The following discussion and analysis of our company's financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors.

We are a company with limited liability incorporated in 2007 under the laws of the Cayman Islands. Headquartered in Beijing, we provide products and services to oil and gas companies and their affiliates through our Domestic Companies. As the company contractually controlling the Domestic Companies, we are the center of strategic management, financial control and human resources allocation.

Our business is mainly focused on the upstream sectors of the oil and gas industry. We derive our revenues from the sales and provision of (1) hardware products, (2) software products, and (3) services. Our products and services involve most of the key procedures of the extraction and production of oil and gas, and include automation systems, equipment, tools and on-site technical services.

Our VIEs provide the oil and gas industry with equipment, production technologies, automation and services to enhance our customers' efficiency.

• Nanjing Recon: Nanjing Recon is a high-tech company that specializes in automation services for oilfield companies. It mainly focuses on providing automation solutions to the oil exploration industry, including monitoring wells, automatic metering to the joint station production, process monitor, and a variety of oilfield equipment and control systems.

• BHD: BHD is a high-tech company that specializes in transportation equipment and stimulation productions and services. Possessing proprietary patents and substantial industry experience, BHD has built up stable and strong working relationships with the major oilfields in China.

Business Outlook

The oilfield engineering and technical service industry is generally divided into five sections: (1) exploration, (2) drilling and completion, (3) testing and logging, (4) production and (5) oilfield construction. Our businesses have mainly focused on production processes. As of this year, we are also expanding our business to well completion and horizontal well down-hole service process. We still believe that many existing oil wells and oilfields are in need of renewal and improvement on their current equipment to maintain production. We also believe that as many new wells are developed, our gathering and transferring equipment will be in great need. Accordingly, in the next year, we will focus on the following areas.

Measuring Equipment and Service. "Digital oil field" and the management of oil companies are highly regarded. We believe our oilfield Supervisory Control and Data Acquisition ("SCADA") and related technical support services will address the needs of the oil well automation system market, for which we forecast strong needs in the short term. Through early cooperation with CNPC on Turkmenistan, we have developed our experience in this market. Although bidding has not yet commenced, we will continue pursuing overseas business projects in the coming second phase construction.

Gathering and Transferring Equipment. With more new wells developed, our management anticipates that demand for our furnaces and burners will grow more compared to last year, especially in the Tuha Oilfield and Xinjiang oilfield.

Fracturing service. We believe we cooperated well with Zhongyuan Oilfield in 2012 and expect to continue growing revenue from fracturing and related stimulation services in the coming year.

New product line. Design and development of down-hole tools has always been an important technique for oilfield companies. Recently, this market has developed very rapidly. After a year test project for our client, we have developed experience with this technology and our products and servers have been accepted by our client. We expect revenue from this business in the coming year.

In addition to our business development, our management will monitor our cash flows very closely to make sure our Company can meet our short-term obligations and to balance business development with our capital requirements.

Recent Industry Developments

Despite uncertainty in the energy industry related to such matters as fluctuating prices and future opportunities for oil companies, our management believes there are still many factors to support our long-term development:

(1) The opening of the Chinese oil industry to participation by non-state owned service providers and vendors played an increasingly important role in the high-end oilfield service segment to allow competition based on efficiency and price. As oil and gas fields are depleted, it becomes more challenging to find and convert reserves into usable energy sources. As the industry has permitted competition by private companies and oil companies have formed separate service companies, high-tech service has gradually opened up to private companies.

(2) Speeding up the development of unconventional hydrocarbon resources such as shale gas and coal bed methane will bring more requirements of related technic and service. China is rich in unconventional hydrocarbon resources, but new exploration and development technology breakthroughs are urgently needed; and

(3) Overseas assets of Chinese oilfield companies increased gradually, and they will provide more opportunity for domestic service companies to participate in foreign projects.

Management is focus on these factors and will seek to extend our business on the industrial chain, like providing more integrated services and incremental measures and growing our business from a predominantly up-ground business to include some down-hole services as well.

Growth Strategy

As a smaller local company, it is our basic strategy to focus on developing our onshore oilfield business, i.e. the upstream of the industry. Due to the remote location and difficult environment of China's oil and gas fields, foreign competitors rarely enter those fields.

Large domestic oil companies prefer to focus on their exploration and development businesses to earn higher margins and keep their competitive advantage. With regard to private oilfield service companies, 90% specialize in the manufacture of drilling and production equipment. Thus, the market for technical support and project service is still in its early stage. Our management focuses on providing high quality products and service at oilfields where we have a geographical advantage. Such strategy allows us to avoid conflicts of interest with bigger suppliers of drilling equipment and keep our leading position within the market segment. Our mission is to increase the automation and safety levels of industrial petroleum production in China, and improve its efficiency and effectiveness through advanced technologies. At the same time, we are always looking to improve our business and to increase our earning capability.

Factors Affecting Our Results of Operations

Our operating results in any period are subject to the general conditions typically affecting the Chinese oilfield service industry including:

• the amount of spending by our customers, primarily those in the oil and gas industry;

• growing demand from large corporations for improved management and software designed to enhance corporate performance;

• the procurement processes of our customers, especially those in the oil and gas industry;

• competition and related pricing pressure from other oilfield service solution providers, especially those targeting the oil and gas industry in China;

• the ongoing development of the oilfield service market in China; and

• inflation and other factors.

Unfavorable changes in any of these general conditions could negatively affect the number and size of the projects we undertake, the number of products we sell, the amount of services we provide, the price of our products and services or otherwise affect our results of operations.

Our operating results in any period are more directly affected by company-specific factors including:

• our continued ability to lead and to control all affiliated entities;

• our revenue growth;

• the proportion of our business dedicated to large companies;

• our ability to successfully develop, introduce and market new solutions and services;

• our ability to increase our revenues from customers both old and new in the oil and gas industry in China;

• our ability to effectively manage our operating costs and expenses; and

• our ability to effectively implement any targeted acquisitions and/or strategic alliances so as to provide efficient access to the markets in the oil and gas industry.

Estimates and Assumptions

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"), which require us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe that the following policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this quarterly report. Significant accounting estimates reflected in our Company's consolidated financial statements include revenue recognition, allowance for doubtful accounts, and useful lives of property and equipment.

Consolidation of VIEs

We recognize an entity as a VIE if it either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. We consolidate a VIE as its primary beneficiary when we have both the power to direct the activities that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE.

Assets recognized as a result of consolidating VIEs do not represent additional assets that could be used to satisfy claims against our general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIEs.

Revenue Recognition

We recognize revenue when the following four criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been provided; (3) the sales price is fixed or determinable; and
(4) collectability is reasonably assured. Delivery does not occur until products have been shipped or services have been provided to the client and the client has signed a completion and acceptance report, risk of loss has transferred to the client, client acceptance provisions have lapsed, or the Company has objective evidence that the criteria specified in client acceptance provisions have been satisfied. The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved.

Hardware

Revenue from hardware sales is generally recognized when the product is shipped to the customer and when there are no unfulfilled company obligations that affect the customer's final acceptance of the arrangement.

Software

The Company sells self-developed software. For software sales, the Company recognizes revenues in accordance with the provisions of Accounting Standards Codification, Topic 985-605, "Software Revenue Recognition," and related interpretations. Revenue from software is recognized according to project contracts. Contract costs are accumulated during the periods of installation and testing or commissioning. Usually this is short term. Revenue is not recognized until completion of the contracts and receipt of acceptance statements.

Services

The Company provides services to improve software functions and system requirements on separated fixed-price contracts. Revenue is recognized when services are completed and acceptance is determined by a completion report signed by the customer.

Deferred income represents unearned amounts billed to customers related to sales contracts.

Cost of Revenues

When the criteria for revenue recognition have been met, costs incurred are recognized as cost of revenue. Cost of revenues includes wages, materials, handling charges, the cost of purchased equipment and pipes, and other expenses associated with manufactured products and services provided to customers. We expect cost of revenues to grow as our revenues grow. It is possible that we could incur development costs with little revenue recognition, but based upon our past history, we expect our revenues to grow.

Fair Values of Financial Instruments

The carrying amounts reported in the consolidated balance sheets for trade accounts receivable, other receivables, advances to suppliers, trade accounts payable, accrued liabilities, advances from customers and notes payable approximate fair value because of the immediate or short-term maturity of these financial instruments. Long-term other receivables approximate fair value because the interest rate approximates the market rate.

Allowance for Doubtful Accounts

Trade receivables and other receivable accounts are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less a provision made for impairment of these receivables. Provisions are applied to trade and other receivables where events or changes in circumstances indicate that the balance may not be collectible. The identification of doubtful accounts requires the use of judgment and estimates of management. Our management must make estimates of the collectability of our accounts receivable. Management specifically analyzes accounts receivable, historical bad debts, customer creditworthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Our allowance for trade accounts receivable was ¥4,744,584 ($750,761) and ¥2,854,583 on June 30, 2012 and 2011, respectively. Specifically, allowance for trade accounts receivable - related parties on June 30, 2012 and 2011 was ¥1,362,290 ($215,563) and ¥184,728, respectively. Allowance for other receivables on June 30, 2012 and 2011 was ¥475,760 ($75,282) and ¥199,635, respectively. There was no allowance for other receivables from related parties.

Valuation of Long-Lived Assets

We review the carrying values of our long-lived assets for impairment whenever events or changes in circumstances indicate that they may not be recoverable. When such an event occurs, we project undiscounted cash flows to be generated from the use of the asset and its eventual disposition over the remaining life of the asset. If projections indicate that the carrying value of the long-lived asset will not be recovered, we reduce the carrying value of the long-lived asset by the estimated excess of the carrying value over the projected discounted cash flows. In the past, we have not had to make significant adjustments to the carrying values of our long-lived assets, and we do not anticipate a need to do so in the future. However, circumstances could cause us to have to reduce the value of our capitalized software more rapidly than we have in the past if our revenues were to significantly decline. Estimated cash flows from the use of the long-lived assets are highly uncertain and therefore the estimation of the need to impair these assets is reasonably likely to change in the future. Should the economy or the acceptance of our software change in the future, it is likely that our estimate of the future cash flows from the use of these assets will change by a material amount.

The following consolidated results of operations include the results of operations of the Company and its variable interest entities ("VIEs"), BHD, Nanjing Recon and ENI (as to ENI, from July 1, 2010 to December 15, 2010 only). The results of operations are those of the VIEs. On December 16, 2010, ENI changed its equity ownership. We ceased to have the power to direct the activities of ENI that most significantly impact its economic performance as of that date. As a result of the Company's determination to deconsolidate ENI, ENI's results of operations have been consolidated in the Company's results of operations only through December 15, 2010.

Our historical reporting results are not necessarily indicative of the results to be expected for any future period.

Revenue

Revenues. Our total revenues for the year ended June 30, 2012 were ¥75,542,379 ($11,953,476), an increase of ¥11,853,912 or 18.61% from ¥63,688,467 for the year ended June 30, 2011. This was mainly caused by:

(1) Deconsolidation of ENI. For the year ended June 30, 2012, there was no revenue contributed by ENI while that contribution of ENI was ¥18,681,469 for the year ended June 30, 2011. In light of the ownership change of ENI on December 16, 2010, the Company's Audit Committee concluded that ENI is no longer a VIE and the Company should not include ENI's operations in the Company's operating results starting December 16, 2010. After eliminating that factor, our revenue from operations increased about ¥30,535,381, or 67.85%. When results from ENI are included in operations for the period in fiscal year 2011 before it was deconsolidated, the increase from 2011 to 2012 revenue from operations is more moderate.

(2) Recently developed horizontal fracturing business. During this year, Recon BHD signed several contracts with an aggregate contract value of RMB 30 million with Sinopec Zhongyuan oilfield. As of June 30, 2012, we completed about half of the contracts and recognized a corresponding percentage of revenues from the contracts;

(3) Overseas Project. During this year, we also entered into the overseas market by following CNPC. We won a major contract of approximately ¥16,645,000 with CNPC Sichuan Petroleum Administration Bureau to provide it with the Emerson PCS & SIS Systems in its South Yolotan Gas Field 100*108 M3/A Project located in Turkmenistan. As of June 30, 2012, we had provided that equipment and recognized approximately ¥14,717,000 of the contract amount as revenue in 2012.

Cost and Margin

Cost of Revenues. Our cost of revenues includes raw materials and costs related to design, implementation, delivery and maintenance of products and services. All materials and components we need can be purchased or manufactured under contracts. Usually the prices of electronic components do not fluctuate dramatically due to market competition and will not significantly affect our cost of revenues. However, specialized equipment and incentive chemical products may be directly influenced by the price moves of metal and oil. Additionally, the prices of some imported accessories mandated by our clients can also impact our cost.

Our cost of revenues increased by ¥7,800,444, or 17.94%, from ¥43,469,506 in the year ended June 30, 2011 to ¥51,269,950 ($8,112,719) for the same period in 2012.

(1) Costs of operations increased by ¥21,146,542 or 70.20%, which were mainly due to increase of new projects; and

(2) The decrease of costs was mainly due to the deconsolidation of ENI, which accounted for ¥17,632,489 ($2,727,798).

As a percentage of revenues, our cost of remained stable at 67.87% in the year ended June 30, 2012 compared to 68.25% in the fiscal year 2011. Because most of our new vendors are international companies and our clients require us to import their relatively expensive products, our cost of operations is relatively high. Oil and gas production is a dangerous process, so right now domestic oil companies prefer to use more well known mature products. They have begun to implement import substitution strategies by using more domestic self-developed products. We are cooperating with our clients on this so that we can decrease our cost in the long run.

Gross Profit. For the year ended June 30, 2012, our gross profit increased to ¥24,272,429 ($3,840,757) from ¥20,218,961 for the same period in 2011, an increase of ¥4,053,468, or 20.05%. For the year ended June 30, 2012, our gross profit as a percentage of revenue was stable at 32.13%, compared to 31.75% for the year of 2011.

Our management believes that a higher margin level is very important to secure our business. The domestic oilfield service industry in China is becoming more and more competitive. As a small company, we are now switching our role from being a primary products supplier to becoming an advanced products and services integrator so that we can make full use of our knowledge and rich experience in the oilfields production to satisfy our clients' needs. With further exploration and development of oilfields, the level of reserved crude oil gradually decreases, as does the output. A company, which can provide more effective service and safe products to help increase oil well recovery efficiency, will earn higher profit and keep greater flexibility in managing its business. Management believes that specializing in providing packaged customized solutions will increase our long-term competitiveness.

Expenses





                                          For the Years Ended June 30,
                                              2012                2011           Increase          Percentage
?                                                                               (Decrease)           Change
Selling and distribution expenses       ¥      5,054,219      ¥  7,736,091     ¥  (2,681,872 )          (34.67 %)
% of revenue                                        6.69 %           12.15 %           (5.46 %)             --
General and administrative expenses           22,755,891        32,055,652        (9,299,761 )          (29.01 %)
% of revenue                                       30.12 %           50.33 %          (20.21 %)             --
Operating expenses                      ¥     27,810,110      ¥ 39,791,743     ¥ (11,981,633 )          (30.11 %)

Selling and Distribution Expenses. Selling and distribution expenses consist primarily of salaries and related expenditures of our sales and marketing department, sales commissions, costs of our marketing programs (such as public relations, advertising and trade shows), and an allocation of our facilities and depreciation expenses. Selling expenses decreased by ¥2,681,872, or 34.67%, from ¥7,736,091 for the year ended June 30, 2011 to ¥5,054,219 ($799,756) for the same period of 2012 as a result of focusing our selling efforts on a more limited number of clients. The percentage of selling expenses in revenue decreased from 12.15% to 6.69%. Our management believes the selling and distribution expenses are reasonable and expect selling and distribution expenses as a percentage of revenue will remain around 10% of our revenue in the long run.

General and Administrative Expenses. General and administrative expenses consist primarily of costs from our human resources organization, facilities costs, provision for bad debt, depreciation expenses, professional advisor fees, audit fees and other expenses incurred in connection with the operations. General and administrative expenses decreased by ¥9,299,761, or 29.01%, from ¥32,055,652 in the year ended June 30, 2011 to ¥22,755,891 ($3,600,787) for the same period of 2012. Of the decrease, it was mainly caused by the deconsolidation of ENI, offset by the following operational general and administrative expenses: (1) increased expenses related to research and development activities, (2) increased salaries by our VIEs to attract talent, (3) increased allowance for accounts receivable and (4) increased expenses related to SOX compliance services. General and administrative expenses were 30.12% of total revenues for the year ended June 30, 2012 and 50.33% of total revenues for the same period in 2011. Overall, this percentage is high and our management will focus on this issue and take steps to reduce these expenses.

Net Income



                                            For the Years ended June 30,
                                                               Increase     Percentage
             ?               ?     2012     ?     2011      ? (Decrease)  ?   Change
Loss from operations         ¥  (3,537,681) ¥  (19,572,782) ¥  16,035,101      (81.93%)
Interest income              ?      335,517 ?         1,463 ?     334,054 ?  22,833.49%
Interest expense and foreign    (1,009,127)       (564,654)     (444,473)        78.72%
currency adjustments
Other income (loss)                (78,097)         279,664     (357,761)     (127.93%)
Subsidy income                      554,856         822,545     (267,689)      (32.54%)
Loss on deconsolidation                  -      (8,989,614)     8,989,614         100%?
Loss before income taxes        (3,734,532)    (28,023,378)    24,288,846      (86.67%)
Benefit from (provision for) ?      220,050       (665,146)       885,196     (133.08%)
income taxes                                ?               ?             ?
Net income attributable to        (305,653)       (347,851)        42,198      (12.13%)
non-controlling interest
Net loss attributable to        (3,820,135)    (29,036,375)    25,216,240      (86.84%)
ordinary shareholders        ¥              ¥               ¥

Loss from Operations. Loss from operations was ¥3,537,681 ($559,786) for the year ended June 30, 2012, compared to loss from operations of ¥19,572,782 for the same period of 2011, as a result of deconsolidation of ENI, increasing revenues and reducing expenses during this year.

Subsidy Income. We received grants of ¥822,545 and ¥554,856 ($87,798) from the local government for the years ended June 30, 2011 and 2012, respectively. These grants were given by the government in the form of income tax return to support local companies in developing advanced technologies and improving their products.

Loss on Deconsolidation. As a result of the deconsolidation of ENI, we suffered . . .