---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10Q(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30,
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:001-33774

CHINA SECURITY & SURVEILLANCE TECHNOLOGY,
INC.(Exact name of small business issuer as specified
in its charter)

|Delaware                        | 98-0509431               
|------------------------------- | -------------------------
|(State or other jurisdiction of | (I.R.S. Empl. Ident. No.)
|incorporation or organization)  |                          

13/F, Shenzhen Special Zone Press Tower, Shennan Road
Futian District, Shenzhen, China 518034(Address of principal executive offices, Zip Code)

(86) 755-8351-0888(Registrants
telephone number, including area code)

____________________________________________________________________(Former
name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act during
the past 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 (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files)

Yes [   ]            
No [   ]

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.

|Large Accelerated Filer [   ]                                            | Accelerated Filer [X]          
|------------------------------------------------------------------------ | -------------------------------
|                                                                         |                                
|Non-Accelerated Filer [   ](Do not check if a smaller reporting company) | Smaller reporting company [   ]

Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).

Yes [   ]             No [X]

The number of shares outstanding of each of the issuers
classes of common equity, as of October 22, 2010 is as follows:

|Class of Securities             | Shares Outstanding
|------------------------------- | ------------------
|Common Stock, $0.0001 par value | 89,290,406        

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TABLE OF CONTENTS

|         | Page                                                                                       
|-------- | -------------------------------------------------------------------------------------------
|PART I  
|Item 1.  | Financial Statements                                                                       
|Item 2.  | Management's Discussion and
      Analysis of Financial Condition and Results of Operations
|Item 3.  | Quantitative and Qualitative Disclosures About
      Market Risk                           
|Item 4.  | Controls and Procedures                                                                    
|         |                                                                                            
|PART II 
|Item 1.  | Legal Proceedings                                                                          
|Item 1A. | Risk Factors                                                                               
|Item 2.  | Unregistered Sales of Equity Securities and Use
      of Proceeds                          
|Item 3.  | Defaults Upon Senior Securities                                                            
|Item 4.  | (Removed and Reserved)                                                                     
|Item 5.  | Other Information                                                                          
|Item 6.  | Exhibits                                                                                   

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PART IFINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES
|---------------------------------------------------------------------
|CONDENSED CONSOLIDATED BALANCE SHEETS                                
|AS OF SEPTEMBER 30, 2010 (UNAUDITED) AND DECEMBER 31,
      2009     
|Expressed in thousands of U.S. dollars                               
|(Except for share and per share amounts)                             

|ASSETS                                                                                |  
|------------------------------------------------------------------------------------- | -
|                                                                                      |  
|                                                                                      |  
|Cash and cash equivalents                                                             | $
|Accounts receivable, net                                                              |  
|Inventories, net                                                                      |  
|Prepayments and deposits                                                              |  
|Advances to suppliers                                                                 |  
|Other receivables, net                                                                |  
|Deferred tax assets - current portion                                                 |  
|Total current assets                                                                  |  
|                                                                                      |  
|Deposits paid for acquisition of subsidiaries, properties
      and intangible assets |  
|Plant and equipment, net                                                              |  
|Land use rights, net                                                                  |  
|Intangible assets, net                                                                |  
|Goodwill                                                                              |  
|Deferred financing cost, net                                                          |  
|TOTAL ASSETS                                                                          | $

Continued

1

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|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES
|---------------------------------------------------------------------
|CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)                    
|AS OF SEPTEMBER 30, 2010 (UNAUDITED) AND DECEMBER 31,
      2009     
|Expressed in thousands of U.S. dollars                               
|(Except for share and per share amounts)                             

|LIABILITIES AND EQUITY                                                                                                                                                                                                |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -
|                                                                                                                                                                                                                      |  
|                                                                                                                                                                                                                      |  
|CURRENT LIABILITIES                                                                                                                                                                                                   |  
|                                                                                                                                                                                                                      |  
|Notes payable                                                                                                                                                                                                         | $
|Obligations under product financing
      arrangements  short term                                                                                                                                                   |  
|Guaranteed senior unsecured notes payable  short term                                                                                                                                                                |  
|Accounts and bills payable                                                                                                                                                                                            |  
|Accrued expenses                                                                                                                                                                                                      |  
|Advances from customers                                                                                                                                                                                               |  
|Taxes payable                                                                                                                                                                                                         |  
|Payable for acquisition of businesses,
      properties and land use rights                                                                                                                                           |  
|Deferred income                                                                                                                                                                                                       |  
|Total current liabilities                                                                                                                                                                                             |  
|                                                                                                                                                                                                                      |  
|LONG TERM LIABILITIES                                                                                                                                                                                                 |  
|Obligations under product financing arrangements  long
      term                                                                                                                                                    |  
|Guaranteed senior unsecured notes payable 
      long term                                                                                                                                                           |  
|Net deferred tax liabilities                                                                                                                                                                                          |  
|Total liabilities                                                                                                                                                                                                     |  
|                                                                                                                                                                                                                      |  
|EQUITY                                                                                                                                                                                                                |  
|Preferred stock, $0.0001 par value; 10,000,000 shares
      authorized,       0 shares issued and
      outstanding                                                                                                   |  
|                                                                                                                                                                                                                      |  
|Common stock, $0.0001 par
      value;       290,000,000 shares
      authorized       89,290,406 (September
      30, 2010) and       67,866,730 (December
      31, 2009)       shares issued and
      outstanding |  
|Additional paid-in capital                                                                                                                                                                                            |  
|Retained earnings                                                                                                                                                                                                     |  
|Statutory surplus reserve fund                                                                                                                                                                                        |  
|Accumulated other comprehensive income                                                                                                                                                                                |  
|                                                                                                                                                                                                                      |  
|                                                                                                                                                                                                                      |  
|Total equity of the Company                                                                                                                                                                                           |  
|Noncontrolling interest                                                                                                                                                                                               |  
|Total equity                                                                                                                                                                                                          |  
|TOTAL LIABILITIES AND EQUITY                                                                                                                                                                                          | $

See the accompanying notes to condensed consolidated financial
statements

2

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|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES     
|--------------------------------------------------------------------------
|CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
      COMPREHENSIVE INCOME
|FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010
      AND 2009     
|Expressed in thousands of U.S. dollars                                    
|(Except for share and per share amounts)                                  

|                                                                                                                                                                                                                                                                       |   | Three Months Ended September 30, |   |   | Nine Months Ended September 30, |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------------------------------- | - | - | ------------------------------- | -
|                                                                                                                                                                                                                                                                       |   | 2010                             |   |   | 2009                            |  
|                                                                                                                                                                                                                                                                       |   | (Unaudited)                      |   |   | (Unaudited)                     |  
|Revenues                                                                                                                                                                                                                                                               | $ | 182,148                          |   | $ | 159,820                         |  
|Cost of goods sold (including depreciation
      and        amortization for
      the three and
      nine        months ended
      September 30, 2010
      and        2009 of $243, $745,
      $259 and
      $738,        respectively)                          |   | 126,224                          |   |   | 124,484                         |  
|                                                                                                                                                                                                                                                                       |   |                                  |   |   |                                 |  
|Gross profit                                                                                                                                                                                                                                                           |   | 55,924                           |   |   | 35,336                          |  
|Selling and marketing                                                                                                                                                                                                                                                  |   | 2,848                            |   |   | 3,102                           |  
|General and administrative (including
      non-cash        employee
      compensation for the three
      and        nine months ended
      September 30, 2010
      and        2009 of $5,553,
      $18,934, $4,743
      and        $13,319,
      respectively) |   | 14,866                           |   |   | 12,071                          |  
|Depreciation and amortization                                                                                                                                                                                                                                          |   | 2,992                            |   |   | 2,958                           |  
|                                                                                                                                                                                                                                                                       |   |                                  |   |   |                                 |  
|Income from operations                                                                                                                                                                                                                                                 |   | 35,218                           |   |   | 17,205                          |  
|Interest income                                                                                                                                                                                                                                                        |   | 132                              |   |   | 41                              |  
|Gain on modification of convertible notes                                                                                                                                                                                                                              |   | --                               |   |   | 9,315                           |  
|Interest expense                                                                                                                                                                                                                                                       |   | (3,755                           | ) |   | (5,175                          | )
|Other income, net                                                                                                                                                                                                                                                      |   | 311                              |   |   | 441                             |  
|                                                                                                                                                                                                                                                                       |   |                                  |   |   |                                 |  
|Income before income taxes                                                                                                                                                                                                                                             |   | 31,906                           |   |   | 21,827                          |  
|Income taxes                                                                                                                                                                                                                                                           |   | (4,638                           | ) |   | 145                             |  
|                                                                                                                                                                                                                                                                       |   |                                  |   |   |                                 |  
|Net income                                                                                                                                                                                                                                                             |   | 27,268                           |   |   | 21,972                          |  
|Add: Net loss (income) attributable to
      the        noncontrolling
      interest                                                                                                                                                                                  |   | 1                                |   |   | 33                              |  
|                                                                                                                                                                                                                                                                       |   |                                  |   |   |                                 |  
|Net income attributable to the Company                                                                                                                                                                                                                                 |   | 27,269                           |   |   | 22,005                          |  
|Foreign currency translation gain (loss)                                                                                                                                                                                                                               |   | 3,199                            |   |   | (1,535                          | )
|                                                                                                                                                                                                                                                                       |   |                                  |   |   |                                 |  
|Comprehensive income attributable to the                                                                                                                                                                                                                               |   |                                  |   |   |                                 |  
|Company                                                                                                                                                                                                                                                                |   | 30,468                           |   |   | 20,470                          |  
|Comprehensive (loss) income attributable to
      the        noncontrolling
      interest                                                                                                                                                                             |   | (1                               | ) |   | (33                             | )
|                                                                                                                                                                                                                                                                       |   |                                  |   |   |                                 |  
|COMPREHENSIVE INCOME                                                                                                                                                                                                                                                   | $ | 30,467                           |   | $ | 20,437                          |  
|                                                                                                                                                                                                                                                                       |   |                                  |   |   |                                 |  
|NET INCOME PER SHARE                                                                                                                                                                                                                                                   |   |                                  |   |   |                                 |  
|ATTRIBUTABLE TO THE COMPANYS                                                                                                                                                                                                                                          |   |                                  |   |   |                                 |  
|COMMON SHAREHOLDERS                                                                                                                                                                                                                                                    |   |                                  |   |   |                                 |  
|BASIC                                                                                                                                                                                                                                                                  | $ | 0.33                             |   | $ | 0.46                            |  
|DILUTED                                                                                                                                                                                                                                                                | $ | 0.31                             |   | $ | 0.41                            |  
|WEIGHTED AVERAGE NUMBER OF                                                                                                                                                                                                                                             |   |                                  |   |   |                                 |  
|SHARES OUTSTANDING                                                                                                                                                                                                                                                     |   |                                  |   |   |                                 |  
|BASIC                                                                                                                                                                                                                                                                  |   | 82,342,000                       |   |   | 48,352,000                      |  
|DILUTED                                                                                                                                                                                                                                                                |   | 88,000,000                       |   |   | 53,487,000                      |  

See the accompanying notes to condensed consolidated financial
statements

3



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|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES
|---------------------------------------------------------------------
|CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY                
|FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010
      (UNAUDITED)       
|Expressed in thousands of U.S. dollars                               
|(Except for share and per share amounts)                             

Common Stock
    
    
    The Companys ShareholdersAccumulated
    
    
    StatutoryAdditional
    
    
    
    
    
    Other
    
    
    SurplusPar
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    Reserve
    
    
    Noncontrolling
    
    
    TotalShares
    
    
    Value
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    Fund
    
    
    Interest
    
    
    EquityBALANCE ATJANUARY 1, 2010
    
    67,866,730
    
    $
    7
    
    $
    285,025
    
    $
    165,982
    
    $
    27,565
    
    $
    804
    
    $
    (18
    )
    $
    479,365Common stock issued in
      public ****offering,
      net of offering costs
    
    17,250,000
    
    
    2
    
    
    64,571
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    64,573Issuance of restricted stock
      under ****Equity
      Incentive Plan and ****recognition of
      stock-based ****compensation
    
    4,173,676
    
    
    --
    
    
    18,934
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    18,934Foreign currency translation gain
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    11,358
    
    
    --
    
    
    --
    
    
    11,358Net income for the period
    
    --
    
    
    --
    
    
    --
    
    
    48,348
    
    
    --
    
    
    --
    
    
    2
    
    
    48,350BALANCE
      ATSEPTEMBER 30, 2010
    
    89,290,406
    
    $
    9
    
    $
    368,530
    
    $
    214,330
    
    $
    38,923
    
    $
    804
    
    $
    (16
    )
    $
    622,580


See the accompanying notes to condensed consolidated financial
statements

4

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|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES  
|-----------------------------------------------------------------------
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                        
|FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
      (UNAUDITED)
|Expressed in thousands of U.S. dollars                                 
|(Except for share and per share amounts)                               

|                                                                                                                                      |   | Nine Months Ended
      September 30, |  
|------------------------------------------------------------------------------------------------------------------------------------- | - | ------------------------------------- | -
|                                                                                                                                      |   | 2010                                  |  
|CASH FLOWS FROM OPERATING
      ACTIVITIES:                                                                                           |   |                                       |  
|Net income                                                                                                                            | $ | 48,350                                |  
|Adjustments
      to reconcile net income to net cash (used in) provided
      by                        
      operating activities: |   |                                       |  
|Provision for doubtful accounts                                                                                                       |   | --                                    |  
|Depreciation and amortization                                                                                                         |   | 9,722                                 |  
|Amortization of consultancy services                                                                                                  |   | --                                    |  
|Amortization of deferred financing cost                                                                                               |   | 792                                   |  
|Non-cash employee compensation                                                                                                        |   | 18,934                                |  
|Redemption accretion on convertible
      notes                                                                                       |   | --                                    |  
|Debt discount amortization                                                                                                            |   | 2,421                                 |  
|Gain on modification of convertible
      notes                                                                                       |   | --                                    |  
|Deferred taxes                                                                                                                        |   | 11                                    |  
|Changes in operating assets and
      liabilities:                                                                                    |   |                                       |  
|(Increase) decrease in:                                                                                                               |   |                                       |  
|Accounts receivable                                                                                                                   |   | (131,916                              | )
|Inventories                                                                                                                           |   | (18,993                               | )
|Prepayments and deposits                                                                                                              |   | (150                                  | )
|Advances to suppliers                                                                                                                 |   | (36,513                               | )
|Other receivables                                                                                                                     |   | (8,746                                | )
|(Decrease) increase in:                                                                                                               |   |                                       |  
|Accounts and bills payable and accrued
      expenses                                                                                 |   | 16,088                                |  
|Advances from customers                                                                                                               |   | 9,902                                 |  
|Taxes payable                                                                                                                         |   | 12,978                                |  
|Deferred income                                                                                                                       |   | 843                                   |  
|Net cash (used in) provided by operating
      activities                                                                             |   | (76,277                               | )
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                                 |   |                                       |  
|Additions to plant and equipment                                                                                                      |   | (2,002                                | )
|Additions to intangible assets                                                                                                        |   | (1,394                                | )
|Additions to land use rights                                                                                                          |   | --                                    |  
|Deposits paid for acquisition of subsidiaries,
      properties and intangible assets                                                 |   | (63,765                               | )
|Payments for business acquisitions                                                                                                    |   | (1,341                                | )
|Net cash inflow from acquisition of subsidiaries                                                                                      |   | --                                    |  
|Net cash used in investing activities                                                                                                 |   | (68,502                               | )
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                                 |   |                                       |  
|Issue of common stock, net of offering
      costs                                                                                    |   | 64,573                                |  
|Proceeds from borrowings, net of financing costs                                                                                      |   | 212,178                               |  
|Repayment of borrowings                                                                                                               |   | (68,274                               | )
|Repayment of guaranteed senior unsecured notes payable                                                                                |   | (38,640                               | )
|Proceeds
      from obligations under product
      financing                        
      arrangements, net of financing costs      |   | 6,293                                 |  
|Repayment of obligations under product financing
      arrangements                                                                   |   | (4,416                                | )
|Repayment of convertible notes payables                                                                                               |   | --                                    |  
|Net cash provided by financing activities                                                                                             |   | 171,714                               |  
|NET INCREASE IN CASH AND CASH
      EQUIVALENTS                                                                                       |   | 26,935                                |  
|Effect of exchange rate changes on cash and cash
      equivalents                                                                    |   | 4,281                                 |  
|Cash and cash equivalents, beginning of
      period                                                                                  |   | 154,483                               |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                                                                              | $ | 185,699                               |  

5

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|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES
|---------------------------------------------------------------------
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
      (CONTINUED)    
|FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009                
|Expressed in thousands of U.S. dollars                               
|(Except for share and per share amounts)                             

|SUPPLEMENTARY CASH FLOW INFORMATION: |   | Nine Months Ended
      September 30, | 
|------------------------------------ | - | ------------------------------------- | 
|                                     |   | 2010                                  | 
|                                     |   | (Unaudited)                           | 
|Interest paid                        | $ | 5,595                                 | 
|Income taxes paid                    | $ | 996                                   | 

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:

139,573 shares of common stock were issued in satisfaction of a
payable of approximately $906 related to the acquisition of DIT Industry (H.K.)
Limited (DIT) in February 2009.

341,228 shares of common stock were issued in satisfaction of
the purchase price of approximately $1,669 in the acquisition of Shenzhen Coson
Electronic Co. Ltd. (Coson) in February 2009. Additionally, the Company
recorded a liability in the amount of $1,170 representing the estimated fair
value of contingent consideration, to be payable in cash, issued in the
acquisition.

See the accompanying notes to condensed consolidated financial
statements

6

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|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES 
|----------------------------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)
|Expressed in thousands of U.S. dollars                                
|(Except for share and per share amounts)                              

1. BASIS OF PRESENTATION

The accompanying financial statements, as of September 30, 2010
and for the three and nine months ended September 30, 2010 and 2009, have been
prepared by CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. (the Company)
without an audit. Pursuant to the rules and regulations of the Securities and
Exchange Commission (the SEC), certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
accounting principles generally accepted in the United States of America (US
GAAP) have been condensed or omitted pursuant to such rules and regulations.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Companys audited annual
financial statements for the year ended December 31, 2009, which are included in
the Companys Annual Report on Form 10-K for the year ended December 31, 2009,
filed with the SEC on March 2, 2010, as amended on March 10, 2010. Amounts as of
December 31, 2009 are derived from these audited consolidated financial
statements.

The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses and the
disclosure of contingent assets and liabilities. Actual results could differ
from these estimates.

In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position as of September 30, 2010, results of operations for the three and nine
months ended September 30, 2010 and 2009, and cash flows for the nine months
ended September 30, 2010 and 2009, have been made. Due in part to the seasonal
nature of the Companys business, the results of operations for the three and
nine months ended September 30, 2010 are not necessarily indicative of the
operating results for the full year.

2. SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES

(a) Use of Estimates

The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Management makes these
estimates using the best information available at the time the estimates are
made; however actual results could differ materially from those estimates.

(b) Fair Value Measurement

Accounting Standards Codification (ASC) 820 Fair Value
Measurements and Disclosures, which defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. The statement clarifies that the exchange price is the price in an
orderly transaction between market participants to sell the asset or transfer
the liability in the market in which the reporting entity would transact for the
asset or liability, that is, the principal or most advantageous market for the
asset or liability. It also emphasizes that fair value is a market-based
measurement, not an entity-specific measurement, and that market participant
assumptions include assumptions about risk and effect of a restriction on the
sale or use of an asset.

This ASC establishes a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurements) and the lowest priority
to unobservable inputs (Level 3 measurements). The three levels of the fair
value hierarchy are described below:

Level 1: Unadjusted quoted prices in active markets that
are accessible at the measurement date for identical, unrestricted assets or
liabilities;

Level 2: Quoted prices in markets that are not active,
or inputs that are observable, either directly or indirectly, for substantially
the full term of the asset or liability; and

Level 3: Prices or valuation techniques that require
inputs that are both significant to the fair value measurement and unobservable
(supported by little or no market activity).

At September 30, 2010, the Company has no financial assets or
liabilities subject to recurring fair value measurements.

7

---

|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES 
|----------------------------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)
|Expressed in thousands of U.S. dollars                                
|(Except for share and per share amounts)                              

2. SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

(b) Fair Value Measurement - continued

The Companys financial instruments include cash and cash
equivalents, accounts receivable, deposits, other receivables, accounts and
bills payable, notes payable, obligations under product financing arrangements,
and guaranteed senior unsecured notes payable. Management estimates that the
carrying amounts of the non-related party financial instruments approximate
their fair values due to their short-term nature.

(c) Accounts Receivable

Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The Company extends credit to its customers in the normal course of business and
generally does not require collateral. The Companys credit terms in general are
from 30 to 330 days, dependent upon the segment. The Company assesses the
probability of collection from each customer at the outset of the arrangement
based on a number of factors, including the customers payment history and its
current creditworthiness. If in managements judgment collection is not
probable, the Company does not record revenue until the uncertainty is removed.

Management performs ongoing credit evaluations, and the Company
maintains an allowance for potential credit losses based upon its loss history
and its aging analysis. The allowance for doubtful accounts is the Companys
best estimate of the amount of credit losses in existing trade receivables.
Management reviews the allowance for doubtful accounts each reporting period
based on a detailed analysis of trade receivables. In the analysis, management
primarily considers the age of the customers receivable, and also considers the
creditworthiness of the customer, the economic conditions of the customers
industry, general economic conditions and trends, and the business relationship
and history with its customers, among other factors. If any of these factors
change, the Company may also change its original estimates, which could impact
the level of the Companys future allowance for doubtful accounts. If judgments
regarding the collectability of receivables were incorrect, adjustments to the
allowance may be required, which would reduce profitability.

No trade receivable due from any single individual customer
exceeds 10% of total accounts receivable at September 30, 2010 and December 31,
2009.

From time to time, the Company enters into receivable factoring
agreements. The Company accounts for such arrangements under ASC 860
Transfer and Servicing. These arrangements are without recourse, the
receivables are isolated from the Company, the transferee has the right to
pledge or exchange the receivables, and the Company does not maintain effective
control over the receivables. Therefore, these arrangements satisfy the
conditions to be accounted for as a sale and the Company recognizes any gain or
loss in earnings. The Company did not enter into any receivable factoring
agreements during the nine months ended September 30, 2010.

8

---

|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES 
|----------------------------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)
|Expressed in thousands of U.S. dollars                                
|(Except for share and per share amounts)                              

2. SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

(d) Inventories

Inventories are stated at the lower of cost, determined on a
weighted average basis, or net realizable value. Net realizable value is the
estimated selling price in the ordinary course of business less the estimated
cost of completion and the estimated costs necessary to make the sale.

When inventories are sold, their carrying amount is charged to
expense in the period in which the revenue is recognized. Write-downs for
declines in net realizable value or for losses of inventories are recognized as
an expense in the period the impairment or loss occurs. There were no declines
in net realizable value of inventory for the three and nine months ended
September 30, 2010 and 2009.

As of September 30, 2010 and December 31, 2009, inventories
held under product financing arrangements (discussed further in Note 11) were
$19,598 and $12,953, respectively.

During the three and nine months ended September 30, 2010 and
2009, inventory purchases from the Companys top five suppliers constituted
approximately 49%, 42%, 37% and 20% of the total inventory purchases,
respectively.

(e) Accounting for Software to Be Sold, Leased or Marketed

The Company accounts for software development costs in
accordance with ASC 985-20, Costs of Software to be Sold, Leased, or
Marketed. Costs related to establishing the technological feasibility of a
software product are expensed as incurred as a part of research and development
in general and administrative expenses. Costs that are incurred to produce the
finished product after technological feasibility is established are capitalized
and amortized over the estimated economic life of 5 years. The Company performs
periodic reviews to ensure that unamortized software development costs remain
recoverable from future revenue.

As of September 30, 2010 and December 31, 2009, unamortized
computer software costs were $5,282 and $4,693, respectively. During the three
and nine months ended September 30, 2010 and 2009, $413, $1,076, $418 and $1,130
of amortization expense was charged to income, respectively.

(f) Goodwill

ASC 350-30-50, Goodwill and Other Intangible Assets,
requires the testing of goodwill and indefinite-lived intangible assets for
impairment at least annually. The Company tests goodwill for impairment in the
fourth quarter each year.

Under applicable accounting guidance, the goodwill impairment
analysis is a two-step test. The first step of the goodwill impairment test
involves comparing the fair value of each reporting unit with its carrying
amount including goodwill. If the fair value of a reporting unit exceeds its
carrying amount, goodwill of the reporting unit is considered not impaired;
however, if the carrying amount of the reporting unit exceeds its fair value,
the second step must be performed to measure potential impairment.

The second step involves calculating an implied fair value of
goodwill for each reporting unit for which the first step indicated possible
impairment. If the implied fair value of goodwill exceeds the goodwill assigned
to the reporting unit, there is no impairment. If the goodwill assigned to a
reporting unit exceeds the implied fair value of goodwill, an impairment charge
is recorded for the excess.

9

---

|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES 
|----------------------------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)
|Expressed in thousands of U.S. dollars                                
|(Except for share and per share amounts)                              

2. SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

(g) Revenue Recognition

Revenues from sales of surveillance and safety products and
systems are recognized in accordance with Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition, and related interpretations. Revenues are
recognized when the following criteria are met:

| | (i)   | Persuasive evidence of an arrangement exists  The Company requires
      evidence of an agreement with a customer specifying the terms and
      conditions of the products to be delivered, typically in the form of a
      signed contract or purchase order;  
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                    
| | (ii)  | Delivery has occurred  For product sales, delivery generally takes
      place when title to the product is transferred, which generally takes
      place when products are shipped to or accepted by the customer, depending
      on the terms of the contract;
| |       |                                                                                                                                                                                                                                                                    
| | (iii) | The fee is fixed or determinable  Fees are fixed or determinable
      based on the contract or purchase order terms; and                                                                                                                                         
| |       |                                                                                                                                                                                                                                                                    
| | (iv)  | Collection is probable  The Company performs a credit review of all
      customers with significant transactions to determine whether a customer is
      creditworthy and collection is probable.                                                               

The sales contracts generally provide a one to three-year
product warranty to customers from the date of purchase. The Company estimates
the costs of satisfying warranty claims based on an analysis of past experience
and provide for the future claims in the period the revenue is recognized. As of
September 30, 2010 and December 31, 2009, no material product warranty reserve
was accrued. Warranty costs incurred by the Company have not been material.

The Company derives the bulk of its revenue from the supply and
installation of surveillance and safety equipment, and the two deliverables do
not meet the separation criteria under ASC 605-25 Multiple-Element
Arrangements. Revenue from the supply and installation of surveillance and
safety equipment are recognized when the installation is completed and the
customer acceptance is received. Approximately 1% of contract installation
revenue is deferred for the repair work during the one-year warranty period. The
Company carefully monitors the warranty work requested by its customers, and has
determined that minimal warranty work has historically been requested to be
performed. Management believes that this 1% warranty reserve is adequate as of
September 30, 2010 and December 31, 2009.

Repairs and maintenance service revenue is recognized when the
service is performed.

The Company derives a portion of its revenue from one-year
software upgrades. These services are typical post-contract service (PCS)
arrangements according to ASC 985-605-25 Revenue Recognition. Under
this guidance, PCS revenue may be recognized together with the initial licensing
fee on delivery of the software if all of the following conditions are met:

| | (i)   | The PCS fee is included with the initial licensing fee;                                                                                                        
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                
| | (ii)  | The PCS included with the initial license is for one year or less;                                                                                             
| |       |                                                                                                                                                                
| | (iii) | The estimated cost of providing PCS during the arrangement is
      insignificant; and                                                                         
| |       |                                                                                                                                                                
| | (iv)  | Unspecified upgrades/enhancements offered during PCS arrangements
      historically have been and are expected to continue to be minimal and
      infrequent.

Revenue from surveillance and safety system one-year software
upgrades is recognized when delivery occurs and the risk of ownership passes to
the customers, as the Company believes it meets the conditions in compliance
with the ASC guidance.

10

---

|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES 
|----------------------------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)
|Expressed in thousands of U.S. dollars                                
|(Except for share and per share amounts)                              

2. SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

(h) Research and Development Costs

Research and development costs are expensed as incurred.
Research and development costs included in general and administrative expenses
for the three and nine months ended September 30, 2010 and 2009 amounted to
$597, $1,891, $642 and $2,038, respectively.

(i) Advertising Costs

The Company expenses advertising costs as incurred or the first
time advertising takes place. During the three and nine months ended September
30, 2010 and 2009, the Company incurred advertising costs of approximately
$1,132, $2,696, $102 and $276, respectively.

(j) Retirement Benefits

Retirement benefits in the form of contributions under defined
contribution retirement plans to the relevant authorities are charged to the
consolidated statements of income as incurred. The retirement benefit expenses
for the three and nine months ended September 30, 2010 and 2009 were $391, $975,
$283 and $809, respectively and are included in the selling and marketing
expenses and general and administrative expenses.

(k) Income taxes

The Company accounts for income taxes using the asset and
liability method prescribed by ASC 740 Income Taxes. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial reporting and tax bases of assets and liabilities using
enacted tax rates that will be in effect in the year in which the differences
are expected to reverse. The Company records a valuation allowance to offset
deferred tax assets if based on the weight of available evidence, it is
more-likely-than-not that some portion, or all the deferred tax assets will not
be realized. The effect on deferred taxes of a change in tax rates is recognized
as income or loss in the period that includes the enactment date.

The Company does not have any material unrecognized tax
benefits.

The Company files income tax returns with the relevant
government authorities in the U.S. and the PRC. The Company was not subject to
U.S. federal tax examinations for years before 2006. The Company does not
believe there will be any material changes in its unrecognized tax positions
over the next 12 months.

The Companys policy is to recognize interest and penalties
accrued on any unrecognized tax benefits as a component of income tax expense.
The Companys effective tax rate differs from the federal statutory rate
primarily due to non-deductible expenses, temporary differences, and
preferential tax treatment.

(l) Earnings Per Share

ASC 260 Earnings Per Share, requires dual presentation
of basic and diluted earnings per share (EPS) with a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity.

Earnings per basic share of common stock is based on the
weighted average number of shares of common stock outstanding during each
respective period. Earnings per diluted share of common stock adds to basic
weighted shares the weighted average number of shares issuable under contingent
issuances, stock options and warrants outstanding during each respective period,
using the if-converted or treasury-stock methods.

For purposes of the computation of net income per share, shares
issued in connection with acquisitions that are returnable are considered
contingently returnable shares. These contingently returnable shares, although
classified as issued and outstanding, are not included in basic weighted average
number of shares until all necessary conditions are met that no longer cause the
shares to be contingently returnable. These contingently returnable shares are
included in diluted weighted average number of shares as of the beginning of the
period in which the conditions were satisfied (or as of the date of the
agreement, if later).

11

---

|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES 
|----------------------------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)
|Expressed in thousands of U.S. dollars                                
|(Except for share and per share amounts)                              

2. SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

(l) Earnings Per Share  continued

Unvested restricted shares issued (share-based compensation)
under the Equity Incentive Plan are not included in basic weighted average
number of shares but are considered to be outstanding as of the grant date for
purposes of computing diluted earnings per share even though the shares are
subject to vesting requirements.

The calculation of diluted earnings per share also considers
the outstanding warrants for the three and nine months ended September 30, 2010
and 2009. As of September 30, 2010, warrants were outstanding to acquire
2,514,302 shares of common stock (1,188,515 at September 30, 2009). Warrants
which were outstanding to acquire 2,484,296 shares of common stock were not included in the dilutive calculation for the three
and nine months ended September 30, 2010 (1,158,509 at September 30, 2009), as
the effect would be anti-dilutive, under the if-converted method.

Basic and diluted earnings per share for the three months ended
September 30, 2010 and 2009 were calculated as follows:

|                                               |   | 2010       |  |   | 2009       | 
|---------------------------------------------- | - | ---------- |  | - | ---------- | 
|Net income attributable to the Company         | $ | 27,269     |  | $ | 22,005     | 
|Weighted average number of common shares:      |   |            |  |   |            | 
|Basic                                          |   | 82,342,000 |  |   | 48,352,000 | 
|Effect of dilutive
      securities:           |   |            |  |   |            | 
|Warrants                                       |   | 3,000      |  |   | 19,000     | 
|Employee share-based compensation              |   | 5,655,000  |  |   | 5,116,000  | 
|Diluted                                        |   | 88,000,000 |  |   | 53,487,000 | 
|Earnings per share attributable to the Company |   |            |  |   |            | 
|Basic                                          | $ | 0.33       |  | $ | 0.46       | 
|Diluted                                        | $ | 0.31       |  | $ | 0.41       | 

Basic and diluted earnings per share for the nine months ended
September 30, 2010 and 2009 were calculated as follows:

|                                               |   | 2010       |  |   | 2009       | 
|---------------------------------------------- | - | ---------- |  | - | ---------- | 
|Net income attributable to the Company         | $ | 48,348     |  | $ | 30,519     | 
|Weighted average number of common shares:      |   |            |  |   |            | 
|Basic                                          |   | 73,243,000 |  |   | 46,636,000 | 
|Effect of dilutive
      securities:           |   |            |  |   |            | 
|Warrants                                       |   | 7,000      |  |   | 23,000     | 
|Employee share-based compensation              |   | 4,281,000  |  |   | 4,313,000  | 
|Diluted                                        |   | 77,531,000 |  |   | 50,972,000 | 
|Earnings per share attributable to the Company |   |            |  |   |            | 
|Basic                                          | $ | 0.66       |  | $ | 0.65       | 
|Diluted                                        | $ | 0.62       |  | $ | 0.60       | 

(m) New Accounting Standards

Accounting for Transfers of Financial Assets

(Included in ASC 860 Transfers and Serving)

This ASC guidance addresses information a reporting entity
provides in its financial statements about the transfer of financial assets; the
effects of a transfer on its financial position, financial performance, and cash
flows; and a transferors continuing involvement in transferred financial
assets. Also, this ASC guidance removes the concept of a qualifying special
purpose entity, limits the circumstances in which a transferor derecognizes a
portion or component of a financial asset, defines participating interest and
enhances the information provided to financial statement users to provide
greater transparency. This guidance was effective for the Company as of January
1, 2010. The adoption of this guidance had no impact on the Companys
consolidated financial statements.

12

---

|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES 
|----------------------------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)
|Expressed in thousands of U.S. dollars                                
|(Except for share and per share amounts)                              

2. SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

(m) New Accounting Standards - continued

Consolidation of Variable Interest Entities  Amended(Included in ASC 810 Consolidation)

Revisions under ASC 810 require an enterprise to perform
ongoing reassessments of whether an enterprise is the primary beneficiary of a
variable interest entity and eliminates the quantitative approach previously
required for determining the primary beneficiary of a variable interest entity.
This ASC guidance also requires enhanced disclosures that provide users of
financial statements with more transparent information about an enterprises
involvement in a variable interest entity. ASC 810 was effective for the Company
as of January 1, 2010. The adoption of this guidance had no impact on the
Companys consolidated financial statements.

Multiple Deliverable Revenue Arrangements(Accounting Standards Updates 2009-13 and 2009-14)

In October 2009, the FASB issued a new accounting standard
which provides guidance for arrangements with multiple deliverables.
Specifically, the new standard requires an entity to allocate consideration at
the inception of an arrangement to all of its deliverables based on their
relative selling prices. In the absence of the vendor-specific objective
evidence or third-party evidence of the selling prices, consideration must be
allocated to the deliverables based on managements best estimate of the selling
prices. In addition, the new standard eliminates the use of the residual method
of allocation. In October 2009, the FASB also issued a new accounting standard
which changes revenue recognition for tangible products containing software and
hardware elements. Specifically, tangible products containing software and
hardware that function together to deliver the tangible products essential
functionality are scoped out of the existing software revenue recognition
guidance and will be accounted for under the multiple-element arrangements
revenue recognition guidance discussed above. Both standards will be effective
for the Company in the first quarter of 2011. Early adoption is permitted. The
Company is currently evaluating the impact that the adoption of this standard
may have on its consolidated financial statements.

3. ACCOUNTS RECEIVABLE

The Company provides an allowance for doubtful accounts related
to its receivables. The receivables and allowance balances at September 30, 2010
and December 31, 2009 are as follows:

|                                      |   | September 30, |   |   | December 31, |  
|------------------------------------- | - | ------------- | - | - | ------------ | -
|                                      |   | 2010          |   |   | 2009         |  
|Accounts receivable                   | $ | 390,391       |   | $ | 253,610      |  
|Less: allowance for doubtful accounts |   | (1,810        | ) |   | (2,006       | )
|Accounts receivable, net              | $ | 388,581       |   | $ | 251,604      |  

13

---

|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES 
|----------------------------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)
|Expressed in thousands of U.S. dollars                                
|(Except for share and per share amounts)                              

4. INVENTORIES

Inventories consist of the following as of September 30, 2010
and December 31, 2009:

|                                         |   | September 30, 2010 |   |   | December 31, 2009 |  
|---------------------------------------- | - | ------------------ | - | - | ----------------- | -
|                                         |   |                    |   |   |                   |  
|Raw materials                            | $ | 17,011             |   | $ | 14,292            |  
|Work in progress                         |   | 2,492              |   |   | 2,212             |  
|Finished goods                           |   | 27,751             |   |   | 18,790            |  
|Installations in process                 |   | 45,033             |   |   | 36,371            |  
|Total                                    |   | 92,287             |   |   | 71,665            |  
|Less: allowance for obsolete inventories |   | (1,742             | ) |   | (1,524            | )
|Inventories, net                         | $ | 90,545             |   | $ | 70,141            |  

5. PREPAYMENTS AND DEPOSITS

Prepayments and deposits consist of the following as of
September 30, 2010 and December 31, 2009:

|                                                                          |   | September 30, |  |   | December 31, | 
|------------------------------------------------------------------------- | - | ------------- |  | - | ------------ | 
|                                                                          |   | 2010          |  |   | 2009         | 
|                                                                          |   |               |  |   |              | 
|Current portion                                                           | $ | 4,951         |  | $ | 4,706        | 
|Non-current portion                                                       |   |               |  |   |              | 
|- Deposits
      paid for acquisition of subsidiaries                     |   | 36,951        |  |   | 5,081        | 
|- Deposits paid for
      acquisition of properties and intangible assets |   | 35,027        |  |   | 2,118        | 
|                                                                          | $ | 71,978        |  | $ | 7,199        | 

The deposits paid for acquisition of subsidiaries, properties
and intangible assets are refundable. There are no commitments to acquire the
subsidiaries, properties and intangible assets.

6. ADVANCE PAYMENTS

The Company has made payments to unrelated suppliers in advance
of receiving merchandise. The advance payments are meant to ensure preferential
pricing and delivery. The amounts advanced under such arrangements totaled
$76,703 and $39,399 as of September 30, 2010 and December 31, 2009,
respectively.

7. PLANT AND EQUIPMENT

At September 30, 2010 and December 31, 2009, plant and
equipment, at cost, consist of:

|                               |   | September 30, |   |   | December 31, |  
|------------------------------ | - | ------------- | - | - | ------------ | -
|                               |   | 2010          |   |   | 2009         |  
|Buildings                      | $ | 63,351        |   | $ | 62,102       |  
|Leasehold improvements         |   | 3,903         |   |   | 2,763        |  
|Plant and equipment            |   | 8,512         |   |   | 7,971        |  
|Electronic equipment           |   | 9,941         |   |   | 9,305        |  
|Motor vehicles                 |   | 5,418         |   |   | 5,343        |  
|                               |   | 91,125        |   |   | 87,484       |  
|Less: accumulated depreciation |   | (15,758       | ) |   | (12,037      | )
|Plant and equipment, net       | $ | 75,367        |   | $ | 75,447       |  

Depreciation expense for the three and nine months ended
September 30, 2010 and 2009 was $1,197, $3,585, $1,055 and $3,099, respectively.

14

---

|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES 
|----------------------------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)
|Expressed in thousands of U.S. dollars                                
|(Except for share and per share amounts)                              

8. LAND USE RIGHTS

Land use rights consist of the following as of September 30,
2010 and December 31, 2009:

|                               |   | September 30, 2010 |   |   | December 31, 2009 |  
|------------------------------ | - | ------------------ | - | - | ----------------- | -
|Cost of land use rights        | $ | 8,698              |   | $ | 8,526             |  
|Less: accumulated amortization |   | (866               | ) |   | (793              | )
|Land use rights, net           | $ | 7,832              |   | $ | 7,733             |  

Amortization expense for the three and nine months ended
September 30, 2010 and 2009 was $73, $173, $42 and $128, respectively.

Amortization expense for the next five years and thereafter is
as follows:

|2010 (for the remaining three months) | $ | 43    | 
|------------------------------------- | - | ----- | 
|2011                                  |   | 172   | 
|2012                                  |   | 172   | 
|2013                                  |   | 172   | 
|2014                                  |   | 172   | 
|2015                                  |   | 172   | 
|Thereafter                            |   | 6,929 | 
|Total                                 | $ | 7,832 | 

9. INTANGIBLE ASSETS

|                                                      |   | September 30, 2010 |   |   | December 31, 2009 |  
|----------------------------------------------------- | - | ------------------ | - | - | ----------------- | -
|Trademarks (life of 11 to 25 years)                   | $ | 17,222             |   | $ | 17,222            |  
|Exclusive cooperation agreements (life of 20 years)   |   | 13,632             |   |   | 13,632            |  
|Customer base (life of 5 to 10 years)                 |   | 10,448             |   |   | 10,448            |  
|Patents (life of 10 years)                            |   | 4,542              |   |   | 4,542             |  
|Technical know-how (life of 9 to 10 years)            |   | 17,057             |   |   | 17,030            |  
|Non-compete agreements (life of 5 years)              |   | 1,303              |   |   | 1,303             |  
|Contracts in progress (life of 2 to 9
      months)   |   | 410                |   |   | 410               |  
|Surveillance software (life of 5 years)               |   | 10,793             |   |   | 9,268             |  
|Surveillance recording system (life of 5
      years) |   | 500                |   |   | 500               |  
|                                                      |   | 75,907             |   |   | 74,355            |  
|Less: accumulated amortization                        |   | (25,681            | ) |   | (19,678           | )
|Intangible assets, net                                | $ | 50,226             |   | $ | 54,677            |  

Amortization expense for the three and nine months ended
September 30, 2010 and 2009 was $1,965, $5,964, $2,120 and $6,201, respectively.

Estimated amortization expense for the next five years and
thereafter is as follows:

|2010 (for the remaining three months) | $ | 1,995  | 
|------------------------------------- | - | ------ | 
|2011                                  |   | 6,808  | 
|2012                                  |   | 6,017  | 
|2013                                  |   | 5,484  | 
|2014                                  |   | 5,063  | 
|2015                                  |   | 3,894  | 
|Thereafter                            |   | 20,965 | 
|Total                                 | $ | 50,226 | 

15

---

|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES 
|----------------------------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)
|Expressed in thousands of U.S. dollars                                
|(Except for share and per share amounts)                              

10. NOTES PAYABLE

The Companys notes payable to banks (all current) as of
September 30, 2010 and December 31, 2009, totaled $202,168 and $57,116,
respectively.

Repayments under the terms of the notes are as follows:

|2010 (for the remaining three months) | $ | 44,087  | 
|------------------------------------- | - | ------- | 
|2011                                  |   | 158,081 | 
|Total                                 | $ | 202,168 | 

On September 25, 2010, the Company entered into a loan
agreement with Shanghai Pudong Development Bank. The Company borrowed RMB40,000
(approximately $5,976) with an annual interest rate equal to 4.86%, with
interest payable on the 20th of each month. The loan is due in
December 2010. The loan is guaranteed by Whitehorse Technology Limited, a
company wholly owned by the Companys CEO.

On August 27, 2010, the Company entered into a loan agreement
with China Merchants Bank. The Company borrowed $16,000 with an annual interest
rate of 1% per annum over the applicable three months London Inter Bank Offered
Rate (1.29% at September 30, 2010), with interest payable on the maturity date.
Interest payable will be calculated on the basis of the actual number of days
elapsed. The loan is due in November 2010. The loan is collateralized by a cash
deposit of a subsidiary.

On August 18, 2010, the Company entered into a loan agreement
with Shenzhen Development Bank. The Company borrowed RMB40,000 (approximately
$5,976) with an annual interest rate equal to 5.31%, with interest payable on
the 20th of each month. The loan is due in August 2011. The loan is guaranteed
by the CEO of the Company, two subsidiaries of the Company and is collateralized
by the property of a subsidiary.

On August 9, 2010, the Company entered into a loan agreement
with Societe Generale. The Company borrowed RMB27,000 (approximately $4,033)
with an annual interest rate equal to 4.86%, with interest payable on the due
date of the loan. The loan is due in February 2011. The loan is guaranteed by a
subsidiary of the Company.

On July 26, 2010, the Company entered into a loan agreement
with China Everbright Bank Co., Ltd. The Company borrowed RMB40,000
(approximately $5,976) with an annual interest rate equal to 5.31%, with
interest payable on the 20th of each month. The loan is due in July 2011. The
loan is guaranteed by the CEO of the Company, a subsidiary of the Company and
Chuang Guan.

On July 21, 2010, the Company entered into a loan agreement
with the Industrial and Commercial Bank of China. The Company borrowed RMB54,600
(approximately $8,157) with an annual interest rate equal to 5.31%, with
interest payable on the 20th of each month. The loan is due in July 2011. The
loan is guaranteed by three subsidiaries of the Company and is collateralized by
the property of a subsidiary.

On July 15, 2010, the Company entered into a loan agreement
with China Construction Bank. The Company borrowed RMB30,000 (approximately
$4,482) with an annual interest rate equal to 5.841%, with interest payable on
the 20th of each month. The loan is due in July 2011 and is collateralized by
the property of a subsidiary.

On July 1, 2010, the Company entered into a loan agreement with
Guangdong Development Bank. The Company borrowed RMB49,600 (approximately
$7,410) with an annual interest rate equal to 5.841%, with interest payable on
the 20th of each month. The loan is due in June 2011. The loan is guaranteed by
the CEO and a subsidiary of the Company.

On June 18, 2010, the Company entered into a loan agreement
with Industrial and Commercial Bank of China (Asia) Limited. The Company
borrowed $8,000 and $2,000 on July 15, 2010 and August 12, 2010 with an
effective interest rate at 3% per annum over the applicable one year London
Inter Bank Offered Rate (3.78% at September 30, 2010), with interest payable on
the due date of the loan. Interest payable will be calculated on the basis of
the actual number of days elapsed and a 360-day year. The loan is due in July
2011. The loan is guaranteed by the CEO of the Company and is collateralized by
fixed assets of a subsidiary and the shares of a subsidiary.

16

---

|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES 
|----------------------------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)
|Expressed in thousands of U.S. dollars                                
|(Except for share and per share amounts)                              

10. NOTES PAYABLE (CONTINUED)

On May 21, 2010, the Company entered into a loan agreement with
China Zheshang Bank. The Company borrowed RMB20,000 (approximately $2,988) with
an annual interest rate equal to 110% of the benchmark lending rate (5.346% as
of September 30, 2010), with interest payable on the 20th of each month. The
loan is due in November 2010. The loan is guaranteed by the CEO of the Company,
and two subsidiaries of the Company.

On May 18, 2010, the Company entered into a loan agreement with
China Everbright Bank Co., Ltd. The Company borrowed RMB40,000 (approximately
$5,976) with an annual interest rate equal to 4.86%, with interest payable on
the 20th of each month. The loan is due in November 2010. The loan is guaranteed
by the CEO of the Company, a subsidiary of the Company and Chuang Guan. The loan
was repaid in July 2010.

On April 16, 2010, the Company entered into a loan agreement
with Shanghai Pudong Development Bank. The Company borrowed RMB80,000
(approximately $11,952) with an annual interest rate equal to 5.31%, with
interest payable on the 20th of each month. The loan is due in April 2011. The
loan is guaranteed by the CEO of the Company and a subsidiary of the Company,
and is collateralized by the properties and land use rights of a subsidiary.

On April 15, 2010, the Company entered into a loan agreement
with Shanghai Pudong Development Bank. The Company borrowed RMB80,000
(approximately $11,952) with an annual interest rate equal to 5.31%, with
interest payable on the 20th of each month. The loan is due in April 2011. The
loan is guaranteed by the CEO of the Company, and is collateralized by the
properties and land use rights of a subsidiary.

On March 31, 2010, the Company entered into a loan agreement
with China Merchants Bank. The Company borrowed RMB50,000 (approximately $7,470)
with an annual interest rate equal to 5.31%, with interest payable on the 20th
of each month. The loan is due in March 2011. The loan is guaranteed by the CEO
of the Company, his wife and a subsidiary of the Company, and is collateralized
by the property and land use rights of a subsidiary.

On March 25, 2010, the Company entered into a loan agreement
with China Citic Bank. The Company borrowed RMB90,000 (approximately $13,445)
with an annual interest rate equal to 5.31%, with interest payable on the 20th
of each month. The loan is due in March 2011. The loan is guaranteed by the CEO
of the Company, his wife and a subsidiary of the Company, and is collateralized
by the properties of two subsidiaries of the Company.

On March 24, 2010, the Company entered into a loan agreement
with China Citic Bank. The Company borrowed RMB60,000 (approximately $8,964)
with an annual interest rate equal to 5.31%, with interest payable on the 20th
of each month. The loan is due in March 2011. The loan is guaranteed by the CEO
of the Company, his wife and a subsidiary of the Company, and is collateralized
by the properties of two subsidiaries of the Company.

On March 4, 2010, the Company entered into a loan agreement
with the Industrial and Commercial Bank of China. The Company borrowed RMB31,000
(approximately $4,631) with an annual interest rate equal to 4.78%, with
interest payable on the 20th of each month. The loan is due in March 2011. The
loan is guaranteed by three subsidiaries of the Company, and is collateralized
by the property of a subsidiary.

On March 4, 2010, the Company entered into a loan agreement
with the Industrial and Commercial Bank of China. The Company borrowed RMB39,000
(approximately $5,826) with an annual interest rate equal to 4.78%, with
interest payable on the 20th of each month. The loan is due in March 2011. The
loan is guaranteed by three subsidiaries of the Company, and is collateralized
by the property of a subsidiary.

17

---

|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES 
|----------------------------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)
|Expressed in thousands of U.S. dollars                                
|(Except for share and per share amounts)                              

10. NOTES PAYABLE (CONTINUED)

On March 3, 2010, the Company entered into a loan agreement
with China Construction Bank. The Company borrowed RMB50,000 (approximately
$7,470) with an annual interest rate equal to 5.58%, with interest payable on
the 20th of each month. The loan is due in March 2011. The loan is guaranteed by
the CEO of the Company and a subsidiary of the Company, and is collateralized by
the property of a subsidiary.

On March 2, 2010, the Company entered into a loan agreement
with China Merchants Bank. The Company borrowed RMB41,000 (approximately $6,125)
with an annual interest rate equal to 5.31%, with interest payable on the 20th
of each month. The loan is due in March 2011. The loan is guaranteed by the CEO
of the Company, his wife and a subsidiary of the Company, and is collateralized
by the property and land use rights of a subsidiary.

On February 26, 2010, the Company entered into a loan agreement
with Bank of China. The Company borrowed RMB48,000 (approximately $7,171) with
an annual interest rate equal to 5.04%, with interest payable on the 20th of
each month. The loan is due in November 2010. The loan is guaranteed by the CEO
of the Company and two subsidiaries of the Company, and is collateralized by the
property and land use rights of a subsidiary.

On February 11, 2010, the Company entered into a loan agreement
with Bank of China. The Company borrowed RMB75,000 (approximately $11,205) with
an annual interest rate equal to 5.841%, with interest payable on the 20th of
each month. The loan is due in February 2011. The loan is guaranteed by the CEO
of the Company and two subsidiaries of the Company, and is collateralized by the
property and land use rights of a subsidiary.

On February 8, 2010, the Company entered into a loan agreement
with Societe Generale. The Company borrowed RMB27,000 (approximately $4,033)
with an annual interest rate equal to 4.86%, with interest payable on the due
date of the loan. The loan was due and repaid in August 2010. The loan was
guaranteed by a subsidiary of the Company.

On February 3, 2010, the Company entered into a loan agreement
with China Merchants Bank. The Company borrowed RMB59,000 (approximately $8,814)
with an annual interest rate equal to 5.31%, with interest payable on the 20th
of each month. The loan is due in February 2011. The loan is guaranteed by the
CEO of the Company, his wife and a subsidiary of the Company, and is
collateralized by the property and land use rights of a subsidiary.

On January 26, 2010, the Company entered into a loan agreement
with the Industrial and Commercial Bank of China. The Company borrowed
RMB100,000 (approximately $14,940) with an annual interest rate equal to 4.78%,
with interest payable on the 20th of each month. The loan is due in January
2011. The Company repaid RMB 80,000 (approximately $11,952) in June 2010. The
loan is guaranteed by the CEO of the Company.

On January 7, 2010, the Company entered into a loan agreement
with Bank of China. The Company borrowed RMB75,000 (approximately $11,205) with
an annual interest rate equal to 5.31%, with interest payable on the 20th of
each month. The loan is due in January 2011. The loan is guaranteed by the CEO
of the Company and two subsidiaries of the Company, and is collateralized by the
property and land use rights of a subsidiary.

On December 25, 2009, the Company entered into a loan agreement
with Bank of Ningbo. The Company borrowed RMB30,000 (approximately $4,482) with
an annual interest rate equal to 5.31%, with interest payable on the 20th of
each month. The loan is due in December 2010. The loan is guaranteed by the CEO
of the Company and a subsidiary of the Company.

On December 11, 2009, the Company entered into a loan agreement
with Agricultural Bank of China. The Company borrowed RMB20,000 (approximately
$2,988) with an annual interest rate equal to 5.31%, with interest payable on
the 20th of each month. The loan was due in September 2010 and repaid in January
2010. The loan was guaranteed by the CEO and COO of the Company and a subsidiary
of the Company, and was collateralized by the land use right and properties of a
subsidiary.

18

---

|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES 
|----------------------------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)
|Expressed in thousands of U.S. dollars                                
|(Except for share and per share amounts)                              

10. NOTES PAYABLE (CONTINUED)

On December 11, 2009, the Company entered into a loan agreement
with Agricultural Bank of China. The Company borrowed RMB20,000 (approximately
$2,988) with an annual interest rate equal to 5.31%, with interest payable on
the 20th of each month. The loan was due in October 2010 and repaid in January
2010. The loan was guaranteed by the CEO and COO of the Company and a subsidiary
of the Company, and was collateralized by the land use right and properties of a
subsidiary.

On November 6, 2009, the Company entered into a loan agreement
with the Industrial and Commercial Bank of China. The Company borrowed RMB50,000
(approximately $7,470) with an annual interest rate equal to 5.31%, with
interest payable on the 20th of each month. The loan is due in November 2010.
The loan is guaranteed by three subsidiaries of the Company, and is
collateralized by the land use rights and property of a subsidiary.

On September 30, 2009, the Company entered into a loan
agreement with Shenzhen Development Bank. The Company borrowed RMB20,000
(approximately $2,988) with an annual interest rate equal to 105% of the
benchmark lending rate, with interest payable on the 20th of each month. The
loan was due in September 2010 and repaid in July 2010. The loan was guaranteed
by the CEO of the Company and two subsidiaries of the Company, and was
collateralized by the property of a subsidiary.

On August 13, 2009, the Company entered into a loan agreement
with China Construction Bank. The Company borrowed RMB30,000 (approximately
$4,482) with an annual interest rate equal to 5.5755%, with interest payable on
the 20th of each month. The loan was due in August 2010 and was collateralized
by the property of a subsidiary. The loan was repaid in July 2010.

On May 20, 2009, the Company entered into a loan agreement with
China Everbright Bank Co., Ltd. The Company borrowed RMB40,000 (approximately
$5,976) with an annual interest rate equal to 5.31%, with interest payable on
the 20th of each month. The loan was due and repaid in May 2010. The loan was
guaranteed by the CEO of the Company, a subsidiary of the Company and Chuang
Guan.

On April 15, 2009, the Company entered into a loan agreement
with Shanghai Pudong Development Bank. The Company borrowed RMB80,000
(approximately $11,952) with an annual interest rate equal to 5.31%, with
interest payable on the 20th of each month. The loan was due in April 2010 and
repaid in March 2010. The loan was collateralized by the properties of two
subsidiaries.

On April 1, 2009, the Company entered into a loan agreement
with China Merchants Bank. The Company borrowed RMB50,000 (approximately $7,470)
with an annual interest rate equal to 92% of benchmark lending rate, with
interest payable on the 20th of each month. The loan was due in April 2010 and
repaid in March 2010. The loan was guaranteed by the CEO of the Company, his
wife and subsidiaries of the Company, and was collateralized by the land use
rights of a subsidiary.

On February 25, 2009, the Company entered into a loan agreement
with China Merchants Bank. The Company borrowed RMB60,000 (approximately $8,789)
with an annual interest rate equal to 92% of the benchmark lending rate. The
loan was due in February 2010 and the interest was payable on the 20th of each
month. The loan was guaranteed by the CEO of the Company, his wife and
subsidiaries of the Company, and was collateralized by the land use rights of a
subsidiary. The Company repaid RMB 10,000 (approximately $1,464) and RMB50,000
(approximately $7,325) in March 2009 and in the first quarter of 2010,
respectively.

11. OBLIGATIONS UNDER PRODUCT FINANCING ARRANGEMENTS

In June 2010, the Company entered into product financing
agreements with a financial institution. Under the terms of the agreements, the
Company agreed to pay an annual interest rate of 8.23% on inventory financings.
The Company borrowed RMB50,000 (approximately $7,363). The loans expire in June
2013, and payments of principal and interest are due at the end of each quarter.

In September 2009, the Company entered into product financing
agreements with a financial institution. Under the terms of the agreements, the
Company agreed to pay an annual interest rate of 8.46% on inventory financings.
The Company borrowed RMB50,000 (approximately $7,322). The loans expire in
September 2012, and payments of principal and interest are due at the end of
each quarter.

In February 2009, the Company entered into product financing
agreements with a financial institution. Under the terms of the agreements, the
Company agreed to pay an annual interest rate of 10.5% on inventory financings.
The Company borrowed RMB 7,114 (approximately $1,041). The loans expire in
September 2013, and payments of principal and interest are due at the end of
each quarter.

19

---

|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES 
|----------------------------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)
|Expressed in thousands of U.S. dollars                                
|(Except for share and per share amounts)                              

11. OBLIGATIONS UNDER PRODUCT FINANCING ARRANGEMENTS
(CONTINUED)

In July 2008, the Company entered into product financing
agreements with a financial institution. Under the terms of the agreements, the
Company agreed to pay an annual interest rate of 10% on inventory financings.
The Company borrowed RMB53,492 (approximately $7,845). The loans expire in July
2011, and payments of principal and interest are due at the end of each quarter.

The Company paid $366, $829, $163, and $527 during the three
and nine months ended September 30, 2010 and 2009 of interest expense on the
product financing arrangements, respectively.

The following is a summary of the Companys obligations under
product financing arrangements as of September 30, 2010 and December 31, 2009:

|                                                       |   | September 30, |   |   | December 31, |  
|------------------------------------------------------ | - | ------------- | - | - | ------------ | -
|                                                       |   | 2010          |   |   | 2009         |  
|Obligations under product financing
      arrangements | $ | 14,956        |   | $ | 11,725       |  
|Less: current portion                                  |   | (7,232        | ) |   | (5,184       | )
|Long-term portion                                      | $ | 7,724         |   | $ | 6,541        |  

|Estimated repayments are as follows:  |   |        |   |  | 
|------------------------------------- | - | ------ | - |  | 
|2010 (for the remaining three months) | $ | 2,261  |   |  | 
|2011                                  |   | 7,480  |   |  | 
|2012                                  |   | 5,204  |   |  | 
|2013                                  |   | 1,595  |   |  | 
|Total                                 |   | 16,540 |   |  | 
|Less: amount representing interest    |   | (1,584 | ) |  | 
|Net                                   | $ | 14,956 |   |  | 

Approximately RMB14,250 (approximately $2,129) and RMB11,373
(approximately $1,665) of other costs directly associated with the product
financing agreements were recorded as deferred financing costs in the balance
sheet at September 30, 2010 and December 31, 2009, respectively. The Company is
amortizing these financing costs over the respective terms of the obligations.
The amortization was recorded as interest expense, which was $283, $717, $103
and $306, respectively for the three and nine months ended September 30, 2010
and 2009.

12. DEFERRED INCOME

Deferred income balances as of September 30, 2010 and December
31, 2009, were $2,748 and $1,868, respectively, and represent amounts invoiced
but deferred as revenue as an estimated warranty reserve.

13. GUARANTEED SENIOR UNSECURED NOTES PAYABLE

On February 16, 2007, pursuant to a note purchase agreement and
indenture with Citadel Equity Fund Ltd. (Citadel), the Company issued to
Citadel $60,000 aggregate principal amount of guaranteed senior unsecured
convertible notes due 2012 (the February Notes). The terms of the February
Notes indenture was subsequently amended on March 29, 2007 and April 24, 2007.
The February Notes financing replaced the existing bridge financing that was
closed on February 8, 2007 in which the Company had issued to Citadel $60,000
aggregate principal amount of senior notes. The February Notes bear interest at
1% per annum. The net proceeds from the sales of the February Notes were being
used for the Companys working capital and acquisition plans.

Under the February Notes indenture, the February Notes were
convertible by the holders thereof at any time on or prior to maturity, into
common stock of the Company initially at the conversion price of $18 per share
(subject to adjustment in certain circumstances, including semi-annual reset of
the conversion price and upon occurrence of certain dilutive events, in each
case subject to certain conditions). On February 16, 2009, the conversion price
was adjusted to $9 per share. If the February Notes were not converted before
maturity, the February Notes were to be redeemed by the Company on the maturity
date at a redemption price equal to 100% of the principal amount of the February
Notes then outstanding plus an additional amount of 15.0% per annum, calculated
on a quarterly compounded basis, plus any accrued and unpaid interest.

20

---

|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES 
|----------------------------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)
|Expressed in thousands of U.S. dollars                                
|(Except for share and per share amounts)                              

13. GUARANTEED SENIOR UNSECURED NOTES PAYABLE (CONTINUED)

On April 24, 2007, pursuant to another note purchase agreement
with Citadel, the Company issued to Citadel $50,000 aggregate principal amount
of guaranteed senior unsecured convertible notes due 2012 (the April Notes).
The April Notes bear annual interest of 1%. All the net proceeds from the sales
of the April Notes were being used for the Company's working capital and
acquisition plan.

Under the April Notes indenture, the April Notes were
convertible, by the holders thereof, at any time on or prior to maturity, into
common stock of the Company initially at the conversion price of $23.60 per
share (subject to adjustment in certain circumstances, including semi-annual
reset of the conversion price and upon occurrence of certain dilutive events, in
each case subject to certain conditions). On February 16, 2009, the conversion
price was adjusted to $9 per share. If the April Notes were not converted before
maturity, the April Notes were to be redeemed by the Company on the maturity
date at a redemption price equal to 100% of the principal amount of the April
Notes then outstanding plus an additional amount of 15.0% per annum, calculated
on a quarterly compounded basis, plus any accrued and unpaid interest.

The February Notes and April Notes indentures, the notes
purchase agreements and certain investor rights agreements between the Company
and Citadel entered into in connection with the February Notes and April Notes
financings contained various covenants that could have limited the Company's
discretion in operating its business. In particular, the Company was limited in
its ability to merge, consolidate or transfer substantially all of its assets,
issue stock of subsidiaries, incur additional debt and create liens on assets to
secure debt. In addition, if there was a default, or if the Company did not
maintain certain financial covenants or did not maintain borrowing availability
in excess of certain pre-determined levels, the February Notes and the April
Notes could have been accelerated with the balance becoming due and payable
immediately and the Company could have been unable to incur additional
indebtedness, make restricted payments (including paying cash dividends on
capital stock) or redeem or repurchase capital stock.

The Company accreted $3,899 and $14,851 for the three and nine
months ended September 30, 2009 of the additional redemption amount related to
the February Notes and April Notes, which amount is included in interest
expense.

On August 18, 2009, the Company entered into a notes purchase
agreement with Citadel under which the parties restructured the February Notes
and April Notes into two new tranches of notes, consisting of the Tranche A Zero
Coupon Guaranteed Senior Unsecured Convertible Notes (the Tranche A Notes) and
the Tranche B Zero Coupon Guaranteed Senior Unsecured Notes (the Tranche B
Notes), and together with the Tranche A Notes, the New Notes). In addition,
as an inducement to the restructuring of the February Notes and April Notes, the
Company paid to Citadel additional consideration, consisting of $5,000 in cash
and 2,902,758 shares of the Companys common stock. The transaction closed on
September 2, 2009.

The Company determined that the restructuring of the
convertible debt was an exchange of debt instruments with substantially
different terms, because the present value of cash flows under the terms of the
new debt instruments was more than 10% different from the present value of the
remaining cash flows under the terms of the original debt instruments.
Therefore, the Company accounted for the restructuring as an extinguishment of
the original debt instruments. On September 2, 2009, the carrying amount of the
original debt instruments was approximately $158,194 (including accrued
redemption interest of approximately $48,194). The Company determined, based on
a third party valuation, that the fair values of the new Tranche A Notes and
Tranche B Notes were approximately $47,500 and $78,440, respectively, or
$125,940 in total. The gain on the transaction was determined as follows:

|Net carrying amount of the original debt
      instruments | $ | 158,194 | 
|---------------------------------------------------------- | - | ------- | 
|Reacquisition price:                                       |   |         | 
|Fair
      value of the new debt instruments               |   | 125,940 | 
|Cash consideration                                         |   | 5,000   | 
|Value of
      common stock given                          |   | 17,939  | 
|                                                           |   | 148,879 | 
|Gain                                                       | $ | 9,315   | 

21

---

|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES 
|----------------------------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)
|Expressed in thousands of U.S. dollars                                
|(Except for share and per share amounts)                              

13. GUARANTEED SENIOR UNSECURED NOTES PAYABLE (CONTINUED)

The Tranche A Notes had a principal amount of $50,000, zero
coupon interest, and a fair value of $47,500, resulting in a debt discount of
$2,500 and an effective interest rate of 3%. The notes were scheduled to mature
on September 2, 2012. The Company was to repay the principal amount in six
consecutive semi-annual installments, starting March 2, 2010, with 25%, 25% and
50% of the principal amount to be repaid in the first, second and third year,
respectively. The conversion price was $10 per share initially, subject to
customary conversion price adjustments, anti-dilution protections and a one-time
price reset on March 2, 2011 based on the volume weighted average price of the
Companys shares during the 45 trading days immediately preceding the Reset
Date, provided that the conversion price was to be adjusted to no lower than
$6.00 per share. On October 22, 2009, the Company entered into a notes purchase
agreement with Citadel pursuant to which the Company agreed to repurchase the
Tranche A Notes for a total consideration of $47,500. The Company paid $27,000
on October 30, 2009 and $20,500 on November 16, 2009.

As of September 30, 2010, the Company has outstanding Tranche B
Zero Coupon Guaranteed Senior Unsecured Notes (the Tranche B Notes). The
Tranche B Notes have a principal amount of $84,000, zero coupon interest and a
fair value of $78,440, resulting in a debt discount of $5,560 and an effective
interest rate of approximately 5%. The Tranche B Notes mature on September 2,
2012. The Company is to repay the principal amount in six consecutive
semi-annual installments, starting March 2, 2010, with 46%, 46% and 8% of the
principal amount to be repaid in the first, second and third year, respectively.
The Tranche B Notes are not convertible. The Company is entitled to redeem the
Tranche B Notes at any time with no premium or penalty at a redemption price
equal to 100% of the principal amount of the Tranche B Notes to be redeemed,
plus default interest, if any. The Tranche B Notes are guaranteed by the
Companys significant subsidiaries to the extent permitted under the applicable
laws. The Company repaid $38,640 of the principal on the Tranche B Notes in the
first nine months of 2010.

The Company has recorded $740 and $2,421 of debt discount
amortization for the three and nine months ended September 30, 2010 related to
the Tranche B Notes, respectively. These amounts were included in interest
expense.

Approximately $300 of legal fees and other costs directly
associated with the issuance of the Tranche B Notes was recorded as deferred
financing costs in the balance sheet at September 30, 2010. The Company is
amortizing these financing costs over the term of the Tranche B Notes. The
amortization for the three and nine months ended September 30, 2010 was $25 and
$75, respectively.

The following is a summary of the guaranteed senior unsecured
notes payable as of September 30, 2010 and December 31, 2009:

|                      |   | September 30, |   |   | December 31, |  
|--------------------- | - | ------------- | - | - | ------------ | -
|                      |   | 2010          |   |   | 2009         |  
|Total                 | $ | 43,470        |   | $ | 79,689       |  
|Less: current portion |   | (36,993       | ) |   | (35,701      | )
|Long-term portion     | $ | 6,477         |   | $ | 43,988       |  

|Repayments under the terms of the notes are as follows: |   |        |  
|------------------------------------------------------- | - | ------ | -
|2010 (remaining three months)                           | $ | --     |  
|2011                                                    |   | 38,640 |  
|2012                                                    |   | 6,720  |  
|Total                                                   |   | 45,360 |  
|Less: amount representing unamortized
      discount    |   | (1,890 | )
|Net                                                     | $ | 43,470 |  

22

---

|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES 
|----------------------------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)
|Expressed in thousands of U.S. dollars                                
|(Except for share and per share amounts)                              

14. ISSUANCE OF COMMON STOCK AND WARRANTS

On May 25, 2010, the Company completed a public offering, in
which the Company sold a total of 17,250,000 shares of common stock for an
aggregate purchase price of $69,000 at $4.00 per share. Net proceeds to the
Company from this transaction were approximately $64,573.

A summary of the status of the Companys warrants and the
changes during the three months ended September 30, 2010 and 2009 is presented
below:

|                                     |  | 2010       |   |   | 2009            |  
|------------------------------------ |  | ---------- | - | - | --------------- | -
|                                     |  |            |   |   | Weighted        |  
|                                     |  |            |   |   | Average         |  
|                                     |  | Shares     |   |   | Exercise Prices |  
|Outstanding at July 1                |  | 3,528,302  |   | $ | 8.72            |  
|Granted                              |  | --         |   |   | --              |  
|Exercised                            |  | --         |   |   | --              |  
|Expired                              |  | (1,014,000 | ) |   | (8.62           | )
|Outstanding at September 30          |  | 2,514,302  |   | $ | 8.76            |  
|Warrants exercisable at September 30 |  | 2,514,302  |   | $ | 8.76            |  

A summary of the status of the Companys warrants and the
changes during the nine months ended September 30, 2010 and 2009 is presented
below:

|                                     |  | 2010       |   |   | 2009            |  
|------------------------------------ |  | ---------- | - | - | --------------- | -
|                                     |  |            |   |   | Weighted        |  
|                                     |  |            |   |   | Average         |  
|                                     |  | Shares     |   |   | Exercise Prices |  
|Outstanding at January 1             |  | 3,528,302  |   | $ | 8.72            |  
|Granted                              |  | --         |   |   | --              |  
|Exercised                            |  | --         |   |   | --              |  
|Expired                              |  | (1,014,000 | ) |   | (8.62           | )
|Outstanding at September 30          |  | 2,514,302  |   | $ | 8.76            |  
|Warrants exercisable at September 30 |  | 2,514,302  |   | $ | 8.76            |  

23

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|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES 
|----------------------------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)
|Expressed in thousands of U.S. dollars                                
|(Except for share and per share amounts)                              

15. EQUITY INCENTIVE PLAN

On February 7, 2007, the Company adopted the 2007 Equity
Incentive Plan (the Plan), which was amended in February 2010. The Plan, as
amended, has a ten-year term and provides for grants of stock options, stock
appreciation rights, performance units, restricted stock units and performance
shares. The total number of shares which may be issued under the Plan is
12,000,000.

During the three and nine months ended September 30, 2010 and
2009, 3,064,570, 4,320,262, 1,026,500 and 1,951,318 shares of restricted stock
were granted, respectively. During the three and nine months ended September 30,
2010 and 2009, 71,332, 146,586, 0 and 30,888 shares of restricted stock were
forfeited and retired, respectively. The shares that have been issued under the
Plan vest over a four to five-year period, and at issuance, resulted in total
deferred compensation of $100,935 and $80,101 as of September 30, 2010 and
December 31, 2009, respectively. The fair values of these restricted stock
awards are equal to the fair value of the Companys common stock on the date of
grant, after taking into account certain discounts. Such restricted stock is
subject to the risk of forfeiture upon the occurrence of certain events. During
the three and nine months ended September 30, 2010 and 2009, the Company
recognized $5,553, $18,934, $4,743 and $13,319, respectively, of compensation
expense under the Plan. As of September 30, 2010 and December 31, 2009, there
was $46,165 and $44,632, respectively, of unrecognized compensation expense
related to the nonvested restricted stock. This cost is expected to be
recognized over a four to five-year period. During the three and nine months
ended September 30, 2010 and 2009, the Company has not recognized any tax
benefits for the compensation expense under the Plan.

The following table summarizes the status of the Companys
nonvested restricted stock awards during the three months ended September 30,
2010 and 2009:

|                            |  | Nonvested Restricted
      Stock |   |   | Nonvested Restricted
      Stock |  
|--------------------------- |  | -------------------------------- | - | - | -------------------------------- | -
|                            |  | 2010                             |   |   | 2009                             |  
|                            |  |                                  |   |   | Weighted                         |  
|                            |  |                                  |   |   | Average                          |  
|                            |  |                                  |   |   | Grant                            |  
|                            |  | Number of                        |   |   | Date Fair                        |  
|                            |  | Shares                           |   |   | Values                           |  
|Outstanding at July 1       |  | 4,574,043                        |   | $ | 8.60                             |  
|Granted                     |  | 3,064,570                        |   |   | 4.39                             |  
|Vested                      |  | (616,659                         | ) |   | (9.01                            | )
|Forfeited                   |  | (71,332                          | ) |   | (9.10                            | )
|Outstanding at September 30 |  | 6,950,622                        |   | $ | 6.74                             |  

The following table summarizes the status of the Companys
nonvested restricted stock awards during the nine months ended September 30,
2010 and 2009:

|                            |  | Nonvested Restricted
      Stock |   |   | Nonvested Restricted
      Stock |  
|--------------------------- |  | -------------------------------- | - | - | -------------------------------- | -
|                            |  | 2010                             |   |   | 2009                             |  
|                            |  |                                  |   |   | Weighted                         |  
|                            |  |                                  |   |   | Average                          |  
|                            |  |                                  |   |   | Grant                            |  
|                            |  | Number of                        |   |   | Date Fair                        |  
|                            |  | Shares                           |   |   | Values                           |  
|Outstanding at January 1    |  | 4,713,983                        |   | $ | 9.47                             |  
|Granted                     |  | 4,320,262                        |   |   | 5.20                             |  
|Vested                      |  | (1,937,037                       | ) |   | (9.59                            | )
|Forfeited                   |  | (146,586                         | ) |   | (10.98                           | )
|Outstanding at September 30 |  | 6,950,622                        |   | $ | 6.74                             |  

24

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|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES 
|----------------------------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)
|Expressed in thousands of U.S. dollars                                
|(Except for share and per share amounts)                              

16. CONSOLIDATED SEGMENT DATA

Segment information is consistent with how management reviews
the businesses, makes investing and resource allocation decisions and assesses
operating performance. The segment data presented reflects this segment
structure. The Company reports financial and operating information in the
following four segments:

|(a) | System installation: designs, sells, installs, services and monitors
      electronics surveillance and safety systems to residential, commercial,
      industrial and governmental customers (the Installation segment);                                                                                                                                                                                                                                                 
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(b) | Manufacturing of surveillance and safety products: designs,
      manufactures and sells surveillance and safety products, including
      intrusion security, access control and video management systems (the
      Manufacturing segment);                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(c) | Distribution of surveillance and safety products: sells surveillance
      and safety products, including intrusion security, access control and
      video management systems (the Distribution segment); and                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(d) | Providing surveillance and safety services: provides a full range of
      surveillance and safety services, including network alarm response
      services, surveillance and safety products and solutions post-sale,
      maintenance services, software upgrading services, project integration
      services, security guard services, surveillance and safety consulting
      services, and surveillance and safety trustee services (the Service
      segment).

The Company also provides general corporate services to its
segments and these costs are reported as Corporate and others.

Effective April 1, 2010, the Company began presenting its
service business as a separate segment. The Service segment comprised only 1.5%
and 1.3% of revenue and 0.8% and 0.7% of operating income for the three and nine
months ended September 30, 2010, respectively. However, because management
believes the Service segment will expand substantially in the future, it has
made the decision to begin reporting it as a separate segment. Prior to 2010,
the service business was negligible.

Selected information in the segment structure is presented in
the following tables for the three and nine months ended September 30, 2010 and
2009:

Revenues by segment for the three months ended September 30,
2010 and 2009 are as follows:

|Revenues(1)           |   | 2010    |  |   | 2009    | 
|--------------------- | - | ------- |  | - | ------- | 
|Installation segment  | $ | 144,475 |  | $ | 120,500 | 
|Manufacturing segment |   | 25,718  |  |   | 24,520  | 
|Distribution segment  |   | 9,142   |  |   | 14,800  | 
|Service segment       |   | 2,813   |  |   | --      | 
|                      | $ | 182,148 |  | $ | 159,820 | 

Revenues by segment for the nine months ended September 30,
2010 and 2009 are as follows:

|Revenues(1)           |   | 2010    |  |   | 2009    | 
|--------------------- | - | ------- |  | - | ------- | 
|Installation segment  | $ | 366,573 |  | $ | 303,553 | 
|Manufacturing segment |   | 63,706  |  |   | 60,322  | 
|Distribution segment  |   | 34,247  |  |   | 34,276  | 
|Service segment       |   | 6,166   |  |   | --      | 
|                      | $ | 470,692 |  | $ | 398,151 | 

(1) Revenues by operating segments exclude intercompany
transactions.

25

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|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES 
|----------------------------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)
|Expressed in thousands of U.S. dollars                                
|(Except for share and per share amounts)                              

16. CONSOLIDATED SEGMENT DATA (CONTINUED)

Income (loss) from operations by segment for the three months
ended September 30, 2010 and 2009 is as follows:

Income (loss) from operations:
    
    2010
    
    
    2009Installation segment
    $
    44,450
    
    $
    22,111Manufacturing segment
    
    869
    
    
    1,933Distribution segment
    
    (1,015
    )
    
    (177
    )Service segment
    
    277
    
    
    --Corporate and
      others(1)
    
    (9,363
    )
    
    (6,662
    )Income from operations
    
    35,218
    
    
    17,205Corporate interest
      income
    
    132
    
    
    41Corporate gainon modification of
      convertible notes
    
    --
    
    
    9,315Corporate interest
      expense
    
    (3,755
    )
    
    (5,175
    )Corporate other income
    
    311
    
    
    441Income before income
      taxes
    
    31,906
    
    
    21,827Income taxes
    
    (4,638
    )
    
    145Net income
    $
    27,268
    
    $
    21,972


Income (loss) from operations by segment for the nine months
ended September 30, 2010 and 2009 is as follows:

|Income (loss) from operations:                           |   | 2010    |   |   | 2009    |  
|-------------------------------------------------------- | - | ------- | - | - | ------- | -
|Installation segment                                     | $ | 96,989  |   | $ | 55,232  |  
|Manufacturing segment                                    |   | 7       |   |   | 1,302   |  
|Distribution segment                                     |   | (2,684  | ) |   | (725    | )
|Service segment                                          |   | 483     |   |   | --      |  
|Corporate and
      others(1)                            |   | (28,060 | ) |   | (18,049 | )
|Income from operations                                   |   | 66,735  |   |   | 37,760  |  
|Corporate interest
      income                          |   | 263     |   |   | 127     |  
|Corporate gain on modification of
      convertiblenotes |   | --      |   |   | 9,315   |  
|Corporate interest
      expense                         |   | (9,114  | ) |   | (17,792 | )
|Corporate other income                                   |   | 951     |   |   | 1,670   |  
|Income before income
      taxes                         |   | 58,835  |   |   | 31,080  |  
|Income taxes                                             |   | (10,485 | ) |   | (608    | )
|Net income                                               | $ | 48,350  |   | $ | 30,472  |  

(1) Includes non-cash employee compensation, professional fees
and consultancy fees for the Company.

Non-cash employee compensation by segment for the three months
ended September 30, 2010 and 2009 is as follows:

|Non-cash employee compensation: |   | 2010  |  |   | 2009  | 
|------------------------------- | - | ----- |  | - | ----- | 
|Installation segment            | $ | 583   |  | $ | 575   | 
|Manufacturing segment           |   | 978   |  |   | 912   | 
|Distribution segment            |   | 387   |  |   | 365   | 
|Service segment                 |   | 12    |  |   | --    | 
|Corporate and others            |   | 3,593 |  |   | 2,891 | 
|                                | $ | 5,553 |  | $ | 4,743 | 

26

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|CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
      SUBSIDIARIES 
|----------------------------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)
|Expressed in thousands of U.S. dollars                                
|(Except for share and per share amounts)                              

16. CONSOLIDATED SEGMENT DATA (CONTINUED)

Non-cash employee compensation by segment for the nine months
ended September 30, 2010 and 2009 is as follows:

|Non-cash employee compensation: |   | 2010   |  |   | 2009   | 
|------------------------------- | - | ------ |  | - | ------ | 
|Installation segment            | $ | 1,736  |  | $ | 1,589  | 
|Manufacturing segment           |   | 2,882  |  |   | 2,377  | 
|Distribution segment            |   | 1,135  |  |   | 1,068  | 
|Service segment                 |   | 24     |  |   | --     | 
|Corporate and others            |   | 13,157 |  |   | 8,285  | 
|                                | $ | 18,934 |  | $ | 13,319 | 

Depreciation and amortization by segment for the three months
ended September 30, 2010 and 2009 are as follows:

|Depreciation and amortization: |   | 2010  |  |   | 2009  | 
|------------------------------ | - | ----- |  | - | ----- | 
|Installation segment           | $ | 1,107 |  | $ | 1,192 | 
|Manufacturing segment          |   | 1,677 |  |   | 1,524 | 
|Distribution segment           |   | 232   |  |   | 360   | 
|Service segment                |   | 7     |  |   | --    | 
|Corporate and others           |   | 212   |  |   | 141   | 
|                               | $ | 3,235 |  | $ | 3,217 | 

Depreciation and amortization by segment for the nine months
ended September 30, 2010 and 2009 are as follows:

|Depreciation and amortization: |   | 2010  |  |   | 2009  | 
|------------------------------ | - | ----- |  | - | ----- | 
|Installation segment           | $ | 3,287 |  | $ | 3,508 | 
|Manufacturing segment          |   | 4,853 |  |   | 4,454 | 
|Distribution segment           |   | 938   |  |   | 1,067 | 
|Service segment                |   | 20    |  |   | --    | 
|Corporate and others           |   | 624   |  |   | 399   | 
|                               | $ | 9,722 |  | $ | 9,428 | 

Total assets by segment as of September 30, 2010 and December
31, 2009 are as follows:

|Total assets             |   | September 30, |  |   | December 31, | 
|------------------------ | - | ------------- |  | - | ------------ | 
|                         |   | 2010          |  |   | 2009         | 
|Installation segment     | $ | 645,863       |  | $ | 476,743      | 
|Manufacturing segment    |   | 191,765       |  |   | 188,978      | 
|Distribution segment     |   | 38,947        |  |   | 47,458       | 
|Service segment          |   | 11,222        |  |   | --           | 
|Corporate and others (1) |   | 181,896       |  |   | 60,379       | 
|                         | $ | 1,069,693     |  | $ | 773,558      | 

(1) Includes deposits paid for acquisition of
subsidiaries, properties and intangible assets.

Goodwill by segment as of September 30, 2010 and December 31,
2009, is as follows:

|Goodwill              |   | September 30, |  |   | December 31, | 
|--------------------- | - | ------------- |  | - | ------------ | 
|                      |   | 2010          |  |   | 2009         | 
|Installation segment  | $ | 11,079        |  | $ | 11,079       | 
|Manufacturing segment |   | 56,456        |  |   | 56,456       | 
|Distribution segment  |   | 11,979        |  |   | 11,976       | 
|                      | $ | 79,514        |  | $ | 79,511       | 

27

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

Special Note Regarding Forward-Looking Statements

In addition to historical information, this report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. We use words such as believe,
expect, anticipate, project, target, plan, optimistic, intend,
aim, will or similar expressions which are intended to identify
forward-looking statements. Such statements include, among others, those
concerning market and industry segment growth and demand and acceptance of new
and existing products; any projections of sales, earnings, revenue, margins or
other financial items; any statements of the plans, strategies and objectives of
management for future operations; any statements regarding future economic
conditions or performance; uncertainties related to conducting business in
China, as well as all assumptions, expectations, predictions, intentions or
beliefs about future events. You are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, as well as assumptions, that, if they were to ever materialize or
prove incorrect, could cause the results of the Company to differ materially
from those expressed or implied by such forward-looking statements. Such risks
and uncertainties, among others, include:

- Our ability to attract new customers;
- Our ability to employ and retain qualified employees;
- Our ability to successfully integrate companies that we have acquired and
  to avoid or mitigate potential damages arising from risks associated with
  acquired companies and the legal structures utilized to effectuate
  acquisitions of these companies;
- Our ability to keep pace with technological developments in the
  surveillance and safety industry, and to develop and commercialize new
  products;
- Competition and competitive factors in the markets in which we compete;
- General economic and business conditions in China and in the local
  economies in which we regularly conduct business, which can affect demand for
  the Companys products and services;
- Changes in laws, rules and regulations governing the business community in
  China in general and the surveillance and safety industry in particular; and
- The risks identified in the Risk Factors section included in the
  Companys annual report on Form 10-K for the year ended December 31, 2009, as
  amended, and the subsequent SEC filings.

All statements other than statements of historical fact are
statements that could be deemed forward-looking statements. The Company assumes
no obligation and does not intend to update these forward-looking statements,
except as required by law.

Use of terms

Except as otherwise indicated by the context, references to
CSR, we, us, our, our Company, or the Company are to China Security
& Surveillance Technology, Inc., a Delaware corporation, and its
consolidated subsidiaries. Unless the context otherwise requires, all references
to:

- Cheng Feng are to Shanghai Cheng Feng Digital Technology Co., Ltd., a
  corporation incorporated in the Peoples Republic of China and an indirect,
  wholly owned subsidiary of the Company;
- Chuang Guan are to Shenzhen Chuang Guan Intelligence Network Technology
  Co., Ltd., a corporation incorporated in the Peoples Republic of China;
- Coson are to Shenzhen Coson Electronic Co., Ltd., a corporation
  incorporated in the Peoples Republic of China and an indirect, wholly owned
  subsidiary of the Company;
- CSSD are to China Security & Surveillance Distribution (PRC) Inc., a
  corporation incorporated in the Peoples Republic of China and a direct,
  wholly owned subsidiary of the Company;
- CSSM are to China Security & Surveillance Manufacturing (PRC) Inc.,
  a corporation incorporated in the Peoples Republic of China and a direct,
  wholly owned subsidiary of the Company;
- CSSS are to China Security & Surveillance Services (PRC) Inc., a
  corporation incorporated in the Peoples Republic of China and a direct,
  wholly owned subsidiary of the Company;
- CSST PRC are to China Security & Surveillance Technology (PRC) Inc.,
  a corporation incorporated in the Peoples Republic of China and a direct,
  wholly owned subsidiary of the Company;
- DIT are to DIT Industry(H.K.) Limited, a Hong Kong corporation and an
  indirect, wholly owned subsidiary of the Company;
- DM are to Beijing DM Security & Technology Co., Ltd., a corporation
  incorporated in the Peoples Republic of China;

28

---

- Golden are to Golden Group Corporation (Shenzhen) Limited, a corporation
  incorporated in the Peoples Republic of China and an indirect, wholly owned
  subsidiary of the Company;
- Guanling are to Beijing Aurine Divine Land Technology Co., Ltd., a
  corporation incorporated in the Peoples Republic of China and an indirect,
  wholly owned subsidiary of the Company;
- HiEasy are to HiEasy Electronic Technology Development Co., Ltd., a
  corporation incorporated in the Peoples Republic of China and an indirect,
  wholly owned subsidiary of the Company;
- Hongtianzhi are to Shenzhen Hongtianzhi Electronics Co., Ltd., a
  corporation incorporated in the Peoples Republic of China and an indirect,
  wholly owned subsidiary of the Company;
- Jin Lin are to Shenzhen Jin Lin Technology Co., Ltd., a corporation
  incorporated in the Peoples Republic of China and an indirect, wholly owned
  subsidiary of the Company;
- Longhorn are to Shenzhen Longhorn Security Technology Co., Ltd., a
  corporation incorporated in the Peoples Republic of China and an indirect,
  wholly owned subsidiary of the Company;
- Minking are to Changzhou Minking Electronics Co., Ltd., a corporation
  incorporated in the Peoples Republic of China and an indirect, wholly owned
  subsidiary of the Company;
- Safetech are to China Safetech Holdings Limited, a British Virgin
  Islands corporation and a direct, wholly owned subsidiary of the Company;
- Stonesonic are to Guangdong Stonesonic Digital Technique Co., Ltd., a
  corporation incorporated in the Peoples Republic of China and an indirect,
  wholly owned subsidiary of the Company;
- Tsingvision are to Hangzhou Tsingvision Intelligence System Co., Ltd., a
  corporation incorporated in the Peoples Republic of China and an indirect,
  wholly owned subsidiary of the Company;
- PRC and China are to the Peoples Republic of China;
- RMB are to Yuan Renminbi of China;
- U.S. dollar, $ and US$ are to United States dollars;
- Exchange Act are to the Securities Exchange Act of 1934, as amended; and
- Securities Act are to the Securities Act of 1933, as amended.

Overview of Our Business

We are primarily engaged, through our indirect Chinese
subsidiaries, in the manufacturing, distributing, installing, and servicing of
surveillance and safety products and systems and developing surveillance and
safety related software in China. Our customers are primarily comprised of: (1)
governmental entities, such as customs agencies, courts, public security
bureaus, and prisons; (2) non-profit organizations, including schools, museums,
sports arenas, and libraries; and (3) commercial entities, such as airports,
hotels, real estate, banks, mines, railways, supermarkets, and entertainment
venues.

A majority of our revenues are derived from the provision of
surveillance and safety packaged solutions, including manufacturing,
installation and after-sale service maintenance of surveillance and safety
systems. Because the majority of our revenues are derived from installations,
they are generally non-recurring. Our revenues are not concentrated within any
one customer or group of related customers. Maintenance services in our packaged
solutions are included for the first year following installation. Our customers
may separately purchase maintenance services after the first year.

Our sales network covers most of Chinas populated areas, and
we do not rely on any particular region for revenues. Our subsidiaries
collectively have more than 150 branch offices and distribution points.

Reportable Operating Segments

Segment information is consistent with how management reviews
the businesses, makes investing and resource allocation decisions and assesses
operating performance. We have set up a new service segment for provision of a
full range of surveillance and safety services and realigned our management and
segment reporting structure effective April 1, 2010. We now report financial and
operating information in the following four segments:

- The Installation Segment provides design, sales, installation, services
  and monitoring of electronics surveillance and safety systems to residential,
  commercial, industrial and governmental customers (the Installation
  Segment);
- The Manufacturing Segment provides design, manufacturing and sales of
  surveillance and safety products, including intrusion security, access control
  and video management systems (the Manufacturing Segment);
- The Distribution Segment provides distribution and sales of surveillance
  and safety products and services, including intrusion security, access control and video management systems
  (the Distribution Segment); and
- The Service Segment provides a full range of surveillance and safety
  services, including network alarm response services, surveillance and safety
  products and solutions post-sale, maintenance services, software upgrading
  services, project integration services, security guard services, surveillance
  and safety consulting services, and surveillance and safety trustee services
  (the Service Segment).

29

---

The Company also provides general corporate services to its
segments and these costs are reported as Corporate and Others.

The Service Segment comprised only approximately 1.5% and 1.3%
of revenue and approximately 0.8% and 0.7% of operating income for the three and
nine months ended September 30, 2010, respectively. However, because we believe
the Service Segment will expand substantially in the future, we have made the
decision to begin showing it as a separate segment. Prior to 2010, the service
business was negligible.

Third Quarter Financial Performance Highlights

We experienced strong demand for our products and services and
significant growth in our revenues, gross margin and net income in this quarter.
Effective on April 1, 2010, we also established a new service segment for the
provision of a full range of surveillance and safety services to further expand
our one-stop-shop service. The surveillance and safety product market in China
continued to expand in the third quarter of 2010 due, in part, to several
programs and regulatory drivers initiated by the Chinese government, such as
State Ordinance 458 and the Safe City program, which require many public places
to install security systems, including city-wide surveillance systems, traffic
conjunctions, critical government locations, cyber cafés, bars and discotheques.
The ongoing installation of these security systems as required by applicable
Chinese law is being conducted by the affected constituents. In addition,
economic development in China and the general rise in affluence of the
population of China continue to contribute to increased demand for surveillance
and safety products within various industries and organizations, such as
residential real estate, factories and shopping centers.

The following are some financial highlights for the third
quarter of 2010:

- Revenues: Revenues increased $22.33 million, or 14.0%, to $182.15
  million for the third quarter of 2010, from $159.82 million for the same
  quarter of last year.
- Gross margin: Gross margin increased to 30.7% for the third quarter
  of 2010 from 22.1% for the same period in 2009.
- Income from operations: Income from operations increased $18.01
  million, or 104.6%, to $35.22 million for the third quarter of 2010, from
  $17.21 million for the same period last year.
- Operating margin: Operating margin (the ratio of income from
  operations to revenues, expressed as a percentage) was 19.3% for the third
  quarter of 2010, compared to 10.8% during the same period in 2009.
- Net income attributable to the Company: Despite a $6.24 million
  increase in non-cash expenses as discussed below, net income attributable to
  the Company increased $5.27 million, or 24.0%, to $27.27 million for the third
  quarter of 2010, from $22.00 million for the same period of last year.
- Net margin: Net margin (the ratio of net income attributable to the
  Company to revenues, expressed as a percentage) was 15.0% for the third
  quarter of 2010, compared to 13.8% for the same period in 2009.
- Fully diluted net income per share: Fully diluted net income per
  share was $0.31 for the third quarter of 2010, as compared to $0.41 for the
  same period last year.
- Non-cash expenses: Non-cash expenses were $8.78 million for the
  three months ended September 30, 2010, representing an increase of $6.24
  million, or 245.7% from $2.54 million (including a non-cash gain of $9.32
  million on the modification of convertible notes) during the same period last
  year. Non-cash expenses for the three months ended September 30, 2010 included
  (i) depreciation and amortization of $3.23 million, and (ii) non-cash employee
  compensation expense of $5.55 million.

30

---

Our net income attributable to the Company for the three months
ended September 30, 2010 and 2009 was approximately $27.27 million and $22.00
million, respectively. Our net income attributable to the Company for the nine
months ended September 30, 2010 and 2009 was approximately $48.35 million and
$30.51 million, respectively. Our net income attributable to the Company was
materially impacted by: (i) depreciation and amortization of long-lived assets
in the subsidiaries we acquired; (ii) non-cash employee compensation recognized
pursuant to Accounting Standard Codification (ASC) 718; and (iii) redemption
accretion on convertible notes we issued in February and April 2007. In the
table below, we have presented a non-GAAP financial disclosure to provide a
quantitative analysis of the impact of the depreciation and amortization of
long-lived assets in the subsidiaries we acquired, non-cash employee
compensation and redemption accretion on convertible notes on our net income.
Because these items do not require the use of current assets, management does
not include these items in its analysis of our financial results or how we
allocate our resources. Because of this, we deemed it meaningful to provide this
non-GAAP disclosure of the impact of these significant items on our financial
results.

The following table summarizes the Companys non-cash expenses
(income) during the three and nine months ended September 30, 2010 and 2009.

(All amounts in millions of U.S. dollars)

|                                                                     |   | Three Months Ended |  |   |       |  
|-------------------------------------------------------------------- | - | ------------------ |  | - | ----- | -
|                                                                     |   | September 30,      |  |   |       |  
|Non-cash expenses (income)                                           |   |                    |  |   |       |  
|                                                                     |   | 2010               |  |   | 2009  |  
|Depreciation and amortization                                        | $ | 2.99               |  | $ | 2.96  |  
|Depreciation and amortization (included in cost of goods
      sold) |   | 0.24               |  |   | 0.26  |  
|Non-cash employee compensation                                       |   | 5.55               |  |   | 4.74  |  
|Redemption accretion on convertible notes                            |   | --                 |  |   | 3.90  |  
|Gain on modification of convertible notes                            |   | --                 |  |   | (9.32 | )
|Total                                                                | $ | 8.78               |  | $ | 2.54  |  

|                                                                     |   | Nine Months Ended |  |   |       |  
|-------------------------------------------------------------------- | - | ----------------- |  | - | ----- | -
|                                                                     |   | September 30,     |  |   |       |  
|Non-cash expenses (income)                                           |   |                   |  |   |       |  
|                                                                     |   | 2010              |  |   | 2009  |  
|Depreciation and amortization                                        | $ | 8.98              |  | $ | 8.69  |  
|Depreciation and amortization (included in cost of goods
      sold) |   | 0.74              |  |   | 0.74  |  
|Non-cash employee compensation                                       |   | 18.93             |  |   | 13.32 |  
|Redemption accretion on convertible notes                            |   | --                |  |   | 14.85 |  
|Gain on modification of convertible notes                            |   | --                |  |   | (9.32 | )
|Total                                                                | $ | 28.65             |  | $ | 28.28 |  

Results of Operations

The following table sets forth key components of our results of
operations for the periods indicated, in millions of U.S. dollars and as a
percentage of revenues.

(All amounts, other than percentages, in millions of U.S.
dollars)

Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues
    $
    182.15
    
    
    100.0%
    
    $
    159.82
    
    
    100.0%
    
    $
    470.69
    
    
    100.0%
    
    $
    398.15
    
    
    100.0%Cost of goods sold (including depreciation and amortization
      for the three and nine months ended September 30, 2010 and 2009 of $0.24,
      $0.74, $0.26 and $0.74, respectively)
    
    (126.22
    )
    
    69.3%
    
    
    (124.48
    )
    
    77.9%
    
    
    (342.43
    )
    
    72.8%
    
    
    (306.77
    )
    
    77.0%Gross profit
    
    55.93
    
    
    30.7%
    
    
    35.34
    
    
    22.1%
    
    
    128.26
    
    
    27.2%
    
    
    91.38
    
    
    23.0%Selling and marketing
    
    (2.85
    )
    
    1.6%
    
    
    (3.10
    )
    
    1.9%
    
    
    (8.69
    )
    
    1.8%
    
    
    (8.85
    )
    
    2.2%General and administrative
    
    (9.32
    )
    
    5.1%
    
    
    (7.33
    )
    
    4.5%
    
    
    (24.92
    )
    
    5.3%
    
    
    (22.76
    )
    
    5.7%Non-cash employee compensation
    
    (5.55
    )
    
    3.1%
    
    
    (4.74
    )
    
    3.0%
    
    
    (18.93
    )
    
    4.0%
    
    
    (13.32
    )
    
    3.3%Depreciation and amortization
    
    (2.99
    )
    
    1.6%
    
    
    (2.96
    )
    
    1.9%
    
    
    (8.98
    )
    
    1.9%
    
    
    (8.69
    )
    
    2.2%


|Income from operations                    |   | 35.22 |   |  | 19.3% |  |   | 17.21 |   |  | 10.8% |  |   | 66.74  |   |  | 14.2% |  |   | 37.76  |   |  | 9.6% | 
|----------------------------------------- | - | ----- | - |  | ----- |  | - | ----- | - |  | ----- |  | - | ------ | - |  | ----- |  | - | ------ | - |  | ---- | 
|Other income                              |   | 0.45  |   |  | 0.3%  |  |   | 0.51  |   |  | 0.3%  |  |   | 1.21   |   |  | 0.2%  |  |   | 1.84   |   |  | 0.5% | 
|Gain on modification of convertible notes |   | --    |   |  | --    |  |   | 9.32  |   |  | 5.8%  |  |   | --     |   |  | --    |  |   | 9.32   |   |  | 2.3% | 
|Interest expense, Cash                    |   | (3.76 | ) |  | 2.1%  |  |   | (1.28 | ) |  | 0.8%  |  |   | (9.12  | ) |  | 1.9%  |  |   | (2.95  | ) |  | 0.7% | 
|Redemption accretion on convertible notes |   | --    |   |  | --    |  |   | (3.90 | ) |  | 2.4%  |  |   | --     |   |  | --    |  |   | (14.85 | ) |  | 3.8% | 
|Income before income taxes                |   | 31.91 |   |  | 17.5% |  |   | 21.86 |   |  | 13.7% |  |   | 58.83  |   |  | 12.5% |  |   | 31.12  |   |  | 7.9% | 
|Income taxes                              |   | (4.64 | ) |  | 2.5%  |  |   | 0.14  |   |  | 0.1%  |  |   | (10.48 | ) |  | 2.2%  |  |   | (0.61  | ) |  | 0.2% | 
|                                          |   |       |   |  |       |  |   |       |   |  |       |  |   |        |   |  |       |  |   |        |   |  |      | 
|Net income attributable to the Company    | $ | 27.27 |   |  | 15.0% |  | $ | 22.00 |   |  | 13.8% |  | $ | 48.35  |   |  | 10.3% |  | $ | 30.51  |   |  | 7.7% | 

31

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Revenues

Our revenues are primarily generated from system installations,
manufacturing and distribution of surveillance and safety products and providing
surveillance and safety services. We experienced solid growth in revenues during
the three and nine months ended September 30, 2010. Revenues increased $22.33
million, or 14.0%, to $182.15 million for the three months ended September 30,
2010 from $159.82 million for the three months ended September 30, 2009.
Revenues increased $72.54 million, or 18.2%, to $470.69 million for the nine
months ended September 30, 2010 from $398.15 million for the nine months ended
September 30, 2009. This increase was mainly attributable to growth in the
surveillance and safety market in China, the increased market demand for our
products, our increased brand recognition. Our strategic efforts to increase our
distribution channels during 2008 and 2009 and adequate working capital from
prior fund raising activities with banks also allowed us to successfully take
advantage of the growth in market demand in this quarter. Historically, the
first quarter has generally been a slow quarter for us due to the Chinese New
Year holiday and the fourth quarter has generally been the strongest quarter.
Management expects the same trend in 2010 and that revenue growth will remain
strong for the remainder of 2010.

The following table shows the revenues recognized in the third
quarter of 2010:

|(In millions of U.S. dollars)                                                                                             |  
|------------------------------------------------------------------------------------------------------------------------- | -
|Revenues from the Installation Segment
      recognized from installation contracts signed before June 30, 2010           | $
|Revenues from the Installation Segment recognized from
      installation contracts signed in the third quarter of 2010   |  
|Revenues from the Manufacturing Segment
      recognized from manufacturing contracts signed before June 30, 2010         |  
|Revenues from the Manufacturing Segment recognized from
      manufacturing contracts signed in the third quarter of 2010 |  
|Revenues from the Distribution Segment
      recognized from distribution contracts signed before June 30, 2010           |  
|Revenues from the Distribution Segment recognized from
      distribution contracts signed in the third quarter of 2010   |  
|Revenues from the Service Segment
      recognized from service contracts signed before June 30, 2010                     |  
|Revenues from the Service Segment recognized from service
      contracts signed in the third quarter of 2010             |  
|Total revenues recognized in the third
      quarter of 2010                                                              | $
|Revenues deferred                                                                                                         | $
|Backlog of sales contracts signed before
      September 30, 2010 (1)                                                     | $

(1) We have conservatively not included letters of intent,
framework agreements and various other agreements in our backlog numbers as they
are subject to final binding agreements to be entered into at later dates.

Our revenues are generated from four business segments:
Installation Segment, Manufacturing Segment, Distribution Segment and Service
Segment.

The following table shows the different segments comprising our
total revenues for the three and nine months ended September 30, 2010 and 2009.

(All amounts, except percentage of revenues, in millions of U.S.
dollars)

|                      |   | Three months ended September 30, | 
|--------------------- | - | -------------------------------- | 
|Revenues              |   | 2010                             | 
|Installation Segment  | $ | 144.48                           | 
|Manufacturing Segment |   | 25.72                            | 
|Distribution Segment  |   | 9.14                             | 
|Service Segment       |   | 2.81                             | 
|Total                 | $ | 182.15                           | 

32

---

|                      |   | Nine months ended September 30, | 
|--------------------- | - | ------------------------------- | 
|Revenues              |   | 2010                            | 
|Installation Segment  | $ | 366.57                          | 
|Manufacturing Segment |   | 63.71                           | 
|Distribution Segment  |   | 34.25                           | 
|Service Segment       |   | 6.16                            | 
|Total                 | $ | 470.69                          | 

For the three months ended September 30, 2010 and 2009, our
Installation Segment generated revenues of $144.48 million and $120.50 million,
which represented 79.4% and 75.4% of our total revenues, respectively. For the
nine months ended September 30, 2010 and 2009, our Installation Segment
generated revenues of $366.57 million and $303.55 million, which represented
77.9% and 76.2% of our total revenues, respectively. The increase in revenues
was mainly due to the following factors: First, demand for surveillance and
security products has grown in China, which we attribute in part to the general
rise in affluence of population in China. The increased demand within various
industries and organizations, such as residential real estate, factories and
shopping centers, also contributed to increased demand for surveillance and
safety products. Second, the Chinese government initiated several programs and
regulatory drivers, such as State Ordinance 458 and the 3111 program, that
require many public places, including city-wide surveillance systems, traffic
surveillance systems, critical government locations, cyber cafés, bars and
discotheques, to install security systems. Third, our strategic efforts to
increase our distribution channels during 2008 and 2009 allowed us to
successfully take advantage of the growth in market demand in the first nine
months of 2010. Fourth, in November 2008, the Chinese government announced an
economic stimulus package to invest RMB 4 trillion (approximately $586 billion)
in infrastructure and social welfare by the end of 2010. The economic stimulus
package increased the demand for surveillance and safety products in China.
Fifth, we have been successful in raising sufficient working capital to
facilitate expansion in the China market. Finally, our increased brand
recognition also contributed to the growth in revenues.

For the three months ended September 30, 2010 and 2009, our
Manufacturing Segment generated revenues of $25.72 million and $24.52 million,
representing 14.1% and 15.3% of our total revenues, respectively. For the nine
months ended September 30, 2010 and 2009, our Manufacturing Segment generated
revenues of $63.71 million and $60.32 million, representing 13.5% and 15.2% of
our total revenues, respectively. Management believes that revenues from the
installation projects will continue to be the Companys major revenue source in
the next few years.

For the three months ended September 30, 2010 and 2009, our
Distribution Segment generated revenues of $9.14 million and $14.80 million,
representing 5.0% and 9.3% of our total revenues. For the nine months ended
September 30, 2010 and 2009, our Distribution Segment generated revenues of
$34.25 million and $34.28 million, representing 7.3% and 8.6% of our total
revenue, respectively. Such
decrease was mainly due to a decrease of selling prices due to market
competition.

During the second quarter of 2010, we established a new segment
 our Service Segment which generated revenues of $2.81 million and $6.16
million, representing 1.5% and 1.3% of our total revenues for the three and nine
months ended September 2010, respectively.

Management expects growth in all four segments to remain strong
in the remainder of 2010 due to (i) continued growth in the surveillance and
safety market both within the corporate and government sectors, (ii) better
capitalization of the Company to fuel its growth, (iii) continued enhancement of
our brand and profile in China, and (iv) acquisition strategy intended to boost
our market share and competitiveness.

Cost of goods sold

Our cost of goods sold is primarily comprised of the costs of
our raw materials, labor and overhead. Cost of goods sold for the third quarter
of 2010 increased by $1.74 million, or 1.4%, to $126.22 million, as compared to
$124.48 million for the same period last year. Cost of goods sold for the nine
months ended September 30, 2010 increased by $35.66 million, or 11.6%, to
$342.43 million, as compared to $306.77 million for the same period last year.
The increase was mainly due to the increase of sales volume.

Gross profit and gross margin

Our gross profit is equal to the difference between our
revenues and our cost of goods sold. Our gross profit increased $20.59 million,
or 58.3%, to $55.93 million for the three months ended September 30, 2010, from
$35.34 million for the same period last year. Gross margin for the three months ended
September 30, 2010 was 30.7%, as compared to 22.1% for the same period of 2009.
Our gross profit increased $36.88 million, or 40.4%, to $128.26 million for the
nine months ended September 30, 2009, from $91.38 million for the same period
last year. Gross margin for the nine months ended September 30, 2010 was 27.2%,
as compared to 23.0% for the same period of 2009.

33

---

The following table shows the different segment components
comprising our gross profit margin over the three and nine months ended
September 30, 2010 and 2009.

|                      |  | Three months ended September 30, |  |  | Nine months ended September 30, | 
|--------------------- |  | -------------------------------- |  |  | ------------------------------- | 
|Gross Margin          |  | 2010                             |  |  | 2009                            | 
|Installation Segment  |  | 32.9%                            |  |  | 21.6%                           | 
|Manufacturing Segment |  | 25.6%                            |  |  | 30.3%                           | 
|Distribution Segment  |  | 10.9%                            |  |  | 12.5%                           | 
|Service Segment       |  | 27.2%                            |  |  | --                              | 
|Total                 |  | 30.7%                            |  |  | 22.1%                           | 

The gross margin of the newly established Service Segment was
27.2% and 21.7% for the three months and nine months ended September 30, 2010,
respectively. The increase in our gross margin for the Installment Segment was
primarily driven by the high margins from larger scale projects resulting
primarily from our marketing efforts. The decrease in our gross margin for the
Manufacturing Segment was primarily driven by the decrease of selling prices in
an effort to maintain market share and expand our customer base. The decrease of
gross margin for the Distribution Segment for the three and nine months ended
September 30, 2010 was mainly due to the decrease of products selling prices.

Selling and marketing expenses

Our selling and marketing expenses are comprised primarily of
sales commissions, the cost of advertising and promotional materials, salaries
and fringe benefits of sales personnel, after-sale support services and other
sales related costs. Our selling and marketing expenses decreased $0.25 million,
or 8.1%, to $2.85 million for the three months ended September 30, 2010 from
$3.10 million for the same period in 2009. As a percentage of revenues, our
selling and marketing expenses decreased to 1.6% for the three months ended
September 30, 2010 from 1.9% for the same period in 2009. In the first nine
months of fiscal 2010, our selling and marketing expenses decreased $0.16
million, or 1.8% to $8.69 million from $8.85 million. As a percentage of
revenues, our selling and marketing expenses decreased to 1.8% for the nine
months ended September 30, 2010 from 2.2% for the same period in 2009. The
slight percentage decrease was due to cost efficiency.

General and administrative expenses

General and administrative expenses consist primarily of
compensation and benefits to our general management, finance and administrative
staff, professional advisor fees, audit fees and other expenses incurred in
connection with general operations. Our general and administrative expenses
increased $1.99 million, or 27.1%, to $9.32 million for the three months ended
September 30, 2010 from $7.33 million for the same period in 2009. As a
percentage of revenues, general and administrative expenses increased to 5.1%
for the three months ended September 30, 2010 from 4.5% for the same period in
2009. The dollar and percentage increase was mainly due to the hiring of
additional staff and professional expenses related to consolidating our acquired
subsidiaries into the public reporting company. In the first nine months of
2010, our general and administrative expenses increased $2.16 million, or 9.5%
to $24.92 million from $22.76 million. As a percentage of revenues, general and
administrative expenses decreased to 5.3% for the nine months ended September
30, 2010 from 5.7% for the same periods in 2009. The percentage decrease was
mainly due to economy of scale and managements cost control efforts.

Non-cash employee compensation

Non-cash employee compensation by segment for the three and
nine months ended September 30, 2010 and 2009 is as follows:

All amounts, except percentage of non-cash compensation, in
millions of U.S. dollars

|                               |   | Three months ended September 30, | 
|------------------------------ | - | -------------------------------- | 
|Non-cash employee compensation |   | 2010                             | 
|Installation Segment           | $ | 0.59                             | 
|Manufacturing Segment          |   | 0.98                             | 

|Distribution Segment |   | 0.38 |  |  | 6.8%   |  |   | 0.36 |  |  | 7.6%   | 
|-------------------- | - | ---- |  |  | ------ |  | - | ---- |  |  | ------ | 
|Service Segment      |   | 0.01 |  |  | 0.1%   |  |   | --   |  |  | --     | 
|Corporate and others |   | 3.59 |  |  | 64.8%  |  |   | 2.89 |  |  | 61.0%  | 
|Total                | $ | 5.55 |  |  | 100.0% |  | $ | 4.74 |  |  | 100.0% | 

34

---

|                               |   | Nine months ended September 30, | 
|------------------------------ | - | ------------------------------- | 
|Non-cash employee compensation |   | 2010                            | 
|Installation Segment           | $ | 1.74                            | 
|Manufacturing Segment          |   | 2.89                            | 
|Distribution Segment           |   | 1.13                            | 
|Service Segment                |   | 0.02                            | 
|Corporate and others           |   | 13.15                           | 
|Total                          | $ | 18.93                           | 

Effective February 7, 2007, our board of directors adopted the
2007 Equity Incentive Plan (the Plan) which was subsequently amended in
February 2010. The Plan provides for grants of stock options, stock appreciation
rights, performance units, restricted stock, restricted stock units, and
performance shares. A total of 12,000,000 shares of our common stock may be
issued under our Plan. The Plan has a 10-year term. During the three and nine
months ended September 30, 2010, we granted an aggregate of 3,064,570, and
4,320,262 shares of restricted stock pursuant to the Plan to our employees and
consultants, respectively. These shares will vest with respect to each of the
employees and consultants over a period of four to five years.

Non-cash employee compensation for the three months ended
September 30, 2010 increased to $5.55 million from $4.74 million for the same
period in 2009. In the first nine months of fiscal 2010, non-cash employee
compensation increased to $18.93 million from $13.32 million, primarily because
more shares were granted to employees and consultants under the Plan during the
respective period.

Depreciation and amortization

Our depreciation and amortization costs increased $0.01
million, or 0.3%, to $3.23 million (including $0.24 million of depreciation and
amortization costs included under cost of goods sold) for the three months ended
September 30, 2010 from $3.22 million for the same period in 2009. As a
percentage of revenues, depreciation and amortization expenses decreased to 1.8%
for the three months ended September 30, 2010 from 2.0% for the same period in
2009. In the first nine months of fiscal 2010, our depreciation and amortization
increased $0.29 million, or 3.1%, to $9.72 million (including $0.74 million of
depreciation and amortization costs included under cost of goods sold) from
$9.43 million for the same period 2009. As a percentage of revenues,
depreciation and amortization expenses decreased to 2.1% for the nine months
ended September 30, 2010 from 2.4% for the same period in 2009. This dollar
increase was primarily due to the increased depreciation and amortization cost
of assets resulting from the acquired subsidiaries. Such percentage decrease was
primarily due to the increase in incremental revenue in 2010.

Income from operations

Our income from operations increased $18.01 million, or 104.6%,
to $35.22 million for the three months ended September 30, 2010 as compared to
$17.21 million for the same period in 2009. As a percentage of revenues, income
from operations increased to 19.3% for the three months ended September 30, 2010
from 10.8% for the same period in 2009. In the first nine months of fiscal 2010,
our income from operations increased $28.98 million, or 76.7%, to $66.74 million
as compared to $37.76 million for the same period in 2009. As a percentage of
revenues, income from operations increased to 14.2% for the nine months ended
September 30, 2010 from 9.6% for the same period in 2009.

The following table shows the different segments comprising our
income (loss) from operations for the three and nine months ended September 30,
2010 and 2009.

All amounts, except percentage of income from operations, in
millions of U.S. dollars

|                              |   | Three months ended September 30, | 
|----------------------------- | - | -------------------------------- | 
|Income (loss) from operations |   | 2010                             | 
|Installation Segment          | $ | 44.45                            | 
|Manufacturing Segment         |   | 0.87                             | 

|Distribution Segment |   | (1.02 | ) |  | (2.9%  | ) |   | (0.17 | ) |  | (1.0%  | )
|-------------------- | - | ----- | - |  | ------ | - | - | ----- | - |  | ------ | -
|Service Segment      |   | 0.28  |   |  | 0.8%   |   |   | --    |   |  | --     |  
|Corporate and others |   | (9.36 | ) |  | (26.6% | ) |   | (6.66 | ) |  | (38.7% | )
|Total                | $ | 35.22 |   |  | 100.0% |   | $ | 17.21 |   |  | 100.0% |  

35

---

|                              |   | Nine months ended September 30, |  
|----------------------------- | - | ------------------------------- | -
|Income (loss) from operations |   | 2010                            |  
|Installation Segment          | $ | 96.99                           |  
|Manufacturing Segment         |   | 0.01                            |  
|Distribution Segment          |   | (2.69                           | )
|Service Segment               |   | 0.49                            |  
|Corporate and others          |   | (28.06                          | )
|Total                         | $ | 66.74                           |  

Income from operations related to the Installation Segment
increased 101.0%, or $22.34 million, to $44.45 million for the three months
ended September 30, 2010, compared to $22.11 million for the same period in
2009. In the first nine months of fiscal 2010, income from operations related to
the Installation Segment increased 75.6%, or $41.76 million, to $96.99 million,
compared to $55.23 million. Such increase was mainly due to higher demand of
total one-stop-shop installations from customers. We finished more projects with
higher margin in 2010 as compared to the same period in 2009.

Income from operations related to the Manufacturing Segment was
$0.87 million for the three months ended September 30, 2010, compared to $1.93
million for the same period in 2009. Income from operations related to the
Manufacturing Segment was $0.01 million for the nine months ended September 30,
2010, compared to $1.30 million for the same period in 2009. During the three
and nine months ended September 30, 2010, we hired additional staff to meet the
anticipated growth of the Manufacturing Segment which, together with the
increased non-cash expenses, more than offset the growth in revenues. We expect
that the Manufacturing Segments margin will increase as we integrate the
recently completed acquisitions which will allow us to benefit from economies of
scale.

Loss from operations related to the Distribution Segment was
$1.02 million for the three months ended September 30, 2010, compared to the
operating loss of $0.17 million for the same period in 2009. Loss from
operations related to the Distribution Segment was $2.69 million for the nine
months ended September 30, 2010, compared to loss from operations of $0.72
million for the same period in 2009. The increase in loss from operations was
mainly due to the decrease of gross margin.

Income from operations related to the newly established Service
Segment was $0.28 million and $0.49 million for the three and nine months ended
September 30, 2010, respectively.

We also provide general corporate services to our segments.
Costs attributable to these services are reported as corporate and other
expenses. These costs include amortization, depreciation, and non-cash
compensation for employees. Loss from operations related to the Corporate and
others increased 40.5%, or $2.70 million, to $9.36 million for the three months
ended September 30, 2010, compared to $6.66 million for the same period in 2009.
Loss from operations related to Corporate and others increased 55.5%, or $10.01
million, to $28.06 million for the nine months ended September 30, 2010,
compared to $18.05 million for the same period in 2009. This increase was mainly
due to the increase of non-cash compensation as discussed above and professional
expenses related to the costs of being a public reporting company.

Other income

Our other income decreased $0.06 million, or 11.8%, to $0.45
million for the three months ended September 30, 2010 from $0.51 million for the
same period in 2009. As a percentage of revenues, other income remained at 0.3%
for the three months ended September 30, 2010 as compared to the same period in
2009. Our other income decreased $0.63 million, or 34.2%, to $1.21 million for
the nine months ended September 30, 2010 from $1.84 million for the same period
in 2009. As a percentage of revenues, other income for the nine months ended
September 30, 2010 was 0.2%, as compared to 0.5% for the same period in 2009.
The dollar and percentage decrease was mainly due to a subsidy received from the
local government in 2009. We did not receive any significant subsidy income in
2010.

Interest expense (excluding redemption accretion on
convertible notes)

During the first nine months of 2010, we borrowed funds under
26 short-term loans from banks and 4 product financing arrangements from financial institutions of which had incurred
total interest expense of $3.76 million for the three months ended September 30,
2010, as compared to $1.28 million for the same period in 2009. During the first
nine months of 2010, we incurred total interest expense of $9.12 million, as
compared to $2.95 million for the same period in 2009. We incurred $0.74 million
and $2.42 million in interest during the three and nine months ended September 30, 2010 in connection with our outstanding Tranche B Zero Coupon Guaranteed
Senior Unsecured Notes (the Tranche B Notes), as compared to $0.31
million in interest during both the three and nine months ended September 30,  2009,
respectively. We paid $0.28 million and $0.83
million in interest in connection with the guaranteed senior unsecured
convertible notes due 2012 (the Convertible Notes) during the three and nine
months ended September 30, 2009, respectively. The Convertible Notes were
retired in 2009. This dollar increase in interest expenses was primarily due to
the increase in the outstanding balances of our bank loans.

36

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Redemption accretion on convertible notes

Redemption accretion on the Convertible Notes for the three and
nine months ended September 30, 2009 was $3.90 million and $14.85 million,
respectively. We raised $110 million from the issuance of Convertible Notes in
February and April 2007 which were retired and restructured into two new zero
coupon interest notes on September 2, 2009.

Gain on modification of convertible notes

We recognized a gain on modification of convertible notes of
$9.32 million due to the restructuring of the Convertible Notes for the three
and nine months ended September 30, 2009. We raised $110 million from the
issuance of Convertible Notes in February and April 2007 which were retired and
restructured into two new zero coupon interest notes on September 2, 2009.

Income before taxes

Our income before taxes increased $10.05 million, or 46.0%, to
$31.91 million for the three months ended September 30, 2010 from $21.86 million
for the same period in 2009. As a percentage of revenues, income before taxes
for the three months ended September 30, 2010 increased to 17.5% from 13.7% for
the same period in 2009. Our income before taxes increased $27.71 million, or
89.0%, to $58.83 million for the nine months ended September 30, 2010 from
$31.12 million for the same period in 2009. As a percentage of revenues, income
before taxes for the nine months ended September 30, 2010 increased to 12.5%
from 7.9% for the same period in 2009. Such percentage increase was primarily
due to increase of gross margin and decreased redemption accretion on
convertible notes as discussed above.

Income Taxes

China Security & Surveillance Technology, Inc. is subject
to  United States federal income tax at a tax rate of 34%. No provision for
income taxes in the United States has been made, as China Security &
Surveillance Technology, Inc. had no United States, taxable income during the
three or nine months ended September 30, 2010.

Our wholly-owned subsidiary Safetech was incorporated in the
British Virgin Island and, under the current laws of the British Virgin Islands,
is not subject to income taxes.

Before January 1, 2008, foreign invested enterprises (FIEs)
established in the PRC were generally subject to an enterprise income tax
(EIT) rate of 33%, which included a 30% state income tax and a 3% local income
tax. FIEs established in Shenzhen Special Economic Zone, such as our Chinese
subsidiary, Golden, and certain high-technology companies were subject to a
reduced tax rate. On March 16, 2007, the National People's Congress of China
passed the new Enterprise Income Tax Law (EIT Law), and on November 28, 2007,
the State Council of China passed the Implementing Rules for the EIT Law
(Implementing Rules) which took effect on January 1, 2008. The EIT Law and
Implementing Rules impose a unified EIT of 25% on all domestic-invested
enterprises and FIEs, unless they qualify under certain limited exceptions.
Therefore, nearly all FIEs are subject to the new tax rate alongside other
domestic businesses rather than benefiting from the EIT, and its associated
preferential tax treatments, beginning January 1, 2008.

Despite these changes, the EIT Law gives the Old FIEs a
five-year grandfathering period during which they can continue to enjoy their
existing preferential tax treatments. During this five-year grandfathering
period, the Old FIEs which enjoyed tax rates lower than 25% under the original
EIT Law shall gradually increase their EIT rate within 5 years until the tax
rate reaches 25%. In addition, the Old FIEs that are eligible for the two-year
exemption and three-year half reduction or five-year exemption and five-year
half-reduction under the original EIT Law, are allowed to remain to enjoy their
preference until these holidays expire. The discontinuation of any such special
or preferential tax treatment or other incentives would have an adverse affect
on any organization's business, fiscal condition and current operations in
China.

37

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In addition to the changes to the current tax structure, under
the EIT Law, an enterprise established outside of China with de facto
management bodies within China is considered a resident enterprise and will
normally be subject to an EIT of 25% on its global income. The Implementing
Rules define the term de facto management bodies as an establishment that
exercises, in substance, overall management and control over the production,
business, personnel, accounting, etc., of a Chinese enterprise. If the PRC tax
authorities subsequently determine that the Company should be classified as a
resident enterprise, then the organizations global income will be subject to
PRC income tax of 25%.

Our subsidiary, Golden, is subject to an EIT rate of 22% for
2010. Hongtianzhi is located in Shenzhen and its 2010 EIT rate is 22% because it
receives a lower tax rate as a high-technology company. Cheng Feng, HiEasy,
Minking, and Stonesonic are each subject to an EIT rate of 15% in 2010 due to
their high-technology or software company status. CSST PRC and Longhorn are
located in Shenzhen and their 2010 EIT rate is 11% because they receive a lower
tax rate as a high-technology company. Coson and Zhuhai DIT Digital Technology
Limited are each subject to an EIT rate of 22% in 2010 due to their
high-technology company status. Tsingvision and Jin Lin are subject to an EIT
rate of 12.5% in 2010 due to their software company status. CSSM, CSSS, CSSD and
Guanling are subject to an EIT rate of 25% in 2010.

Our income taxes increased $4.78 million to $4.64 million for
the three months ended September 30, 2010 from $0.14 million (due to an income
tax refund) for the same period of 2009. Our income taxes increased $9.87
million to $10.48 million for the nine months ended September 30, 2010 from
$0.61 million for the same period of 2009. Such increase was primarily because
of the increase in tax rate of some subsidiaries. The income tax exemption of
some of our major subsidiaries expired as of the beginning of 2010.

Net income attributable to the Company

Net income attributable to the Company increased $5.27 million,
or 24.0%, to $27.27 million for the three months ended September 30, 2010 from
$22.00 million for the same period in 2009. As a percentage of revenues, net
income attributable to the Company increased to 15.0% for the three months ended
September 30, 2010 from 13.8% for the same period in 2009. Net income
attributable to the Company increased $17.84 million, or 58.5%, to $48.35
million for the nine months ended September 30, 2010 from $30.51 million for the
same period in 2009. As a percentage of revenues, net income attributable to the
Company increased to 10.3% for the nine months ended September 30, 2010 from
7.7% for the same period in 2009. This dollar and percentage increase was mainly
due to increase of gross margin and profit and the decrease of redemption
accretion on our Convertible Notes and as discussed above.

Foreign Currency Translation Losses/Gains

Our operating subsidiaries are located in China. The operating
subsidiaries purchase all products and render services in China, and receive
payment from customers in China using RMB as the functional currency. We do not
engage in currency hedging.

We incurred a foreign currency translation gain of $3.20
million for the three months ended September 30, 2010, as compared with the
foreign currency translation loss of $1.54 million for the same period in 2009.

We incurred a foreign currency translation gain of $11.36
million for the nine months ended September 30, 2010, as compared with the
foreign currency translation loss of $1.64 million for the same period in 2009.

As we have done since China revalued RMB by 2.1 percent and
allowed the RMB to appreciate as much as 0.3 percent per day against the U.S.
dollar, we implement different exchange rates in translating RMB into U.S.
dollars in our financial statements for the three and nine months ended
September 30, 2010 and 2009.

For the three months ended September 30, 2010, the exchange
rates of 6.69, 6.76 and 8.04 were implemented in calculating the assets and
liabilities, revenue and expenses, and shareholders' equity, respectively, which
results in a $3.20 million foreign currency translation gain in the third
quarter of 2010. In the third quarter of 2009, the exchange rates of 6.83, 6.83
and 8.04 were implemented in calculating the assets and liabilities, revenue and
expenses, and shareholders equity, respectively, which results in $1.54 million
foreign currency translation loss in this period.

Liquidity and Capital Resources

General

As of September 30, 2010, we had cash and cash equivalents of
$185.70 million. The following table sets forth a summary of our net cash flows
for the periods indicated.

38

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CASH FLOW(All amounts in millions of U.S. dollars)

|                                                          |   | Nine Months Ended
      September 30, |  
|--------------------------------------------------------- | - | ------------------------------------- | -
|                                                          |   | (unaudited)                           |  
|                                                          |   | 2010                                  |  
|Net cash (used in) provided by operating
      activities | $ | (76.27                                | )
|Net cash used in investing activities                     | $ | (68.50                                | )
|Net cash provided by financing activities                 | $ | 171.71                                |  
|Effect of exchange rate changes on cash                   | $ | 4.28                                  |  
|Net cash inflow                                           | $ | 31.22                                 |  

Operating Activities

Net cash used in operating activities in the nine months ended
September 30, 2010 totaled $76.27 million as compared to $15.95 million net cash
provided by operating activities for the same period of 2009. The increase in
net cash used in operating activities in the nine months ended September 30,
2010 was primarily due to increases in accounts receivables and advances to
suppliers.

Investing Activities

Our main uses of cash for investing activities during the first
nine months of 2010 were acquisitions of plant and equipment and deposits for
the acquisition of subsidiaries.

Net cash used in investing activities for the nine months ended
September 30, 2010 was $68.50 million, which is an increase of $54.38 million
from net cash used in investing activities of $14.12 million in the same period
of 2009. This increase was primarily due to deposits made for acquisitions of
subsidiaries in the first nine months of 2010.

Financing Activities

Net cash provided by financing activities in the nine months
ended September 30, 2010 totaled $171.71 million as compared to net cash
provided by financing activities of $53.31 million in the same period of 2009.
The net cash provided by financing activities was mainly attributable to
proceeds from our public offering, and additional bank loans obtained in the
first nine months of 2010. We completed a public offering of 17,250,000 shares
of common stock in May 2010 and received net proceeds of approximately $64.57
million.

Loan Facilities

As of September 30, 2010, the amount, maturity date and term of
each of our bank loans and product financing arrangements are as follows:

All amounts in millions of U.S. dollars

|Lender                                         |   | Amount |  |  | Maturity Date |  |  | Duration | 
|---------------------------------------------- | - | ------ |  |  | ------------- |  |  | -------- | 
|                                               |   |        |  |  |               |  |  |          | 
|Shanghai Pudong Development Bank               | $ | 5.98   |  |  | December 2010 |  |  | 3 months | 
|China Merchants Bank                           |   | 16.00  |  |  | November 2010 |  |  | 3 months | 
|Shanghai Pudong Development Bank               |   | 5.98   |  |  | August 2011   |  |  | 1 year   | 
|China Everbright Bank                          |   | 5.98   |  |  | July 2011     |  |  | 1 year   | 
|Industrial and Commercial Bank of China        |   | 8.16   |  |  | July 2011     |  |  | 1 year   | 
|China Construction Bank                        |   | 4.48   |  |  | July 2011     |  |  | 1 year   | 
|Guangdong Development Bank                     |   | 7.41   |  |  | June 2011     |  |  | 1 year   | 
|Industrial and Commercial Bank of China (Asia) |   | 10.00  |  |  | July 2011     |  |  | 1 year   | 
|China Zheshang Bank                            |   | 2.99   |  |  | November 2010 |  |  | 6 months | 
|Shanghai Pudong Development Bank               |   | 11.95  |  |  | April 2011    |  |  | 1 year   | 
|Shanghai Pudong Development Bank               |   | 11.95  |  |  | April 2011    |  |  | 1 year   | 
|China Merchants Bank                           |   | 7.47   |  |  | March 2011    |  |  | 1 year   | 
|China Citic Bank                               |   | 13.45  |  |  | March 2011    |  |  | 1 year   | 
|China Citic Bank                               |   | 8.96   |  |  | March 2011    |  |  | 1 year   | 
|Industrial and Commercial Bank of China        |   | 4.63   |  |  | March 2011    |  |  | 1 year   | 

|Industrial and Commercial Bank of China |   | 5.83   |  |  | March 2011     |  |  | 1 year   | 
|--------------------------------------- | - | ------ |  |  | -------------- |  |  | -------- | 
|China Construction Bank                 |   | 7.47   |  |  | March 2011     |  |  | 1 year   | 
|China Merchants Bank                    |   | 6.13   |  |  | March 2011     |  |  | 1 year   | 
|Bank of China                           |   | 7.17   |  |  | November 2010  |  |  | 9 months | 
|Bank of China                           |   | 11.20  |  |  | February 2011  |  |  | 1 year   | 
|Societe Generale                        |   | 4.03   |  |  | February 2011  |  |  | 6 months | 
|China Merchants Bank                    |   | 8.81   |  |  | February 2011  |  |  | 1 year   | 
|Industrial and Commercial Bank of China |   | 2.99   |  |  | January 2011   |  |  | 1 year   | 
|Bank of China                           |   | 11.20  |  |  | January 2011   |  |  | 1 year   | 
|Bank of Ningbo                          |   | 4.48   |  |  | December 2010  |  |  | 1 year   | 
|Industrial and Commercial Bank of China |   | 7.47   |  |  | November 2010  |  |  | 1 year   | 
|A Financial Institution                 |   | 6.91   |  |  | June 2013      |  |  | 3 years  | 
|A Financial Institution                 |   | 0.62   |  |  | September 2013 |  |  | 4 years  | 
|A Financial Institution                 |   | 5.19   |  |  | September 2012 |  |  | 3 years  | 
|A Financial Institution                 |   | 2.24   |  |  | July 2011      |  |  | 3 years  | 
|                                        |   |        |  |  |                |  |  |          | 
|Total                                   | $ | 217.13 |  |  |                |  |  |          | 

39

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a) Notes payable

On September 25, 2010, we entered into a loan agreement with
Shanghai Pudong Development Bank. We borrowed RMB40 million (approximately $5.98
million) with an annual interest rate equal to 4.86%, with interest payable on
the 20th of each month. The loan is due in December 2010. The loan is
guaranteed by Whitehorse Technology Limited, a company wholly owned by our CEO.

On August 27, 2010, we entered into a loan agreement with China
Merchants Bank. We borrowed $16.00 million with an interest rate at 1% per annum
over the applicable three months London Inter Bank Offered Rate (1.29% at
September 30, 2010), with interest payable on the due date. Interest payable
will be calculated on the basis of the actual number of days elapsed. The loan
is due in November 2010. The loan is collateralized by a cash deposit of a
subsidiary.

On August 18, 2010, we entered into a loan agreement with
Shenzhen Development Bank. We borrowed RMB40 million (approximately $5.98
million) with an annual interest rate equal to 5.31%, with interest payable on
the 20th of each month. The loan is due in August 2011. The loan is guaranteed
by our CEO and two of our subsidiaries, and is collateralized by the property of
a subsidiary.

On August 9, 2010, the Company entered into a loan agreement
with Societe Generale. The Company borrowed RMB27 million (approximately $4.03
million) with an annual interest rate equal to 4.86%, with interest payable on
the due date of the loan. The loan is due in February 2011. The loan is
guaranteed by one of our subsidiaries.

On July 26, 2010, we entered into a loan agreement with China
Everbright Bank Co., Ltd. We borrowed RMB40 million (approximately $5.98
million) with an annual interest rate equal to 5.31%, with interest payable on
the 20th of each month. The loan is due in July 2011. The loan is guaranteed by
our CEO, one of our subsidiaries and Chuang Guan.

On July 21, 2010, we entered into a loan agreement with the
Industrial and Commercial Bank of China. We borrowed RMB54.60 million
(approximately $8.16 million) with an annual interest rate equal to 5.31%, with
interest payable on the 20th of each month. The loan is due in July 2011. The
loan is guaranteed by three of our subsidiaries and is collateralized by the
property of a subsidiary.

On July 15, 2010, we entered into a loan agreement with China
Construction Bank. We borrowed RMB30 million (approximately $4.48 million) with
an annual interest rate equal to 5.841%, with interest payable on the 20th of
each month. The loan is due in July 2011 and is collateralized by the property
of a subsidiary.

On July 1, 2010, we entered into a loan agreement with
Guangdong Development Bank. We borrowed RMB49.60 million (approximately $7.41
million) with an annual interest rate equal to 5.841%, with interest payable on
the 20th of each month. The loan is due in June 2011. The loan is guaranteed by
our CEO and one of our subsidiaries.

On June 18, 2010, we entered into a loan agreement with
Industrial and Commercial Bank of China (Asia) Limited. We borrowed $8.00 million and $2.00 million on July 5, 2010 and
August 12, 2010 with an interest rate at 3% per annum over the applicable one
year London Inter Bank Offered Rate (3.78% at September 30, 2010), with interest
payable on the due date of the loan. Interest payable will be calculated on the
basis of the actual number of days elapsed and a 360-day year. The loan is due
in July 2011. The loan is guaranteed by our CEO, and is collateralized by fixed
assets of a subsidiary and the shares of a subsidiary.

40

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On May 21, 2010, we entered into a loan agreement with China
Zheshang Bank. We borrowed RMB20 million (approximately $2.99 million) with an
annual interest rate equal to 110% of the benchmark lending rate (5.346% as of
September 30, 2010) with interest payable on the 20th of each month. The loan is
due in November 2010. The loan is guaranteed by our CEO, and two of our
subsidiaries.

On May 18, 2010, we entered into a loan agreement with China
Everbright Bank Co., Ltd. We borrowed RMB40 million (approximately $5.98
million) with an annual interest rate equal to 4.86%, with interest payable on
the 20th of each month. The loan is due in November 2010. The loan is guaranteed
by our CEO, one of our subsidiaries and Chuang Guan. The loan was repaid in July
2010.

On April 16, 2010, we entered into a loan agreement with
Shanghai Pudong Development Bank. We borrowed RMB80 million (approximately
$11.95 million) with an annual interest rate equal to 5.31%, with interest
payable on the 20th of each month. The loan is due in April 2011. The loan is
guaranteed by our CEO and one of our subsidiaries, and is collateralized by the
properties and land use rights of a subsidiary.

On April 15, 2010, we entered into a loan agreement with
Shanghai Pudong Development Bank. We borrowed RMB80 million (approximately
$11.95 million) with an annual interest rate equal to 5.31%, with interest
payable on the 20th of each month. The loan is due in April 2011. The loan is
guaranteed by our CEO, and is collateralized by the properties and land use
rights of a subsidiary.

On March 31, 2010, we entered into a loan agreement with China
Merchants Bank. We borrowed RMB50 million (approximately $7.47 million) with an
annual interest rate equal to 5.31%, with interest payable on the 20th of each
month. The loan is due in March 2011. The loan is guaranteed by our CEO, his
wife and one of our subsidiaries, and is collateralized by the property and land
use rights of a subsidiary.

On March 25, 2010, we entered into a loan agreement with China
Citic Bank. We borrowed RMB90 million (approximately $13.45 million) with an
annual interest rate equal to 5.31%, with interest payable on the 20th of each
month. The loan is due in March 2011. The loan is guaranteed by our CEO, his
wife and one of our subsidiaries, and is collateralized by the properties of two
subsidiaries.

On March 24, 2010, we entered into a loan agreement with China
Citic Bank. The Company borrowed RMB60 million (approximately $8.96 million)
with an annual interest rate equal to 5.31%, with interest payable on the 20th
of each month. The loan is due in March 2011. The loan is guaranteed by our CEO,
his wife and one of our subsidiaries, and is collateralized by the properties of
two subsidiaries.

On March 4, 2010, we entered into a loan agreement with the
Industrial and Commercial Bank of China. We borrowed RMB31 million
(approximately $4.63 million) with an annual interest rate equal to 4.78%, with
interest payable on the 20th of each month. The loan is due in March 2011. The
loan is guaranteed by three of our subsidiaries, and is collateralized by the
property of a subsidiary.

On March 4, 2010, we entered into a loan agreement with the
Industrial and Commercial Bank of China. We borrowed RMB39 million
(approximately $5.83 million) with an annual interest rate equal to 4.78%, with
interest payable on the 20th of each month. The loan is due in March 2011. The
loan is guaranteed by three of our subsidiaries, and is collateralized by the
property of a subsidiary.

On March 3, 2010, we entered into a loan agreement with China
Construction Bank. We borrowed RMB50 million (approximately $7.47 million) with
an annual interest rate equal to 5.58%, with interest payable on the 20th of
each month. The loan is due in March 2011. The loan is guaranteed by our CEO and
one of our subsidiaries, and is collateralized by the property of a subsidiary.

On March 2, 2010, we entered into a loan agreement with China
Merchants Bank. We borrowed RMB41 million (approximately $6.13 million) with an
annual interest rate equal to 5.31%, with interest payable on the 20th of each
month. The loan is due in March 2011. The loan is guaranteed by our CEO, his
wife and one of our subsidiaries, and is collateralized by the property and land
use rights of a subsidiary.

41

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On February 26, 2010, we entered into a loan agreement with
Bank of China. We borrowed RMB48 million (approximately $7.17 million) with an
annual interest rate equal to 5.04%, with interest payable on the 20th of each
month. The loan is due in November 2010. The loan is guaranteed by our CEO and
two of our subsidiaries, and is collateralized by the property and land use
rights of a subsidiary.

On February 11, 2010, we entered into a loan agreement with
Bank of China. We borrowed RMB75 million (approximately $11.20 million) with an
annual interest rate equal to 5.841%, with interest payable on the 20th of each
month. The loan is due in February 2011. The loan is guaranteed by our CEO and
two of our subsidiaries, and is collateralized by the property and land use
rights of a subsidiary.

On February 8, 2010, we entered into a loan agreement with
Societe Generale. We borrowed RMB27 million (approximately $4.03 million) with
an annual interest rate equal to 4.86%, with interest payable on the due date of
the loan. The loan was due in August 2010. The loan was guaranteed by one of our
subsidiaries. The loan was repaid in August 2010.

On February 3, 2010, we entered into a loan agreement with
China Merchants Bank. We borrowed RMB59 million (approximately $8.81 million)
with an annual interest rate equal to 5.31%, with interest payable on the 20th
of each month. The loan is due in February 2011. The loan is guaranteed by our
CEO, his wife and one of our subsidiaries, and is collateralized by the property
and land use rights of a subsidiary.

On January 26, 2010,we entered into a loan agreement with the
Industrial and Commercial Bank of China. We borrowed RMB100 million
(approximately $14.94 million) with an annual interest rate equal to 4.78%, with
interest payable on the 20th of each month. The loan is due in January 2011. We
repaid RMB80 million (approximately $11.95 million) in June 2010. The loan is
guaranteed by our CEO.

On January 7, 2010, we entered into a loan agreement with Bank
of China. We borrowed RMB75 million (approximately $11.20 million) with an
annual interest rate equal to 5.31%, with interest payable on the 20th of each
month. The loan is due in January 2011. The loan is guaranteed by our CEO and
two of our subsidiaries, and is collateralized by the property and land use
rights of a subsidiary.

On December 25, 2009, we entered into a loan agreement with
Bank of Ningbo. We borrowed RMB30 million (approximately $4.48 million) with an
annual interest rate equal to 5.31%, with interest payable on the 20th of each
month. The loan is due in December 2010. The loan is guaranteed by our CEO and
one of our subsidiaries.

On December 11, 2009, we entered into a loan agreement with
Agricultural Bank of China. We borrowed RMB20 million (approximately $2.99
million) with an annual interest rate equal to 5.31%, with interest payable on
the 20th of each month. The loan was due in September 2010. The loan was
guaranteed by our CEO, our COO and one of our subsidiaries, and was
collateralized by the land use right and properties of a subsidiary. The loan
was repaid in January 2010.

On December 11, 2009, we entered into a loan agreement with
Agricultural Bank of China. We borrowed RMB20 million (approximately $2.99
million) with an annual interest rate equal to 5.31%, with interest payable on
the 20th of each month. The loan was due in October 2010. The loan was
guaranteed by our CEO, our COO and one of our subsidiaries, and was
collateralized by the land use right and properties of a subsidiary. The loan
was repaid in January 2010.

On November 6, 2009, we entered into a loan agreement with the
Industrial and Commercial Bank of China. We borrowed RMB50 million
(approximately $7.47 million) with an annual interest rate equal to 5.31%, with
interest payable on the 20th of each month. The loan is due in November 2010.
The loan is guaranteed by three subsidiaries, and is collateralized by the land
use rights and property of a subsidiary.

On September 30, 2009, we entered into a loan agreement with
Shenzhen Development Bank. We borrowed RMB20 million (approximately $2.99
million) with an annual interest rate equal to 105% of the benchmark lending
rate, with interest payable on the 20th of each month. The loan was due in
September 2010. The loan was guaranteed by our CEO and two of our subsidiaries,
and was collateralized by the property of a subsidiary. The loan was repaid in
July 2010.

On August 13, 2009, we entered into a loan agreement with China
Construction Bank. We borrowed RMB30 million (approximately $4.48 million) with
an annual interest rate equal to 5.5755%, with interest payable on the 20th of
each month. The loan was due in August 2010 and was collateralized by the
property of a subsidiary. The loan was repaid in July 2010.

On May 20, 2009, we entered into a loan agreement with China
Everbright Bank Co., Ltd. We borrowed RMB40 million (approximately $5.98 million) with an annual interest rate
equal to 5.31%, with interest payable on the 20th of each month. The loan was
due and repaid in May 2010. The loan was guaranteed by our CEO, one of our
subsidiaries and Chuang Guan.

42

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On April 15, 2009, we entered into a loan agreement with
Shanghai Pudong Development Bank. We borrowed RMB80 million (approximately
$11.95 million) with an annual interest rate equal to 5.31%, with interest
payable on the 20th of each month. The loan was due in April 2010 and repaid in
March 2010. The loan was collateralized by the properties of two subsidiaries.

On April 1, 2009, we entered into a loan agreement with China
Merchants Bank. We borrowed RMB50 million (approximately $7.47 million) with an
annual interest rate equal to 92% of benchmark lending rate, with interest
payable on the 20th of each month. The loan was due in April 2010 and repaid in
March 2010. The loan was guaranteed by our CEO, his wife and our subsidiaries,
and was collateralized by the land use rights of a subsidiary.

On February 25, 2009, we entered into a loan agreement with
China Merchants Bank. We borrowed RMB60 million (approximately $8.79 million)
with an annual interest rate equal to 92% of the benchmark lending rate. The
loan was due in February 2010 and the interest was payable on the 20th of each
month. The loan was guaranteed by our CEO, his wife and our subsidiaries, and
was collateralized by the land use rights of a subsidiary. The Company repaid
RMB10 million (approximately $1,464) and RMB50 million (approximately $7.33
million) in March 2009 and in the first quarter of 2010, respectively.

b) Product financing arrangements

In June 2010, we entered into product financing agreements with
a financial institution. Under the terms of the agreements, we agreed to pay an
annual interest rate of 8.23% on inventory financings. We borrowed RMB50 million
(approximately $7.36 million). The loans expire in June 2013, and payments of
principal and interest are due at the end of each quarter.

In September 2009, we entered into product financing agreements
with a financial institution. Under the terms of the agreements, we agreed to
pay an annual interest rate of 8.46% on inventory financings. We borrowed RMB50
million (approximately $7.32 million). The loans expire in September 2012, and
payments of principal and interest are due at the end of each quarter.

In February 2009, we entered into product financing agreements
with a financial institution. Under the terms of the agreements, the Company
agreed to pay an annual interest rate of 10.5% on inventory financings. We
borrowed RMB 7.11 million (approximately $1.04 million). The loans expire in
September 2013, and payments of principal and interest are due at the end of
each quarter.

In July 2008, we entered into product financing agreements with
a financial institution. Under the terms of the agreements, the Company agreed
to pay an annual interest rate of 10% on inventory financings. We borrowed
RMB53.49 million (approximately $7.85 million). The loans expire in July 2011,
and payments of principal and interest are due at the end of each quarter.

c) Guaranteed senior unsecured notes payable

As of September 30, 2010, we have outstanding the Tranche B
Notes. The Tranche B Notes have a principal amount of $84.00 million, zero
coupon interest and a fair value of $78.44 million, resulting in a debt discount
of $5.56 million and an effective interest rate of approximately 5%. The Tranche
B Notes mature on September 2, 2012. We are to repay the principal amount in six
consecutive semi-annual installments, starting March 2, 2010, with 46%, 46%, and
8% of the principal amount to be repaid in the first, second and third year,
respectively. The Tranche B Notes are not convertible. We will be entitled to
redeem the Tranche B Notes at any time with no premium or penalty at a
redemption price equal to 100% of the principal amount of the Tranche B Notes to
be redeemed, plus default interest, if any. The Tranche B Notes are guaranteed
by our significant subsidiaries to the extent permitted under the applicable
laws. We repaid $38.64 million of the principal on the Tranche B Notes in the
first nine months of 2010.

d) Others

The Kunming Safe City project consisted of two stages - Stage I
and Stage II. Stage I was completed in December 2008, and Stage II was completed
in March 2009. All receivables totaling RMB123 million ($18 million) related to
Stage I were sold to ICBC in March 2009 for RMB113 million ($16.5 million). This
amount was fully collected from ICBC in March 2009. Stage II receivables were
RMB86 million ($12.6 million), of which RMB11.3 million ($1.7 million) are outstanding as of September 30, 2010. We believe this
receivable from the Kunming Municipal Government is fully collectible, and we
anticipate collection by the end of 2010.

43

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On October 3, 2006, we signed a banking facility agreement with
China Construction Bank under which the bank agreed to provide a new
receivable-based facility to support our efforts in securing new contracts
relating to the Safe City Project initiative, also known as Plan 3111. This
facility will provide three possible financing options: (1) the government takes
a loan from the bank to finance the project; (2) we sell the accounts receivable
to the bank, 85% of the total account receivables value will be paid by the bank
to the Company and the remaining 15% will be collected by the bank from the
government; from the 15% collected from the government, the bank will retain
certain finance charges and pay the remainder over to the Company; or (3) we
take a loan from the bank to finance the project. As part of this agreement, we
will make periodic deposits with the bank, which, depending upon the specific
project, will provide a maximum factoring capacity of five to ten times the
amount deposited. None of the facility has been drawn down as of the date of
this report.

Loan facility liquidity requirements

In the coming twelve months, we have approximately $202.17
million in bank loans that will mature. We believe we will be able to pay all
obligations as they become due. As some of our loans become due, we may elect to
refinance, rather than repay, the indebtedness. However, there is no assurance
that additional financing will become available on terms acceptable to us. We
believe that we will have the ability to refinance our indebtedness when and if
we elect to do so. While we currently are not in a position to know the terms of
such refinancing, we expect to refinance our indebtedness at prevailing market
rates and on prevailing market terms. We are exposed to a variety of risks
associated with short-term borrowings including adverse fluctuations in fixed
interest rates for short-term borrowings and unfavorable increases in variable
interest rates, potential inability to service our short term indebtedness
through cash flow from operations and the overall reduction of credit in the
current economic environment.

We believe that our currently available working capital, after
receiving the aggregate proceeds of our capital raising activities and the credit
facilities referred to above, should be adequate to sustain our
operations at our current levels through at least the next twelve months.

Our liquidity and working capital may be affected by the
substantial amount of our outstanding short-term loans, which represent our
primary source of financing in China. Depending on the level of cash used in our
operating activities and the level of our indebtedness, (i) it may become more
difficult for us to satisfy our existing or future liabilities or obligations,
which could in turn result in an event of default on such obligations, (ii) we
may have to dedicate a substantial portion of our cash flows from borrowings to
our operating activities and to debt service payments, thereby reducing the
availability of cash for working capital and capital expenditures, acquisitions,
general corporate purposes or other purposes, (iii) our ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may become impaired,
(iv) our ability to withstand a downturn in our business, the industry in which
we operate or the economy generally may be diminished, (v) we may experience
limited flexibility in planning for, or reacting to, changes in our business and
the industry in which we operate and (vi) we may find ourselves at a competitive
disadvantage compared to competitors that have proportionately less debt. If we
are unable to meet our debt service obligations, we could be forced to
restructure or refinance our indebtedness, seek additional equity capital or
sell assets. We may be unable to obtain financing or sell assets on satisfactory
terms, or at all, which could cause us to default on our debt service
obligations and be subject to foreclosure on such loans. Additionally, we could
incur additional indebtedness in the future and, if new debt is added to our
current debt levels, the risks above could intensify.

Obligations under material contracts

Below is a table setting forth our material contractual
obligations as of September 30, 2010:

All amounts in millions of U.S. dollars

Payments due by periodLess than
    
    
    
    
    
    
    
    
    More1
    
    
    
    
    
    
    
    
    than 5Total
    
    
    year
    
    
    1-3 years
    
    
    3-5 years
    
    
    yearsDebt Obligations
    $
    264.07
    
    $
    248.68
    
    $
    15.39
    
    $
    --
    
    $
    --Operating LeaseObligations
    
    3.12
    
    
    1.69
    
    
    1.43
    
    
    --
    
    
    --Total
    $
    267.19
    
    $
    250.37
    
    $
    16.82
    
    $
    --
    
    $
    --


44

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Critical Accounting Policies

Use of Estimates -The preparation of financial
statements in conformity with US GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Management makes these estimates using the best information
available at the time the estimates are made; however actual results could
differ materially from those estimates.

Fair Value Measurement ASC 820 Fair Value
Measurements and Disclosures, which defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. The statement clarifies that the exchange price is the price in an
orderly transaction between market participants to sell the asset or transfer
the liability in the market in which the reporting entity would transact for the
asset or liability, that is, the principal or most advantageous market for the
asset or liability. It also emphasizes that fair value is a market-based
measurement, not an entity-specific measurement, and that market participant
assumptions include assumptions about risk and effect of a restriction on the
sale or use of an asset.

This ASC establishes a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurements) and the lowest priority
to unobservable inputs (Level 3 measurements). The three levels of the fair
value hierarchy are described below:

Level 1: Unadjusted quoted prices in active markets that
are accessible at the measurement date for identical, unrestricted assets or
liabilities;

Level 2: Quoted prices in markets that are not active,
or inputs that are observable, either directly or indirectly, for substantially
the full term of the asset or liability; and

Level 3: Prices or valuation techniques that require
inputs that are both significant to the fair value measurement and unobservable
(supported by little or no market activity).

Our financial instruments include cash and cash equivalents,
accounts receivable, deposits, other receivables, accounts and bills payable,
notes payable, obligations under product financing arrangements, and guaranteed
senior unsecured notes payable. Management estimates that the carrying amounts
of the non-related party financial instruments approximate their fair values due
to their short-term nature.

Accounts Receivable We extend credit to our customers
in the normal course of business when considered appropriate. Our credit terms
in general are from 30 to 330 days, dependent upon the segment. We perform
ongoing credit evaluations and generally do not require collateral. We maintain
an allowance for potential credit losses based upon our loss history and its
aging analysis. The allowance for doubtful accounts is our best estimate of the
amount of probable credit losses in our existing accounts receivable. We review
the allowance for doubtful accounts each reporting period based on a detailed
analysis of our accounts receivable. In the analysis, we primarily consider the
age of the customers receivable and also consider the creditworthiness of the
customer, the economic conditions of the customers industry, and general
economic conditions, among other factors. If any of these factors change, we may
also change our original estimates, which could impact the level of our future
allowance for doubtful accounts.

If payment is not made timely, we contact the customer to try
to obtain payment. Once all collection efforts are exhausted, the receivable is
written off against the allowance for doubtful accounts.

From time to time, we enter into receivable factoring
agreements. We account for such arrangements under ASC 860 Transfer and
Servicing. These arrangements are without recourse, the receivables are
isolated from us, the transferee has the right to pledge or exchange the
receivables, and we do not maintain effective control over the receivables.
Therefore, these arrangements satisfy the conditions to be accounted for as a
sale and we recognize any gain or loss in earnings.

Inventories -Inventories are stated at the lower of
cost, determined on a weighted average basis, or net realizable value. Net
realizable value is the estimated selling price in the ordinary course of
business less the estimated cost of completion and the estimated costs necessary
to make the sale.

When inventories are sold, their carrying amount is charged to
expense in the period in which the revenue is recognized. Write-downs for
declines in net realizable value or for losses of inventories are recognized as
an expense in the period the impairment or loss occurs.

45

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Goodwill  Goodwill represents the excess of the
purchase price over the net fair value of the identifiable tangible and
intangible assets acquired and the fair value of liabilities assumed in
acquisitions. ASC 350-30-50, Goodwill and Other Intangible Assets,
requires the testing of goodwill and indefinite-lived intangible assets for
impairment at least annually. We test goodwill for impairment in the fourth
quarter each year.

Under applicable accounting guidance, the goodwill impairment
analysis is a two-step test. The first step of the goodwill impairment test
involves comparing the fair value of each reporting unit with its carrying
amount including goodwill. If the fair value of a reporting unit exceeds its
carrying amount, goodwill of the reporting unit is considered not impaired;
however, if the carrying amount of the reporting unit exceeds its fair value,
the second step must be performed to measure potential impairment.

The second step involves calculating an implied fair value of
goodwill for each reporting unit for which the first step indicated possible
impairment. The implied fair value of goodwill is determined in the same manner
as the amount of goodwill recognized in a business combination, which is the
excess of the fair value of the reporting unit, as determined in the first step,
over the aggregate fair values of the assets, liabilities and identifiable
intangibles as if the reporting unit was being acquired in a business
combination. The adjustments to measure the assets, liabilities and intangibles
at fair value are for the purpose of measuring the implied fair value of
goodwill, and such adjustments are not reflected in the consolidated balance
sheet. If the implied fair value of goodwill exceeds the goodwill assigned to
the reporting unit, there is no impairment. If the goodwill assigned to a
reporting unit exceeds the implied fair value of goodwill, an impairment charge
is recorded for the excess.

Revenue Recognition -Revenues from sales of
surveillance and safety products and systems are recognized in accordance with
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, and
related interpretations. Revenues are recognized when the following criteria are
met:

| | (i)   | Persuasive evidence of an arrangement exists  We require evidence of
      an agreement with a customer specifying the terms and conditions of the
      products to be delivered, typically in the form of a signed contract or
      purchase order;            
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                    
| | (ii)  | Delivery has occurred  For product sales, delivery generally takes
      place when title to the product is transferred, which generally takes
      place when products are shipped to or accepted by the customer, depending
      on the terms of the contract;
| |       |                                                                                                                                                                                                                                                                    
| | (iii) | The fee is fixed or determinable  Fees are fixed or determinable
      based on the contract or purchase order terms; and                                                                                                                                         
| |       |                                                                                                                                                                                                                                                                    
| | (iv)  | Collection is probable  We perform a credit review of all customers
      with significant transactions to determine whether a customer is
      creditworthy and collection is probable.                                                                         

The sales contracts generally provide a one to three-year
product warranty to customers from the date of purchase. We estimate the costs
of satisfying warranty claims based on an analysis of past experience and
provide for the future claims in the period the revenue is recognized.

We derive the bulk of our revenue from the supply and
installation of surveillance and safety equipment, and the two deliverables do
not meet the separation criteria under ASC 605-25 Multiple-Element
Arrangements. Revenue from the supply and installation of surveillance and
safety equipment are recognized when the installation is completed and the
customer acceptance is received. Approximately 1% of contract installation
revenue is deferred for the repair work during the one-year warranty period. We
carefully monitor the warranty work requested by our customers, and have
determined that minimal warranty work has historically been requested to be
performed.

Repairs and maintenance service revenue is recognized when the
service is performed.

We derive a portion of our revenue from one-year software
upgrades. These services are typical post-contract service (PCS) arrangements
according to ASC 985-605-25 Revenue Recognition. Under this guidance,
PCS revenue may be recognized together with the initial licensing fee on
delivery of the software if all of the following conditions are met:

46

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| | (i)   | The PCS fee is included with the initial licensing fee;                                                                                                        
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                
| | (ii)  | The PCS included with the initial license is for one year or less;                                                                                             
| |       |                                                                                                                                                                
| | (iii) | The estimated cost of providing PCS during the arrangement is
      insignificant; and                                                                         
| |       |                                                                                                                                                                
| | (iv)  | Unspecified upgrades/enhancements offered during PCS arrangements
      historically have been and are expected to continue to be minimal and
      infrequent.

Revenue from surveillance and safety system one-year software
upgrades is recognized when delivery occurs and the risk of ownership passes to
the customers, as we believe it meets the conditions in compliance with the ASC
guidance.

Income taxes -We account for income taxes using the
asset and liability method prescribed by ASC 740 Income Taxes. Under
this method, deferred tax assets and liabilities are determined based on the
difference between the financial reporting and tax bases of assets and
liabilities using enacted tax rates that will be in effect in the year in which
the differences are expected to reverse. We record a valuation allowance to
offset deferred tax assets if based on the weight of available evidence, it is
more-likely-than-not that some portion, or all the deferred tax assets will not
be realized. The effect on deferred taxes of a change in tax rates is recognized
as income or loss in the period that includes the enactment date.

We do not have any material unrecognized tax benefits.

We file income tax returns with the relevant government
authorities in the U.S. and the PRC. We were not subject to U.S. federal tax
examinations for years before 2006. We do not believe there will be any material
changes in its unrecognized tax positions over the next 12 months.

Our policy is to recognize interest and penalties accrued on
any unrecognized tax benefits as a component of income tax expense. Our
effective tax rate differs from the federal statutory rate primarily due to
non-deductible expenses, temporary differences, and preferential tax treatment.

Earnings Per Share -ASC 260 Earnings Per
Share, requires dual presentation of basic and diluted earnings per share
(EPS) with a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity.

Earnings per basic share of common stock is based on the
weighted average number of shares of common stock outstanding during each
respective period. Earnings per diluted share of common stock adds to basic
weighted shares the weighted average number of shares issuable under contingent
issuances, stock options and warrants outstanding during each respective period,
using the if-converted or treasury-stock methods.

For purposes of the computation of net income per share, shares
issued in connection with acquisitions that are returnable are considered
contingently returnable shares. These contingently returnable shares, although
classified as issued and outstanding, are not included in basic weighted average
number of shares until all necessary conditions are met that no longer cause the
shares to be contingently returnable. These contingently returnable shares are
included in diluted weighted average number of shares as of the beginning of the
period in which the conditions were satisfied (or as of the date of the
agreement, if later).

Unvested restricted shares issued (share-based compensation)
under the Equity Incentive Plan are not included in basic weighted average
number of shares but are considered to be outstanding as of the grant date for
purposes of computing diluted earnings per share even though the shares are
subject to vesting requirements.

For additional Critical Accounting Policies, please see Item 7,
Managements Discussion and Analysis of Results of Operations and Financial
Condition in the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2009, for a discussion of the Companys critical accounting
policies.

Recent Accounting Pronouncements

Accounting for Transfers of Financial Assets
(Included in ASC 860 Transfers and Serving)

47

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This ASC guidance addresses information a reporting entity
provides in its financial statements about: the transfer of financial assets;
the effects of a transfer on its financial position, financial performance, and
cash flows; and a transferors continuing involvement in transferred financial
assets. Also, ASC 860 removes the concept of a qualifying special purpose
entity, limits the circumstances in which a transferor derecognizes a portion or
component of a financial asset, defines participating interest and enhances the
information provided to financial statement users to provide greater
transparency. This guidance was effective for us as of January 1, 2010. The
adoption of this guidance had no impact on our consolidated financial
statements.

Consolidation of Variable Interest Entities  Amended
(Included in ASC 810 Consolidation)

Revisions under ASC 810, require an enterprise to perform
ongoing reassessments of whether an enterprise is the primary beneficiary of a
variable interest entity; and eliminates the quantitative approach previously
required for determining the primary beneficiary of a variable interest entity.
This ASC guidance also requires enhanced disclosures that will provide users of
financial statements with more transparent information about an enterprises
involvement in a variable interest entity. This guidance was effective for us as
of January 1, 2010. The adoption of this guidance had no impact on our
consolidated financial statements.

Multiple Deliverable Revenue Arrangements
(Accounting Standards Updates 2009-13 and 2009-14)

In October 2009, the FASB issued a new accounting standard
which provides guidance for arrangements with multiple deliverables.
Specifically, the new standard requires an entity to allocate consideration at
the inception of an arrangement to all of its deliverables based on their
relative selling prices. In the absence of the vendor-specific objective
evidence or third-party evidence of the selling prices, consideration must be
allocated to the deliverables based on managements best estimate of the selling
prices. In addition, the new standard eliminates the use of the residual method
of allocation. In October 2009, the FASB also issued a new accounting standard
which changes revenue recognition for tangible products containing software and
hardware elements. Specifically, tangible products containing software and
hardware that function together to deliver the tangible products essential
functionality are scoped out of the existing software revenue recognition
guidance and will be accounted for under the multiple-element arrangements
revenue recognition guidance discussed above. Both standards will be effective
for us in the first quarter of 2011. Early adoption is permitted. We are
currently evaluating the impact that the adoption of this standard may have on
our consolidated financial statements.

Seasonality

Our operating results and operating cash flows historically
have been subject to seasonal variations. Our revenues are usually higher in the
second half of the year than in the first half of the year and the first quarter
is usually the slowest quarter because fewer projects are undertaken during and
around the Chinese spring festival.

Inflation

We believe our operations have not been materially adversely
affected by inflation or changing prices.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK

Interest Rate Risk

The Company deposits surplus funds with Chinese banks earning
daily interest. The Company does not invest in any instruments for trading
purposes. All of the Companys outstanding debt instruments carry fixed rates of
interest. The Companys operations generally are not directly sensitive to
fluctuations in interest rates. The amount of long-term debt outstanding as of
September 30, 2010 and December 31, 2009 was $14.20 million and $50.53 million,
respectively. A hypothetical 1.0% increase in the annual interest rates for all
of our credit facilities under which we had outstanding borrowings at September
30, 2010 would not have any material impact on our net income before provision
for income taxes for the quarter. Management monitors the banks prime rates in
conjunction with our cash requirements to determine the appropriate level of
debt balances relative to other sources of funds. We have not entered into any
hedging transactions in an effort to reduce our exposure to interest rate risk.

48

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Foreign Exchange Risk

Our reporting currency is the U.S. dollar. Except for the U.S.
holding company, all of our consolidated revenues, consolidated costs and
expenses, and our assets are denominated in RMB. As a result, we are exposed to
foreign exchange risk as our revenues and results of operations may be affected
by fluctuations in the exchange rate between U.S. dollars and RMB. If the RMB
depreciates against the U.S. dollar, the value of our RMB revenues, earnings and
assets as expressed in our U.S. dollar financial statements will decline. Assets
and liabilities are translated at exchange rates at the balance sheet dates and
revenue and expenses are translated at the average exchange rates and
shareholders equity is translated at historical exchange rates. Any resulting
translation adjustments are not included in determining net income but are
included in determining other comprehensive income, a component of shareholders
equity. An average appreciation (depreciation) of the RMB against the U.S.
dollar of 5% would increase our comprehensive income by $0.57 million based on
our outstanding revenues, costs and expenses, assets and liabilities denominated
in RMB as of September 30, 2010. As of September 30, 2010, our accumulated other
comprehensive income was $38.92 million. We have not entered into any hedging
transactions in an effort to reduce our exposure to foreign exchange risk.

The value of the Renminbi against the U.S. dollar and other
currencies is affected by, among other things, changes in Chinas political and
economic conditions. Since July 2005, the Renminbi has not been pegged to the
U.S. dollar. Although the Peoples Bank of China regularly intervenes in the
foreign exchange market to prevent significant short-term fluctuations in the
exchange rate, the Renminbi may appreciate or depreciate significantly in value
against the U.S. dollar in the medium to long term. Moreover, it is possible
that in the future, PRC authorities may lift restrictions on fluctuations in the
Renminbi exchange rate and lessen intervention in the foreign exchange market.

Inflation

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. We
maintain a system of disclosure controls and procedures. The term "disclosure
controls and procedures," as defined by regulations of the SEC, means controls
and other procedures that are designed to ensure that information required to be
disclosed in the reports that we file or submit to the SEC under the Exchange
Act, is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file or submit
to the SEC under the Exchange Act is accumulated and communicated to our
management, including our principal executive officer and our principal
financial officer, or persons performing similar functions, as appropriate to
allow timely decisions to be made regarding required disclosure. Each of Guoshen
Tu, our Chief Executive Officer, and Terence Yap, our Chief Financial Officer,
have evaluated the design and operating effectiveness of our disclosure controls
and procedures as of September 30, 2010. Based upon their evaluation, these
executive officers have concluded that our disclosure controls and procedures
are effective as of September 30, 2010.

Changes in Internal Control over Financial Reporting.
There has been no change to our internal control over financial reporting during
the quarter ended September 30, 2010 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.

49

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PART IIOTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may have disputes that arise in the
ordinary course of our business. Currently, there are no legal proceedings to
which we are a party, or to which any of our property is subject, that we expect
to have a material adverse effect on our financial condition.

ITEM 1A. RISK FACTORS

There are no material changes from the risk factors previously
disclosed in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K
for the year ended December 31, 2009, filed with the SEC on March 2, 2010, as
amended on March 10, 2010.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. (REMOVED AND RESERVED)

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

|Exhibit Number | Description                                                                                                                                                                 
|-------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1           | Certification of Principal
      Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act
      of 2002.                                                   
|31.2           | Certification of Principal Financial Officer
      filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                         
|32.1           | Certification of Principal
      Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|32.2           | Certification of Principal Financial Officer
      furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.

50

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.

DATED: October 26, 2010

China Security & Surveillance
Technology, Inc.

By: /s/ Guoshen
TuPrincipal Executive Officer

By: /s/ Terence
Yap 
Principal Financial Officer

51

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EXHIBIT INDEX

|Exhibit Number | Description                                                                                                                                                                 
|-------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1           | Certification of Principal
      Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act
      of 2002.                                                   
|31.2           | Certification of Principal Financial Officer
      filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                         
|32.1           | Certification of Principal
      Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|32.2           | Certification of Principal Financial Officer
      furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.

52

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