Research and Development Expenses

Research and development expenses consist primarily of personnel-related expenses, as well as costs associated with new software and hardware development and enhancement. Research and development expenses increased by $0.16 million, or 28.78%, to $0.73 million for the three months ended March 31, 2011, from $0.57 million in the same period of 2010. As a percentage of revenue, research and development expenses accounts for approximately 2.72% of the total revenue for the three months ended March 31, 2011, compared with 2.25% of total revenue for the same period in 2010. Such an increase reflects our efforts in developing DT solutions and improving their profitability.

Selling Expenses

Selling expenses consist primarily of compensation and benefits to our sales and marketing staff, sales and after-sales traveling cost, and other sales related costs. Our selling expenses increased $0.29 million, or 23.68%, to $1.5 million for the three months ended March 31, 2011, from $1.21 million in the corresponding period of 2010. Such increase was due to our heightened efforts in national market expansion which lead to higher travel and telecommunication expenses as well as increased total compensation to the sales and marketing staff.

Income from Operations

Income from operations was $8.92 million in the first quarter of 2011, an increase of 35.83%, or $2.35 million from $6.56 million in the same period in 2010.

Net Income Attributable to the Company

In addition to the factors described above, the effective tax rate declined to 11.78% during the current quarter from 15.48% a year ago as all of the our operating entities qualify for the tax benefits associated with the National High Tech status staring this year.  As such, net income increased $1.94 million, or 30.91 %, to $8.22 million during the three months ended March 31, 2011, from $6.28 million for the same period in 2010.

Net income attributable to the company on a Non-GAAP basis was $ 7.36 million in the first quarter of 2011 versus $ 5.99 million in the first quarter of 2010, an increase of 22.91%.

Cash and Cash Equivalents

As of March 31, 2011, we had $23.77 million in cash and cash equivalents as well as restricted cash, as compared to $26.51 million at the end of 2010.  Cash flow from operating activities for the three months ended March 31, 2011 amounted to $1.90 million while during the same period in the previous year; we experienced a net cash outflow of $11.34 million from operating activities.  

Financial Outlook

For fiscal year 2011, the Company reiterates its guidance with projected revenue in the range of $165 million to $187 million and adjusted net income in the range of $42 million to $45 million, excluding any non-cash expenses as a result of employee stock awards, amortization of intangible assets associated with acquisitions and changes in fair value of contingent considerations.

About Non-GAAP Financial Measures

This press release contains non-GAAP financial measures for earnings that exclude non-cash charges. China Information Technology believes that these non-GAAP financial measures are useful to investors because they exclude non-cash charges that management excludes when it internally evaluates the performance of the Company's business and makes operating decisions, including internal budgeting, and performance measurement, because these measures provide a consistent method of comparison to historical periods. Moreover, management believes these non-GAAP measures reflect the essential operating activities of China Information Technology. Accordingly, management excludes the expense arising from certain non-cash charges when making operational decisions. China Information Technology believes that providing the non-GAAP measures that management uses to its investors is useful to investors for a number of reasons. The non-GAAP measures provide a consistent basis for investors to understand China Information Technology's financial performance in comparison to historical periods. In addition, it allows investors to evaluate China Information Technology's performance using the same methodology and information as that used by China Information Technology's management. Non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment of which charges are excluded from the non-GAAP financial measure. However, China Information Technology's management compensates for these limitations by providing the relevant disclosure of the items excluded.

The following table provides the non-GAAP financial measure and the related GAAP measure and provides a reconciliation of the non-GAAP measure to the equivalent GAAP measure.