fleet for our product and services.

Our direct sales force sells our GPS location and tracking systems primarily to fleet truck operators and logistics providers through our internal sales account executives in China. The efforts of our sales executives are supported by our systems sales consultants, client management, and customer service professionals. Our internal sales and support staff have an intimate working knowledge of the hardware and software configurations and experience integrating our systems into fleets. We primarily focus our direct sales and marketing efforts on transportation and logistics companies of all sizes in China, but we also market to other markets such as automobile dealerships and government municipalities.

In December 2010, our vehicle-embedded GPS products received “transportation product certification” issued by the National Transportation Ministry, which we believe will facilitate the expansion of our GPS projects.

Research and Development

Companies in our industry are under pressure to develop new designs and product innovations to support changing consumer tastes and regulatory requirements. To date, we have engaged in modest research and development activities and much of our expenditures on research and development have been reimbursed by the local government. We believe that the engineering and technical expertise of our management and key personnel has allowed us to efficiently and timely identify and bring new products to market for our customers. However, we believe that substantial additional research and development activities are important to allowing us to offer technologically-advanced products to serve a broader array of customers. We expect that our research and development budget will substantially increase as the scope of our operations expands and as we have access to additional working capital to fund these activities.

We focus our product design efforts on both improving our existing products and developing new products. In an effort to enhance our product quality, reduce costs and keep up with emerging product trends, we work with our key customers to identify emerging product trends and implement new solutions intended to meet the current and future needs of the markets we serve.

For the years ended December 31, 2010, 2009 and 2008, we have invested approximately $399,000 $221,000, and $10,000, respectively, in research and development. The increase in research and development in 2010 as compared to 2009 was, in part, due to advancement of our GPS product and services segment. For the year ended December 31, 2008, the Company received a reimbursement from the local government for all of its research and development expenses for that year, and therefore research and development expenses net of reimbursement was nil.

Competition

The market for set-top boxes and digital networking products is highly competitive, especially with respect to pricing and the introduction of new products and features. Our products compete primarily on the basis of:

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reliability;

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brand recognition;

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quality;

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price;

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quality;

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quality service and support to retailers and our customers.

Currently, there are many significant competitors in the set-top box business including several established companies who have sold set-top boxes to major cable operators for many years. These competitors include companies such as Motorola, Cisco Systems, and Pace. In addition, a number of rapidly growing companies have recently entered the market, many of them with set-top box offerings similar to our existing set-top box products. We also expect additional competition in the future from new and existing companies who do not currently compete in the market for set-top boxes. As the set-top box business evolves, our current and potential competitors may establish cooperative relationships among themselves or with third parties, including software and hardware companies that could acquire significant market share, which could adversely affect our business. We also face competition from set-top boxes that have been internally developed by digital video providers.

Competition in fleet management for the transport and logistics industry in China is highly competitive and fragmented. Advances in technology has resulted in increased affordability and functionality of wireless communications and internet technologies, which have reduced barriers to enter into the GPS tracking product and services market. Our GPS products and services business compete primarily on the basis of quality, price, customer service, and ease of use.

In recent years, we and many of our competitors, have regularly lowered prices, and we expect these pricing pressures to continue. If these pricing pressures are not mitigated by increases in volume, cost reductions from our supplier or changes in product mix, our revenues and profits could be substantially reduced. As compared to us, many of our competitors have:

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significantly longer operating histories;

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significantly greater managerial, financial, marketing, technical and other competitive resources; and

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greater brand recognition.

As a result, our competitors may be able to:

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adapt more quickly to new or emerging technologies and changes in customer requirements;

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devote greater resources to the promotion and sale of their products and services; and

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respond more effectively to pricing pressures.

Intellectual Property

We rely on a combination of patent and trade secret protection and other unpatented proprietary information to protect our intellectual property rights and to maintain and enhance our competitiveness in the portable electronic product industry. Prior to January 2009, we relied upon a patent licensed from our Chief Executive Officer and Chairman of the Board, Zhong Bo, which granted us rights to intellectual property that is necessary or useful for our business. Mr. Zhong transferred the patent to us in January 2009 through application to SIPO for the transfer of the patent to Zhengzhou ZST. SIPO accepted the application on December 31, 2008 and the patent transfer to Zhengzhou ZST was approved on January 9, 2009. Mr. Zhong did not receive any additional consideration for the transfer of the intellectual property rights to the Company, other than the execution of the patent license agreement being a condition to the closing of the Share Exchange.

Some of our products are also designed to include software or other intellectual property licensed from third parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of our products and business methods, based on past experience and industry practice we believe that such licenses generally could be obtained on commercially reasonable terms. However, there is no guarantee that such licenses could be obtained at all. Because of technological changes in the portable electronics industry, current extensive patent coverage and the rapid rate of issuance of new patents, it is possible certain components of our products may unknowingly infringe existing patents or intellectual property rights of others.

We have implemented enhanced file management procedures at the Company in an effort to protect our proprietary rights; however, there can be no assurance that our patents and other proprietary rights will not be challenged, invalidated, or circumvented, that others will not assert intellectual property rights to technologies that are relevant to us, or that our rights will give us a competitive advantage. In addition, the laws of some foreign countries may not protect our proprietary rights to the same extent as the laws of the China.

In March 2009, we entered into a network access right agreement with the Henan Subsidiary of China Unicom that allows us to use the China Unicom wireless network for providing GPS location and tracking services to third parties.

We have one registered trademark in China, with an expiration date of December 2011.

PRC Government Regulations

Environmental Regulations

The major environmental regulations applicable to us include the PRC Environmental Protection Law, the PRC Law on the Prevention and Control of Water Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Air Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control of Noise Pollution.

We have not been named as a defendant in any legal proceedings alleging violation of environmental laws. We have no reasonable basis to believe that there is any threatened claim, action or legal proceedings against us that would have a material adverse effect on our business, financial condition or results of operations due to any non-compliance with environmental laws.

Patent Protection in China

The PRC’s intellectual property protection regime is consistent with those of other modern industrialized countries. The PRC has domestic laws for the protection of rights in copyrights, patents, trademarks and trade secrets. The PRC is also a signatory to most of the world’s major intellectual property conventions, including:

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Convention establishing the World Intellectual Property Organization (WIPO Convention) (June 4, 1980);

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Paris Convention for the Protection of Industrial Property (March 19, 1985);

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Patent Cooperation Treaty (January 1, 1994); and

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The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (November 11, 2001).

Patents in the PRC are governed by the China Patent Law and its Implementing Regulations, each of which went into effect in 1985. Amended versions of the China Patent Law and its Implementing Regulations came into effect in 1992, 1993, 2001 and 2003, respectively. The latest amended version of the China Patent Law was made on December 7, 2008 and will become effective on October 1, 2009.

The PRC is signatory to the Paris Convention for the Protection of Industrial Property, in accordance with which any person who has duly filed an application for a patent in one signatory country shall enjoy, for the purposes of filing in the other countries, a right of priority during the period fixed in the convention (12 months for inventions and utility models, and 6 months for industrial designs).

The Patent Law covers three kinds of patents, i.e., patents for inventions, utility models and designs respectively. The Chinese patent system adopts the principle of first to file. This means that, where more than one person files a patent application for the same invention, a patent can only be granted to the person who first filed the application. Consistent with international practice, the PRC only allows the patenting of inventions or utility models that possess the characteristics of novelty, inventiveness and practical applicability. For a design to be patentable, it should not be identical with or similar to any design which, before the date of filing, has been publicly disclosed in publications in the country or abroad or has been publicly used in the country, and should not be in conflict with any prior right of another.

PRC law provides that anyone wishing to exploit the patent of another must conclude a written licensing contract with the patent holder and pay the patent holder a fee. One rather broad exception to this, however, is that, where a party possesses the means to exploit a patent but cannot obtain a license from the patent holder on reasonable terms and in reasonable period of time, the PRC State Intellectual Property Office, or SIPO, is authorized to grant a compulsory license. A compulsory license can also be granted where a national emergency or any extraordinary state of affairs occurs or where the public interest so requires. SIPO, however, has not granted any compulsory license up to now. The patent holder may appeal such decision within three months from receiving notification by filing a suit in a people’s court.

PRC law defines patent infringement as the exploitation of a patent without the authorization of the patent holder. A patent holder who believes his patent is being infringed may file a civil suit or file a complaint with a PRC local Intellectual Property Administrative Authority, which may order the infringer to stop the infringing acts. Preliminary injunction may be issued by the People’s Court upon the patentee’s or the interested parties’ request before instituting any legal proceedings or during the proceedings. Evidence preservation and property preservation measures are also available both before and during the litigation. Damages in the case of patent infringement is calculated as either the loss suffered by the patent holder arising from the infringement or the benefit gained by the infringer from the infringement. If it is difficult to ascertain damages in this manner, damages may be reasonably determined in an amount ranging from one to three times of the license fee under a contractual license. In the case of false patents, if there is no license fee for reference, the damages may be reasonably determined in an amount ranging from RMB 10,000 to RMB 1,000,000.

Tax

Pursuant to the Provisional Regulation of China on Value Added Tax and their implementing rules, all entities and individuals that are engaged in the sale of goods, the provision of repairs and replacement services and the importation of goods in China are generally required to pay VAT at a rate of 17.0% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer. Further, when exporting goods, the exporter is entitled to a portion of or a full refund of the VAT that it has already paid or borne. The revenue from installation services and GPS subscription services are subject to business tax with a rate of 5%.

Foreign Currency Exchange

Under the PRC foreign currency exchange regulations applicable to us, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Conversion of Renminbi for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of the PRC State Administration of Foreign Exchange, or SAFE. Foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from the SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by the Ministry of Commerce, the SAFE and the State Reform and Development Commission.

Dividend Distributions

Under applicable PRC regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China are required to set aside at least 10.0% of their after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50.0% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.

Employees

As of December 31, 2010, we had approximately 124 employees. All of our employees are based in China. There are no collective bargaining contracts covering any of our employees. We believe our relationship with our employees is satisfactory.

We are required to contribute a portion of our employees’ total salaries to the Chinese government’s social insurance funds, including pension insurance, medical insurance, unemployment insurance, and work-related injury insurance, and maternity insurance, in accordance with relevant regulations. Total contributions to the funds are approximately $48,000, $19,000 and $6,000 for the years ended December 31, 2010, 2009 and 2008, respectively. We expect that the amount of our contribution to the government’s social insurance funds will increase in the future as we expand our workforce and operations.

We also provide housing facilities for our employees. At present, approximately 1% of our employees live in company-provided housing facilities. Under PRC laws, we are also required to make contributions to a housing accumulation fund for employees. Presently, contribution to such housing accumulation fund is not strictly enforced by the Zhengzhou Municipal Government and therefore, we provide free housing facilities to all employees who need accommodation. We may commence contributions to the housing assistance fund in the future. For additional information, please see below, page 27, “Item 1A--RISK FACTORS--Risks Related to Doing Business in China--We have not made statutory contributions to the public housing fund for our employees in accordance with applicable regulations, and this could subject us to fines and other penalties.”

ITEM 1A. RISK FACTORS.

Any investment in our common stock involves a high degree of risk. Potential investors should carefully consider the material risks described below and all of the information contained in this Annual Report on Form 10-K before deciding whether to purchase any of our securities. Our business, financial condition or results of operations could be materially adversely affected by these risks if any of them actually occur. The trading price of our common stock could decline due to any of these risks, and an investor may lose all or part of his investment. Some of these factors have affected our financial condition and operating results in the past or are currently affecting us. This report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced described below and elsewhere in this Annual Report on Form 10-K.

RISKS RELATED TO OUR OPERATIONS

We are and will continue to be subject to rapidly declining average selling prices, which may harm our results of operations.

Set-top boxes and networking products, as well as GPS tracking systems, such as those we offer are often subject to declines in average selling prices due to rapidly evolving technologies, industry standards and consumer preferences. These products are also subject to rapid technological changes which often cause product obsolescence. Companies within our industry are continuously developing new products with heightened performance and functionality. This puts pricing pressure on existing products and constantly threatens to make them, or causes them to be, obsolete. Our typical product’s life cycle is short, typically generating lower average selling prices as the cycle matures. If we fail to accurately anticipate the introduction of new technologies, we may possess significant amounts of obsolete inventory that can only be sold at substantially lower prices and profit margins than we anticipated. In addition, if we fail to accurately anticipate the introduction of new technologies, we may be unable to compete effectively due to our failure to offer products most demanded by the marketplace. If any of these failures occur, our sales, profit margins and profitability will be adversely affected.

In addition, third party network systems operators and systems integrators expect suppliers, such as our Company, to cut their costs and lower the price of their products to lessen the negative impact on their own profit margins. As a result, we have previously reduced the price of some of our products and expect to continue to face market-driven downward pricing pressures in the future. Our results of operations will suffer if we are unable to offset any declines in the average selling prices of our products by developing new or enhanced products with higher selling prices or gross profit margins, increasing our sales volumes or reducing our production costs.

If we do not correctly forecast demand for our products, we could have costly excess production or inventories and we may not be able to secure sufficient or cost effective quantities of our products or production materials and our revenues, cost of revenues and financial condition could be adversely affected.

The demand for our products depends on many factors, including pricing and inventory levels, and is difficult to forecast due in part to variations in economic conditions, changes in consumer and business preferences, relatively short product life cycles, changes in competition, seasonality and reliance on key third party carriers. It is particularly difficult to forecast demand by individual product. Significant unanticipated fluctuations in demand, the timing and disclosure of new product releases or the timing of key sales orders could result in costly excess production or inventories or the inability to secure sufficient, cost-effective quantities of our products or production materials. These inventory risks are particularly acute during end product transitions in which a new generation of set-top boxes is being deployed and inventory of older generation set-top boxes is at a higher risk of obsolescence. Furthermore, because of the competitive nature of the set-top box business and the short-term nature of our purchase orders, we could in the future be required to reduce the average selling-prices of our set-top boxes, which in turn would adversely affect our gross margins and profitability. This could adversely impact our revenues, cost of revenues and financial condition.

We depend on sales of set-top boxes for a substantial portion of our revenue, and if sales of our set-top boxes decline or we are not able to penetrate new markets for set-up boxes, our business and financial position will suffer.

The substantial portion of our revenues currently consists primarily of sales of our set-top boxes. In addition, we currently derive, and expect to continue to derive in the near term, revenue from sales of our set-top boxes to a limited number of customers. Continued market acceptance of our set-top boxes is critical to our future success. If we are not able to expand sales of our set-top boxes to other providers of digital television, our growth prospects will be limited, and our revenues will be substantially impacted.

Our set-up boxes were initially designed for, and have been deployed mostly by, providers of cable-delivered digital television. To date, we have not made any sales of our set-top boxes to direct-to-home satellite providers. In addition, the set-top box market is highly competitive and we expect competition to intensify in the future. In particular, we believe that most set-top boxes are sold by a small number of well entrenched competitors who have long-standing relationships with direct-to-home satellite providers. This competition may make it more difficult for us to sell home satellite set-top boxes, and may result in pricing pressure, small profit margins, high sales and marketing expenses and failure to obtain market share, any of which could likely seriously harm our business, operating results and financial condition.

Our business may suffer if cable television operators, who currently comprise our customer base, do not compete successfully with existing and emerging alternative platforms for delivering digital television, including terrestrial networks, internet protocol television and direct-to-home satellite service providers.

Our existing customers for our set-top boxes and networking products are cable television operators, which compete with direct-to-home satellite video providers and terrestrial broadcasters for the same pool of viewers. As technologies develop, other means of delivering information and entertainment to television viewers are evolving. For example, some telecommunications companies are seeking to compete with terrestrial broadcasters, cable television network operators and direct-to-home satellite services by offering internet protocol television, which allows telecommunications companies to stream television programs through telephone lines or fiber optic lines. To the extent that the terrestrial television networks, telecommunications companies and direct-to-home satellite providers compete successfully against cable television networks services for viewers, the ability of our existing customer base to attract and retain subscribers may be adversely affected. As a result, demand for our set-top boxes could decline and we may not be able to sustain our current revenue levels.

Our products may contain errors or defects, which could result in the rejection of our products, damage to our reputation, lost revenues, diverted development resources and increased service costs, warranty claims and litigation.

Our products are complex and must meet stringent user requirements. In addition, we must develop our products to keep pace with the rapidly changing markets. Sophisticated products like ours are likely to contain undetected errors or defects, especially when first introduced or when new models or versions are released. Our products may not be free from errors or defects after commercial shipments have begun, which could result in the rejection of our products and jeopardize our relationship with carriers. End users may also reject or find issues with our products and have a right to return them even if the products are free from errors or defects. In either case, returns or quality issues could result in damage to our reputation, lost revenues, diverted development resources, increased customer service and support costs, and warranty claims and litigation which could harm our business, results of operations and financial condition.

If we were to lose our access to the China Unicom wireless network on which our GPS services to third-party depends, the loss would substantially interfere with our ability to transact the GPS segment of our business.

Our GPS business is largely based on our access to the China Unicom wireless network. In March 2009, we entered into a network access right agreement with the Henan Subsidiary of China Unicom that allows us to use the China Unicom wireless network for providing GPS location and tracking services to third parties. We began providing GPS location and tracking services to third parties in the fourth quarter of 2009. If we were to lose our access to the China Unicom wireless network on which our services to third-party depends, the loss would substantially interfere with our ability to transact the GPS segment of our business. There are a limited number of wireless networks available in China, and if we were to lose our right to use the China Unicom wireless network, we would be forced to attempt to seek and negotiate access to on another network. There is no guarantee that we would be able to obtain access to another wireless network, and if we were able to, any down time associated with the loss of access to the wireless network could render our GPS systems, as issued, useless. Even if we were then able to identify and negotiate access to another wireless network, we might not be able to do so in time to preserve our business name and customer relationships. Thus, the loss of our access to the China Unicom wireless network could a material adverse effect on our financial position and results of operations.

We do not carry any business interruption insurance, products liability insurance or any other insurance policy. As a result, we may incur uninsured losses, increasing the possibility that you would lose your entire investment in our company.

We could be exposed to liabilities or other claims for which we would have no insurance protection. We do not currently maintain any business interruption insurance, products liability insurance, or any other comprehensive insurance policy. As a result, we may incur uninsured liabilities and losses as a result of the conduct of our business. There can be no guarantee that we will be able to obtain additional insurance coverage in the future, and even if we are able to obtain additional coverage, we may not carry sufficient insurance coverage to satisfy potential claims. Should uninsured losses occur, any purchasers of our common stock could lose their entire investment.

Because we do not carry products liability insurance, a failure of any of the products marketed by us may subject us to the risk of product liability claims and litigation arising from injuries allegedly caused by the improper functioning or design of our products. We cannot assure that we will have enough funds to defend or pay for liabilities arising out of a products liability claim. To the extent we incur any product liability or other litigation losses, our expenses could materially increase substantially. There can be no assurance that we will have sufficient funds to pay for such expenses, which could end our operations and you would lose your entire investment.

We intend to make significant investments in new products and services that may not be profitable.

Companies in our industry are under pressure to develop new designs and product innovations to support changing consumer tastes and regulatory requirements. To date, we have engaged in modest research and development activities and much of our expenditures on research and development have been reimbursed by the local government. However, we believe that substantial additional research and development activities are necessary to allow us to offer technologically-advanced products to serve a broader array of customers. We expect that our research and development budget will substantially increase as the scope of our operations expands and as we have access to additional working capital to fund these activities. However, research and development and investments in new technology are inherently speculative and commercial success depends on many factors including technological innovation, novelty, service and support, and effective sales and marketing. We may not achieve significant revenue from new product and service investments for a number of years, if at all. Moreover, new products and services may not be profitable, and even if they are profitable, operating margins for new products and businesses may be minimal.

We are subject to intense competition in the industry in which we operate, which could cause material reductions in the selling price of our products or losses of our market share.

The primary market in which we compete—set-top boxes and networking products—is highly competitive, especially with respect to pricing and the introduction of new products and features. Our products compete primarily on the basis of:

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reliability;

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brand recognition;

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quality;

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price;

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design; and

•

quality service and support to retailers and our customers.

Currently, there are many significant competitors in the set-top box business including several established companies who have sold set-top boxes to major cable operators for many years. These competitors include companies such as Shenzhen Coship Electronics Co., Ltd; TianPo Broadband Network Technology Co, Ltd; and Qingdao Hisense Electric Co., Ltd. In addition, a number of rapidly growing companies have recently entered the market, many of them with set-top box offerings similar to our existing set-top box products. We also expect additional competition in the future from new and existing companies who do not currently compete in the market for set-top boxes. As the set-top box business evolves, our current and potential competitors may establish cooperative relationships among themselves or with third parties, including software and hardware companies that could acquire significant market share, which could adversely affect our business. We also face competition from set-top boxes that have been internally developed by digital video providers.

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significantly longer operating histories;

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significantly greater managerial, financial, marketing, technical and other competitive resources; and

•

greater brand recognition.

As a result, our competitors may be able to:

•

adapt more quickly to new or emerging technologies and changes in customer requirements;

•

devote greater resources to the promotion and sale of their products and services; and

•

respond more effectively to pricing pressures.

These factors could materially adversely affect our operations and financial condition. In addition, competition could increase if:

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new companies enter the market;

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existing competitors expand their product mix; or

•

we expand into new markets.

An increase in competition could result in material price reductions or loss of our market share.

Changes in existing technologies or the emergence of new products or technologies could significantly harm our business.

Our businesses change rapidly as new technologies are developed. These new technologies may cause our services and products to become obsolete. Changes in existing technologies could also cause demand for our products and services to decline. For example, if changes in technology allow digital television subscribers to use devices such as personal computers, cable ready televisions and network based digital video recording services in place of set-top boxes, our customers may not need to purchase our set-top boxes to provide their digital television subscribers with digital video recording and other set-top box features. One or more new technologies also could be introduced that compete favorably with our products or that cause our products to no longer be of significant benefit to our customers.

We and our suppliers also may not be able to keep pace with technological developments. Alternatively, if the new technologies on which we intend to focus our research and development investments fail to achieve acceptance in the marketplace, we could suffer a material adverse effect on our future competitive position that could cause a reduction in our revenues and earnings. Our competitors could also obtain or develop proprietary technologies that are perceived by the market as being superior to ours. Further, after we have incurred substantial research and development costs, one or more of the technologies under development could become obsolete prior to its introduction. Finally, delays in the delivery of components or other unforeseen problems may occur that could materially and adversely affect our ability to generate revenue, offer new products and services and remain competitive.

The loss or significant reduction in business of any of our key customers could materially and adversely affect our revenues and earnings.

We are highly dependent upon sales of our products to certain of our customers. During the year ended December 31, 2010, Yiyang Radio & Television Bureau and Huaxian Radio & Television Bureau, accounted for approximately 6% and 5% , respectively, of our net revenues. During our fiscal year ended December 31, 2009, Nanyang Radio & Television Bureau, Kaifeng Radio & Television Bureau, Pingding Radio & Television Bureau, Mengzhou Radio & Television Bureau, and Anyang Radio & Television Bureau each accounted for approximately 7%, 6%, 6%, 6% and 6%, respectively, of our net revenues. During our fiscal year ended December 31, 2008, Neihuang Radio & Television Bureau and Kaifeng Radio & Television Bureau each accounted for approximately 10% of our net revenues. No other customer accounted for greater than 5% of our net revenues during these periods.

All purchases of our products by customers are made through purchase orders and we do not have long-term contracts with any of our customers. The loss of any of our customers to which we sell a significant amount of our products or any significant portion of orders from Cable TV Station of Pingdingshan and Cable TV Station of Nanyang, or such other customers or any material adverse change in the financial condition of such customers could negatively affect our revenues and decrease our earnings.

We cannot rely on long-term purchase orders or commitments to protect us from the negative financial effects of a decline in demand for our products. The limited certainty of product orders can make it difficult for us to forecast our sales and allocate our resources in a manner consistent with our actual sales. Moreover, our expense levels are based in part on our expectations of future sales and, if our expectations regarding future sales are inaccurate, we may be unable to reduce costs in a timely manner to adjust for sales shortfalls. Cancellations or reductions of customer orders could result in the loss of anticipated sales without allowing us sufficient time to reduce our inventory and operating expenses. Furthermore, because we depend on a small number of customers for the vast majority of our sales, the magnitude of the ramifications of these risks is greater than if our sales were less concentrated with a small number of customers. As a result of our lack of long-term purchase orders and purchase commitments we may experience a rapid decline in our sales and profitability.

In addition, there are a relatively small number of potential new customers for our set-top boxes and we expect this customer concentration to continue for the foreseeable future. Therefore, our operating results will likely continue to depend on sales to a relatively small number of customers, as well as the continued success of these customers. If we do not develop relationships with new customers, we may not be able to expand our customer base or maintain or increase our revenue.

We depend on a limited number of suppliers for components for our products. The inability to secure components for our products could reduce our revenues and adversely affect our relationship with our customers.

We rely on a limited number of suppliers for our component parts and raw materials. Although there are many suppliers for each of our component parts and raw materials, we are dependent on a limited number of suppliers for many of the significant components and raw materials. This reliance involves a number of significant potential risks, including:

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lack of availability of materials and interruptions in delivery of components and raw materials from our suppliers;

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manufacturing delays caused by such lack of availability or interruptions in delivery;

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fluctuations in the quality and the price of components and raw materials, in particular due to the petroleum price impact on such materials; and

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risks related to foreign operations.

We generally do not have any long-term or exclusive purchase commitments with any of our suppliers. Sichuan Jinwangtong Technology Co. Ltd., Farway Electronics Factory, Guangzhou Beidou Dasantong Navigation Technology Co., Ltd., and Hangzhou Jingbao Electronic Ltd., each accounted for more than 10% of our purchases of components for our products for the year ended December 31, 2010. Hangzhou Jingbao Electronic Ltd., Sichuan Jinwangtong Technology Co. Ltd. and Jinbo Electronic Co. Ltd. each of which accounted for more than 10% of our purchases of components for our products for the fiscal year ended December 31, 2009. Hangzhou Jingbao Electronic Ltd., Farway Electronics Factory and Henan Hui-ke Electronics Co., Ltd. each accounted for more than 10% of our purchases of components for our products for the fiscal year ended December 31, 2008. Our failure to maintain existing relationships with our suppliers or to establish new relationships in the future could also negatively affect our ability to obtain our components and raw materials used in our products in a timely manner. If we are unable to obtain ample supply of products from our existing suppliers or alternative sources of supply, we may be unable to satisfy our customers’ orders which could materially and adversely affect our revenues and our relationship with our customers.

Certain disruptions in supply of and changes in the competitive environment for components and raw materials integral to our products may adversely affect our profitability.

We use a broad range of materials and supplies, including LCD components, ICs, flash memories, WiFi modules, GPS modules, capacitors, resistors, switches, connectors, batteries and other electronic components in our products. A significant disruption in the supply of these materials could decrease production and shipping levels, materially increase our operating costs and materially adversely affect our profit margins. Shortages of materials or interruptions in transportation systems, labor strikes, work stoppages, war, acts of terrorism or other interruptions to or difficulties in the employment of labor or transportation in the markets in which we purchase materials, components and supplies for the production of our products, in each case may adversely affect our ability to maintain production of our products and sustain profitability. If we were to experience a significant or prolonged shortage of critical components and raw materials from any of our suppliers and could not procure the components from other sources, we would be unable to meet our production schedules for some of our key products and to ship such products to our customers in a timely fashion, which would adversely affect our sales, margins and customer relations.

Substantial defaults by our customers on accounts receivable or the loss of significant customers could have a material adverse effect on our business.

A substantial portion of our working capital consists of accounts receivable from customers. If customers responsible for a significant amount of accounts receivable were to become insolvent or otherwise unable to pay for products and services, or to make payments in a timely manner, our business, results of operations or financial condition could be materially adversely affected. An economic or industry downturn could materially adversely affect the servicing of these accounts receivable, which could result in longer payment cycles, increased collection costs and defaults in excess of management’s expectations. A significant deterioration in our ability to collect on accounts receivable could also impact the cost or availability of financing available to us.

In addition, our business is characterized by long periods for collection from our customers and short periods for payment to our suppliers, the combination of which may cause us to have liquidity problems. We experience an average accounts settlement period ranging from one month to as high as four months from the time we sell our products to the time we receive payment from our customers. In contrast, we typically need to place certain deposits and advances with our suppliers on a portion of the purchase price in advance and for some suppliers we must maintain a deposit for future orders. Because our payment cycle is considerably shorter than our receivable cycle, we may experience working capital shortages. Working capital management, including prompt and diligent billing and collection, is an important factor in our results of operations and liquidity. We cannot assure you that system problems, industry trends or other issues will not extend our collection period, adversely impact our working capital.

Our operations would be materially adversely affected if third-party carriers were unable to transport our products on a timely basis.

All of our products are shipped through third party carriers. If a strike or other event prevented or disrupted these carriers from transporting our products, other carriers may be unavailable or may not have the capacity to deliver our products to our customers. If adequate third party sources to ship our products were unavailable at any time, our business would be materially adversely affected.

Our quarterly results may fluctuate because of many factors and, as a result, investors should not rely on quarterly operating results as indicative of future results.

Fluctuations in operating results or the failure of operating results to meet the expectations of public market analysts and investors may negatively impact the value of our securities. Quarterly operating results may fluctuate in the future due to a variety of factors that could affect revenues or expenses in any particular quarter. Fluctuations in quarterly operating results could cause the value of our securities to decline. Investors should not rely on quarter-to-quarter comparisons of results of operations as an indication of future performance. As a result of the factors listed below, it is possible that in future periods results of operations may be below the expectations of public market analysts and investors. This could cause the market price of our securities to decline. Factors that may affect our quarterly results include:

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seasonal variations in operating results;

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variations in the sales of our products to our significant customers;

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the discretionary nature of our customers’ demands and spending patterns;

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variations in manufacturing and supplier relationships;

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fluctuation and unpredictability of costs related to the components and raw materials used to manufacture our products;

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if we are unable to correctly anticipate and provide for inventory requirements from quarter to quarter, we may not have sufficient inventory to deliver our products to our customers in a timely fashion or we may have excess inventory that we are unable to sell;

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competition from our competitors;

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changes in market and economic conditions;

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vulnerability of our business to a general economic downturn in China;

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changes in the laws of the PRC that affect our operations; and

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our ability to obtain necessary government certifications and/or licenses to conduct our business.

In addition, our quarterly operating results could be materially adversely affected by political instability, war, acts of terrorism or other disasters.

As a result of these and other factors, revenues for any quarter are subject to significant variation, which may adversely affect our results of operations and the market price for our common stock.

We depend upon a patent that was transferred to us by Zhong Bo, our Chief Executive Officer and Chairman of the Board. The loss of this patent or our failure to properly maintain or enforce the patent may require us to suspend our operations until we obtain replacements and/or redesign our products.

Prior to January 2009, we relied upon a patent licensed from our Chief Executive Officer and Chairman of the Board, Zhong Bo, which granted us rights to intellectual property that is necessary or useful for our business. Mr. Zhong transferred the patent to us in January 2009 through application to SIPO for the transfer of the patent to Zhengzhou ZST. SIPO accepted the application on December 31, 2008 and the patent transfer to Zhengzhou ZST was approved on January 9, 2009. Mr. Zhong did not receive any additional consideration for the transfer of the intellectual property rights to the Company, other than the execution of the patent license agreement being a condition to the closing of the Share Exchange.

We may also enter into additional licenses to third party intellectual property in the future. Our licensors may not successfully prosecute the patent applications for the intellectual property we have licensed. Even if patents issue in respect of these patent applications, our licensors may fail to maintain these patents, may determine not to pursue litigation against other companies that are infringing these patents, or may pursue such litigation less aggressively than we would. Without protection for the intellectual property we license, other companies might be able to offer substantially identical products for sale, which could adversely affect our competitive business position and harm our business prospects.

Our ability to compete partly depends on the superiority, uniqueness and value of our technologies, including both internally developed technology and technology licensed from an affiliated party. To protect our proprietary rights, we rely on a combination of trademark, patent, copyright and trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual provisions. Despite our efforts to protect our intellectual property, any of the following occurrences may reduce the value of our intellectual property:

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our applications for trademarks or patents may not be granted and, if granted, may be challenged or invalidated;

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issued patents, copyrights and trademarks may not provide us with any competitive advantages;

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our efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology or dilution of our trademarks;

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our efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or superior to those that we develop; or

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another party may obtain a blocking patent that would force us to either obtain a license or design around the patent to continue to offer the contested feature or service in our technologies.

We rely on trade secret protections through confidentiality agreements with our employees, customers and other parties; the breach of such agreements could adversely affect our business and results of operations.

We also rely on trade secrets, which we seek to protect, in part, through confidentiality and non-disclosure agreements with our employees, customers and other parties. There can be no assurance that these agreements will not be breached, that we would have adequate remedies for any such breach or that our trade secrets will not otherwise become known to or independently developed by competitors. To the extent that consultants, key employees or other third parties apply technological information independently developed by them or by others to our proposed projects, disputes may arise as to the proprietary rights to such information that may not be resolved in our favor. We may be involved from time to time in litigation to determine the enforceability, scope and validity of our proprietary rights. Any such litigation could result in substantial cost and diversion of effort by our management and technical personnel.

We intend to pursue future acquisitions. Our business may be adversely affected if we cannot consummate acquisitions on satisfactory terms, or if we cannot effectively integrate acquired operations.

Part of our growth strategy involves the acquisition of other companies. Any future growth through acquisitions will be partially dependent upon the availability of suitable acquisition candidates at favorable prices and upon advantageous terms and conditions. We intend to pursue acquisitions that we believe will present opportunities consistent with our overall business strategy. However, we may not be able to find suitable acquisition candidates to purchase or may be unable to acquire desired businesses or assets on economically acceptable terms. In addition, we may not be able to raise the capital necessary to fund future acquisitions. In addition, acquisitions involve risks that the businesses acquired will not perform in accordance with expectations and that business judgments concerning the value, strengths and weaknesses of businesses acquired will prove incorrect.

We regularly engage in discussions with respect to potential acquisition and investment opportunities. If we consummate an acquisition, our capitalization and results of operations may change significantly. Future acquisitions could likely result in the incurrence of additional debt and contingent liabilities and an increase in interest and amortization expenses or periodic impairment charges related to goodwill and other intangible assets as well as significant charges relating to integration costs.

In addition, we may not be able to successfully integrate any business we acquire into our existing business. The successful integration of new businesses depends on our ability to manage these new businesses and cut excess costs. The successful integration of future acquisitions may also require substantial attention from our senior management and the management of the acquired business, which could decrease the time that they have to service and attract customers and develop new products and services. In addition, because we may actively pursue a number of opportunities simultaneously, we may encounter unforeseen expenses, complications and delays, including difficulties in employing sufficient staff and maintaining operational and management oversight.

We may need additional capital to implement our current business strategy, which may not be available to us, and if we raise additional capital, it may dilute your ownership in us.

We currently primarily depend on net revenues to meet our short-term cash requirements. In order to grow revenues and sustain profitability, we will need additional capital. We recently completed a public offering of shares of common stock, and we filed a universal shelf registration statement with the SEC for the future sale of an indeterminate amount of debt securities, common stock, preferred stock, warrants and other securities. The securities may be offered from time to time, if at all, separately or together. Obtaining financing will be subject to a number of factors, including market conditions, our operating performance and investor sentiment. These factors may make the timing, amount, terms and conditions of additional financing unattractive to us. We cannot assure you that we will be able to obtain any additional financing. If we are unable to obtain the financing needed to implement our business strategy, our ability to increase revenues will be impaired and we may not be able to sustain profitability.

The capital and credit markets have been experiencing extreme volatility and disruption for more than twelve months. In recent months, the volatility and disruption have reached unprecedented levels. In some cases, the markets have exerted downward pressure on availability of liquidity and credit capacity for certain issuers. We have historically relied on credit to fund our business and we need liquidity to pay our operating expenses. Without sufficient liquidity, we will be forced to curtail our operations, and our business will suffer. Disruptions, uncertainty or volatility in the capital and credit markets may also limit our access to capital required to operate our business. Such market conditions may limit our ability to replace, in a timely manner, maturing liabilities and access the capital necessary to operate and grow our business. As such, we may be forced to delay raising capital or bear an unattractive cost of capital which could decrease our profitability and significantly reduce our financial flexibility. Our results of operations, financial condition, cash flows and capital position could be materially adversely affected by disruptions in the financial markets.

Our failure to effectively manage growth could harm our business.

We have rapidly and significantly expanded the number and types of products we sell, and we will endeavor to further expand our product portfolio. We must continually introduce new products and technologies, enhance existing products in order to remain competitive, and effectively stimulate customer demand for new products and upgraded versions of our existing products.

This expansion of our products places a significant strain on our management, operations and engineering resources. Specifically, the areas that are strained most by our growth include the following:

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New Product Launch. With the growth of our product portfolio, we experience increased complexity in coordinating product development, manufacturing, and shipping. As this complexity increases, it places a strain on our ability to accurately coordinate the commercial launch of our products with adequate supply to meet anticipated customer demand and effective marketing to stimulate demand and market acceptance. If we are unable to scale and improve our product launch coordination, we could frustrate our customers and lose retail shelf space and product sales;

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Forecasting, Planning and Supply Chain Logistics. With the growth of our product portfolio, we also experience increased complexity in forecasting customer demand and in planning for production, and transportation and logistics management. If we are unable to scale and improve our forecasting, planning and logistics management, we could frustrate our customers, lose product sales or accumulate excess inventory; and

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Support Processes. To manage the growth of our operations, we will need to continue to improve our transaction processing, operational and financial systems, and procedures and controls to effectively manage the increased complexity. If we are unable to scale and improve these areas, the consequences could include: delays in shipment of product, degradation in levels of customer support, lost sales, decreased cash flows, and increased inventory. These difficulties could harm or limit our ability to expand.

We are dependent on certain key personnel and loss of these key personnel could have a material adverse effect on our business, financial condition and results of operations.

Our success is, to a certain extent, attributable to the management, sales and marketing, and operational and technical expertise of certain key personnel. Each of the named executive officers performs key functions in the operation of our business. The loss of a significant number of these employees could have a material adverse effect upon our business, financial condition, and results of operations.

We are dependent on a technically trained workforce and an inability to retain or effectively recruit such employees could have a material adverse effect on our business, financial condition and results of operations.

We must attract, recruit and retain a sizeable workforce of technically competent employees to develop and manufacture our products and provide service support. Our ability to implement effectively our business strategy will depend upon, among other factors, the successful recruitment and retention of additional highly skilled and experienced engineering and other technical and marketing personnel. Technological innovation is important to our success and depends, to a significant degree, on the work of technically skilled employees. There is significant competition for technologically qualified personnel in our business and we may not be successful in recruiting or retaining sufficient qualified personnel consistent with our operational needs.

Our facilities and information systems could be damaged as a result of disasters or unpredictable events, which could have an adverse effect on our business operations.

Our headquarters and major facilities including sales offices and research and development centers are located in China. If major disasters such as earthquakes, fires, floods, wars, terrorist attacks, computer viruses, transportation disasters or other events occur, or our information system or communications network breaks down or operates improperly as a result of such events, our facilities may be seriously damaged, and we may have to stop or delay production and shipment. We may incur expenses relating to such damages.

RISKS RELATED TO DOING BUSINESS IN CHINA

We derive substantially all of our revenues from sales in the PRC and any downturn in the Chinese economy could have a material adverse effect on our business and financial condition.

Substantially all of our revenues are generated from sales in the PRC. We anticipate that revenues from sales of our products in the PRC will continue to represent the substantial portion of our total revenues in the near future. Our sales and earnings can also be affected by changes in the general economy since purchases of cable television services are generally discretionary for consumers. Our success is influenced by a number of economic factors which affect disposable consumer income, such as employment levels, business conditions, interest rates, oil and gas prices and taxation rates. Adverse changes in these economic factors, among others, may restrict consumer spending, thereby negatively affecting our sales and profitability.

Substantially all of our assets are located in the PRC and substantially all of our revenues are derived from our operations in China, and changes in the political and economic policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and accordingly on the results of our operations and financial condition.

Our business operations may be adversely affected by the current and future political environment in the PRC. The Chinese government exerts substantial influence and control over the manner in which we must conduct our business activities. Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations, including those relating to taxation, import and export tariffs, raw materials, environmental regulations, land use rights, property and other matters. Under the current government leadership, the government of the PRC has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the government of the PRC will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.

We and an increasing number of China-based companies listed on U.S. stock exchanges have become the subject of negative media reports that focus on differences between the financial information set forth in filings with the US SEC and filings with the PRC’s SAIC. We have, and may continue to be, subject to these types of negative reports, which may adversely affect the price of our common stock.

During the second half of 2010 and continuing into 2011, numerous media reports in the United States and elsewhere made negative claims or suggestions regarding China-based companies listed on U.S. stock exchanges, including claims and suggestions relating to the accuracy and completeness of such companies’ financial information filed with the US SEC. Many of these reports appear to have been based, at least in part, on differences between financial information set forth in a company’s filings with the U.S. SEC and filings with the PRC’s State Administration for Industry and Commerce (SAIC).

We have been subject to these negative reports that focus on differences in the financial information our filings with the SAIC and SEC, and we expect that there will continue to be differences in the financial information contained in the fillings made with the SAIC and the SEC. Any differences between the financial information we disclose in our SEC filings and the financial information set forth in the filings that our subsidiaries are required to make with the SAIC may be identified by short sellers or media who may publish negative claims or suggestions about us or our financial results, which could negatively affect the price of our common stock.

Our operations are subject to PRC laws and regulations that are sometimes vague and uncertain. Any changes in such PRC laws and regulations, or the interpretations thereof, may have a material and adverse effect on our business.

The PRC legal system is a civil law system based on written statutes. Unlike the common law system prevalent in the United States, decided legal cases have little value as precedent in China. There are substantial uncertainties regarding the interpretation and application of PRC 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 or 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.

Our principal operating subsidiary, Zhengzhou Shenyang Technology Company Limited (“Zhengzhou ZST”), is considered a foreign invested enterprise under PRC laws, and as a result is required to comply with PRC laws and regulations, including laws and regulations specifically governing the activities and conduct of foreign invested enterprises. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses. If the relevant authorities find us in violation of PRC laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation:

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levying fines;

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revoking our business license, other licenses or authorities;

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requiring that we restructure our ownership or operations; and

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requiring that we discontinue any portion or all of our business.

Investors may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based upon U.S. laws, including the federal securities laws or other foreign laws against us or our management.

Most of our current operations, including the manufacturing and distribution of our products, are conducted in China. Moreover, all of our directors and officers are nationals and residents of China. All or substantially all of the assets of these persons are located outside the United States and in the PRC. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon these persons. In addition, uncertainty exists as to whether the courts of China would recognize or enforce judgments of U.S. courts obtained against us or such officers and/or directors predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or be competent to hear original actions brought in China against us or such persons predicated upon the securities laws of the United States or any state thereof.

The scope of our business license in China is limited, and we may not expand or continue our business without government approval and renewal, respectively.

Our principal operating subsidiary, Zhengzhou ZST, is a wholly foreign-owned enterprise, commonly known as a WFOE. A WFOE can only conduct business within its approved business scope, which ultimately appears on its business license. Our license permits us to design, manufacture, sell and market portable electronic products throughout the PRC and overseas. Any amendment to the scope of our business requires further application and government approval. In order for us to expand our business beyond the scope of our license, we will be required to enter into a negotiation with the PRC authorities for the approval to expand the scope of our business. We cannot assure investors that Zhengzhou ZST will be able to obtain the necessary government approval for any change or expansion of its business.

We are subject to a variety of environmental laws and regulations related to our manufacturing operations. Our failure to comply with environmental laws and regulations may have a material adverse effect on our business and results of operations.

We cannot assure you that at all times we will be in compliance with environmental laws and regulations or that we will not be required to expend significant funds to comply with, or discharge liabilities arising under, environmental laws, regulations and permits.

Recent PRC regulations relating to acquisitions of PRC companies by foreign entities may create regulatory uncertainties that could restrict or limit our ability to operate. Our failure to obtain required prior approval for the share exchange, reverse merger and the listing and trading of our common stock could have a material adverse effect on our business, operating results, reputation and trading price of our common stock.

The PRC State Administration of Foreign Exchange, or “SAFE,” issued a public notice in November 2005, known as Circular 75. The SAFE also issued implementation rules for Circular 75 with the latest rules issued in May 2011 and the implementing rules provide for more detailed provisions and requirements regarding the overseas investment foreign exchange registration procedures. The Circular 75 and its implementations require that (1) a PRC resident shall register with a local branch of the SAFE in connection with his or her establishment or control of an offshore entity established for the purpose of overseas equity financing involving a roundtrip investment whereby the offshore entity acquires or controls onshore assets or equity interests held by the PRC residents; (2) when a PRC resident engages in overseas financing after contributing assets or equity interests to an offshore entity, or an offshore entity establishes or control any enterprise outside China, the PRC resident shall, within 30 days from the occurrence of the event that triggers the change, register such change with a local branch of the SAFE; (3) when a PRC resident obtains proceeds from any reduction in capital, share transfer or liquidation to an offshore entity, the PRC resident shall register such change with a local branch of the SAFE before he or she remit such proceeds into China; (4) a PRC resident shall also register other material changes with a local branch of the SAFE during annual inspection period for foreign investment enterprises.

Although we have requested PRC residents holding direct or indirect interest in our company to our knowledge to make the necessary applications, filings and amendments as required under Circular 75 and other related rules, our PRC resident beneficial holders have not completed such approvals and registrations required by the SAFE regulations. We cannot assure you that such PRC residents will be able to complete the necessary approval and registration procedures required by the SAFE regulations. Failure by any PRC resident beneficial holder to register as required with the relevant branch of SAFE could subject these PRC resident beneficial holders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit Zhengzhou ZST’s ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects. Moreover, failure to comply with the various SAFE registration requirements described above could result in liabilities for our PRC subsidiary Zhengzhou ZST under PRC laws for evasion of applicable foreign exchange restrictions, including (1) the requirement by SAFE to return the foreign exchange remitted overseas within a period specified by SAFE, with a fine of up to 30% of the total amount of foreign exchange remitted overseas and deemed to have been evasive and (2) in circumstances involving serious violations, a fine of no less than 30% of and up to the total amount of remitted foreign exchange deemed evasive. Furthermore, the persons-in-charge and other persons at our PRC subsidiary who are held directly liable for the violations may be subject to criminal sanctions.

On August 8, 2006, the PRC Ministry of Commerce (“MOFCOM”), the State-owned Assets Supervision and Administration Commission of the State Council, the State Administration of Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission and SAFE, released a substantially amended version of the Provisions for Foreign Investors to Merge with or Acquire Domestic Enterprises (the “Revised M&A Regulations”), which took effect September 8, 2006 and was amended on June 22, 2009. These new rules significantly revised China’s regulatory framework governing onshore-to-offshore restructurings and foreign acquisitions of domestic enterprises. These new rules signify greater PRC government attention to cross-border merger, acquisition and other investment activities, by confirming MOFCOM as a key regulator for issues related to mergers and acquisitions in China and requiring MOFCOM approval of a broad range of merger, acquisition and investment transactions. Further, the new rules establish reporting requirements for acquisition of control by foreigners of companies in key industries, and reinforce the ability of the Chinese government to monitor and prohibit foreign control transactions in key industries.

Among other things, the Revised M&A Regulations include new provisions that purport to require that an offshore special purpose vehicle, or a SPV, formed for listing purposes and controlled directly or indirectly by PRC companies or individuals must obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings. However, the application of this PRC regulation remains unclear with no consensus currently existing among the leading PRC law firms regarding the scope and applicability of the CSRC approval requirement.

According to the Revised M&A Regulations, a “Related Party Acquisition” is defined as having taken place when a PRC business that is owned by PRC individual(s) is sold to a non-PRC entity that is established or controlled, directly or indirectly, by those same PRC individual(s). Under the Revised M&A Regulations, any Related Party Acquisition must be approved by MOFCOM and any indirect arrangement or series of arrangements which achieves the same end result without the approval of MOFCOM is a violation of PRC law.

Everfair obtained all the equity interests of Zhengzhou ZST (the “Restructuring”) further to an Equity Purchase Agreement dated October 10, 2008 (the “Equity Purchase Agreement”) by and among Everfair, Zhong Bo, Wu Dexiu, Huang Jiankang, Sun Hui and Li Yuting (the “ZST Management”). At that time and upon completion of the Restructuring, our BVI subsidiary, World Orient, World Orient’s BVI subsidiary, Global Asia, and Global Asia’s Hong Kong subsidiary, Everfair, were owned by non-PRC individuals. The Equity Purchase Agreement received approval by the Zhengzhou Municipal Bureau of Commerce on November 10, 2008 and Zhengzhou ZST filed all required applications and received all appropriate SAFE approvals from the Henan branch of SAFE. With respect to the Restructuring, the PRC legal counsel of Zhengzhou ZST, Han Kun Law Offices, has opined on January 9, 2009 that: (1) the Equity Purchase Agreement and the Restructuring have received all requisite approvals from the competent authorities, and all required registrations, certifications and approvals for the Equity Purchase Agreement and the Restructuring have been received by Zhengzhou ZST; (2) Zhengzhou ZST has filed all required applications for the Equity Purchase Agreement and the Restructuring and has received any and all foreign exchange registrations, certifications and approvals as required, including, but not limited to, those as required from the appropriate national and local branches of SAFE and MOFCOM; and (3) to their best knowledge, the Equity Purchase Agreement and the Restructuring do not (a) contravene or circumvent any provision of applicable PRC laws and regulations, including without limitation, the M&A Regulations, Circular 75 and its implementing rules; or (b) contravene the articles of association, business license or other constituent documents of Zhengzhou ZST. We, however, cannot assure you that the PRC regulatory authorities, MOFCOM in particular, may take the same view as the PRC legal counsel with respect to the Restructuring.

On January 14, 2009, Zhong Bo, our Chief Executive Officer, Wu Dexiu, Huang Jiankang, Sun Hui and Li Yuting (the “ZST Management”) each entered into a Common Stock Purchase Agreement pursuant to which the Company issued and the ZST Management agreed to purchase an aggregate of 5,090,315 shares of our common stock at a per share purchase price of $0.6907 (the “Purchase Right”). The purchase price for the shares was paid in full on May 25, 2009. Each of the stockholders and warrantholders of the Company prior to the Share Exchange agreed to cancel 0.3317 shares of common stock and warrants to purchase 0.5328 shares of common stock held by each of them for each one (1) share of common stock purchased by the ZST Management pursuant to the Purchase Right (the “Share and Warrant Cancellation”). After giving effect to the Purchase Right and Share and Warrant Cancellation, Mr. Zhong beneficially owned approximately 59.87% of our outstanding common stock upon the acquisition of shares under the Purchase Right.

The PRC regulatory authorities may take the view that the Restructuring, the Share Exchange, the Purchase Right and the Share and Warrant Cancellation are part of an overall series of arrangements which constitute a Related Party Acquisition, because at the end of these transactions, PRC individuals become majority owners and effective controlling parties of a foreign entity that acquired ownership of Zhengzhou ZST. The PRC regulatory authorities may also take the view that the registration of the acquisition of Zhengzhou ZST by Everfair with the Zhengzhou Municipal Bureau of Commerce and the filings with the Henan SAFE may not evidence that the acquisition has been properly approved because the relevant parties did not fully disclose to the Zhengzhou Bureau of Commerce or Henan SAFE of the overall restructuring arrangements, the existence of the Share Exchange and its link with the acquisition of Zhengzhou ZST by Everfair.

We are aware of other similar companies that have completed similar transactions like the share exchange and private placement and we are not aware of any situation in which a PRC regulatory agency has invalidated the structure and ownership of the PRC entity with any such transactions, but this would not prevent the PRC regulatory authorities from invalidating the transactions as a Related Party Acquisition. Based on such knowledge as well as the approvals that we have been obtained from PRC regulatory agencies for our restructuring, we believe that it is not likely that PRC regulatory authorities will view the acquisition of Zhengzhou ZST by Everfair and the Share Exchange as a Related Party Acquisition and invalidate our acquisition and ownership of Zhengzhou ZST. However, we cannot assure you that the PRC regulatory authorities, MOFCOM in particular, may take the same view. If the PRC regulatory authorities take the view that the acquisition constitutes a Related Party Acquisition under the M&A Regulations, we cannot assure you we may be able to obtain the approval required from the national offices of MOFCOM.

If the PRC regulatory authorities take the view that the acquisition of Zhengzhou ZST by Everfair constitutes a Related Party Acquisition without the approval of the national offices of MOFCOM, they could invalidate our acquisition and ownership of Zhengzhou ZST. Additionally, the PRC regulatory authorities may take the view that the Share Exchange constitutes a transaction which requires the prior approval of the China Securities Regulatory Commission, or CSRC.

If our ownership of Zhengzhou ZST was invalidated, we would attempt to find a way to re-establish control of Zhengzhou ZST’s business operations through a series of contractual arrangements rather than an outright purchase of Zhengzhou ZST; however, we cannot assure you that we would be able to establish such contractual arrangements. For example, we would have to first resolve any violations and penalties with the CSRC and other PRC regulatory agencies for the current structure, and such agencies could prevent us from establishing control through contractual arrangements. In addition, the PRC government could determine that the contractual arrangements structure also does not comply with applicable PRC laws, rules and regulations. Even if we are able to re-establish control of Zhengzhou ZST through contractual arrangements, we cannot assure you that such arrangement would provide as complete and effective economic benefit and overall control of Zhengzhou ZST’s business than if we had direct ownership of Zhengzhou ZST. For example, we could incur substantial costs to enforce such agreements and would be forced to rely on legal remedies under PRC contractual law, including seeking specific performance or injunctive relief, and claiming damage if the parties to the arrangements failed to perform their responsibilities under any of our contractual arrangements.

If we cannot obtain MOFCOM or CSRC approval if required by the PRC regulatory authorities to do so, and if we cannot put in place or enforce relevant contractual arrangements as an alternative and equivalent means of control of Zhengzhou ZST, our business and financial performance will be materially adversely affected.

If the CSRC approval is not obtained, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from any financings into the PRC, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our common stock.

Any uncertainties and/or negative publicity regarding this CSRC approval requirement could have a material adverse effect on the trading price of our common stock.

It is uncertain how our business operations or future strategy will be affected by the interpretations and implementation of the aforementioned rules and regulations. It is anticipated that application of the new rules will be subject to significant administrative interpretation, and we will need to closely monitor how MOFCOM and other ministries apply the rules to ensure that our domestic and offshore activities continue to comply with PRC law. Given the uncertainties regarding interpretation and application of the new rules, we may need to expend significant time and resources to maintain compliance.

Our labor costs are likely to increase as a result of changes in Chinese labor laws.

We expect to experience an increase in our cost of labor due to recent changes in Chinese labor laws which are likely to increase costs further and impose restrictions on our relationship with our employees. In June 2007, the National People’s Congress of the PRC enacted new labor law legislation called the Labor Contract Law and more strictly enforced existing labor laws. The new law, which became effective on January 1, 2008, amended and formalized workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of trade unions. As a result of the new law, the Company has had to reduce the number of hours of overtime its employees can work, substantially increase the salaries of its employees, provide additional benefits to its employees, and revise certain other of its labor practices. The increase in labor costs has increased the Company’s operating costs, which increase the Company has not always been able to pass through to its customers. As a result, the Company has incurred certain operating losses as its cost of manufacturing increased. In addition, under the new law, employees who either have worked for the Company for 10 years or more or who have had two consecutive fixed-term contracts must be given an “open-ended employment contract” that, in effect, constitutes a lifetime, permanent contract, which is terminable only in the event the employee materially breaches the Company’s rules and regulations or is in serious dereliction of his duty. Such non-cancelable employment contracts will substantially increase its employment related risks and limit the Company’s ability to downsize its workforce in the event of an economic downturn. No assurance can be given that the Company will not in the future be subject to labor strikes or that it will not have to make other payments to resolve future labor issues caused by the new laws. Furthermore, there can be no assurance that the labor laws will not change further or that their interpretation and implementation will vary, which may have a negative effect upon our business and results of operations.

We have not made statutory contributions to the public housing fund for our employees in accordance with applicable regulations, and this could subject us to fines and other penalties.

Although the PRC State Council has regulations governing a company's contribution to the public housing fund for its employees, we had not been expressly required by our local government authority in charge of this matter to make such contribution due to lack of implementing rules. If the relevant local public housing fund administrative centre issues a notification that requires companies like us to make contributions to the local public housing fund for our employees, we intend to establish a public housing fund account and we will begin to make statutory contributions for our employees to such account once it is open. However, we cannot assure you that the local government agencies will not penalize us for non-compliance with the regulation promulgated by the PRC State Council. If the relevant local public housing fund administrative center takes any legal action against us for our non-compliance with such regulation, such as fines, or the requirement of making up contributions to the public housing fund for our employees, our financial conditions and results of operations may be adversely affected.

The ability of our Chinese operating subsidiaries to pay dividends may be restricted due to foreign exchange control and other regulations of China.

Under applicable PRC regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside at least 10.0% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50.0% of its registered capital. Zhengzhou ZST’s current registered capital is approximately 260 million RMB, or approximately US$40 million, and we believe that Zhengzhou ZST has made the required allocations in accordance with PRC regulations. Allocations to these statutory reserve funds are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.

Furthermore, the ability of our Chinese operating subsidiaries to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balance of the Chinese operating subsidiaries. Because substantially all of our operations are conducted in China and a substantial majority of our revenues are generated in China, a majority of our revenue being earned and currency received are denominated in Renminbi (RMB). RMB is subject to the exchange control regulation in China, and, as a result, we may unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into U.S. Dollars.

Our inability to receive dividends or other payments from our Chinese operating subsidiary could adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business. Zhengzhou ZST’s funds may not be readily available to us to satisfy obligations which have been incurred outside the PRC, which could adversely affect our business and prospects or our ability to meet our cash obligations. Accordingly, if we do not receive dividends from our Chinese operating subsidiary, our liquidity, financial condition and ability to make dividend distributions to our stockholders will be materially and adversely affected.

The foreign currency exchange rate between U.S. Dollars and Renminbi could adversely affect our financial condition.

To the extent that we need to convert U.S. Dollars into Renminbi for our operational needs, our financial position and the price of our common stock may be adversely affected should the Renminbi appreciate against the U.S. Dollar at that time. Conversely, if we decide to convert our Renminbi into U.S. Dollars for the operational needs or paying dividends on our common stock, the dollar equivalent of our earnings from our subsidiaries in China would be reduced should the U.S. Dollar appreciate against the Renminbi.

Until 1994, the Renminbi experienced a gradual but significant devaluation against most major currencies, including U.S. Dollars, and there was a significant devaluation of the Renminbi on January 1, 1994 in connection with the replacement of the dual exchange rate system with a unified managed floating rate foreign exchange system. Since 1994, the value of the Renminbi relative to the U.S. Dollar has remained stable and has appreciated slightly against the U.S. Dollar. Countries, including the United States, have argued that the Renminbi is artificially undervalued due to China’s current monetary policies and have pressured China to allow the Renminbi to float freely in world markets. In July 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. Dollar. Under the new policy the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of designated foreign currencies. While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in further and more significant appreciation of the Renminbi against the U.S. Dollar.

Inflation in the PRC could negatively affect our profitability and growth.

While the PRC economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. According to the National Bureau of Statistics of China, China’s Consumer Price Index increased 2.7% in February 2010 over February 2009. If prices for our products and services rise at a rate that is insufficient to compensate for the rise in the costs of supplies such as raw materials, it may have an adverse effect on our profitability.

Furthermore, in order to control inflation in the past, the PRC government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. In January 2010, the Chinese government took steps to tighten the availability of credit including ordering banks to increase the amount of reserves they hold and to reduce or limit their lending. The implementation of such policies may impede economic growth. In 2004, the People’s Bank of China, the PRC’s central bank, raised interest rates for the first time in nearly a decade and indicated in a statement that the measure was prompted by inflationary concerns in the Chinese economy. In 2007, and most recently in October 2010, the People’s Bank of China raised the interest rate again. Repeated rises in interest rates by the central bank would likely slow economic activity in China which could, in turn, materially increase our costs and also reduce demand for our products and services.

Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

As our ultimate holding company is a Delaware corporation, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur from time-to-time in the PRC. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

If we make equity compensation grants to persons who are PRC citizens, they may be required to register with the State Administration of Foreign Exchange of the PRC, or SAFE. We may also face regulatory uncertainties that could restrict our ability to adopt an equity compensation plan for our directors and employees and other parties under PRC law.

On April 6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed Company, also know as “Circular 78” to regulate the foreign exchange matters associated with the employee stock option plans granted to PRC individuals by companies whose shares are listed on overseas stock exchanges. Domestic individuals who are granted shares or share options by companies listed on overseas stock exchanges based on the company’s employee share option or share incentive plan are required to register with the SAFE or its local counterparts. Pursuant to Circular 78, PRC individuals participating in the employee stock option plans of the overseas listed companies must entrust a domestic agent, which can be a subsidiary of the overseas listed company in China to handle various foreign exchange matters associated with their employee stock options plans. The PRC agents or employers must, on behalf of the domestic individuals who have the right to exercise the employee stock options, apply annually to the SAFE or its local competent branches for a quota for the conversion and/or payment of foreign currencies in connection with the domestic individuals’ exercise of the employee stock options. The foreign exchange proceeds received by the domestic individuals from sale of shares under the stock option plans granted by the overseas listed companies must be remitted into the bank accounts in China opened by their employers or PRC agents. We have adopted the ZST Digital Networks, Inc. 2010 Omnibus Incentive Plan and plan to make substantial option grants to our officers and directors, most of who are PRC citizens. We plan to advise our employees and directors participating in our stock incentive plan to handle foreign exchange matters in accordance with Circular 78. However, we cannot assure that the stock options holders can successfully complete the registration with the SAFE in full compliance with Circular 78. The failure of our stock options holders to complete their SAFE registration pursuant to Circular 78 and other SAFE requirements may subject these PRC individuals to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary, limit our PRC subsidiary’s ability to distribute dividends to us or otherwise materially adversely affect our business.

Further, in 2005 and 2006, the Ministry of Finance and the State Administration of Taxation jointly issued notices concerning the individual income tax on earnings from employee stock options. The notice requires PRC companies that implement employee share option programs in the PRC, under which the shares issuable are the shares of listed companies (domestic or overseas) to (i) file the employee share option plans and other relevant documents to the local taxation departments having jurisdiction over them before implementation of such employee share option plans; and (ii) file share option exercise notices and other relevant documents with the local taxation departments having jurisdiction over them before exercise by the employees of the share options. To comply with the requirement, we will file the ZST Digital Networks, Inc. 2010 Omnibus Incentive Plan with the local taxation bureau.

Any outbreak of the Swine Flu (H1N1), severe acute respiratory syndrome, or SARS, the Avian Flu, or another widespread public health problem in the PRC could adversely affect our operations.

There have been recent outbreaks of the highly pathogenic Swine Flu, caused by the H1N1 virus, in certain regions of the world, including parts of China, where all of our manufacturing facilities are located and where all of our sales occur. Our business is dependent upon our ability to continue to manufacture and distribute our products, and an outbreak of the Swine Flu, or a renewed outbreak of SARS, the Avian Flu, or another widespread public health problem in China, could have a negative effect on our operations. Any such outbreak could have an impact on our operations as a result of:

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quarantines or closures of our manufacturing or distribution facilities or the retail outlets, which would severely disrupt our operations,

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the sickness or death of our key officers and employees, and

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a general slowdown in the Chinese economy.

Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our operations.

We face risks related to natural disasters, terrorist attacks or other events in China that may affect usage of public transportation, which could have a material adverse effect on our business and results of operations.

Our business could be materially and adversely affected by natural disasters, terrorist attacks or other events in China. For example, in early 2008, parts of China suffered a wave of strong snow storms that severely impacted public transportation systems. In May 2008, Sichuan Province in China suffered a strong earthquake measuring approximately 8.0 on the Richter scale that caused widespread damage and casualties. The May 2008 Sichuan earthquake has had a material adverse effect on the general economic conditions in the areas affected by the earthquake. Any future natural disasters, terrorist attacks or other events in China could cause a reduction in usage of or other severe disruptions to, public transportation systems and could have a material adverse effect on our business and results of operations.

Because our business is located in the PRC, we may have difficulty establishing adequate management, legal and financial controls, which we are required to do in order to comply with U.S. GAAP and securities laws, and which could cause a materially adverse impact on our financial statements, the trading of our common stock and our business.

PRC companies have historically not adopted a Western style of management and financial reporting concepts and practices, which includes strong corporate governance, internal controls and, computer, financial and other control systems. Most of our middle and top management staff are not educated and trained in the Western system, and we may have difficulty hiring new employees in the PRC with experience and expertise relating to U.S. GAAP and U.S. public-company reporting requirements. In addition, we may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards. Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or material weaknesses in our internal controls which could impact the reliability of our financial statements and prevent us from complying with SEC rules and regulations and the requirements of the Sarbanes-Oxley Act of 2002. Any such deficiencies, material weaknesses or lack of compliance could result in restatements of our historical financial information, cause investors to lose confidence in our reported financial information, have an adverse impact on the trading price of our common stock, adversely affect our ability to access the capital markets and our ability to recruit personnel, lead to the delisting of our securities from the stock exchange on which they are traded, lead to litigation claims, thereby diverting management’s attention and resources, and which may lead to the payment of damages to the extent such claims are not resolved in our favor, lead to regulatory proceedings, which may result in sanctions, monetary or otherwise, and have a materially adverse effect on our reputation and business.

Contract drafting, interpretation and enforcement in China involves significant uncertainty.

We have entered into numerous contracts governed by PRC law, many of which are material to our business. As compared with contracts in the United States, contracts governed by PRC law tend to contain less detail and are not as comprehensive in defining contracting parties’ rights and obligations. As a result, contracts in China are more vulnerable to disputes and legal challenges. In addition, contract interpretation and enforcement in China is not as developed as in the United States, and the result of any contract dispute is subject to significant uncertainties. Therefore, we cannot assure you that we will not be subject to disputes under our material contracts, and if such disputes arise, we cannot assure you that we will prevail.

Under the new EIT Law, we, World Orient, Global Asia and EverFair may be classified as “resident enterprises” of China for tax purpose. Such classification will likely result in unfavorable tax consequences to us, World Orient, Global Asia, EverFair and our non-PRC stockholders.

Under the new EIT Law and its implementation rules, both of which became effective on January 1, 2008, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation rules define the term “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.”

On April 22, 2009, the State Administration of Taxation (“SAT”)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 SAT Circular 82, further interpreting the application of the EIT Law. SAT Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. Pursuant to the SAT Circular 82, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or enterprise 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) its 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.

Although we, World Orient, Global Asia and EverFair all have members of management located in China, SAT Circular 82 provides that the above standards shall apply to the enterprises which are registered outside of the PRC and funded by Chinese enterprises as controlling investors, and therefore such standards may be cited for reference only and may not be directly adopted when considering whether our "de facto management bodies" is in the PRC or not. Accordingly, it is still uncertain whether we may be considered a resident enterprise under the EIT Law. Due to the short history of the EIT Law and lack of applicable legal precedents, the PRC tax authorities determine the PRC tax resident treatment of a foreign (non-PRC) company on a case-by-case basis, and it is possible that the PRC tax authorities could determine that we, World Orient, Global Asia and EverFair are resident enterprises.

If we are determined to be resident enterprises, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on financing proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiary 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 enterprise stockholders and with respect to gains derived by such non-PRC enterprise stockholders from transferring our shares and a 20% withholding tax is imposed on dividends we pay to our non-PRC individual stockholders and with respect to gains derived by such non-PRC individual stockholders from transferring our shares. We are actively monitoring the possibility of “resident enterprise” treatment and are evaluating appropriate organizational changes to avoid this treatment, to the extent reasonably possible.

If we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S. and China, and our PRC tax may not be creditable against our U.S. tax.

Dividends EverFair receives from Zhengzhou ZST located in the PRC may be subject to PRC withholding tax.

If we, World Orient, Global Asia and EverFair are not treated as a resident enterprise under the New EIT Law, then dividends that EverFair receive from Zhengzhou ZST may be subject to PRC withholding tax. The New EIT Law provides that an income tax rate of 20% may be applicable to dividends payable to non-resident investors, which (i) do not have an establishment or place of business in the PRC or (ii) have an establishment or place of business in the PRC but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources within the PRC. The State Council of the PRC reduced such rate to 10% through the implementation regulations of the New EIT Law. Further, pursuant to the Double Tax Avoidance Arrangement between Hong Kong and Mainland China and the Notice on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties issued on February 20, 2009 by the State Administration of Taxation, if the Hong Kong resident enterprise owns more than 25% of the equity interest in a company in China incessantly within 12 months immediately prior to obtaining dividend from such company, the 10% withholding tax on the dividends the Hong Kong resident enterprise received from such company in China is reduced to 5%.

As described above, the PRC tax authorities determine the resident enterprise status of entities organized under the laws of foreign jurisdictions, including ZST, World Orient, Global Asia or EverFair, on a case-by-case basis. Each of ZST, World Orient, Global Asia or EverFair is a holding company and substantially all of its income may be derived from dividends EverFair receives from Zhengzhou ZST. EverFair is incorporated in Hong Kong, which owns 100% equity interest in Zhengzhou ZST. Thus, if ZST, World Orient, Global Asia or EverFair is considered as a “non-resident enterprise” under the New EIT Law and EverFair is considered as a Hong Kong resident enterprise under the Double Tax Avoidance Arrangement, dividends paid to EverFair by Zhengzhou ZST may be subject to the reduced 5% enterprise income tax. However, based on the Notice on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties, if the relevant PRC tax authorities determine, in their discretion, that a company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authorities may adjust the preferential tax treatment; and based on the Notice on the Comprehension and Recognition of Beneficial Owner in Tax Treaties issued on October 27, 2009 by the State Administration of Taxation, funnel companies, which are established for the purpose of evading or reducing tax, transferring or accumulating profits, shall not be recognized as beneficial owner and thus are not entitled to the abovementioned reduced income tax rate of 5% under the Double Tax Avoidance Arrangement. If we are required under the New EIT Law to pay income tax for any dividends EverFair receive from Zhengzhou ZST, or if EverFair is determined by PRC government authority as receiving benefits from reduced income tax rate due to a structure or arrangement that is primarily tax-driven, it would materially and adversely affect the amount of dividends, if any, we may pay to our shareholders.

Dividends payable by us to our foreign investors and any gain on the sale of our shares may be subject to taxes under PRC tax laws.

If dividends payable to shareholders by the Company are treated as income derived from sources within China, then the dividends that shareholders receive from us, and any gain on the sale or transfer of our shares, may be subject to taxes under PRC tax laws.

Under the New EIT Law, PRC enterprise income tax at the rate of 20% is applicable to dividends payable by us to our investors that are non-resident enterprises which (i) do not have an establishment or place of business in the PRC or (ii) have an establishment or place of business in the PRC but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources within the PRC. The State Council of the PRC reduced such rate to 10% through the implementation regulations of the New EIT Law. Similarly, any gain realized on the transfer of our shares by such investors is also subject to a 10% PRC income tax if such gain is regarded as income derived from sources within China and the Company is considered as a resident enterprise which is domiciled in China for tax purpose. If we are required under the New EIT Law to withhold PRC income tax on our dividends payable to our foreign shareholders or investors who are non-resident enterprises, or if you are required to pay PRC income tax on the transfer or our shares under the circumstances mentioned above, the value of your investment in our shares may be materially and adversely affected.

In January, 2009, the State Administration of Taxation promulgated the Provisional Measures for the Administration of Withholding of Enterprise Income Tax for Non-resident Enterprises (“Measures”), pursuant to which, the entities which have the direct obligation to make the following payment to a non-resident enterprise shall be the relevant tax withholders for such non-resident enterprise, and such payment includes: incomes from equity investment (including dividends and other return on investment), interests, rents, royalties, and incomes from assignment of property as well as other incomes subject to enterprise income tax received by non-resident enterprises in China. Further, the Measures provides that in case of equity transfer between two non-resident enterprises which occurs outside China, the non-resident enterprise which receives the equity transfer payment shall, by itself or engage an agent to, file tax declaration with the PRC tax authority located at place of the PRC company whose equity has been transferred, and the PRC company whose equity has been transferred shall assist the tax authorities to collect taxes from the relevant non-resident enterprise. However, it is unclear whether the Measures refer to the equity transfer by a non-resident enterprise which is a direct or an indirect shareholder of the said PRC company. Given these Measures, there is a possibility that Zhengzhou ZST may have an obligation to withhold income tax in respect of the dividends paid to non-resident enterprise investors.

Furthermore, non-resident individual investors may be required to pay PRC individual income tax at a rate of 20% on interests or dividends payable to the investors or any capital gains realized from the transfer of shares if such gains are deemed income derived from sources within the PRC. Under the PRC Individual Income Tax Law, or IIT Law, non-resident individual refers to an individual who has no domicile in China and does not stay in the territory of China or who has no domicile in China and has stayed in the territory of China for less than one year. Pursuant to the IIT Law and its implementation rules, for purposes of the PRC capital gains tax, the taxable income will be the balance of the total income obtained from the transfer of the shares minus all the costs and expenses that are permitted under PRC tax laws to be deducted from the income. If we are considered a ‘‘resident enterprise’’ and relevant competent PRC tax authorities consider dividends we pay with respect to our shares and the gains realized from the transfer of our shares to be income derived from sources within the PRC, such gains earned by non-resident individuals may be subject to PRC withholding tax at a rate of 20%. If we are required under PRC law to withhold PRC income tax on dividends payable to our non-PRC investors that are non-resident individuals or if you are required to pay PRC income tax on the transfer of our shares, the value of your investment in our shares may be materially and adversely affected.

We will not be able to complete an acquisition of prospective acquisition targets in the PRC unless their financial statements can be reconciled to U.S. generally accepted accounting principles in a timely manner.

Companies based in the PRC may not have properly kept financial books and records that may be reconciled with U.S. generally accepted accounting principles. If we attempt to acquire a significant PRC target company and/or its assets, we would be required to obtain or prepare financial statements of the target that are prepared in accordance with and reconciled to U.S. generally accepted accounting principles. Federal securities laws require that a business combination meeting certain financial significance tests require the public acquirer to prepare and file historical and/or pro forma financial statement disclosure with the SEC. These financial statements must be prepared in accordance with, or be reconciled to U.S. generally accepted accounting principles and the historical financial statements must be audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), or PCAOB. If a proposed acquisition target does not have financial statements that have been prepared in accordance with, or that can be reconciled to, U.S. generally accepted accounting principles and audited in accordance with the standards of the PCAOB, we will not be able to acquire that proposed acquisition target. These financial statement requirements may limit the pool of potential acquisition targets with which we may acquire and hinder our ability to expand our retail operations. Furthermore, if we consummate an acquisition and are unable to timely file audited financial statements and/or pro forma financial information required by the Exchange Act, such as Item 9.01 of Form 8-K, we will be ineligible to use the SEC’s short-form registration statement on Form S-3 to raise capital, if we are otherwise eligible to use a Form S-3. If we are ineligible to use a Form S-3, the process of raising capital may be more expensive and time consuming and the terms of any offering transaction may not be as favorable as they would have been if we were eligible to use Form S-3.

We face uncertainty from China’s Circular on Strengthening the Administration of Enterprise Income Tax on Non-Resident Enterprises' Share Transfer (“Circular 698”) that was released in December 2009 with retroactive effect from January 1, 2008.

The Chinese State Administration of Taxation released a circular (“Circular 698”) on December 10, 2009 that addresses the transfer of shares by nonresident companies. Circular 698, which is effective retroactively to January 1, 2008, may have a significant impact on many companies that use offshore holding companies to invest in China. Pursuant to Circular 698, where the withholding agent does not withhold in accordance with laws or cannot perform the withholding obligation, the non-resident enterprises shall file a tax declaration with the PRC tax authority located at place of the resident enterprise whose equity has been transferred, within seven days since the date of equity transfer provided under the contracts.

Where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise by selling the shares in an offshore holding company, and the latter is located in a country or jurisdiction where the effective tax burden is less than 12.5% or where the offshore income of his, her, or its residents is not taxable, the foreign investor is required to provide the tax authority in charge of that Chinese resident enterprise with the relevant information within 30 days of the transfers. Moreover, where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise through an abuse of form of organization and there are no reasonable commercial purposes such that the corporate income tax liability is avoided, the PRC tax authority will have the power to re-assess the nature of the equity transfer and deny the existence of the offshore holding company that is used for tax planning purposes.

There is uncertainty as to the application of Circular 698. For example, while the term "indirectly transfer" is not defined, it is understood that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no direct contact with China. Moreover, the relevant authority has not yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax in the country or jurisdiction and to what extent and the process of the disclosure to the tax authority in charge of that Chinese resident enterprise. In addition, there are not any formal declarations with regard to how to decide abuse of form of organization and reasonable commercial purpose, which can be utilized by us to balance if our company complies with the Circular 698. As a result, we may become at risk of being taxed under Circular 698 and we may be required to expend valuable resources to comply with Circular 698 or to establish that we should not be taxed under Circular 698, which could have a material adverse effect on our financial condition and results of operations.

RISKS RELATED TO OUR CAPITAL STRUCTURE

Our stock price is volatile.

Prior to the listing of our common stock on the NASDAQ Global Market in October 2009, there was no public market for our securities in the United States. The stock market has experienced extreme volatility that often has been unrelated to the performance of its listed companies. Moreover, only a limited number of our shares are traded each day, which could increase the volatility of the price of our stock. These market fluctuations might cause our stock price to fall regardless of our performance. The market price of our common stock might fluctuate significantly in response to many factors, some of which are beyond our control, including the following:

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actual or anticipated fluctuations in our annual and quarterly results of operations;

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changes in securities analysts’ expectations;

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variations in our operating results, which could cause us to fail to meet analysts’ or investors’ expectations;

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announcements by our competitors or us of significant new products, contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;

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conditions and trends in our industry;

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general market, economic, industry and political conditions;

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changes in market values of comparable companies;

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additions or departures of key personnel;

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stock market price and volume fluctuations attributable to inconsistent trading volume levels; and

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future sales of equity or debt securities, including sales which dilute existing investors.

Shares eligible for future sale may adversely affect the market price of our common stock, as the future sale of a substantial amount of outstanding stock in the public marketplace could reduce the price of our common stock.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market or the perception that these sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

As of the date of this Annual Report, we had approximately 11,710,442 shares of common stock outstanding. In October 2009, we conducted a registered public offering of 3,125,000 shares of common stock, and all of these shares are now freely tradable. Also in October 2009, we registered 1,263,723 shares of common stock underlying shares of Series A Convertible Preferred Stock that were issued in a series of equity financings that was conducted in connection with the Share Exchange (the “Private Placement Shares”). Each private placement investor may sell or transfer any shares of the common stock pursuant to the effective registration statement. We also registered 278,600 shares of common stock held by certain of our stockholders immediately prior to the Share Exchange (the “SRKP Shares”). In January 2010, we registered 1,086,400 shares of common stock held by affiliates of WestPark, all of which may be freely sold and transferred.

Additionally, the former stockholders of World Orient and/or their designees and the ZST Management, may be eligible to sell all or some of our shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act (“Rule 144”) as of January 2010, subject to certain limitations. Under Rule 144, an affiliate stockholder who has satisfied the required holding period may, under certain circumstances, sell within any three-month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale. As of the date of this Annual Report, 1% of our issued and outstanding shares of common stock was approximately 117,104 shares. Non-affiliate stockholders are not subject to volume limitations. Any substantial sale of common stock pursuant to any resale prospectus or Rule 144 may have an adverse effect on the market price of our common stock by creating an excessive supply.

However, each of our executive officers and directors, in additional to all of the stockholders that received shares issued in the Share Exchange or pursuant to the Purchase Right, holding an aggregate of 5,171,565 shares of common stock, have agreed with the Underwriters not to directly or indirectly sell, offer, contract or grant any option to sell, pledge, transfer (excluding intra-family transfers, transfers to a trust for estate planning purposes or to beneficiaries of officers, directors and stockholders upon their death), or otherwise dispose of or enter into any transaction which may result in the disposition of any shares of our common stock or securities convertible into, exchangeable or exercisable for any shares of our common stock, without the prior written consent of the Underwriters, for a period of 24 months after October 20, 2009. Holders of 725,158 shares of common stock have agreed with the Underwriters to be bound by the same transfer restrictions described above, except that such restrictions shall be released on such dates and amounts as follows: (i) 121,876 shares on the date that is six (6) months after our common stock began to be listed on the NASDAQ Global Market, (ii) 121,876 shares on the date that is twelve (12) months after such listing date, (iii) 353,438 shares on the date that is two (2) years after such listing date, and (iv) 127,968 shares shall be released from the restrictions as determined by WestPark, in its sole discretion.

We intend to grant shares of or stock options to purchase shares of our common stock to various of our officers, directors and employees pursuant to our 2010 Omnibus Incentive Plan for which we will incur significant non-cash charges which will negatively affect our results of operations and which may cause the market price of our common stock to drop significantly, even if our business is doing well.

At our annual meeting of stockholders to be held on August 23, 2010, our stockholders approved the ZST Digital Networks, Inc. 2010 Omnibus Incentive Plan covering 500,000 shares of our common stock. We have issued and intend to further issue various types of awards under the plan, including, but not limited to, stock options and restricted shares of common stock. Grants or other stock awards pursuant to the plan will cause us to incur significant non-cash equity-based compensation charges. This non-cash charge will be amortized over the vesting period of the awards. These non-cash charges will negatively impact our results of operations, specifically our net income and net income per share. Additionally, any future awards made pursuant to the plan could have a significant adverse effect on the trading price of our common stock, especially if a significant volume of the stock issued is sold into the public market. Further, the issuance of any stock awards pursuant to the plan will have a dilutive impact on other stockholders by decreasing their ownership percentage of our outstanding common stock. An adverse impact on the trading price of our common stock may negatively affect our ability to use to our securities to raise capital or to acquire other companies using our securities.

Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting. Our management team will need to invest significant management time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.

Changes in securities laws, regulations and financial reporting standards are increasing our costs.

The Sarbanes-Oxley Act of 2002 required changes in some of our corporate governance, public disclosure and compliance practices. These changes resulted in increased costs and as we grow, we expect to see our costs increase. The SEC has passed, promulgated and proposed new rules on a variety of subjects including the requirement that we must file our financial statements with the SEC using the interactive data format eXtensible Business Reporting Language (commonly referred to as “XBRL”) and the possibility that we would be required to adopt International Financial Reporting Standards (“IFRS”). We may have to add additional accounting staff, engage consultants or change our internal practices, standards and policies which could significantly increase our costs to comply with XBRL and IFRS requirements. In addition, the NASDAQ Stock Market LLC (“NASDAQ”) has revised its requirements for companies, such as us, that are listed on NASDAQ. These changes are increasing our legal and financial compliance costs including making it more difficult and more expensive for us to obtain director and officer liability insurance or maintain our current liability coverage. We believe that these new and proposed laws and regulations could make it more difficult for us to attract and retain qualified members of our Board of Directors, particularly to serve on our audit committee, and qualified executive officers.

If we fail to maintain effective internal controls over financial reporting, it may lead to a restatement of our financial information and the price of our common stock may be adversely affected, as well as our ability to access the capital markets and our business.

We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. Any failure of these controls could also prevent us from maintaining accurate accounting records and discovering accounting errors and financial frauds. The standards that must be met for management to assess the internal control over financial reporting as effective are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing activities necessary to make an assessment of our internal control over financial reporting. If we cannot assess our internal control over financial reporting as effective, investor confidence and share value may be negatively impacted.

In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting, disclosure of management’s assessment of our internal controls over financial reporting may cause investors to lose confidence in our reported financial information, have an adverse impact on the trading price of our common stock, adversely affect our ability to access the capital markets and our ability to recruit personnel, lead to the delisting of our securities from the stock exchange on which they are traded, lead to litigation claims, thereby diverting management’s attention and resources, and which may lead to the payment of damages to the extent such claims are not resolved in our favor, lead to regulatory proceedings, which may result in sanctions, monetary or otherwise and have a materially adverse effect on our reputation and business.

We may be exposed to risks relating to our disclosure controls and our internal controls and may need to incur significant costs to comply with applicable requirements.

Based on the evaluation done by our management at August 10, 2010, our disclosure controls were deemed ineffective, in that we could not assure that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and communicated to our management, so as to allow timely decisions regarding required disclosures.

Our controls and procedures were primarily adversely affected by the lack of experience within the company in complying with the requirements of a publicly reporting entity. With the exception of our CFO, our current internal accounting department responsible for financial reporting of the Company, on a consolidated basis, is relatively new to U.S. GAAP and the related internal control procedures required of U.S. public companies. Although our accounting staff is professional and experienced in accounting requirements and procedures generally accepted in the PRC, management has determined that they require additional training and assistance in US GAAP matters. Management has determined that our internal audit function is also significantly deficient due to insufficient qualified resources to perform internal audit functions. We have engaged a third-party internal controls consultant to assist the Company to address issues of timeliness and completeness in financial reporting when we are preparing SEC filings. We are currently in the process of validating the recommendations made by the internal controls consultant.

No assurances can be given that we will be able to adequately remediate existing deficiencies in disclosure controls and not have deficiencies when we report on internal controls. Although we believe that these corrective steps will enable management to conclude that our disclosure controls are effective and these measures will remediate the significant deficiencies discussed above when all of the additional financial staff positions are filled and other remediation plans are implemented, we cannot assure you that this will be sufficient. Also, as we hire more experienced staff and advisors, additional deficiencies may be identified that will need to be remediated. These additional deficiencies may also have caused our historical financial results to be incorrect, which, if material, could require a restatement. As a result, we may be required to expend additional resources to identify, assess and correct any additional weaknesses in disclosure or internal control and to otherwise comply with the internal controls rules under Section 404 of the Sarbanes-Oxley Act, when applicable.

We do not foresee paying cash dividends in the foreseeable future and, as a result, our investors’ sole source of gain, if any, will depend on capital appreciation, if any.

We do not plan to declare or pay any cash dividends on our shares of common stock in the foreseeable future and currently intend to retain any future earnings for funding growth. As a result, investors should not rely on an investment in our securities if they require the investment to produce dividend income. Capital appreciation, if any, of our shares may be investors’ sole source of gain for the foreseeable future. Moreover, investors may not be able to resell their shares of the Company at or above the price they paid for them.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward-Looking Statements

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes, and the other financial information included in this annual report.

This annual report contains forward-looking statements. The words “anticipated,” “believe,” “expect, “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may,” and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect our management’s current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, general economic and business conditions, changes in foreign, political, social, and economic conditions, regulatory initiatives and compliance with governmental regulations, the ability to achieve further market penetration and additional customers, and various other matters, many of which are beyond our control. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated. Consequently, all of the forward-looking statements made in this annual report are qualified by these cautionary statements and there can be no assurance of the actual results or developments.

The following discussion relates to the financial condition and results of operations of ZST Digital Networks, Inc. (the “Company”) its wholly-owned subsidiary World Orient Universal Limited, a company organized under the laws of the British Virgin Islands (“World Orient”), its wholly-owned subsidiary, Global Asia Universal Limited, a company organized under the laws of the British Virgin Islands (“Global Asia”), its wholly-owned subsidiary, Everfair Technologies, Ltd., a company organized under the laws of Hong Kong (“Everfair”), and its wholly-owned subsidiary, Zhengzhou Shenyang Technology Company Limited, a company organized under the laws of the People’s Republic of China (“ZST PRC”). This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the Company’s financial statements and the related notes included in this Annual Report.

Summary of Operating Results for 2010

The following summary is intended to provide significant highlights of the discussion and analysis for the year ended December 31, 2010.

Total revenue for year ended December 31, 2010 was $134.6 million, an increase of 34% compared to fiscal 2009.

Gross profit for the year ended December 31, 2010 was $34.8 million, an increase of 104% compared to fiscal 2009.

Gross profit ratio for fiscal 2010 was 26% compared to 17% for fiscal 2009.

Net income for fiscal 2010 was $22.1 million, an increase of 117% compared to fiscal 2009.

Net income to revenue ratio for fiscal 2010 was 16.4% compared to 10.1% for fiscal 2009.

Basic and diluted earnings per share were both $1.90 for fiscal 2010, an increase of $0.74 compared to $1.16 for basic and diluted earnings per share for fiscal 2009.

Overview

We are principally engaged in two business lines: (1) to supply digital and optical network equipment to cable system operators in the Henan Province of China and (2) to provide GPS location and tracking services in the Henan Province of China.

Cable TV-Related Business

We offer a range of cable television devices and related networking products, including Internet protocol television (“IPTV”) set-top boxes, which integrate Internet, multi-media, and communication technologies. We also offer power supplies, remote controls, and other devices and accessories. Our product sales also include a line of fiber-optic receivers, which convert fiber-optic transmissions into digital RF signals that are amplified and distributed through an optical cable system, optical transmitters that are used in the transmission of cable system front optical fiber signal, and cable transmission amplifiers, which enhance the signal quality in cable networks.

We purchase the products specified by our customers from suppliers on a turnkey basis, which means that our suppliers deliver fully assembled and tested products based on our proprietary designs. The assembled products are delivered to our facilities for final system quality control testing against product specifications and product configuration, including software installation. The use of this model allows us to substantially focus our resources on determining customer requirements, design, development and support of the products we are selling. This model also allows us to significantly reduce capital requirements. We work closely with our suppliers to manage costs and delivery times, and we have not experienced material delays in the delivery of products we have ordered.

We also provide installation services for system equipment ordered by local broadcasting TV bureaus and cable network operators through a network of distributors and resellers in Henan Province. Our customer base covers more than 30 regional cities and counties. In addition, we offer security and monitoring services, including design, installation, and implementation of various devices, such as coding and decoding devices, digital cameras, and matrix exchanges. Our cable services include networking in buildings.

GPS-Related Business

Since the fourth quarter of 2009, we have been providing GPS location and tracking services to third parties, mainly logistics and transportation trucking companies. In March 2009, we entered into a network access right agreement with the Henan Subsidiary of China Unicom that allows us to use the China Unicom wireless network for providing GPS location and tracking services.

We expect that in the foreseeable future, the source of revenue for our business will be from (1) selling network system equipment and set-top boxes to cable system operators and (2) providing GPS location and tracking services to mainly logistics and transportation companies. There are 118 counties within Henan Province whereas we are currently serving only 33 counties. Consequently, we believe there is opportunity for future growth. In the future, we may expand our business activities beyond the border of Henan Province. Since we believe that the broadcasting and TV bureau at the provincial level is planning to redesign and enhance the entire network system in the entire Henan province, opportunities to bid for these projects exist. Our current goal for the GPS line of business is to continuously gain and secure market shares within Henan Province.

We expect that our business expenses will continue to increase as expenses associated with our efforts to expand sales, marketing, product development and general and administrative capabilities in all of our businesses, as well as expenses that we incur as a publicly-traded company, including costs associated with financial reporting, information technology, complying with federal securities laws (including the Sarbanes-Oxley Act of 2002), tax administration and human resources related functions. While we are striving for business growth, we also intend to focus on measures to control operational costs.

Recent Events

Purchase of Office Space

On March 12 and December 29, 2010, respectively, we entered into purchase agreements for office spaces of 2,100 square meters and 2,880 square meters of ITC Kung Kuan with Zhengzhou Zhong Xing Real Estate Co., Ltd. Under the agreements, we agreed to purchase the twenty-seventh to twenty-ninth floors (2,100 square meters) and the third and fourth floors (2,880 square meters) of the building for office space located in Zhengzhou City of Henan Province for a total purchase price of approximately RMB63.2 million, which is equal to approximately US$9.5 million. The total purchased area is approximately 4,980 square meters. Additionally, the seller agreed to deliver the floors of the building before May 18, 2011. As of December 31, 2010, we had made full payment of approximately $9.5 million of the purchase price.

Stock Incentive Plan

On August 23, 2010, at the Annual Meeting of Stockholders of the Company, the stockholders approved the Company’s 2010 Omnibus Incentive Plan (the “Plan”). The Plan became effective on August 23, 2010 and will be administered by the Compensation Committee of the Company's Board of Directors, with participation and approval of the Board of Directors. Awards under the Plan may include incentive stock options, nonqualified stock options, stock appreciation rights, restricted shares of common stock, restricted stock units, performance share or unit awards, other stock-based awards and cash-based incentive awards. An aggregate of 500,000 shares of the Company's common stock is reserved initially for issuance and available for awards under the Plan. As of December 31, 2010, there were still 487,500 shares available for issuance under the Plan, since the Company had granted 12,500 shares of option to purchase common stock to Dr. John Chen, CFO of the Company.

Corporate History

We were incorporated in the State of Delaware on December 7, 2006. We were originally organized as a “blank check” shell company to investigate and acquire a target company or business seeking the perceived advantages of being a publicly held corporation. On January 9, 2009, we closed a share exchange transaction (“Share Exchange”) pursuant to which we (i) issued 1,985,000 shares of our common stock to acquire 100% equity ownership of World Orient, (ii) assumed the operations of World Orient and its subsidiaries, including ZST PRC, and (iii) changed our name from SRKP 18, Inc. to ZST Digital Networks, Inc.

We conduct our business principally through the operations of ZST PRC, which is based in Zhengzhou City of Henan Province where the Company’s headquarters are located. ZST PRC was established in Zhengzhou under the laws of the People’s Republic of China (the “PRC”) on May 20, 1996. After the share exchange and stock purchase transactions incurred in January 2009, ZST PRC became a foreign investment company in China with an operating life of 30 years since November 10, 2008. The other three wholly-owned subsidiaries of the Company, World Orient, Global Asia, and Everfair, have no operating activity.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of inventory, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We are unable to predict future laws and regulations that may have material effect on operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.

Revenue Recognition

We derive revenues principally from the sale of products related to Cable TV systems, which include digital Cable TV network equipment and IPTV set-top boxes; sale of GPS devices; provision of GPS devices installation service and GPS subscription service.

Revenue is recognized when the risk and rewards are transferred, delivery has occurred or the services have been rendered, persuasive evidence of any arrangement exists, the price to the buyer is fixed or determinable and collectability is reasonably assured. These criteria as they apply to stand-alone sale of digital Cable TV network equipment, IPTV set-top boxes, and GPS devices, and the sale of GPS devices with installation service, and provision of technical services are as follows:

Sales of Digital Cable TV Network Equipment and GPS Devices

We recognize revenues from the sale of digital Cable TV network equipment and GPS devices when the price of products to be sold are predetermined, the risk and rewards of ownership and title to the products have been transferred to the buyer, which coincides with delivery and acceptance of the products by the buyer. When certain equipment requires installment service, revenue is not recognized until customer acceptance has been obtained and/or the Company has no further significant obligations to customers.

Sales of IPTV Set-Top Boxes

We recognize revenues from the sale of IPTV set-top boxes when the price of products to be sold are predetermined, the risk and rewards of ownership and title to the products have been transferred to the buyer, which coincides with delivery and acceptance of the products by the buyer.

Pursuant to the terms of our IPTV set-top boxes sales contracts, we have allowed our customers to hold back 10% of the total contract price for one year after the delivery of products for warranty purposes. We recognize the total contract amount as revenue based on the following reasons: (i) the customer’s obligation to pay 10% of the total contract amount is not contingent on the resale of the product shipped; (ii) we do not have significant obligation for future performance to directly bring about resale of the products shipped other than replacement of defective products due to hardware defects in materials and workmanship which, in turn, will be borne by our supplier; (iii) the customer purchasing the products sold by us has economic substance apart from the products provided by us; and (iv) the amount of future returns can be reasonably estimated based on the historical return experience; however, we do not have any historical return experience.

Revenue from selling all products is recognized net of the value added tax imposed by the Chinese government.

Multiple Deliverables

In October 2009, we started to sell GPS devices in conjunction with subscription and installation service. We generally recognize revenue from the sale of the GPS device hardware with the bundled software that is essential to the functionality of the GPS device when there are no continuing obligations upon the completion of installation. We sell the subscription services to customers with 12-month service contracts payable in full upon activation of the related unit or renewal of a previous service contract. The subscription services are deferred and recognized over the life of the service contract upon activation.

In instances where we sell a GPS device unit along with subscription service and/or installation service, we recognize revenue related to the combined sale by allocating between the two or three deliverables using the relative selling price method determined by using the hierarchy of the following principles: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“ESP”).

Sales of Services

Revenue is recognized when services are rendered. The prepayments received for GPS subscription services are treated as deferred revenue which will be recognized over the terms of service contacts.

Warranty Liabilities

We have a return policy where the customers must make a request within 30 days of receipt to return the products when the products delivered have more than 40% of defects or the products are not delivered on time. We determine that warranty costs related to products sold are minimal in monetary terms based on historical return experience. In the event of defective product returns, we have the right to seek replacement of such returned units from its supplier. Based on the purchase agreement, the supplier will replace the defective product when the defects are caused by hardware defects in materials and workmanship during manufacturing process for a period of one year. Based on these facts, we record warranty cost as incurred.

Regarding warranty on GPS devices, we have a policy that provides coverage on repairs of GPS devices for a period of one year after the date of purchase. In the event that repair is needed, customers will be responsible for the cost of parts while the cost of labor will be covered by us. We estimate the costs to service our obligations based on historical experience and expectations of future conditions. We did not incur warranty costs for the year ended December 31, 2010 and 2009. Based on these facts, we record warranty cost as incurred.

Accounts Receivable

Accounts receivable are stated at the historical carrying amount, net of an allowance for doubtful accounts. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on historical write-off experience, customer specific facts and economic conditions. Provisions for doubtful accounts are charged to general and administrative expenses.

Outstanding account balances are reviewed individually for collectability. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. We have not provided a bad debt allowance as of December 31, 2010 and 2009.

Impairment of Long-Lived Assets

We review long-lived assets 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.

Income Taxes

We recognize deferred tax liabilities and assets when accounting for income taxes. 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.

ZST Digital Networks, Inc. was established under the laws of the State of Delaware and is subject to U.S. federal income tax and state franchise tax. For U.S. income tax purposes, no provision has been made for U.S. taxes on undistributed earnings of overseas subsidiaries with which we intend to continue to reinvest. It is not practicable to estimate the amount of additional tax that might be payable on the overseas earnings if they were remitted as dividends, or lent to us, or if we should sell its stock in the subsidiaries.

Results of Operations

Comparison of Years Ended December 31, 2010 and 2009

Revenue

We are currently engaged in two main business lines: the provision of Cable TV related equipment and the provision of GPS devices and related location and tracking services. Total revenue by business line is as follows:

	Years Ended December 31,
	2009		2010
Sales revenue:
Sales of cable TV equipment	$	96,513,119	$	107,077,536
Sales of GPS devices		3,281,804		20,770,634
Revenue from sales of goods		99,794,923		127,848,170
Revenue from service:
GPS-related service		619,192		6,720,751
Total revenue	$	100,414,115	$	134,568,921

Overall our revenue was $134.6 million for the year ended December 31, 2010, representing an increase of $34.2 million or a 34.0% increase in comparison to $100.4 million for the year ended December 31, 2009. The significant increase in revenue was contributed mainly by GPS-related business, revenue from sales of GPS devices and related service amounting to $27.5 million in fiscal 2010, representing an increase of $23.6 million or a 6.0 times increase in comparison to $3.9 million for fiscal 2009, since we did not launch GPS-related business until the fourth quarter of 2009. GPS-related business contributed 23.5% of overall increase in sales revenue. Sales of Cable TV-related equipment also increased in fiscal 2010 and contributed 10.5% to overall increase of sales revenue.

Sales of Cable TV-Related Equipment:

We sell two types of Cable TV-related equipment: digital Cable TV network equipment and IPTV (internet protocol television) set-top boxes. Net revenue from Cable TV-related business were $107.1 million and $96.5 million and accounted to 79.6% and 96.1% to total sales revenue for fiscal 2010 and 2009, respectively. The fact that sales proportion of Cable TV-related equipment decreased from 96.1% to 79.6% during the year 2009 and 2010 reflected our operating strategy to enhance rapid growth of GPS-related business while maintain stable development of Cable TV-related business.

Net revenue from the two product lines of Cable TV-related equipment are as follows:

	Years Ended December 31,
	2009		2010
Sales Revenue from Cable TV products:
Sales of IPTV set-top boxes	$	53,926,556	$	62,804,763
Sales of cable TV network equipment		42,586,563		44,272,773
	$	96,513,119	$	107,077,536

Sales of IPTV set-top boxes

Revenue from sales of IPTV set-top boxes was $62.8 million, an increase of $8.9 million or 16.5% compared with $53.9 million for fiscal 2009. We sold only one type of High Definition IPTV set-top box in 2009; however, during the first quarter of 2010, we launched the Standard Definition IPTV set-top box line with a lower average selling price to capture additional market share in rural cities and counties.

Sales revenue from High Definition products was $40.3 million for fiscal 2010, a decrease of $13.6 million or 25.3% compared with $53.9 million for fiscal 2009. The decrease in sales revenue of High Definition IPTV set-top boxes was the combined effect of a 12.9% decrease in selling prices and a 14.2% decrease in sales volume. The High Definition IPTV set-top boxes had higher selling prices when the products were first launched in 2009; in 2010, we adjusted the selling price to a lower price comparable with market trends. At the same time, the sales volume of High Definition products decreased along with the launch of much cheaper Standard Definition products in 2010.

Sales revenue from Standard Definition products was $22.5 million for fiscal 2010. Since there were no such sales in 2009, sales of Standard Definition products in 2010 constituted a net increase in sales of IPTV set-top boxes, which brought about the net increase of $8.9 million in overall set-top boxes sales after offsetting decrease in sales of High Definition products.

Though sales revenue from Standard Definition products only amounted to 35.8% of sales from IPTV set-top box products, the sales volume of Standard Definition products amounted to 59.8% of total volume of IPTV set-top boxes sold, since the selling price of Standard Definition products were much lower. The overall sales volume of IPTV set-top boxes in 2010 was 1.1 times of the volume in 2009.

The Chinese governmental regulation encouraged the continued integration of telecommunications networks, Cable TV networks and the Internet in 2010. As the terminal units of Cable TV networks, the demand for IPTV set-top boxes increased during the integration process. As a result of this integration process, we expanded our sales in IPTV set-top boxes during fiscal 2010.

Sales of cable TV network equipment

Sales of cable TV network equipment amounted to $44.3 million for fiscal 2010, a slight increase of $1.7 million or 4.0% compared to $42.6 million for fiscal 2009. As the result of a continued shift in resource allocation to the IPTV set-up box business unit, the sales of cable TV network equipment were stable compared between fiscal 2010 and 2009.

GPS Products:

Revenue from sales of GPS devices and GPS-related service was $27.5 million, which accounted to 20.4% of total sales revenue for fiscal 2010. We entered into GPS-related business in the fourth quarter of 2009 whereas there were only two months GPS operations in fiscal 2009 with revenue of $3.9 million. We intend to concentrate on and dedicate resources to the continuous development of our GPS business.

Among the $27.5 million sales revenue from GPS business, sales of GPS devices amounted to $20.8 million and GPS-related service amounted to $6.7 million. GPS-related services fees include service fee from installation service and subscription service for tracking and locating.

Cost of Sales

Cost of sales was driven primarily by procurement costs, given that our products are purchased from suppliers on a turnkey basis. Total cost of sales was $99.8 million in fiscal 2010, compared with $83.3 million for fiscal 2009, representing an increase of approximately $16.4 million or 19.7%. The 19.7% increase in cost of sales was lower than the 34.0% increase in sales revenue, which indicated an increase in gross margin. The primary driver for the increase in gross profit margin was due to the fact that the recently launched GPS business and Standard Definition IPTV set-top box sales had a higher gross margin than both Cable TV network equipment and High-Definition IPTV set-top boxes sold during fiscal 2009.

Gross Margin

Gross margin for fiscal 2010 was 25.9%, an increase of 8.9%, compared with gross margin of 17.0% for the year 2009. With the exception of GPS-related services, which have a gross margin of 96.9%, the gross margin for sales of products was 22.1% for fiscal 2010, which was 5.5% higher when compared to 16.6% for fiscal 2009. As discussed above, the primary driver for the increase in gross margin was a result of combining the recently launched GPS business and Standard Definition IPTV set-top boxes, which has a higher gross margin than the traditional business that existed in 2009.

The increase in gross margin on sales of products was driven mainly by sales of our Standard Definition set-top boxes, which has a gross margin of 39.4% during fiscal 2010. Although the selling price of our Standard Definition products was lower than the selling price for our High Definition products, the production costs of our Standard Definition products were significantly lower than the production costs of our High Definition products in comparison. Therefore, we were able to leverage a higher gross margin on the Standard Definition products. We did not have sales of Standard Definition set-top boxes during fiscal 2009. The gross margin in sales of GPS devices, which we launched in the fourth quarter of 2009, was 20.9% for fiscal 2010, higher than the overall gross margin of 2009. The gross margin of traditional products, cable TV network equipment and High Definition IPTV set-top boxes, were 17.8% and 17.9%, respectively, during fiscal 2010, representing a slight increase, compared with 15.1% and 17.5% during fiscal 2009.

Selling Expense

Selling expense was $744,000 for fiscal 2010, representing an increase of $285,000 or 62.0% compared with $459,000 for fiscal 2009. Selling expenses consist mainly of shipping costs, after-sale service, and salary of sales staff and increased along with expanded sales volume.

Selling expenses accounted for 0.6% and 0.5% of total revenue for fiscal 2010 and 2009, respectively.

Research and Development Expense

Research and development expense was $399,000 for fiscal 2010, an increase of $178,000 or 80.4%, compared to $221,000 in fiscal 2009. Research and development expenses consist mainly of salaries of research and development department.

As a percentage to total revenue, research and development expense accounted for 0.3% and 0.2% for fiscal 2010 and 2009, respectively.

General and Administrative Expense

General and administrative expense was $3.7 million for fiscal 2010, representing an increase of $1.9 million, or a 104.4% increase, compared with $1.8 million for fiscal 2009. General and administrative expense consists mainly of salary expense, consulting service fee, legal service fee, audit-related service fee and other office expenses. The increase in general and administrative expense was primarily due to the increase in salary expenses, consulting service fees, legal fees, and other expenses relating to being a publicly listed company. We raised our employees’ salaries in October 2009, and on November 14, 2009, we entered into a 24-month Retention Agreement with our Chief Operating Officer for a total retention bonus of $285,000, which is amortized throughout the life of the agreement; and, the number of our employees increased with expanding of operation; as a result, the salary expense for fiscal 2010 amounted to $1.2 million, compared to $0.3 million during fiscal 2009. The consulting fees were $1.0 million, an increase of $0.6 million, compared with $0.4 million for fiscal 2009, mainly due to a Consulting Agreement signed with Finance Access, Inc. and other third parties. On October 28, 2009, we entered into a Consulting Agreement with Finance Access, Inc. and other third parties for a 24 months consulting service at total consideration of $1.55 million; which was to be amortized during the following 24 months with a full year’s amortization of approximate $0.8 million. Legal fees and other administrative expenses increased primarily as a result of the Company becoming a publicly reported entity.

As a percentage to total revenue, general and administrative expense accounted for 2.7% and 1.8% for fiscal 2010 and 2009, respectively.

Interest Income (Expense)

Interest income was $79,000 for fiscal 2010, compared with net interest expense of $128,000 for fiscal 2009. We paid off all the loans from the bank at the end of 2009 and no interest expense occurred in 2010.

Income Tax Provision

Income tax provision for fiscal 2010 was $8.0 million, an increase of $3.9 million or 95.4%, compared with $4.1 million for fiscal 2009. The increase of income tax provision was the result of the increase in income before tax, primarily driven by the increase in sales revenue and increased gross margin. We also recognized a deferred tax assets resulting from the deferred revenue, which was subject to taxation under China Tax Laws for the year ended December 31, 2010.

As a percentage to total revenue, income tax provision accounted for 5.9% and 4.1% for fiscal 2010 and 2009, respectively.

Net Income

Net income was $22.1 million for fiscal 2010, an increase of $11.9 million or 116.7%, compared with $10.2 million for fiscal 2009.

Earnings per Share

Basic earnings per share were $1.90 for fiscal 2010, an increase of $0.74 compared with $1.16 for fiscal 2009. The increase in earnings per share was a result of the increase in net income, which was offset in part by the increase in basic weighted average shares outstanding, which were 11,650,442 shares and 8,776,491 shares, respectively, for fiscal 2010 and 2009.

Liquidity and Capital Resources

As of December 31, 2010 and 2009, we had cash and cash equivalents of $23.7 million and $13.6 million, respectively. The increase in cash and cash equivalents was mainly attributed to operating activities, especially by net income earned during fiscal 2010. Our working capital was approximately $61.1 million and $45.9 million as of December 31, 2010 and 2009, respectively.

Our operations were financed by cash generated from operating activities in fiscal 2010, which was different from the prior year situation whereas our operating cash flow was negative $8.6 million and operating activities were financed by the proceeds through selling shares of our preferred stock and common stock in 2009.

Based upon our present plans, we believe that our cash, cash equivalents, and cash flow from operations will be sufficient to fund our capital needs for at least the next 12 months. We expect that our primary sources of funding for our operations for the upcoming 12 months and thereafter. However, our ability to maintain sufficient liquidity depends partially on our ability to achieve anticipated levels of revenue, while continuing to control costs. We did not have material capital investment commitments as of December 31, 2010, but we may need external financing to supplement operating cash flows if are able to rapidly expand our GPS-related business. If we did not have sufficient available cash, we would have to seek additional debt or equity financing through other external sources, which may not be available on acceptable terms, or at all. Failure to maintain financing arrangements on acceptable terms would have a material adverse effect on our business, results of operations and financial condition.

For fiscal 2010, net cash provided by operating activities was $18.5 million, representing an increase of $27.1 million as compared with the net cash used in operating activities of $8.6 million for fiscal 2009. Among the $18.5 million net cash flow provided by operating activities, net income of the period contributed $22.1 million; and increase in deferred revenue from GPS subscription services contributed $2.4 million to operating cash flows as well; in the mean time, increase in accounts receivable accounted for $8.4 million of operating cash flow-out. The balance of accounts receivable increased by 34.6% compared to that of December 31, 2009, which was in line with the 34.0% increase in overall sales revenue.

We have established and implemented corporate policies to manage our cash flows generated by our operating activities. We have established strict credit policies to manage the credit we give to our customers, and we give different credit terms to different types of customers in different business lines. For cable TV-related product sales, we typically provide 30 to 90-day credit terms; for GPS device sales, the credit terms we provide are much shorter, some customers were requested to pay in full before delivery, and all GPS subscription service fees were received on prepayment basis. The credit terms are subject to negotiation if requested by our customers, but any adjustment must be approved by designated management. In general, we will advance 20% of the total purchase order amount to our suppliers and pay in full within 30 days on receipts of products purchased.

A significant portion of our working capital consists of accounts receivable from customers. As of December 31, 2010, our accounts receivable were approximately $33.5 million, of which approximately $7.2 million were for 10% customer hold backs. If customers responsible for a significant amount of accounts receivable were to become insolvent or otherwise unable to pay for our products, or to make payments in a timely manner, our liquidity and results of operations could be materially adversely affected.

In accordance with the purchase contracts, we are required to make advance payments to our suppliers to purchase the IPTV and GPS devices, materials and add-on process work. As of December 31, 2010, advances of approximately $7.3 million advances were outstanding, mainly consisting of advances to two suppliers accounting for 53% and 45% of total balance, respectively.

Net cash used in investing activities was $9.7 million for fiscal 2010, which was mainly the advanced payment for purchasing office space.

Regarding financing activities, our Board of Directors authorized us to repurchase outstanding shares of our common stock in an amount not to exceed $1 million in open market purchases, with block trades being permitted, from time to time in the discretion of our management and as market conditions allow. As of December 31, 2010, we repurchased 24,900 shares of its common stock at a cost of $198,000. In comparison, during the year ended December 31, 2009, we received net proceeds of $25.8 million for sales of 1,263,723 shares of Series A Convertible Preferred Stock and sales of 3,125,000 shares of common stock in the public offering in 2009; and with such cash infusion we repaid $2.4 million in short term bank loans in 2009.

Contractual Obligations

None.

Seasonality

Our business is not seasonal in nature. The seasonal effect does not have material impact on our sales.

Quarterly Information (Unaudited)

The table below presents selected results of operations for the quarters indicated. All amounts are in thousands, except share and per share amounts.

	Quarterly Financial Data
2009	First		Second		Third		Fourth
Net sales	$	17,761	$	23,679	$	28,628	$	30,347
Gross profit		2,916		3,573		4,805		5,788
Net income attributable to common shares		1,246		2,562		3,292		3,078
Basic earnings per share	$	0.16	$	0.31	$	0.39	$	0.28


	Quarterly Financial Data
2010	First		Second		Third		Fourth
Net sales	$	17,048	$	33,046	$	38,519	$	45,956
Gross profit		4,174		8,247		10,023		12,354

Net income attributable to common shares		1,970		5,204		6,410		8,511
Basic earnings per share	$	0.17	$	0.45	$	0.55	$	0.73

Employment Agreement

On December 13, 2010, we entered into an employment agreement with Zhong Bo as the Company’s Chief Executive Officer effective as of January 1, 2011 pursuant to which Mr. Zhong will be entitled to an annual base salary of RMB 1,880,000 (equal to approximately US$282,000), subject to modification from time to time by written agreement between Mr. Zhong and the Company. Payment of salary will be made on a quarterly basis, in advance of each quarter of work performed. The initial term of the employment agreement will be 12 months, with automatic 12-month extensions unless either party provides 90 days written notice of termination prior to the expiration of a term.

Recently Issued Accounting Pronouncements Adopted

Effective January 1, 2010, the Company adopted ASU No. 2010-01, “Accounting for Distributions to Shareholders with Components of Stock and Cash.” The amendments in this Update clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The adoption of this ASU did not have a material impact on its consolidated financial statements.

Effective January 1, 2010, the Company adopted ASU No. 2010-02, “Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope Clarification.” The amendments in this Update affect accounting and reporting by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity. The amendments also affect accounting and reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit activity for an equity interest in another entity. The amendments in this update are effective beginning in the period that an entity adopts SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51.” The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In February 2010, FASB issued ASU No. 2010-9, “Amendments to Certain Recognition and Disclosure Requirements”. This update addresses certain implementation issues related to an entity’s requirement to perform and disclose subsequent-events procedures, removes the requirement that public companies disclose the date of their financial statements in both issued and revised financial statements. According to the FASB, the revised statements include those that have been changed to correct an error or conform to a retrospective application of U.S. GAAP. The amendment is effective immediately. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

Effective July 1, 2010, the Company adopted ASU No. 2010-11, “Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Specifically, only one form of embedded credit derivative qualifies for the exemption - one that is related only to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements Not Adopted Yet

In January 2010, FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements.” This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are 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. These 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 this ASU; however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In April 2010, the FASB issued Accounting Standards Update ("ASU") No. 2010-13, “Compensation - Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades ,” which addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. Topic 718 is amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades shall not be considered to contain a market, performance, or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. The amendments in this Update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. ASU 2010-13 is effective for interim and annual periods beginning on or after December 15, 2010 and is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

The FASB issued ASU No. 2010-17, “Revenue Recognition—Milestone Method (Topic 605): Milestone Method of Revenue Recognition.” This ASU codifies the consensus reached in EITF Issue No. 08-9, “Milestone Method of Revenue Recognition.” The amendments to the Codification provide guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive. Milestones should be considered substantive in their entirety and may not be bifurcated. An arrangement may contain both substantive and nonsubstantive milestones, and each milestone should be evaluated individually to determine if it is substantive. ASU 2010-17 is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. The Company is currently evaluating the impact of this ASU; however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

The FASB has issued ASU No. 2010-28, “Intangibles - Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” This ASU reflects the decision reached in EITF Issue No. 10-A. The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company believes that the adoption of this ASU 2010-28 will not have material impact on its consolidated financial position and operating result.

The FASB has issued ASU No. 2010-29, “Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations.” This ASU reflects the decision reached in EITF Issue No. 10-G. The amendments in this ASU affect any public entity as defined by Topic 805, Business Combinations, that enters into business combinations that are material on an individual or aggregate basis. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company believes that the adoption of this ASU 2010-29 will not have material impact on its consolidated financial position and operating result.

Off-Balance Sheet Arrangements

We have no material off-balance sheet transactions.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Executive Officers, Directors and Key Employees

The following individuals constitute our board of directors and executive management:

Name	Age	Position
Zhong Bo	60	Chief Executive Officer, Chairman of the Board
Zhong Lin	30	Chief Operating Officer, Director
John Chen	33	Chief Financial Officer
Xue Na	33	Corporate Secretary, Deputy General Manager and President of the Labor Union
Yang Ai Mei	60	Director
Tian Li Zhi	37	Director
Liu Hui Fang	32	Director
Zhang Jian’sheng	47	Director

Zhong Bo has served as Chief Executive Officer and Chairman of the Board of the Company since January 9, 2009 and has been chairman of the board of Zhengzhou Shenyang Technology Company Limited, a wholly-owned subsidiary of the Company (“Zhengzhou ZST”), since 1996. He has also served as the director of the Henan Association for the Promotion of Non-Governmental Entrepreneurs since July 1999, as the President of the Federation of Industry and Commerce (General Chamber of Commerce) since January 2001 and as a committee member of the Chinese People’s Political Consultative Conference since January 2004. From October 1989 to September 1992, Mr. Zhong served as the manager of the Zhengzhou and Luoyang Offices of Beijing CEC Video & Audio Technology Jointly Developed Corporation. From September 1970 to September 1989, Mr. Zhong served as the technical principal of the Zhumadian Branch of the Wuhan Times Academy of Sciences. Mr. Zhong obtained a degree in Electronics in September 1989 from the Electronic Engineering Department of Tsinghua University and a Master’s degree in Business Management in 2003 from Asia International Open University in Macau. The Company believes that Mr. Zhong’s successful leadership of the Company’s operations since its inception and his track-record as an established entrepreneur in the Henan Province and the network equipment industry give him unique qualifications and skills to serve as a director of our Company.

John Chen has served as Chief Executive Officer of the Company since October 20, 2009. Mr. Chen previously served as the Vice President, Investment Banking-China Practice of Brean Murray, Carret & Co., from December 2007 to January 2009. From June 2007 to November 2007, Dr. Chen served as the Senior Vice President, Investment Banking of Global Hunter Securities LLC. Dr. Chen served as the Associate Vice President, Business Development of Paramount BioCapital from March 2006 to December 2006. Prior to that, he was a Clinical Research Fellow, on a one year fellowship, at the National Cancer Institute from August 2005 to August 2006. Dr. Chen also served as a Biotechnology Associate Analyst at Friedman, Billings, Ramsey, Inc. from September 2004 to August 2005. Dr. Chen received a M.D./MBA in health management from Tufts University School of Medicine and Brandeis University, Northeastern University in 2004 and a B.S. in Biology from the University of California, Irvine in 2000.

Xue Na has served as Corporate Secretary of the Company since December 11, 2009 and as the Company’s General Manager and President of the Labor Union since January 9, 2009. Ms. Xue has served as deputy general manager of Zhengzhou ZST since September 2005 and as president of the labor union for Zhengzhou ZST since 2003. From January 2002 to August 2005, Ms. Xue served as the assistant general manager of Zhengzhou ZST and from July 1997 to December 2001, she held the position of office director of Zhengzhou ZST. Ms. Xue received her MBA in 2002 from Asia International Open University (Macau). From 1995 to 1997, Ms. Xue studied public relations at Zhengzhou Huanghe Science and Technology College.

Zhong Lin has served as Chief Operating Officer and a Director of the Company since January 9, 2009 and has served as general manager of Zhengzhou ZST since January 2008. Prior to serving as general manager, Mr. Zhong served as the manager of the system integration department of Zhengzhou ZST, from April 2005 to December 2007. From 1997 to 2001, Mr. Zhong studied Computer Information Management at Nanjing University of Science and Technology. The Company believes that Mr. Zhong’s business expertise and intimate knowledge of the Company’s day-to-day operations and the evolution of the Company’s business, including entrance into the GPS tracking industry, give him the unique qualifications and skills to effectively serve as a director of the Company.

Yang Ai Mei has served on the Company’s Board of Directors since January 9, 2009. Ms. Yang has served as managing director of Zhengzhou Guangda Textiles Co., Ltd., a cotton manufacturing company, since May 1995, where she has worked since 1988. From January 1978 to January 1988, Ms. Yang was the manager of Zhongyuan Labour Services Company, a company which engages in the sale and trade of textiles. Ms. Yang received a Bachelor of Economics in the field of Management in 1975 from Zheng Zhau University. The Company believes that Ms. Yang’s extensive business expertise developed for over 20 years in the textile manufacturing and distribution sector provides her with unique insight and skills that enable her to provide valuable insight to the direction of the Company as a member of the Board.

Tian Li Zhi has served as member of the Company’s Board of Directors since January 9, 2009. Ms. Tian has been employed as an attorney for the Henan Image Law Firm since May 2000. From May 1997 to May 2000, Ms. Tian was a legal consultant for Zhengzhou Asia Group, a company which manages commercial properties. Ms. Tian received a law degree in 1997 from Zheng Zhau University. The Company believes that Ms. Tian’s legal training and expertise, specifically in the region of Zhenghou, Henan region, give her the unique qualifications and skills to contribute, as a director, to the Company’s continued compliance with the increasingly complex laws and regulations in the PRC.

Liu Hui Fang has served as a Director of the Company since January 9, 2009. Ms. Liu has served as finance manager of Henan Zhongfu Container Co., Ltd., a company which engages in the production and sale of plastic packaging, since August 2002. From July 1999 to August 2002, Ms. Liu served as chief accountant of Zhengzhou Fukang Medical Equipment Co., Ltd., a distributor of medical equipment. Ms. Liu received a degree in business accounting in 1999 from Henan Business College. She is also a member of The Chinese Institute of Certified Public Accountants. The Company believes that Ms. Liu, as a PRC CPA with diversified work experience, has the accounting and finance knowledge and expertise that permit her to contribute valuable guidance in the financing of the Company’s operations as a member of the Board.

Zhang Jian’sheng has served as a director of the Company since August 23, 2010. Mr. Zhang has served as president of Ji Lin Da Qing Stone Material Co., Ltd., a stone material-related research, mining and production company, since January 2008. From January 2005 to December 2007, Mr. Zhang served as sales manager of An Shan Fibre Technology (Beijing) Co., Ltd., a company that engages in andesite fiber research. Mr. Zhang received a degree in Compound Command and Political Theory from the Land Force College of Xin Yang in 1991 and 1994, respectively. The Company believes that Mr. Zhang’s diverse business experience based on research and development provides him with the unique qualifications to provide the Company valuable guidance, as a Board member, in continuing the Company’s effective research and development activities.

Family Relationships

Zhong Bo is the father of Zhong Lin. Except as noted herein, there are no family relationships among of the directors and executive officers.

The Board of Directors and Committees

Board Composition

Subject to certain exceptions, under the listing standards of the NASDAQ Global Market, a listed company’s board of directors must consist of a majority of independent directors. Currently, our board of directors has determined that each of the following non-management directors, Yang Ai Mei, Tian Li Zhi, Zhang Jian’sheng, and Liu Hui Fang, is an “independent” director as defined by the listing standards of the NASDAQ Global Market currently in effect and approved by the SEC and all applicable rules and regulations of the SEC. All members of the Audit, Compensation and Nominating Committees satisfy the “independence” standards applicable to members of each such committee. The board of directors made this affirmative determination regarding these directors’ independence based on discussions with the directors and on its review of the directors’ responses to a standard questionnaire regarding employment and compensation history; affiliations, family and other relationships; and transactions with the Company. The board of directors considered relationships and transactions between each director or any member of his immediate family and the Company and its subsidiaries and affiliates. The purpose of the board of director’s review with respect to each director was to determine whether any such relationships or transactions were inconsistent with a determination that the director is independent under the NASDAQ Global Market rules.

Audit Committee

We established our Audit Committee in February 2009. The Audit Committee currently consists of Liu Hui Fang, Yang Ai Mei and Tian Li Zhi, each of whom is an independent director. Liu Hui Fang serves as the Chairman of the Audit Committee and the “audit committee financial expert” as defined under Item 407(d) of Regulation S-K. The purpose of the Audit Committee is to represent and assist our Board of Directors in its general oversight of our accounting and financial reporting processes, audits of the financial statements and internal control and audit functions. The Audit Committee’s responsibilities include:

The appointment, replacement, compensation, and oversight of work of the independent auditor, including resolution of disagreements between management and the independent auditor regarding financial reporting, for the purpose of preparing or issuing an audit report or performing other audit, review or attest services.

Reviewing and discussing with management and the independent auditor various topics and events that may have significant financial impact on our Company or that are the subject of discussions between management and the independent auditors.

The Board of Directors has adopted a written charter for the Audit Committee. A copy of the Audit Committee Charter is posted on our corporate website at: www.shenyangkeji.com .

Compensation Committee

We established our Compensation Committee in February 2009. The Compensation Committee currently consists of Liu Hui Fang and Tian Li Zhi, each of whom is an independent director. Liu Hui Fang serves as the Chairman of the Compensation Committee. The Compensation Committee is responsible for the design, review, recommendation and approval of compensation arrangements for our directors, executive officers and key employees, and for the administration of our equity incentive plans, including the approval of grants under such plans to our employees, consultants and directors. The Compensation Committee also reviews and determines compensation of our executive officers, including our Chief Executive Officer. The Board of Directors has adopted a written charter for the Compensation Committee. A copy of the Compensation Committee Charter is posted on our corporate website at: www.shenyangkeji.com .

Nominating Committee

We established our Nominating Committee in February 2009. The Nominating Committee currently consists of Tian Li Zhi and Zhang Jian’sheng, each of whom is an independent director. Tian Li Zhi is the Chairman of the Nominating Committee. The Nominating Committee assists in the selection of director nominees, approves director nominations to be presented for stockholder approval at our annual general meeting and fills any vacancies on our Board of Directors, considers any nominations of director candidates validly made by stockholders, and reviews and considers developments in corporate governance practices. The Board of Directors has adopted a written charter for the Nominating Committee. A copy of the Nominating Committee Charter is posted on our corporate website at: www.shenyangkeji.com .

Board Leadership Structure and Role in Risk Oversight

Our Board of Directors does not have a policy regarding the separation of the roles of Chief Executive Officer and Chairman of the Board as the Board of Directors believes it is in the best interests of the Company to make that determination based on the position and direction of the Company and the membership of the Board. The Board has determined that having the Company's Chief Executive Officer serve as Chairman is in the best interest of the Company's stockholders at this time. This structure makes the best use of the Chief Executive Officer's extensive knowledge of the Company and its industry, as well as fostering greater communication between the Company's management and the Board.

Tian Li Zhi serves as the Company’s Lead Independent Director. The Lead Independent Director advises the Chairperson of the Board of Directors or otherwise undertakes the following:

assesses the quality, quantity and timeliness of the flow of information from management as necessary for the independent directors to perform their duties effectively and responsibly, including requesting that certain material be included in materials prepared for the Board of Directors by management; and

moderates executive sessions of the Board’s independent directors and acts as a liaison between the independent directors and the Chairperson of the Board and/or Chief Executive Officer on appropriate issues.

Companies face a variety of risks, including credit risk, liquidity risk, and operational risk. The Board of Directors believes an effective risk management system will (1) timely identify the material risks that the Company faces, (2) communicate necessary information with respect to material risks to senior executives and, as appropriate, to the Board or Audit Committee, (3) implement appropriate and responsive risk management strategies consistent with Company's risk profile, and (4) integrate risk management into Company decision-making.

The Board has designated the Audit Committee to take the lead in overseeing risk management and the Audit Committee discusses with management the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures, including the Company’s risk assessment and risk management policies.

In addition to the formal compliance program, the Board encourages management to promote a corporate culture that incorporates risk management into the Company's corporate strategy and day-to-day business operations. The Board also continually works, with the input of the Company's executive officers, to assess and analyze the most likely areas of future risk for the Company.

Code of Business Conduct and Ethics

Our Board of Directors has adopted a code of ethics, which applies to all our directors, officers and employees. Our code of ethics is intended to comply with the requirements of Item 406 of Regulation S-K. A copy of our code of ethics will be posted on our corporate website at www.shenyangkeji.com . We will provide our code of ethics in print without charge to any stockholder who makes a written request to: Corporate Secretary, ZST Digital Networks, Inc., 206 Tongbo Street, Boyaxicheng Second Floor, Zhengzhou City, Henan Providence, People’s Republic of China 450007. Any waivers of the application and any amendments to our code of ethics must be made by our Board of Directors. Any waivers of, and any amendments to, our code of ethics will be disclosed promptly on our corporate website.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Company’s directors and officers, and persons who beneficially own more than 10% of a registered class of the Company’s equity securities, to file reports of beneficial ownership and changes in beneficial ownership of the Company’s securities with the SEC on Forms 3, 4 and 5. Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.

Based solely on the Company’s review of the copies of the forms received by it during the fiscal year ended December 31, 2010 and written representations that no other reports were required, the Company believes that the following person(s) who, at any time during such fiscal year, was a director, officer or beneficial owner of more than 10% of the Company’s common stock failed to comply with all Section 16(a) filing requirements during such fiscal year:

Name		Number of Late Reports		Number of Transactions not Reported on a Timely Basis		Failure to File a Required Form
John Fan Chen		1		1		Form 4

ITEM 11. EXECUTIVE COMPENSATION.

Risks Arising From Compensation Policies and Practices

During 2010, the Company and the Compensation Committee conducted a risk assessment of the Company's compensation policies and practices and concluded that they do not motivate imprudent risk taking. In this regard, the Company notes that:

the Company's annual incentive compensation is based on balanced performance metrics that promote disciplined progress towards longer-term Company goals;

the Company does not offer significant short-term incentives that might drive high-risk investments at the expense of long-term Company value;

the Company's compensation programs are weighted towards offering long-term incentives that reward sustainable performance, especially when considering the Company's executive share ownership and holding requirements; and

the Company's compensation awards are capped at reasonable and sustainable levels, as determined by a review of the Company's economic position and prospects, as well as the compensation offered by comparable companies.

The Company's compensation policies and practices were evaluated to ensure that they do not foster risk taking above the level of risk associated with the Company's business model. For this purpose, the Company and the Compensation Committee considered the Company's growth and return performance, volatility and leverage, and the time horizon of the Company's investments; and compared them to the performance metrics, leverage, and time horizon of the Company's compensation policies and practices. Based on this assessment, the Company concluded that it has a balanced pay and performance program that does not promote excessive risk taking.

Summary Compensation Table

The following table sets forth information concerning the compensation for the two fiscal years ended December 31, 2010, 2009 and 2008 of our principal executive officer, our principal financial officer, our three most highly compensated officers whose annual compensation exceeded $100,000, and up to two additional individuals for whom disclosure would have been required but for the fact that the individual was not serving as an executive officer of the registrant at the end of the last fiscal year (the “named executive officers”).

Name and Position	Year	Salary		Bonus			Option Awards			Total
Zhong Bo (1)	2010	$	44,479	$	—		$	—		$	44,479
Chief Executive Officer	2009		14,941		—			—			14,941
	2008		6,594		—			—			6,594

John Chen (2)	2010	$	150,000	$	—		$	51,250	(4)	$	201,250
Chief Financial Officer	2009		37,500		10,274	(3)		172,863	(4)		220,637

(1)

Mr. Zhong was appointed the Company’s Chief Executive Officer and Chairman of the Board upon the closing of the Share Exchange on January 9, 2009. The compensation Mr. Zhong received in 2008 was paid by Zhengzhou ZST, our wholly-owned subsidiary which we acquired upon the closing of the Share Exchange on January 9, 2009.

(2)	Mr. Chen was appointed the Company’s Chief Financial Officer effective on October 20, 2009.

(3)	Pursuant to his employment agreement, Mr. Chen was granted a signing bonus, which is calculated as follows: $410.96 per day multiplied by the number of days between September 25, 2009 and October 20, 2009.

(4)

Pursuant to his employment agreement, Mr. Chen was granted options to purchase 25,000 and 12,500 shares of the Company’s common stock at an exercise price of $8.00 per share and $6.72 per share on October 20, 2009 and 2010, respectively. The amounts disclosed reflect the value of awards for grants of non-qualified stock options. These non-qualified stock options are performance-based compensation for purposes of Section 162(m) of the Internal Revenue Code and reflect the full grant date fair values in accordance with FASB ASC Topic 718. For assumptions used in calculation of option awards, see note 10 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010 and 2009.

Grants of Plan-Based Awards in 2010

The following table summarizes our awards made to our named executive officers in 2010.

Name	Grant Date(1)	Number of Shares of Common Stock Underlying Options		Exercise of Base Price of the Options Award ($/Sh)		Grant Date of Fair Value of Stock and Options Awarded ($)
Zhong Bo Chairman of the Board and Chief Executive Officer	—		—		—		—

John Chen Chief Financial Officer (1)	10/20/2010		12,500		6.72		51,250

Outstanding Equity Awards at 2010 Fiscal Year End

The following table presents the outstanding equity awards held by each of the named executive officers as of the fiscal year ended December 31, 2010.

Name	Number of Securities Underlying Unexercised Options (#) Exercisable		Number of Securities Underlying Unexercised Options (#) Unexercisable		Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)		Option Exercise Price ($)		Option Expiration Date
Zhong Bo Chairman of the Board and Chief Executive Officer		—		—		—		—	—

John Chen Chief Financial Officer (1)		25,000 12,500		— 12,500		— —		8.00 6.72	10/20/2014 10/20/2015

(1)

On October 20, 2009, Mr. Chen was granted 25,000 shares of options, which are immediately exercisable but, to the extent they are exercised, will be subject to a repurchase right of the Company, which will lapse as follows: 50% of the options vested six months after October 20, 2009 and the remaining 50% vested 12 months after October 20, 2009. The options expire five years from the grant date, provided, however, that Mr. Chen remains continuously employed by the Company during the applicable five-year period. On October 20, 2010, Mr. Chen was granted another 12,500 shares of options, which vest six month after the granted date.

Option Exercises and Stock Vested in Fiscal 2010

There were no option exercises or stock vested in fiscal 2010.

Employment Agreements

Chairman Zhong Bo

On December 13, 2009, we entered into an employment agreement with Zhong Bo, our Chief Executive Officer and Chairman of the Board, which had a term of three years. According to the agreement, Mr. Zhong would be paid an annual salary of RMB 102,000, which is approximately USD$14,941.

On December 13, 2010, we entered into a new employment agreement with Mr. Zhong, effective as of January 1, 2011 (the “Effective Date”). Pursuant to the employment agreement, Mr. Zhong is entitled to an annual base salary of RMB 1,880,000 (equal to approximately US$282,000), subject to modification from time to time by written agreement between us and Mr. Zhong. Payment of salary will be made on a quarterly basis, in advance of each quarter of work performed. The initial term of the employment agreement will be 12 months from the Effective Date, with automatic 12-month extensions unless either party provides 90 days written notice of termination prior to the expiration of a term.

We and Mr. Zhong may terminate the agreement with 30 days prior written notice. In the event we terminates the employment of Mr. Zhong without cause, as defined in the employment agreement, we will pay Mr. Zhong on the date of termination the amount of his salary that is earned but unpaid, if any, due under the employment agreement as of the date of termination. ”Cause” is defined in the employment agreement any of the following: an act or acts of dishonesty, fraud, embezzlement, or misappropriation of funds or proprietary information by Mr. Zhong in connection with his employment duties or responsibilities; a conviction of or plea of nolo contendere to a felony or a crime involving moral turpitude (other than minor traffic violations) by Mr. Zhong; a material breach of Mr. Zhong’s obligations under the employment agreement including failure to perform his job duties satisfactorily or failure to follow the Company’s policies or any directive of the Company if not cured by Mr. Zhong within 10 days upon receipt of written notice from the Company; or Mr. Zhong’s willful or gross misconduct in connection with his employment duties. If Mr. Zhong terminates employment for Good Reason, as defined in the employment agreement, Mr. Zhong will also be entitled to a severance payment in an amount equal to three month’s salary. “Good Reason” is defined in the employment agreement as, without Mr. Zhong’s written consent, a material breach or default of any term of the employment agreement by the Company or any material reduction in Mr. Zhong’s duties, position, authority or responsibilities with the Company relative to the duties, position, authority or responsibilities in effect immediately prior to such reduction; provided the Company has not cured or remedied such Good Reason within 15 days after written notice of the Good Reason from Mr. Zhong.

Pursuant to the employment agreement, we agree to grant to Mr. Zhong 60,000 restricted shares of our common stock (the "Initial Grant") under our 2010 Omnibus Incentive Plan (the “Stock Award”) upon the Effective Date. We made such grant on the Effective Date. The Stock Award will vest in equal monthly installments of 5,000 shares per month over the initial 12-month period of the employment agreement. The unvested restricted shares are subject to forfeiture if Mr. Zhong does not meet certain conditions such as continued employment over a specified forfeiture period and/or the material breach of certain terms and conditions over the forfeiture period. The “restricted period” is defined as the period beginning on the grant date and ending on the date the restricted shares, or such applicable portion of the restricted shares, are deemed vested under the terms and conditions under the restricted stock agreement. In addition, pursuant to the terms of the employment agreement, Mr. Zhong will be entitled to an additional grant of 60,000 shares of restricted stock on the 12-month anniversary date of the Effective Date. Vesting for the additional grant of restricted shares will be the same as the Initial Grant.

Dr. John Chen

On October 8, 2009, we entered into an employment agreement with Dr. Chen regarding his employment by the Company as its new Chief Financial Officer effective on October 20, 2009 (the "Effective Date"). Pursuant to the employment agreement, Dr. Chen is entitled to a base salary at an annual rate of $150,000. Dr. Chen was also granted a signing bonus which is calculated as follows: $410.96 per day multiplied by the number of days between September 25, 2009 and the Effective Date. The initial term of the employment agreement will be eighteen (18) months, with automatic one-year extensions. Upon the Effective Date, we also granted Dr. Chen options to purchase 25,000 shares of the common stock of the Company at an exercise price of $8.00 per share (the “Initial Options”). The Initial Options were immediately exercisable but, to the extent they are exercised, are subject to a repurchase right of the Company, which will lapse as follows: 50% of the Initial Options vested six (6) months after the Effective Date and the remaining 50% vested twelve (12) months after the Effective Date. On October 20, 2010, Dr. Chen was granted additional options to purchase 12,500 shares of the common stock of the Company at an exercise price equal to the market price on the grant date that are not immediately exercisable, and which will vest six (6) months from the date of grant (the “Subsequent Options”). The Initial Options and Subsequent Options will expire five (5) years from their respective grant dates, provided, however, that Dr. Chen remains continuously employed by the Company during the applicable five-year period.

Zhong Lin

On November 14, 2009, we entered into a Retention Agreement with Mr. Zhong Lin, our Chief Operating Officer, a member of our Board of Directors, and son of Mr. Zhong Bo, CEO and Chairman of our Board of Directors. Pursuant to the Retention Agreement, Mr. Zhong will receive a one-time retention payment equal to $285,000 if Mr. Zhong remains continuously employed with us for a period of 24 months from November 14, 2009. We advanced the entire retention amount upon the sign of the agreement, which will be earned ratably over a period of 24 months. Upon the occurrence of a “disqualifying termination,” as defined below, Mr. Zhong would be required to return the pro-rata amount of the retention amount based on a daily amortization rate of $390.41 times the number of days remaining from the termination date to the expiration date to us within 10 days of the termination date. The Retention Agreement defines “disqualifying termination” as a termination or discontinuance of Mr. Zhong’s active full-time employment based on a determination by the Company that Mr. Zhong is engaging or has engaged in one or more of the following: (i) commission of a felony or any other crime with respect to which imprisonment is a possible punishment; (ii) willful misconduct in the performance of his duties which is in the good faith judgment of the Company materially injurious to the Company, its customers, employees, suppliers, or shareholders; (iii) acts of disloyalty, gross negligence, willful misconduct, material dishonesty or refusal to perform his duties in good faith; or (iv) the willful breach of any written policy, code or procedure of the Company. In addition, disqualifying termination is further defined to include the termination or discontinuance of Mr. Zhong’s active full-time employment by Mr. Zhong for any reason other than death or disability.

Potential Payments Upon Termination or Change-in-Control

In the event of the termination of Mr. Chen’s employment under his employment agreement, the Company shall pay Mr. Chen on the date of termination only the amount of his salary that is earned but unpaid as of the date of termination, as well as any accrued but unused paid leave and any unreimbursed business expenses incurred as of the termination date. In the event of the termination of Mr. Chen’s employment for Good Reason (as defined in the employment agreement), the Company shall pay Mr. Chen a severance payment in an amount equal to three (3) months of Mr. Chen’s annual salary at the time of termination, less applicable statutory deductions and withholdings, to be paid, at the Company’s discretion, in a lump sum or such regular intervals over the 3-month period as shall be determined by the Company, provided that Mr. Chen signs a standard release of all claims as presented by the Company. In the event of the termination of Mr. Chen’s employment without Cause (as defined in the employment agreement), the Company shall pay Mr. Chen a severance payment in an amount equal to Mr. Chen’s annual salary at the time of termination for remainder of the term of employment, less applicable statutory deductions and withholdings, to be paid, at the Company’s discretion, in a lump sum or such regular intervals over the period as shall be determined by the Company, provided that Mr. Chen signs a standard release of all claims as presented by the Company.

Director Compensation

Name

Fees Earned

or Paid in

Cash

($)

Stock

Awards

($)

Option

Awards

($)

Non-Equity

Incentive Plan

Compensation

($)

Change in

Pension Value

and

Nonqualified

Deferred

Compensation

Earnings

All Other

Compensation

($)

Total

($)

Yang Ai Mei

Tian Li Zhi

Liu Hui Fang

Zhang Jian’sheng(1)

Sheng Yong (2)

(1)

Appointed in August 2010.

(2)

Resigned in August 2010.

The Company did not and does not currently have an established policy to provide compensation to members of its board of directors for their services in that capacity. The Company intends to develop such a policy in the near future.

Indemnifications of Directors and Executive Officers and Limitations of Liability

Under Section 145 of the General Corporation Law of the State of Delaware, we can indemnify our directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act. Our certificate of incorporation provides that, pursuant to Delaware law, our directors shall not be liable for monetary damages for breach of the directors’ fiduciary duty of care to us and our stockholders. This provision in the certificate of incorporation does not eliminate the duty of care, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director’s duty of loyalty to us or our stockholders, for acts or omissions not in good faith or involving intentional misconduct or knowing violations of the law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director’s responsibilities under any other law, such as the federal securities laws or state or federal environmental laws.

Our bylaws provide for the indemnification of our directors to the fullest extent permitted by the Delaware General Corporation Law. Our bylaws further provide that our board of directors has discretion to indemnify our officers and other employees. We are required to advance, prior to the final disposition of any proceeding, promptly on request, all expenses incurred by any director or executive officer in connection with that proceeding on receipt of an undertaking by or on behalf of that director or executive officer to repay those amounts if it should be determined ultimately that he or she is not entitled to be indemnified under the bylaws or otherwise. We are not, however, required to advance any expenses in connection with any proceeding if a determination is reasonably and promptly made by our board of directors by a majority vote of a quorum of disinterested board members that (i) the party seeking an advance acted in bad faith or deliberately breached his or her duty to us or our stockholders and (ii) as a result of such actions by the party seeking an advance, it is more likely than not that it will ultimately be determined that such party is not entitled to indemnification pursuant to the applicable sections of its bylaws.

We have been advised that in the opinion of the Securities and Exchange Commission, insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event a claim for indemnification against such liabilities (other than our payment of expenses incurred or paid by our director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

We may enter into indemnification agreements with each of our directors and officers that are, in some cases, broader than the specific indemnification provisions permitted by Delaware law, and that may provide additional procedural protection. As of the closing of the Share Exchange, we have not entered into any indemnification agreements with our directors or officers, but may choose to do so in the future. Such indemnification agreements may require us, among other things, to:

indemnify officers and directors against certain liabilities that may arise because of their status as officers or directors;

advance expenses, as incurred, to officers and directors in connection with a legal proceeding, subject to limited exceptions; or

obtain directors’ and officers’ insurance.

At present, there is no pending litigation or proceeding involving any of our directors, officers or employees in which indemnification is sought, nor are we aware of any threatened litigation that may result in claims for indemnification.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee of the Board of Directors is composed of the following two Board members: Liu Hui Fang (Chair) and Tian Li Zhi. No member of the Compensation Committee is a former or current officer or employee of the Company or had any relationship requiring disclosure under Item 404 of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended. No interlocking relationship exists between our board of directors and the board of directors or compensation committee of any other company.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

1. Financial Statements: See “Index to Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K.

2. Financial Statement Schedules: None.

3. Exhibits: The exhibits listed in the accompanying “Exhibit Index” are filed or incorporated by reference as part of this Annual Report on Form 10-K.

Exhibit Index

Exhibit No.		Exhibit Description

2.1		Equity Purchase Agreement dated October 10, 2008 by and among Zhong Bo, Wu Dexiu, Huang Jiankang, Sun Hui, Li Yuting and Everfair Technologies, Ltd. (translated to English) (incorporated by reference from Exhibit 2.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2009).

2.2		Share Exchange Agreement dated December 11, 2008 by and among the Registrant, World Orient Universal Limited and all of the stockholders of World Orient Universal Limited (incorporated by reference from Exhibit 2.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2009).

2.3		Amendment No. 1 to Share Exchange Agreement dated January 9, 2009 by and among the Registrant, World Orient Universal Limited and all of the stockholders of World Orient Universal Limited (incorporated by reference from Exhibit 2.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2009).

3.1		Certificate of Incorporation (incorporated by reference from Exhibit 3.1 to the Registration Statement on Form 10-SB filed with the Securities and Exchange Commission on November 26, 2007).

3.2		Bylaws (incorporated by reference from Exhibit 3.2 to the Registration Statement on Form 10-SB filed with the Securities and Exchange Commission on November 26, 2007).

3.3		Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock as filed with the Secretary of State of Delaware on January 5, 2009 (incorporated by reference from Exhibit 3.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2009).

3.4		Certificate of Ownership and Merger effecting name change filed with the Secretary of State of Delaware on January 9, 2009 (incorporated by reference from Exhibit 3.4 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2009).

3.5		Certificate of Amendment to the Company’s Certificate of Incorporation effecting reverse stock split as filed with the Secretary of State of Delaware on October 6, 2009 (incorporated by reference from Exhibit 3.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 7, 2009).

4.1		Form of Warrant dated January 3, 2007 (incorporated by reference from Exhibit 4.1 to the Registration Statement on Form 10-SB (File No. 000-52934) filed with the Securities and Exchange Commission on November 26, 2007).

4.2		ZST Digital Networks, Inc. 2010 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 25, 1010).

4.3		Form of Stock Option Agreement for 2010 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on October 19, 2010).

4.4		Form of Restricted Stock Agreement for 2010 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on October 19, 2010).

4.5		Form of Restricted Stock Unit Agreement for 2010 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on October 19, 2010).

4.6		Form of Stock Appreciation Rights Agreement for 2010 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on October 19, 2010).

10.1		Form of Subscription Agreement (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2009).

10.2		Registration Rights Agreement dated January 9, 2009 by and between the Registrant and the Stockholders (incorporated by reference from Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2009).

10.3		Share and Warrant Cancellation Agreement dated January 9, 2009 by and between the Registrant and the Stockholders (incorporated by reference from Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2009).

10.4		Promissory Note dated January 9, 2009 by and between SRKP 18, Inc. and WestPark Capital, Inc (incorporated by reference from Exhibit 10.4 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2009).

10.5		Form of 2008 Employment Agreement entered into with executive officers indicated in Schedule A attached to the Form of Agreement (translated to English) (incorporated by reference from Exhibit 10.5 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2009).

10.6		Patent License Agreement dated January 9, 2009 by and between Zhengzhou Shenyang Technology Company Limited and Zhong Bo (translated to English) (incorporated by reference from Exhibit 10.6 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2009).

10.7		House Lease Agreement dated August 29, 2007 by and between Zhengzhou Green City Advertisement Co., Ltd. And Zhengzhou Shenyang Technology Company Limited (translated to English) (incorporated by reference from Exhibit 10.7 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2009).

10.8		Accounts Receivable Financing Agreement dated January 4, 2008, as amended, by and between Zhengzhou Shenyang Technology Company Limited and Raiffeisen Zentralbank Oesterreich AG Beijing Branch (translated to English) (incorporated by reference from Exhibit 10.8 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2009).

10.9		Receivable Pledge Agreement dated January 4, 2008 by and between Zhengzhou Shenyang Technology Company Limited and Austria Central Cooperation Bank Beijing Branch (translated to English) (incorporated by reference from Exhibit 10.9 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2009).


10.10		Form of Common Stock Purchase Agreement dated January 14, 2009 (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 21, 2009).

10.11		House Lease Agreement dated April 24, 2009 by and between Zhengzhou Zhong Xing Real Estate Co., Ltd. And Zhengzhou Shenyang Technology Company Limited (translated to English) (incorporated by reference from Exhibit 10.1 to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on June 12, 2009).

10.12 and *		Value Added Service Cooperation Agreement dated March 19, 2009 by and between China Unicom Henan Branch and Zhengzhou Shenyang Technology Company Limited (translated to English).

10.13		Employment Agreement dated October 8, 2009 by and between the Registrant and John Chen, M.D. (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 9, 2009).

10.14		Stock Option Agreement by and between the Registrant and John Chen, M.D. (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 21, 2009).

10.15		Form of Stock Purchase Agreement by and between the Registrant and John Chen, M.D. (incorporated by reference from Exhibit 10.15 to the Registration Statement on Form S-1/A (File No. 333-160343) filed with the Securities and Exchange Commission on October 16, 2009).

10.16		GPS Device Supply and Terminal Service Agreement dated October 25, 2009 (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 10, 2009).

10.17		Retention Agreement dated November 14, 2009 by and between the Registrant and Zhong Lin (incorporated by reference from Exhibit 10.17 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2010).

10.18		Employment Agreement dated December 13, 2009 by and between the Registrant and Zhong Bo (incorporated by reference from Exhibit 10.18 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2010).

10.19		Employment Agreement dated December 14, 2009 by and between the Registrant and Zhong Lin (incorporated by reference from Exhibit 10.19 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2010).

10.20		Employment Agreement dated December 13, 2009 by and between the Registrant and Xue Na (incorporated by reference from Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2010).

10.21		Consulting Agreement dated December 30, 2009 by and between the Registrant and Finance Access, Inc. (incorporated by reference from Exhibit 10.21 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2010).

10.22		Professional Services Agreement dated October 28, 2009 by and between the Registrant and Fabulous Worldwide Limited (incorporated by reference from Exhibit 10.22 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2010).

10.23		Professional Services Agreement dated October 28, 2009 by and between the Registrant and Practical Worldwide Limited (incorporated by reference from Exhibit 10.23 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2010).


10.24		Employment Agreement with Mr. Zhong Bo dated December 13, 2010, effective as of January 1, 2011 (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 14, 2010).

10.25***		Purchase Agreement dated March 12, 2010 for 27th-29th Floors (Commercial House) of ITC Kung Kuan entered into by and between Zhengzhou Shenyang Technology Co., Ltd and Zhengzhou Zhong Xing Real Estate Co., Ltd (translated to English).

10.26		Purchase Agreement dated December 29, 2010 for 3rd-4th Floors (Commercial House) of ITC Kung Kuan entered into by and between Zhengzhou Shenyang Technology Co., Ltd and Zhengzhou Zhong Xing Real Estate Co., Ltd (translated to English) (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 5, 2011).

10.27**		Broadband IP Internet Access Circuit Lease Agreement dated July 15, 2009 by and among Zhengzhou Shenyang Technology Co., Ltd and China Unicom Network Communications Co., Ltd. (incorporated by reference from Exhibit 10.1 to the Registration Statement on Form S-3 filed with the Securities and Exchange Commission on January 7, 2011).

10.28		ZST Digital Networks, Inc. 2010 Omnibus Incentive Plan (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 25, 2010).

14.1***		Code of Business Conduct and Ethics.

23.1***		Consent of BDO China Li Xin Da Hua CPA Co., Ltd., a BDO member firm

23.2***		Consent of Kempisty & Company Certified Public Accountants PC.

21.1		List of Subsidiaries (incorporated by reference from Exhibit 21.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2010).

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

The Registrant has applied with the Secretary of the Securities and Exchange Commission for confidential treatment of certain information pursuant to Rule 24b-2 of the Securities Exchange Act of 1934. The Registrant has filed separately with its application a copy of the exhibit including all confidential portions, which may be made available for public inspection pending the Commission’s review of the application in accordance with Rule 24b-2.

***	Previously filed.

SIGNATURES

Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

	ZST DIGITAL NETWORKS, INC. (Registrant)

August 2, 2011	By:	/s/ Zhong Bo
		Zhong Bo
		Chief Executive Officer and Chairman of the Board (Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SIGNATURE	TITLE	DATE

/s/ Zhong Bo	Chief Executive Officer and Chairman of the Board	August 2, 2011
Zhong Bo	(Principal Executive Officer)

/s/ Henry H. Ngan	Chief Financial Officer	August 2, 2011
Henry H. Ngan	(Principal Financial and Accounting Officer)

*	Chief Operating Officer and Director	August 2, 2011
Zhong Lin

*		August 2, 2011
Yang Ai Mei	Director

*		August 2, 2011
Tian Li Zhi	Director

*		August 2, 2011
Zhang Jian’sheng	Director

*		August 2, 2011
Liu Hui Fang	Director

* By: /s/ Zhong Bo

Zhong Bo, as Attorney in Fact

Attached files

ZST Digital Networks, Inc. Reports

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