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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended: December 31, 2010

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

For the transition period from ____________ to ____________

Commission File No. 001-34076

**CHINA INFORMATION TECHNOLOGY, INC.**(Exact name of registrant as specified in
its charter)

|Nevada                                           | 98-0575209                          
|------------------------------------------------ | ------------------------------------
|(State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.)
|organization)                                    |                                     

21stFloor, Everbright Bank BuildingZhuzilin, Futian DistrictShenzhen, Guangdong, 518040Peoples Republic of China(Address of principal
executive offices)

(+86) 755-8370-8333(Registrants
telephone number, including area code)

_________________________________________(Former name:
China Information Security Technology, Inc.)

Securities registered pursuant to Section 12(b) of the Act:

|Title of each class                     | Name of each exchange on which registered
|--------------------------------------- | -----------------------------------------
|Common Stock, par value $0.01 per share | NASDAQ Global Select Market              

Securities registered pursuant to Section 12(g) of the Exchange
Act: None

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

Yes
[   ]     No [X]

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

Yes [ 
 ]     No [X]

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

Yes [X]     No
[   ]

Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, 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 [   ]

- 1 -

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Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.

[X]

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 registrant is a shell company (as
defined in Rule 12b-2 of the Act).

Yes [  
]     No [X]

As of June 30, 2010 (the last business day of the registrants
most recently completed second fiscal quarter), the aggregate market value of
the shares of the registrants common stock held by non-affiliates (based upon
the closing sale price of such shares as reported on the NASDAQ Global Select
Market) was approximately $164.1 million [$5.20 x 31,555,707 (51,805,787
outstanding-20,250,080 held by affiliates]. Shares of the registrants common
stock held by each executive officer and director and each by each person who
owns 10% or more of the outstanding common stock have been excluded from the
calculation in that such persons may be deemed to be affiliates of the
registrant. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

There were a total of 52, 305,787 shares of the registrants
common stock outstanding as of March 8, 2011.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants Proxy Statement for its Annual
Meeting of Shareholders to be filed with the Commission within 120 days after
the close of the Registrants fiscal year are incorporated by reference into
Part III of this Annual Report on Form 10-K.

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|Annual Report on FORM 10-K                       
|-------------------------------------------------
|For the
      Fiscal Year Ended December 31, 2010

TABLE OF CONTENTS

|PART I  
|--------
|        
|Item 1. 
|Item 1A.
|Item 1B.
|Item 2. 
|Item 3. 
|Item 4. 
|        
|PART II 
|        
|Item 5. 
|Item 6. 
|Item 7. 
|Item 7A.
|Item 8. 
|Item 9. 
|Item 9A.
|Item 9B.
|        
|PART III
|        
|Item 10.
|Item 11.
|Item 12.
|Item 13.
|Item 14.
|        
|PART IV 
|        
|Item 15.

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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 of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. 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; and any
statements regarding future economic conditions or performance, 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, which, 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. Potential risks and uncertainties
include, among other things, the possibility that third parties hold proprietary
rights that preclude us from marketing our products, the emergence of additional
competing technologies, changes in domestic and foreign laws, regulations and
taxes, changes in economic conditions, uncertainties related to Chinas legal
system and economic, political and social events in China, a general economic
downturn, a downturn in the securities markets, and other risks and
uncertainties.

Additional disclosures regarding factors that could cause our
results and performance to differ from results or anticipated performance are
discussed in Item 1A, Risk Factors included herein. All statements other than
statements of historical fact are statements that could be deemed
forward-looking statements. We assume no obligation and do not intend to update
these forward-looking statements, except as required by law.

Use of Terms

Except as otherwise indicated by the context and for the
purposes of this report only, references in this report to:

- CNIT, we, us, or our and the Company are to the combined
  business of China Information Technology, Inc. and its consolidated
  subsidiaries, CITH, IST, ISSI, ISS, ISIID, Bocom, Kwong Tai, Zhongtian, HPC,
  Huipu, HPC Intl; and iASPEC, to whose operations we succeeded on October 9,
  2006 and who became our variable interest entity effective July 1, 2007, and
  its 52.54% majority owned subsidiary, Geo;
- CITH are to China Information Technology Holdings Limited (formerly
  China Public Security Holdings Limited), a British Virgin Islands company;
- IST are to Information Security Technology (China) Co., Ltd., a PRC
  company;
- ISSI are to Information Security Software Investment Limited, a Hong
  Kong company;
- ISS are to Information Security Software (China) Co., Ltd., a PRC
  company;
- ISIID are to Information Security International Investment and
  Development Limited, a Hong Kong company;
- Bocom are to Shenzhen Bocom Multimedia Display Technology Co., Ltd., a
  PRC company;
- Kwong Tai are to Kwong Tai International Technology Limited, a Hong Kong
  company;
- Zhongtian are to Shenzhen Zhongtian Technology Development Company Ltd.,
  a PRC company;
- HPC are to HPC Electronics (China) Company Limited (formerly Topwell
  Treasure Ltd.), a Hong Kong company;
- Huipu are to Huipu Electronics (Shenzhen) Co., Ltd., a PRC company;
- HPC Intl are to Huipu Electronics (International) Co., Ltd, a British
  Virgin Islands company;
- iASPEC are to iASPEC Software Co., Ltd., a PRC company;
- Geo, are to Wuda Geoinformatics Co., Ltd., a PRC company;
- Hong Kong are to the Hong Kong Special Administrative Region of the
  Peoples Republic of China;
- PRC, China, and Chinese, are to the Peoples Republic of China;
- SEC are to the Securities and Exchange Commission;
- Securities Act are to the Securities Act of 1933, as amended;
- Exchange Act are to the Securities Exchange Act of 1934, as amended;
- Renminbi and RMB are to the legal currency of China; and
- U.S. dollars, dollars and $ are to the legal currency of the United
  States.

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PART I

ITEM 1.    BUSINESS.

Overview of Our Business

We are a leading provider of integrated solutions for the
Geographic Information Systems, or GIS, Digital Public Security Technology, or
DPST and the Digital Hospital Information Systems, or DHIS markets, in the PRC.
We provide a broad portfolio of fully integrated solutions and services,
encompassing both software development and display technologies.

We were founded in 1993 and are headquartered in Shenzhen,
China. As of December 31, 2010, we had 1,453 employees and 27 sales offices
nationwide.

Our customers are mostly public sector entities that use our
products and services to improve the service quality and management level and
efficiency of public security, traffic control, fire control, medical rescue,
border control, surveying and mapping as well as healthcare management. Our
typical customers include some of the most important governmental departments in
China, including the Ministry of Public Security, the State Bureau of Surveying
and Mapping, the State Grid Corporation, the public security, fire fighting,
traffic and police departments of several provinces, the Shenzhen General
Station of Exit and Entry Frontier Inspection, and several provincial personnel,
urban planning, civil administration, land resource, and mapping and surveying
bureaus. Over the past several years, we have diversified our customer base
beyond our local reach.In the future, we expect to continually expand
our market and product offerings in the public and private sectors, through
geographic expansion and enhancement of our technical capabilities.

We generate revenues through the sale of our integrated
hardware and software products and through the provision of related support
services. A significant portion of our operations are conducted through iASPEC,
our variable interest entity. iASPEC is a PRC domestic company owned by Jiang
Huai Lin, our Chairman and Chief Executive Officer, who is a PRC citizen and
resident. iASPEC is able to obtain governmental licenses that are restricted to
PRC entities that have no foreign ownership. These licenses allow iASPEC to
perform Police-use Geographic Information Systems, or PGIS, services for PRC
governmental customers. Under our Amended and Restated Management Services
Agreement among our subsidiary, IST, iASPEC and Mr. Lin, IST is entitled to
receive 95% of the net received profit of iASPEC during the term of the
Agreement, less costs and expenses related to sales and operations, and accrued
but uncollected accounts receivable. In fiscal years 2010, 2009 and 2008, 39.1%,
48.6% and 48% of our revenues, respectively, were generated under this exclusive
commercial arrangement with iASPEC.

Our History and Background

We were originally organized under the laws of the State of
Florida on September 19, 1979 under the name Mark Thomas Publishing Inc. and on
April 29, 2003 we changed our name to Irish Mag, Inc. From our inception through
October 8, 2006, we provided consulting services in the offset printing
industry, targeting individual retail consumers as well as small to mid-size
companies. However, as a result of the reverse merger transaction described
below, our business operations changed to the provision of integrated GIS
services. On January 26, 2007, we changed our name to China Public Security
Technology, Inc. to more accurately reflect our new business and commercial
objectives.

On April 7, 2008, we reincorporated to the State of Nevada by
merging into China Information Security Technology, Inc., a subsidiary that we
established in Nevada to effect the reincorporation. As a result, our name
changed to China Information Security Technology, Inc. and we became a Nevada
corporation.

On August 26, 2010, we changed our name to China Information
Technology, Inc. to be aligned with our strategic direction, our ticker symbol
and our trade mark.

Reverse Merger Transaction

Between October 6, 2006 and January 31, 2007, our shareholders
approved a series of transactions whereby we purchased all the issued and
outstanding stock of CPSH from our current Chairman and Chief Executive Officer
Jiang Huai Lin, for 25,500,000 shares of our common stock. As a result of these
transactions, CPSH and its wholly-owned subsidiary, IST, became our wholly-owned
subsidiaries, and Mr. Lin became the beneficial owner of 25,500,000 shares of
our common stock, which, at January 31, 2007, constituted 80.8% of our issued
and outstanding common stock.

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Management Service Agreement

From October 9, 2006 through June 30, 2007, we operated under a
Business Turnkey Agreement, or Turnkey Agreement, with iASPEC, pursuant to which
iASPEC exclusively engaged IST as its subcontractor to provide iASPEC with
outsourcing services (to the extent that those services do not violate any
special governmental permits held by iASPEC and do not involve the improper
transfer of any sensitive confidential governmental or other data).

Effective July 1, 2007, iASPEC and iASPECs shareholders, Mr.
Lin and Mr. Jin Zhu Cai agreed to terminate the Turnkey Agreement and replaced
it on the same day with a Management Service Agreement. Pursuant to the terms of
the Management Service Agreement, iASPEC granted IST an exclusive, royalty-free,
transferable, worldwide, license to use and install for a ten-year term, certain
iASPEC software, along with copies of source and object code relating to such
software, in any manner permitted by applicable laws, and IST licensed back to
iASPEC a royalty-free, limited, non-exclusive license to the software, without
right of sub-license, for the sole purpose of permitting iASPEC to carry out its
business as presently conducted. IST will also have the right to designate two
Chinese citizens to serve as senior managers of iASPEC, to serve on iASPECs
Board of Directors and assist in managing the business and operations of iASPEC.
In addition, both iASPEC and IST will require the affirmative vote of the
majority of our Board of Directors, as well as at least one non-insider
director, for certain material actions with respect to iASPEC, including, but
not limited to: (a) the nomination, appointment, election or replacement of any
board members; (b) the distribution of any dividend or profits; (c) any merger,
division, change of corporate form, dissolution or liquidation; (d) any
reimbursement of net losses or other payments or transfers of funds from IST to
iASPEC; (e) the formation or disposition of a subsidiary or the acquisition or
disposition of any interest in any other entity; and (f) the encumbrance of any
assets under any lien not in the ordinary course of business. Furthermore, under
the Management Service Agreement, IST will receive 100% of the net received
profit of iASPEC and will reimburse iASPEC for all net losses incurred by
iASPEC. The net profit of iASPEC will be paid to IST, and the net losses of
iASPEC will be reimbursed by IST, no later than the last day of the month
following the end of each calendar quarter, commencing on July 1, 2007. IST is
also obligated to pay iASPEC $180,000 per year, no later than the last day of
the month following the end of each calendar year, commencing on July 1, 2007,
and this amount may be retained by iASPEC out of any net received profit due and
payable to IST as of such payment date. IST may also advance to iASPEC, at ISTs
sole discretion, amounts to be credited against ISTs future obligations to
iASPEC, but any such advances will be treated as prepayments and not as loans.
iASPEC will have no obligation to repay any such advances except by crediting
the amount of such advances against ISTs obligation to reimburse net losses, or
by adding the amount thereof to net profit when and as requested by IST. If
iASPEC or any of the iASPEC shareholders materially breaches the Management
Service Agreement and fails to remedy the breach within 60 days after notice
from IST of such breach, they will be jointly and severally obligated to pay to
IST liquidated damages in an amount equal to the higher of (a) eight times the
annualized revenues of IST for the last completed fiscal quarter, or (b) US$50
million.

In connection with the Management Service Agreement, IST also
entered into a purchase option agreement, or Option Agreement, with iASPEC and
its shareholders, effective as of July 1, 2007, pursuant to which the iASPEC
shareholders granted IST, or its designee(s), an exclusive, irrevocable option
to purchase from the iASPEC shareholders, from time to time, all or a part of
iASPECs shares, pursuant to an equity transfer agreement, or all or a part of
iASPECs assets, pursuant to an asset purchase and transfer agreement. However,
according to the Option Agreement, the option may not be exercised by IST if the
exercise would violate any applicable laws and regulations in China or cause any
license or permit held by, and necessary for the operation of iASPEC, to be
cancelled or invalidated. Under the terms of the Option Agreement, the option is
immediately exercisable at an exercise price of $1,800,000, in the aggregate,
subject to regulatory approval. In addition, iASPEC and the iASPEC shareholders
agreed to use their best efforts to acquire all necessary government approvals
and other consents to complete a share purchase under the Option Agreement. The
Option Agreement may be rescinded by IST upon 30 days notice and will terminate
on the date that we purchase all remaining shares or assets of iASPEC pursuant
to the terms of the Option Agreement. If any of the parties breaches the Option
Agreement and fails to remedy the breach, the breaching party will pay a penalty
of RMB5,000,000 (approximately $683,600) to the non-breaching party or parties,
and compensate the non-breaching party or parties for any losses caused by the
breach.

As a result of the restructuring of its relationship with
iASPEC, iASPEC became a variable interest entity of our Company. A variable
interest represents a contractual or ownership interest in another entity that
causes the holder to absorb the changes in fair value of the other entitys net
assets. Potential variable interests include: holding economic interests, voting
rights, or obligations to an entity; issuing guarantees on behalf of an entity;
transferring assets to an entity; managing the assets of an entity; leasing
assets from an entity; and providing financing to an entity. In such cases
consolidation of the variable interest entity is required by the enterprise that
controls the economic risks and rewards of the entity, regardless of ownership.
While we have held an economic interest in iASPEC since October 9, 2006, the
Management Service Agreement and the Option Agreement have now given us control
over the business and operations of iASPEC. As a result, iASPECs financial data
is subject to consolidation with our financial data, commencing July 1, 2007.

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On July 1, 2008, our Chairman and Chief Executive Officer, Mr.
Jiang Huai Lin, entered into an Equity Transfer Agreement with Mr. Jin Zhu Cai,
the owner of a 24% minority interest in iASPEC, pursuant to which Mr. Lin
purchased Mr. Cais minority interest for a total consideration of RMB60 million
(approximately $8.72 million). As a result of the Equity Transfer Agreement, Mr.
Lin holds 100% of the equity interests of iASPEC.

On December 13, 2009, IST, iASPEC and Mr. Lin, as the sole
shareholder of iASPEC, amended and restated the Management Service Agreement,
pursuant to which IST will continue to provide management and consulting
services to iASPEC, subject to the following changes:

- iASPEC agreed that IST will be entitled to receive ninety five percent
  (95%) of the net received profit of iASPEC during the term of the agreement,
  to be calculated as follows: accrued accounts receivable plus net turnover
  (revenue), minus cost of sales, minus operating expenses, and minus accrued
  but not collected accounts receivable, but only if the result is a positive
  number. iASPEC is obligated to calculate and pay the net received profit due
  to IST no later than the last day of the first month following the end of each
  fiscal quarter;
- Mr. Lin agreed to enter into a pledge agreement with IST to pledge all his
  equity interests in iASPEC as security for his and iASPEC's fulfillment of
  their respective obligations under the Management Service Agreement, and to
  register the pledge agreement with the local Administration for Industry and
  Commerce;
- Mr. Lin confirmed his status as the sole shareholder of iASPEC and his
  assumption of all the obligations of the iASPEC shareholder under the
  agreement, including a confirmation of his continuing obligation under a
  written guaranty, dated August 1, 2007, executed by the iASPEC shareholders in
  connection with the Management Service Agreement;
- Based on iASPECs needs for its development and operation, IST has the
  right, from time to time, at its sole discretion, to provide iASPEC with
  capital support either as an entrustment of funds to iASPEC, or as an advance
  to Mr. Lin, as iASPECs shareholder, for the sole purpose of making a capital
  contribution to iASPEC for use in the business of iASPEC; provided that, any
  such advance for capital contribution will be evidenced by an advance
  agreement in the form attached to the Amended and Restated Management Service
  Agreement; and
- IST agreed that it will not interfere in any business of iASPEC covered by
  iASPECs State Secret related Computer Information System Integration
  Certificate, including but not limited to, seeking access to relevant
  documents regarding such business; provided, however, that iASPEC agreed that
  it will cooperate with the requests of the Company as necessary to comply with
  the Companys reporting obligations to the SEC.

Acquisitions

On November 7, 2007, we acquired 100% of the equity interests
of ISSI, and its PRC operating subsidiary, ISS, for which we paid approximately
$7.1 million in cash and issued 883,333 shares of our common stock.

On February 1, 2008, we acquired 100% of the equity interests
of ISIID, and its PRC operating subsidiary, Bocom, for a purchase price of
approximately $18,000,000. We paid approximately $9,000,000 of the purchase
price in cash and the remaining $9,000,000 was paid in 1,125,000 shares of our
common stock.

On April 7, 2008, iASPEC acquired Geo, pursuant to (1) a share
purchase and increased capital agreement, dated as of February 16, 2008, by and
among iASPEC, Wuhan Wuda Venture Capital Co., Ltd., Song Ai Hong and Geo, for
the purchase of 46% of Geo for a purchase price of approximately $4,819,000, and
(2) a share purchase agreement, dated as of February 16, 2008, between iASPEC
and Li Wei, for the purchase of 2.4% of Geo for a purchase price of
approximately $666,700. On September 3, 2010, Geo increased its registered
capital from RMB 60,000,000 (approximately $8,849,680) to RMB 79,200,000
(approximately $11,681,588). The RMB 19,200,000 (approximately $2,831,900)
increase was contributed by iASPEC and a group of new shareholders, comprising
of the management teams of both GEO and iASPEC, including Mr. Jianghuai Lin, the
Companys chief executive officer. As a result of the capital increase, the
equity interest owned by iASPEC in Geo was reduced from 57% to 52.54%, and the
management teams of Geo and iASPEC now hold 11.02% of the equity interest in
Geo.

On October 31, 2008, we completed the acquisition of Kwong Tai
and its PRC operating subsidiary, Zhongtian, from Wide Peace International
Investments Limited, or Wide Peace, for a purchase price of $16,500,000. We paid
$9,900,000 (approximately RMB67,617,000) in cash and the remaining $6,600,000
was paid in 1,280,807 shares of our common stock.

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Wide Peace is obligated to return 355,164 of the purchased
shares to us if Zhongtian does not attain an audited minimum after tax net
income, or ATNI, of $2,200,000 for fiscal year 2009, and an additional 355,164
of the shares if Zhongtian does not attain an audited minimum ATNI of $2,860,000
for fiscal year 2010. The 2009 and 2010 targets were met by Zhongtian.

On October 1, 2009, we completed the acquisition of HPC and its
PRC operating subsidiary, Huipu, from Ms. Rita Kwai Fong Leung for a purchase
price of $16,000,000. We paid $8,000,000 (approximately RMB54,640,000) of the
purchase price in cash and the remaining $4,000,000 in 1,101,930 shares of our
common stock. We are also obligated to issue and deliver to Ms. Leung an
additional 1,101,930 shares of our common stock in accordance with certain make
good provisions agreed to between the parties if HCP attains certain audited
consolidated ATNI thresholds for fiscal years 2010 through 2012, as follows:

Year Ending December 31,
    ATNI Thresholds (in
      USD)
      Common Stock Issuable2010
    Equal to or
      greater than $4,000,000
      413,223Equal to or greater than
      3,600,000 but less than $4,000,000
      371,900Equal to or
      greater than $3,200,000 but less than $3,600,000
      330,578Less than $3,200,000
      - 0 -2011
    Equal to or
      greater than $5,200,000
      413,223Equal to or greater than
      $4,680,000 but less than $5,200,000
      371,900Equal to or
      greater than $4,160,000 but less than $4,680,000
      330,578Less than $4,160,000
      - 0 -2012
    Equal to or
      greater than $6,760,000
      275,484Equal to or greater than
      $6,084,000 but less than $6,760,000
      247,936Equal to or
      greater than $5,408,000 but less than $6,084,000
      220,387Less than $5,408,000
      - 0 -


Corporate Structure

The following chart reflects our current corporate
organizational structure:



Industry Overview

General

Over the past two decades, the PRC government has encouraged
the development and use of new technologies for information and communication,
or ICTs, and their application in all spheres of government, industry, education
and culture.

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The term Informatization or xinxihua has been coined in
China to describe the overall process of ICT application in China and has in
recent years become a linchpin of central and many local economic development
strategies.

As a part of the Informatization process, the PRC government
has launched a series of online programs to accelerate its pace of implementing
and using information technology. For example, the Golden Shield Program
promotes the use of information technology for public security services. The
Public GIS platform aims to integrate the functions of multiple government
departments by using the GIS technology. The Golden Health Program strives to
improve the efficiency of public health management by using digital hospital
technologies. All these initiatives are of top priority to the Chinese
government and are driving the demand for our product offerings.

Global GIS Industry

The GIS field is a rapidly growing field that identifies data
according to location. GIS incorporates geographical features with data in order
to assess real world problems. In the strictest sense, a GIS is a computer
system capable of capturing, storing, analyzing, and displaying geographically
referenced information. The term GIS also includes the procedures, operating
personnel, and spatial data that go into the system.

The power of a GIS comes from the ability to relate different
information in a spatial context and reach a conclusion about this relationship.
Most of the information we have about our world contains a location reference,
placing that information at some point on the globe. However, GIS can be used to
emphasize objects on a map, their absolute location on the Earth's surface and
their spatial relationships, in a series of attribute tablesthe information
part of a GIS. For example, while a computer-aided mapping system may represent
a road simply as a line, a GIS may also recognize that road as the boundary
between wetland and urban development between two census statistical areas. A
GIS, therefore, can reveal important new information (such as whether features
intersect or whether they are adjacent) that leads to better decision making or
solutions.

Data Capture and Integration  In order to utilize a GIS, data
must be directly entered into (or captured by) a GIS in digital form, that is,
in a form the computer can recognize. A GIS can also convert existing digital
information, which may not yet be in map form, into forms it can recognize and
use. Map data may also be created by (1) digitizing maps by hand-tracing with a
computer mouse on the screen or on a digitizing tablet to collect the
coordinates of features, (2) using electronic scanners to convert maps to
digits, or (3) uploading coordinates from Global Positioning System, or GPS,
receivers into a GIS. Once a time-consuming process, the data capture process is
now made easier by the development in the GIS industry of software tools to
automatically extract features from satellite images or aerial photographs and
create databases in map form for use in a GIS.

Information Retrieval and Data Output  With a GIS you can
point at a location, object, or area on the screen and retrieve recorded
information about it from off-screen files. For example, using scanned aerial
photographs as a visual guide, you can ask a GIS about the location of a fire,
analyze the area around the fire and determine conditions of adjacency (what is
next to it), containment (what is enclosed by it) and proximity (how close is
something to it).

Another critical component of a GIS is its ability to produce
graphics on the screen or on paper to convey the results of analyses to the
people who make decisions about resources. Wall maps, Internet-ready maps,
interactive maps and other graphics can be generated, allowing decision makers
to visualize and thereby understand the results of analyses or simulations of
potential events.

Components of GIS

Hardware  Hardware comprises the equipment needed to support
the many activities ranging from data collection to data analysis. A central
piece of the equipment is a workstation, which runs the GIS software and is the
attachment point for the equipment. Data collection efforts can also require the
use of a digitizer for conversion of hard copy data to digital data and a GPS
data logger to collect the field. The use of handheld field technology is also
becoming an important tool in GIS. With the advent of web-enabled GIS, web
servers have become an important piece of equipment for GIS.

Software  Different software packages are important for GIS.
Central to this is the GIS application package. Such software is essential for
creating, editing and adding spatial and attributed data, therefore these
packages contain a myriad of functions inherent to them. Extensions or add-ons
are software that extends capabilities of the GIS software package. Component
GIS software is the opposite of application software. Component GIS seeks to
build software applications that meet a specific purpose and thus are limited in
their spatial analysis capabilities. Utilities are stand-alone programs that
perform a specific function. For example, a file format utility that converts
from one type of GIS file to another. There is also web-GIS software that helps
serve data through Internet browsers.

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Data  Data is the core of any GIS. There are two primary types
of data that are used in GIS, data in geodatabases and attribute data. A
geodatabase is a database that is in some way referenced to locations on earth.
Geodatabases are grouped into two different types: vector and raster. A vector
image is stored as geometric objects, such as lines and arcs, which are drawn
between specific coordinates. If you magnify a vector image you see the lines
more accurately, and the line edges stay smooth. A raster image is made up from
pixels, like the picture obtained from a scanner, or the screen image on a
computer monitor, and has a finite amount of detail which is dependent upon the
image size and resolution. However, the closer you look at a raster image the
coarser it appears and you don't see any extra detail. Vector drawings are
utilized in GIS and other applications where accuracy is important. Usually
coupled with this data is data known as attribute data. Attribute data are data
that relate to a specific, precisely defined location. The data are often
statistical but may be text, images or multi-media. These are linked in the GIS
to spatial data that define the location.

People  Well-trained people knowledgeable in spatial analysis
and skilled in using GIS software are essential to the GIS process.

Public Sector Use of GIS

GIS can be used by the public sector in the following ways:

Pubic Safety and Emergency Response Planning  GIS technology
gives public safety personnel the ability to manage and analyze large amounts of
location-based information. Data (including files from legacy systems) can be
stored in a geodatabase and used to visualize spatial relationships and reveal
trends critical to public safety response and planning. Computer-generated maps
can be shared across a network or the Internet with multiple agencies to
coordinate efforts and maximize resources.

Law Enforcement  GIS software uses geography and
computer-generated maps as an interface for integrating and accessing massive
amounts of location-based information. GIS allows law enforcement and criminal
justice personnel to effectively plan for emergency response, determine
mitigation priorities, analyze historical events, and predict future events. GIS
can also be used to get critical information to emergency responders upon
dispatch or while en route to an incident to assist in tactical planning and
response. While law enforcement agencies collect vast amounts of data, only a
very small part of this information can be absorbed from spreadsheets and
database files. GIS provides a visual, spatial means of displaying data,
allowing law enforcement agencies to integrate and leverage their data for more
informed decision making.

Public Works and Development  Use of GIS software in public
works improves efficiency and productivity to better serve citizens. For
example, GIS applications are in demand in connection with the construction of
the Pan Asia Railway and development of the Meigong River and Tumen River in the
Northwest of China. Such public works systems could use GIS to connect all
divisions in a public works department from engineering to accounting, which
streamlines work flows, asset management, operations, and planning. Using a GIS
throughout the department allows all sections to share and easily access
geographic data. GIS promotes data integrity and facilitates better
communication and decision making throughout the organization.

Economic Development  GIS may be used to foster economic
development. Agencies could work to advance the quality of life and strengthen
the economic base of their region by retaining and growing existing businesses
and attracting new investment.

Urban Planning and Site Selection  Information regarding a
proposed site for parcel zoning, transportation planning, waste disposal or
other use may be combined and manipulated in a GIS to address planning and
natural resource issues (such as the location of a water well near a proposed
waste disposal site) to guarantee the quality of life for everyone in livable
communities. Planning agencies have realized the power of enterprise GIS to
identify problems, respond to them efficiently, and share the results with the
public.

Our Growth Strategy

Our objective is to be the leading provider of integrated
solutions for GIS, public security information technology, and digital hospital
systems in China, as well as related software service operations. Our
intelligence solutions can help organizations make more insightful decisions and
improve the efficiency of their internal processes. Our strategy for achieving
this objective includes the following key elements:

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- Expand geographic footprint to cover all major markets in
  China. We intend to leverage our strengths to expand into new
  geographic markets. For the fiscal year ended December 31, 2010, approximately
  64% of our total revenue was generated through our operations in the Guangdong
  Province. We manage our nationwide operations in the seven strategic
  development areas in China including the South, the North, the East, the
  Central, the Southwest, the Northwest China, as well as the Northeast. We have
  established offices in Guangzhou, Beijing, Wuhan, Hunan and Xinjiang
  provinces, and work through representatives in Nanning, Guangxi Provinces, in
  Dongguan, Guangdong Province, in Chongqing Municipality, in Nanjing, Jiangsu
  Province, in Xian, Shanxi Province, in Chengdu, Sichuan Province, in Baotou,
  Inner Mongolia, in Lanzhou, Gansu Province, etc.. Our nationwide distribution
  network in China covers 32 provinces and provincial cities throughout China.
  We believe that expanding our presence in new geographic areas will allow us
  to increase our cross-selling opportunities for our product and service
  offerings.
- Strengthen R&D capability to enhance and expand core products and
  further penetrate customer base. To provide our clients with
  innovative solutions, we expect to offer additional value-added services and
  add-ins to our current platform through continuous research and development,
  to enhance our product and service offerings and to maintain our leadership
  position in our core areas of focus.
- Continue to maintain our leading position in the rapidly growing
  public security technology market. We plan to leverage our strong
  brand recognition to obtain new customers and new projects from existing
  customers.
- Expand into the private sector. We are witnessing market
  readiness to adopt our IT solutions and display technologies that used to
  serve highly specialized activities of public agencies. As private sector
  grows in technological sophistication, we plan to penetrate into this new
  sector of the market with both display technologies and internet solutions.

We expect to execute these key elements of our growth strategy
through a combination of investments in internal initiatives. Internal
initiatives will focus on expanding capacity and enhancing our technology and
services capabilities.

Our Products and Services

Through the operations of our China-based subsidiaries and the
subcontracting services provided for in our Management Service Agreement with
iASPEC, we are a provider of integrated solutions for the GIS, digital public
security as well as digital hospital information markets in China. Our products
and services can be separated into four categories: (1) GIS applications and
services; (2) Digital Public Security Technology, or DPST; (3) Digital Hospital
Information Systems, or DHIS and (4) Other Products and Services or OTHER.

GIS Software Services and Operations

We provide system management and support services in connection
with our PGIS platform. The PGIS platform is a set of GIS solutions that was
developed by iASPEC and licensed exclusively to us, for use in creating, editing
and adding data to our customers systems. The PGIS platform allows us to
provide our law enforcement customers with different services, including
specialized mapping services, positioning services, messaging services and
services which monitor access to their GIS by users of different levels. We
offer the PGIS platform with a full complement of services, including providing
basic map image data from the GIS and specific data in connection with that map
image (such as a bus stop), a consolidation of both basic data and specific data
services for data inquiry services, and application system services, which is
the application of consolidated services to a specific service requirement, such
as the position of a police officer in the field.

We also provide application interface services which ensure
that our PGIS platform is equipped to interact with other programs to the
benefit of our customers. The data from different law enforcement command
systems can be integrated with our PGIS platform to provide our law enforcement
customers with more robust communication and location information. Typically,
our platforms are integrated with the City Emergency Commanding System, the
Police Resource Consolidated Management System, the Residence Management System,
the Internet Surveillance System, the Traffic Commanding System, the Criminal
Investigation System and the City Surveillance System. Our core PGIS technology
has been selected for use in the Ministry of Public Securitys PGIS Project,
which when complete, is expected to standardize and interconnect all PGIS
systems in China. The MPS plans to standardize 100 largest cities over the next
three years and then subsequently roll out these systems nationwide.

In the Civil-use GIS sector, we have obtained the highest level
of qualifications (some of them are mentioned in the sections under the heading
Competition  High Barriers to Entry and Regulation below) with the widest
range of applications, through its affiliation with Geo. In addition, Geos
copyrighted GIS software, Geostar, has been widely applied in many mission-critical projects covering national defense, surveying
and mapping, land resource, city planning and electricity. Management believes
that these qualifications and intellectual property have positioned the Company
to benefit for the next few years from the PRC governments recent emphasis on
and promulgation of favorable policies to encourage more applications of
domestic-grown GIS software.

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In January 2010, Chinas State Bureau of Surveying and Mapping
announced its plan to build a National Geographic Information Public Service
Platform. The whole program will include the construction of one national level
master node, 31 provincial level nodes, and 333 city level nodes throughout
China, and each city level node will centralize approximately 20 local
government departments different applications. This program aims to improve the
capability and efficiency of geographic information public service, and optimize
the utilization of national geographic information resources in China. The whole
program will be completed in 5 years.

Digital Public Security Technology

First Responder Coordination Platform The First
Responder Coordination Platform is a software program which integrates the
contact numbers for general police, fire, traffic and other related government
organizations into one contact number and enables these agencies to consolidate
and improve their public emergency response. Through this platform, our public
security customers are able to command and coordinate joint responses to provide
the public with immediate, efficient and reliable assistance. The PRC
government, through its Police Force Technology Reinforcement initiative, has
mandated the adoption of the first responder system to consolidate and improve
public emergency response. Approximately 660 cities across China are expected to
initiate the deployment of their coordinated emergency response platforms,
creating significant opportunities for us.

Intelligent Recognition Systems Our Intelligent
  Recognition product is used by the Ministry of Public Security for effective
  border control management. The Recognition System stores biometric information,
  such as finger-prints and facial features from passengers in a database and
  integrates it with infrared and license plate recognition technologies to enable
  the automation of border control checkpoints for faster and more accurate processing
  of passengers, while at the same time helping to safeguard borders from stowaways,
  and greatly improving overall efficiency and the effectiveness of border control
  management. The rapid development of China in recent years has also led to growing
  passenger traffic across its borders, which reached 382 million people in 2010.
  To address the increasing requirement and faster and more accurate checkpoint
  processing of passenger traffic, Exit and Entry Frontier Stations throughout
  China are in the process of implementing their own intelligent border control
  systems. These systems can also be used to strengthen port control and surveillance
  in Chinas 200+ air, sea and land ports and have many alternative private
  sector applications, including the management and control of stadium attendance,
  parking lot traffic, work attendance and toll road traffic.

Residence Card Information Management System This
system is designed to apply the latest information technology to automate the
Shenzhen Residence Card System, and will integrate with police GIS systems.
Through an integrated information transfer platform, the system will facilitate
several social programs, including social welfare management, education
management, and house rental service management. Various government and
functional departments can access information regarding the immigrant population
in the system to improve work efficiency and increase managing capability. In
the near future, the system may be expanded to be compatible with other
applications, such as medical, personal credit history, and driving records. If
successful, the system may be extended to 660 cities across China. According to
national statistics, there are over 210 million internal immigrants in China. In
many mid-to-large cities, the population of recent immigrants from rural areas
exceeds the resident population. As a key pilot project for the Ministry of
China Public Security, our Residence Card information Management System will be
deployed in Shenzhen first for evaluation.

Digital Hospital Information Systems

We provide various hospital information management software and
solutions, such as Medical Case Statistics Software and Electronic Medical Case
Management System, to help build modern, scientific and digital hospitals. Our
products have been widely used to efficiently manage hospital fiscal
information, clinic information, medical technologies, equipment and inventory,
as well as comprehensive hospital information.

Medical Case Statistics Software serves the growing demand for
digital hospital and electronic medical record systems in China. Medical
records, including health examinations, medical care, immunity or infectious
diseases, will be integrated into one centralized system so that doctors within
the network can review a patients complete medical history. Such digital
hospital systems are expected to reduce medical errors and improve the
efficiency of delivering healthcare services, so as to benefit patients, while
helping to minimize medical claims fraud. Our Medical Case Statistics Software
can also be used to provide public health authorities with an integrated command
and decision system for public health and disease control.

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Our Electronic Medical Case Management System is able to
integrate Hospital Information System, Laboratory Information System, Picture
Archiving & Communication System, Radiology Information System and Corporate
Identity System, to digitize all clinic information. The System also provides
access interfaces with related agencies such as Social Insurance and Bank.

Other Products and Services

In addition to providing the above-mentioned three main
segments of offerings, we assess new market opportunities and develop new
solutions such as our display technologies and internet solutions for the
private sector. New offerings under market assessment or development outside the
existing main business segments are aggregated in this category until a
meaningful stand-alone segment is formed, at which point such a new segment will
be separated from this category.

Product Warranty

We usually offer a one-year service warranty for our system
integration services. The warranty includes support services, minimal updates
and system maintenance. In our experience the cost of providing this warranty
has been immaterial. We also offer warranties for our hardware sales, but the
suppliers of such hardware provide the final warranty services.

Our Intellectual Property

Our success depends, in part, on our ability to maintain and
protect our proprietary technology and to conduct our business without
infringing on the proprietary rights of others. We rely primarily on a
combination of copyrights, patents, trademarks and trade secrets, as well as
employee and third-party confidentiality agreements, to safeguard our
intellectual property.

As of December 31, 2010, we had 98 registered and copyrighted
  software products. We also held 16 patents and had 10 patent applications pending.
  We had 9 trademarks.

We protect our know-how and technologies through
confidentiality provisions in the employment contracts we enter into with our
employees. In addition, our engineers are generally divided into different
project groups, each of which generally handles only a portion of the project.
As a result, no one engineer generally has access to the entire design process
and documentation for a particular product.

Sales and Marketing

We develop new business by identifying and contacting potential
new customers and through referrals, or as a result of new customers contacting
us because of our strong brand recognition and reputation in the industry. We
strengthen our market presence through various types of marketing campaigns,
such as participating in exhibitions, trade fairs and seminars, and presenting
solutions to prospective customers. We participate in several domestic and
international trade fairs such as the China High-Tech Fair in Shenzhen and the
e-Gov China Fair in Beijing. We also participate in seminars held by ESRI, IBM
etc. each year, to raise our recognition and promote our products. These trade
fairs not only promote our reputation, but also our brand name.

Our main marketing and business development focus is on GIS,
public security information technology and hospital information system software
services. We have a good reputation and brand recognition in this market. We
expect to expand in the market and obtain more market shares through our mature
products and quality services.

Our Major Customers

In fiscal years 2010 and 2009, no single customer represented
10% or more of our total revenue. In fiscal 2008, no single customer other than
Huipu represented more than 10% of total revenue.

The following tables provide revenue by our major customers for
the years ended December 31, 2010, 2009 and 2008.

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Year 2010

|                                                                              |   | Revenues    |  |  | Percentage of | 
|----------------------------------------------------------------------------- | - | ----------- |  |  | ------------- | 
|                                                                              |   | (Thousands) |  |  | Total Sales   | 
|Shenzhen Municipal Public
      Security Bureau Information Office            | $ | 7,017       |  |  | 4%            | 
|Shenzhen Municipal Public Security Bureau
      Residence Card Program Office |   | 6,946       |  |  | 4%            | 
|Shenzhen Huipuchaungxin
      Technology Limited                              |   | 5,578       |  |  | 3%            | 
|Guangzhou Municipal Public Security Bureau
      ,Guangdong Province          |   | 4,955       |  |  | 3%            | 
|Changfeng Technology
      Industrial Group                                   |   | 4,288       |  |  | 3%            | 
|TOTAL                                                                         | $ | 28,784      |  |  | 17%           | 

Year 2009

|                                                                  |   | Revenues    |  |   | Percentage of | 
|----------------------------------------------------------------- | - | ----------- |  | - | ------------- | 
|                                                                  |   | (Thousands) |  |   | Total Sales   | 
|Haikou Boshuntong Software
      Development Company              | $ | 6,288       |  | $ | 6%            | 
|Shenzhen Longtushenzhou Information Limited                       |   | 5,204       |  |   | 5%            | 
|Shenzhen Municipal Public
      Security Bureau                   |   | 4,967       |  |   | 5%            | 
|Huipu Electronics (Shenzhen) Co.,ltd (prior
      to acquisition) |   | 4,566       |  |   | 5%            | 
|Shenzhen Tianshengji
      Technology Limited                     |   | 4,393       |  |   | 4%            | 
|TOTAL                                                             | $ | 25,418      |  | $ | 25%           | 

Year 2008

|                                                      |   | Revenues    |  |   | Percentage of | 
|----------------------------------------------------- | - | ----------- |  | - | ------------- | 
|                                                      |   | (Thousands) |  |   | Total Sales   | 
|Huipu Electronic (Shenzhen)
      Limited             | $ | 10,663      |  | $ | 13%           | 
|Shenzhen Dingzhi Information Technology
      Limited |   | 5,453       |  |   | 6%            | 
|Hainan Xin Kerui Software
      Engineering Limited   |   | 5,410       |  |   | 6%            | 
|Shenzhen Ai Kemu Computer Technology Limited          |   | 4,112       |  |   | 5%            | 
|Shenzhen Longtushenzhou
      Information Limited     |   | 3,796       |  |   | 4%            | 
|TOTAL                                                 | $ | 29,434      |  | $ | 34%           | 

Competition

The markets for GIS, digital public security and digital
hospital information system sectors in China have developed in recent years but
are still in an emerging stage. There are currently only a few key players
engaged in each of these fields. In the PGIS area, Beijing Founder Digital
Company Limited and Beijing Easymap Information Technology Co., Ltd. are two
important competitors. In the GIS platform software business, we consider
Environmental Systems Research Institute (ESRI), Super Map Software Co., Ltd.
(SuperMap) and Zondy Cyber Group Co., Ltd. ("Zondy Cyber) as meaningful
competitors. In the digital hospital information system sector, our main
competitors include Neusoft Corporation or Neusoft Group Ltd.(Neusoft) and DHC
Software Company Limited (DHC Software).

We believe that we will be able to effectively compete with
these companies in the future. We believe that our pioneering solutions, our
ongoing customer relationships and our reputation for success in the industry
have enabled us to maintain our competitive advantages.

We believe the following are our key competitive strengths.

- Broad and Growing Portfolio of Software and Services. We
  offer our customers a growing portfolio of software and services offerings in
  each of the 4 segments in which we operate. We are therefore able to provide
  multiple integrated solutions for our clients. Public entities use our core
  products to incorporate ever-growing data into their decision-making processes
  to drive more effective results. Through our platforms, our customers can
  develop customized applications, which can be extended across their agencies
  to support a variety of needs and generate more valuable insights. As a
  complement to these offerings, we offer related services, such as application
  development, software upgrades, follow-on phases, and systems integration,
  which help our customers quickly implement and customize our solutions.
- Successful Implementation of High Profile Contracts. Our
  management team has a proven track record of successful implementation of high
  profile government contracts in China. This track record has enabled us to
  expand our customer base, which has grown beyond its historical geographic
  area in the Guangdong province and now includes customers in over 32 provinces
  throughout China. During 2010, we completed numerous high-profile
  mission-critical projects related to our core DPST, GIS and DHIS businesses, including the Police-use GIS for 2010 Shanghai Expo, the security system for
  the 2011 Shenzhen Summer Universiade, the intelligent traffic management system
  for the 2010 Guangzhou Asian Games, the Police-use GIS for 12 major cities under
  Chinas National PGIS Standardization Project, the exclusive contract with
  the Guangdong Department of Health for our patented Medical Case Statistics
  (MCS) software to be rolled out to 2,000 hospitals within the province. Our
  major accomplishments in 2010 also include: our proprietary Geoglobe and Geostar
  was selected by Chinas State Grid Corporation as the sole domestic GIS
  software provider for the build-out of the Smart Grid project; Chinas
  newly released state-sponsored online mapping service Map World
  are entirely run on our GIS platform software; in addition, as of Feb 2011,
  all of the Companys operating entities have been awarded the National
  High-Tech Enterprise Status, which allows us to receive significant benefits
  including lower income tax rate, government subsidies, etc. We were ranked among
  Deloitte Technology Fast 500 Asia Pacific for the third consecutive year and
  named 13th among 2010 Forbes China Best SMEs. During the fourth quarter of 2010,
  we signed new contracts totaling $39.6 million from 25 provinces and provincial
  cities throughout China, bringing the total contracts amount signed in 2010
  to $151.5 million, an increase of 35.8% compared to the year of 2009.

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- High Barriers to Entry. We believe our qualifications, our
    successful contract implementation record, and the high cost of switching
    to other providers provide us with a first mover advantage in
    the PRC market and pose high barriers to entry for our potential competitors.
    iASPEC, holds the Computer System Integration Level 1 license from the PRC
    Ministry of Information, the Information System Security Service qualification
    from Guangdong Province and a State Secret-related Computer Information Integration
    Certificate, and Geo holds a Level A Certificate of Surveying and Mapping.
    As discussed above, we are gaining wider market recognition from our successful
    contract execution record. In addition, after investing in our systems, our
    existing customers have a strong incentive to purchase follow-on phases from
    us in order to expedite implementation and save costs.

Regulation

Because all of our operating entities are located in the PRC,
we are regulated by the national and local laws of the PRC. This section
summarizes the major PRC regulations relating to our business.

Permits and Certificates

Our PRC subsidiary IST is a Shenzhen City Software Enterprise
and holds ISO 9001:2000 Certification, Maturity Level 2 of Capability Maturity
Model Integration and National High-Tech Enterprise. However, fulfillment of
certain PGIS contracts with PRC Government customers is restricted to entities
possessing the necessary government licenses and approvals which IST does not
have.

Through our exclusive commercial arrangements with iASPEC, we
  benefit from the following governmental licenses and permits previously awarded
  and currently held by iASPEC:

|Name                                                                                                                           |  | Grant Date and Duration                                        
|------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------
|Computer System Integration Level II
      Qualification from PRC Ministry of Information                                      |  | June 11, 2010  June 11,
      2013                            
|State Secret related Computer Information System
      Integration Certificate                                                 |  | March 29, 2009  March 29, 2012                                
|Guangdong Province Computer Information
      System Security Service Level II Qualification                                   |  | July 29, 2010  July 29,
      2014                            
|Shenzhen City Key Software Enterprise Certification                                                                            |  | June 13, 2010  June 13, 2011 (subject to
      annual renewal)
|Guangdong Province Security Technology
      Surveillance System Design, Implementation and Repair Level I
      Qualification |  | December 10, 2009  December
      10, 2011                    
|Maturity Level 3 of Capability Maturity Model Integration                                                                      |  | September 2007                                                 
|ISO 9001:2000 Certification                                                                                                    |  | May 30, 2008  May 29, 2011                                    
|Honor the Contract and Keep the Promise Enterprise                                                                             |  | June 15, 2009                                                  
|                                                                                                                               |  |                                                                
|Level II of Construction Certificate for Intelligent
      Project Design & Implementation                                     |  | December 1, 2008  December 1, 2011                            
|National High-Tech Enterprise 2010
      China Top SMEs                                                                        |  | June 27, 2009  June 27,
      2012 
      November 28, 2010   

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In addition, our PRC operating subsidiaries hold the following
certifications and qualifications:

|Name                                                                                                                               | Grant Date and Duration                            | Company  
|---------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------- | ---------
|Maturity Level 3 of Capability Maturity
      Model Integration                                                                    | December 29, 2007                                  | IST      
|ISO 9001:2000 Certification                                                                                                        | June 5, 2008  June 5, 2011                        | IST      
|National High-tech Enterprise                                                                                                      | June 27, 2009 
      June 27, 2012                | IST      
|Guangdong Province Security Technology Surveillance System
      Design, Implementation and Repair Qualification                   | July 18, 2008  July 18, 2011                      | ISS      
|Guangdong Province Computer Information
      System Security Service Qualification                                                | July 29, 2010 
      July 29, 2014                | ISS      
|Maturity Level 3 of Capability Maturity Model Integration                                                                          | April 2008                                         | ISS      
|Computer System Integration Level III
      Qualification from PRC Ministry August 15, 2008  August 15, 2011 of
      Information |                                                    | ISS      
|National High-tech Enterprise                                                                                                      | September 6, 2010  September 6,
      2013        | ISS      
|Certificate for China Compulsory Product
      Certification                                                                       | June 4, 2009                                       | Bocom    
|National High-Tech Enterprise                                                                                                      | December 29, 2009                                  | Bocom    
|Shenzhen Software Enterprise Certification                                                                                         | October 30, 2010
      (subject to annual renewal) | Bocom    
|National High-tech Enterprise                                                                                                      | September 6, 2010  September 6,
      2013        | Zhongtian
|Computer System Integration Level IV
      Qualification from PRC MinistryNovember 17, 2008  November 17, of
      Information    | 2011                                               | Zhongtian
|National High-tech Enterprise                                                                                                      | Approved, certificate to be
      received         | Huipu    

Taxation

On March 16, 2007, the National People's Congress of China
passed a new Enterprise Income Tax Law, or EIT Law, and on November 28, 2007,
the State Council of China passed its implementing rules, which took effect on
January 1, 2008. Before the implementation of the EIT Law, foreign invested
enterprises, or FIEs, established in the PRC, unless granted preferential tax
treatments by the PRC government, were generally subject to an earned income
tax, or EIT, rate of 33.0%, which included a 30.0% state income tax and a 3.0%
local income tax. The EIT Law and its implementing rules impose a unified EIT of
25.0% on all domestic-invested enterprises and FIEs, unless they qualify under
certain limited exceptions. However, the EIT Law gives FIEs established before
March 16, 2007, or Old FIEs, a five-year grandfather period during which they
can continue to enjoy their existing preferential tax treatments. During this
five-year grandfather period, Old FIEs that enjoyed tax rates lower than 25%
under the original EIT Law can gradually increase their EIT rate by 2% per year
until their 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 continue enjoying their preference until these holidays expire.

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 we should be classified as a resident
enterprise, then our organizations global income will be subject to PRC income
tax of 25%. For detailed discussion of PRC tax issues related to resident
enterprise status, see Item 1A, Risk Factors  Risks Related to Doing Business
in China  Under the New Enterprise Income Tax Law, we may be classified as a
resident enterprise of China. Such classification will likely result in
unfavorable tax consequences to us and our non-PRC stockholders.

Foreign Currency Exchange

The principal regulation governing foreign currency exchange in
China is the Foreign Currency Administration Rules (1996), as amended (2008).
Under these Rules, RMB is freely convertible for current account items, such as
trade and service-related foreign exchange transactions, but not for capital
account items, such as direct investment, loan or investment in securities
outside China unless the prior approval of, and/or registration with, the State
Administration of Foreign Exchange of the Peoples Republic of China, or SAFE,
or its local counterparts (as the case may be) is obtained.

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Pursuant to the Foreign Currency Administration Rules, FIEs in
China may purchase foreign currency without the approval of SAFE for trade and
service-related foreign exchange transactions by providing commercial documents
evidencing these transactions. They may also retain foreign exchange (subject to
a cap approved by SAFE) to satisfy foreign exchange liabilities or to pay
dividends. In addition, if a foreign company acquires a company in China, the
acquired company will also become an FIE. However, the relevant PRC government
authorities may limit or eliminate the ability of FIEs to purchase and retain
foreign currencies in the future. In addition, foreign exchange transactions for
direct investment, loan and investment in securities outside China are still
subject to limitations and require approvals from, and/or registration with,
SAFE.

Dividend Distributions

Under applicable PRC regulations, FIEs in China may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, a FIE in
China is required to set aside at least 10% of its after-tax profit based on PRC
accounting standards each year to its general reserves until the accumulative
amount of such reserves reach 50% of its registered capital. These reserves are
not distributable as cash dividends. The board of directors of a FIE has the
discretion to allocate a portion of its after-tax profits to staff welfare and
bonus funds, which may not be distributed to equity owners except in the event
of liquidation.

In addition, under the EIT law, the Notice of the State
Administration of Taxation on Negotiated Reduction of Dividends and Interest
Rates, which was issued on January 29, 2008, the Arrangement between the
PRC and the Hong Kong Special Administrative Region on the Avoidance of Double
Taxation and Prevention of Fiscal Evasion, which became effective on
December 8, 2006, and the Notice of the State Administration of Taxation
Regarding Interpretation and Recognition of Beneficial Owners under Tax
Treaties, which became effective on October 27, 2009, dividends from our PRC
operating subsidiaries paid to us through our Hong Kong subsidiaries may be
subject to a withholding tax at a rate of 10%, or at a rate of 5% if our Hong
Kong subsidiaries are considered a beneficial owner that is generally engaged
in substantial business activities and entitled to treaty benefits under the
Arrangement between the PRC and the Hong Kong Special Administrative Region
on the Avoidance of Double Taxation and Prevention of Fiscal Evasion.

Our Employees

As of December 31, 2010, we had approximately 1,453 full-time
employees. The following table illustrates the allocation of these employees
among the various job functions conducted at our company.

Department
    
    Number of EmployeesSoftware Development
    
    471Sales & Marketing
    
    264Admin & Human Resources
    
    122Finance and Accounting
    
    56Management
    
    31Production
    
    316Project Execution
    
    193TOTAL
    
    1,453


We believe that our relationship with our employees is good.
Our Chinese subsidiaries have trade unions which protect employees rights, aim
to assist in the fulfillment of our economic objectives, encourage employee
participation in management decisions and assist in mediating disputes between
us and union members. We have not experienced any significant problems or
disruption to our operations due to labor disputes, nor have we experienced any
difficulties in recruitment and retention of experienced staff. The remuneration
payable to employees includes basic salaries and allowances. We also provide
training for our staff from time to time to enhance their technical knowledge.

As required by applicable Chinese law, we have entered into
employment contracts with all of our officers, managers and employees.

Our employees in China participate in a state pension scheme
organized by Chinese municipal and provincial governments. We are required to
contribute to the scheme at rates ranging from 13% to 18% of the average monthly
salary. As of the date of this report, we have complied with the regulation and
have paid the state pension plan as required by law. In addition, we are
required by Chinese law to cover employees in China with various types of social
insurance. We have purchased social insurance for all of our employees.

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ITEM 1A. RISK FACTORS.

An investment in our common stock involves a high degree of
risk. You should carefully consider the risks described below, together with all
of the other information included in this report, before making an investment
decision. If any of the following risks actually occurs, our business, financial
condition or results of operations could suffer. In that case, the trading price
of our common stock could decline, and you may lose all or part of your
investment. You should read the section entitled Special Note Regarding Forward
Looking Statements above for a discussion of what types of statements are
forward-looking statements, as well as the significance of such statements in
the context of this report.

RISKS RELATED TO OUR BUSINESS

Unfavorable economic conditions may affect the level of
technology spending by our customers which could cause the demand for our
products and services to decrease.

The revenue growth and profitability of our business depend on
the overall demand for software products and related services, particularly
within the private sector. Our strategy involves a sale of our products and
services primarily to customers in the private sector, so our business depends
on the overall economy and the economic and business conditions within this
market. The current stock market decline and the global economic slowdown may
affect the demand for our software products and related services and decrease
technology spending of many of our customers and potential customers. These
events could have a material effect on us in the future, including, without
limitation, on our future revenue and earnings.

We are not likely to sustain our recent growth rate.

Our revenues have grown significantly in the last few years,
primarily resulting from our strategic acquisitions, including our acquisitions
of ISS, Bocom and Huipu, and the acquisition of Geo by our variable interest
entity, iASPEC. Specifically, our revenue has grown 157% between fiscal years
2007 and 2006 (including revenue earned by our predecessor in fiscal year 2006),
181% between fiscal years 2008 and 2007, 18% between fiscal years 2008 and 2009
and 62% between fiscal years 2009 and 2010. Additionally, our net income has
grown 135% between fiscal years 2007 and 2006 (including revenue earned by our
predecessor in fiscal year 2006), 78% between fiscal years 2008 and 2007, 27%
between fiscal years 2008 and 2009 and 20% between fiscal years 2009 and 2010.
We are not likely to sustain similar growth in revenues or net income in future
periods due to a number factors, including, among others, the greater difficulty
of growing at sustained rates from a larger revenue base and our ability to
identify and consummate strategic acquisitions. Accordingly, you should not rely
on the results of any prior period as an indication of our future financial and
operating performance.

Our quarterly operating results are difficult to predict
and could fall below investor expectations or estimates by securities research
analysts, which may cause the trading price of our common stock to decline.

Our revenues and operating results can vary significantly from
quarter to quarter due to a number of factors, many of which are outside of our
control, such as variations in the volume of business from customers resulting
from changes in our customers' operations, the business decisions of our
customers regarding the use of our products and services, delays or difficulties
in expanding our operational facilities and infrastructure, changes to our
pricing structure or that of our competitors, inaccurate estimates of resources
and time required to complete ongoing projects and currency fluctuations. As
many of our employees take long vacations during the Chinese New Year in the
first quarter, our revenues in that quarter are relatively low compared to the
other quarters. Moreover, our results may vary depending on our customers'
business needs and spending patterns. Due to the annual budget cycles of most of
our customers, we may not be able to estimate accurately the demand for our
products and services beyond the immediate calendar year, which could adversely
affect our business planning and may have a material adverse effect on our
business, results of operations and financial condition. In addition, the volume
of work performed for specific customers is likely to vary from year to year.
Thus, a major customer in one year may not provide the same amount or percentage
of our revenues in any subsequent year.

These fluctuations are likely to continue in the future and
operating results for any period may not be indicative of our performance in any
future period. If our operating results for any quarterly period fall below
investor expectations or estimates by securities research analysts, the trading
price of our common stock may decline.

We face risks once a business is acquired and the
acquired companies may not perform to our expectations, either of which may
adversely affect our results of operations.

We face risks when we acquire other businesses. These risks
include:

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- difficulties in the integration of acquired operations and retention of
  personnel,
- unforeseen or hidden liabilities,
- tax, regulatory and accounting issues, and
- inability to generate sufficient revenues to offset acquisition costs.

Acquired companies may not perform to our expectations for
various reasons, including the loss of key personnel or, as a result, key
customers, and our strategic focus may change. As a result, we may not realize
the benefits we anticipated. If we fail to integrate acquired businesses or
realize the expected benefits, we may lose the return on the investment in these
acquisitions, incur transaction costs and our results of operations could be
materially and adversely affected as a result.

If we are unable to raise additional financing or
identify suitable merger or acquisition targets, we may be unable to implement
our long-term business plan, develop or enhance our products and services, take
advantage of future opportunities or respond to competitive pressures on a
timely basis.

Our long-term business plan includes the identification of
suitable targets for horizontal or vertical mergers or acquisitions, so as to
enhance overall productivity and to benefit from economies of scale. Due to the
current global financial crisis, we may not be able to obtain adequate levels of
additional financing, whether through equity financing, debt financing or other
sources. To raise funds, we may need to issue new equities or bonds which could
result in additional dilution to our shareholders, and additional financings
could result in significant dilution to our earnings per share or the issuance
of securities with rights superior to our current outstanding securities or
contain covenants that would restrict our operations and strategy. In addition,
we may grant registration rights to investors purchasing our equity or debt
securities in the future. If we are unable to raise additional financing, we may
be unable to implement our long-term business plan, develop or enhance our
products and services, take advantage of future opportunities or respond to
competitive pressures on a timely basis, if at all. In addition, a lack of
additional financing could force us to substantially curtail or cease
operations.

We also may not be able to identify merger or acquisition
targets or, after a merger or acquisition, may not be able to integrate the
targets business or operations successfully with ours. Such failure to execute
our long-term business plan likely will negatively impact our results of
operations.

We generally do not have exclusive or long-term
agreements with our customers and we may lose their engagement if they are not
satisfied with our products and services or for other reasons.

We generally do not have exclusive or long-term agreements with
our customers. As a result, we must rely on the quality of our products and
services, industry reputation and favorable pricing to attract and retain
customers. There is no assurance, however, that we will be able to maintain our
relationships with current and/or future customers. Our customers may elect to
terminate their relationships with us if they are not satisfied with our
services. If a substantial number of our customers choose not to continue to
purchase products and services time from us, it would have a material adverse
effect on our business and results of operations.

If we are unable to develop competitive new products and
service offerings our future results of operations could be adversely
affected.

Our future revenue stream depends to a large degree on our
ability to utilize our technology in a way that will allow us to offer new types
of software applications and services to a broader client base. We will be
required to make investments in research and development in order to continue to
develop new software applications and related service offerings, enhance our
existing software applications and related service offerings and achieve market
acceptance of our software applications and service offerings. We may incur
problems in the future in innovating and introducing new software applications
and service offerings. Our development-stage software applications may not be
successfully completed or, if developed, may not achieve significant customer
acceptance. If we are unable to successfully define, develop and introduce
competitive new software applications, and enhance existing software
applications, our future results of operations would be adversely affected.
Development schedules for software applications are difficult to predict. The
timely availability of new applications and their acceptance by customers are
important to our future success. A delay in new the development of new
applications could have a significant impact on its results of operations.

If we are unable to keep pace with the rapid
technological changes in our industry, demand for our products and services
could decline which would adversely affect our revenue.

Our industry is characterized by extremely rapid technological
change, evolving industry standards and changing customer demands. These
conditions require continuous expenditures on product research and development
to enhance existing products, create new products and avoid product
obsolescence. We believe that the timely development of new products and
continuing enhancements to existing products is essential to maintain our
competitive position in the marketplace. Our future success depends in part upon
customer and market acceptance of our products and initiatives, which is
uncertain. Any failure to achieve increased acceptance of these and other new
product offerings could have a material adverse effect on our business and
results of operations.

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Our software products may contain defects or errors,
which could decrease sales, injure our reputation or delay shipments of our
products.

The software products that we develop are complex and must meet
the stringent technical requirements of our customers. In addition, to keep pace
with the rapid technological change in our industry and to avoid the
obsolescence of our software products, we must quickly develop new products and
enhancements to existing products. Because of this complexity and rapid
development cycle, we cannot assure that our software products are free of
errors, especially in newly released software products and new versions of
existing software products. If our software is not free of errors, this could
result in litigation, fewer sales, increased product returns, damage to our
reputation and an increase in service and warranty costs, which would adversely
affect our business.

Our technology may become obsolete which could materially
adversely affect our ability to sell our products and services.

If our technology, products and services become obsolete, our
business operations would be materially adversely affected. The market in which
we compete is characterized by rapid technological change, evolving industry
standards, introductions of new products, and changes in customer demands that
can render existing products obsolete and unmarketable. Our current products
will require continuous upgrading or our technology will become obsolete. Our
future success will depend upon our ability to address the increasingly
sophisticated needs of our customers by supporting existing and emerging
hardware, software, database, and networking platforms and by developing and
introducing enhancements to our existing products and new products on a timely
basis that keep pace with technological developments, evolving industry
standards, and changing customer requirements. Research and development expenses
were $3,016,693 , $2,705,669 and $2,596,430 for the years ended December 31,
2010, 2009 and 2008, respectively.

We face the risk of systems interruptions and capacity
constraints, possibly resulting in adverse publicity, revenue loss and erosion
of customer trust.

The satisfactory performance, reliability and availability of
our network infrastructure are critical to our reputation and our ability to
attract and retain customers and to maintain adequate customer service levels.
We may experience temporary service interruptions for a variety of reasons,
including telecommunications or power failures, fire, water damage, vandalism,
computer bugs or viruses or hardware failures. We may not be able to correct a
problem in a timely manner. Any service interruption that results in the
unavailability of our system or reduces its capacity could result in real or
perceived public safety issues that may affect customer confidence in our
services and result in negative publicity that could cause us to lose customer
accounts or fail to obtain new accounts. Any inability to scale our systems may
cause unanticipated system disruptions, slower response times, degradation in
levels of customer service, or impaired quality and speed of transaction
processing. We are not certain that we will be able to project the rate or
timing of increases, if any, in the use of our services to permit us to upgrade
and expand our systems effectively or to integrate smoothly any newly developed
or purchased modules with our existing systems.

If we are not able to adequately secure and protect our
patent, trademark and other proprietary rights our business may be materially
affected.

Under the Management Service Agreement, we license 21copyrighted software applications from iASPEC on an exclusive basis. To
protect the intellectual property underlying these applications and our other
intellectual property, we rely on a combination of copyright, trademark, and
trade secret laws. We also rely on non-disclosure agreements and other
confidentiality procedures and contractual provisions to protect our
intellectual property rights. Some of these technologies, other than the iASPEC
copyrighted software applications, are very important to our business and are
not protected by copyrights or patents. It may be possible for unauthorized
third parties to copy or reverse engineer our products, or otherwise obtain and
use information that we regard as proprietary. Further, third parties could
challenge the scope or enforceability of our copyrights. In certain foreign
countries, including China where we operate, the laws do not protect our
proprietary rights to the same extent as the laws of the United States. Any
misappropriation of our intellectual property could have a material adverse effect on our business and results of operations, and
we cannot assure you that the measures we take to protect our proprietary rights
are adequate.

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Claims that we infringe the proprietary rights of third
parties could result in significant expenses or restrictions on our ability to
sell our products and services.

Third parties may claim that our products or services infringe
their proprietary rights. Any infringement claim, with or without merit, would
be time-consuming and expensive to litigate or settle and could divert our
managements attention from our core business. In the event of a successful
infringement claim against us, we may have to pay significant damages, incur
substantial legal fees, develop costly non-infringing technology, or enter into
license agreements that require us to pay substantial royalties and that may not
be available on terms acceptable to us, if at all.

A significant portion of our sales are derived from a
limited number of customers, and results from operations could be adversely
affected and stockholder value harmed if we lose any of these customers.

Historically, a significant portion of our revenues have been
derived from a limited number of customers. For the years ended December 31,
2010, 2009 and 2008, 17%, 25% and 34% of our revenues, respectively, were
derived from our five largest customers. The loss of any of these significant
customers would adversely affect our revenues and stockholder value.

The digital security, geographic, and hospital
information systems markets in China are highly competitive, and we may fail to
compete successfully, thereby resulting in loss of customers and decline in our
revenues.

The digital security, geographic, and hospital information
systems markets in China are intensely competitive and are characterized by
frequent technological changes, evolving industry standards and changing
customer demands. We have competition from multiple domestic competitors in each
segment. Increased competition may result in price reductions, reduced margins
and inability to gain or hold market share.

We have limited insurance coverage for our operations in
China.

The insurance industry in China is still at an early stage of
development. Insurance companies in China offer limited insurance products. We
have determined that the risks of disruption or liability from our business, the
loss or damage to our property, including our facilities, equipment and office
furniture, the cost of insuring for these risks, and the difficulties associated
with acquiring such insurance on commercially reasonable terms make it
impractical for us to have such insurance. As a result, we do not have any
business liability, disruption, litigation or property insurance coverage for
our operations in China except for insurance on some company owned vehicles. Any
uninsured occurrence of loss or damage to property, or litigation or business
disruption may result in the incurrence of substantial costs and the diversion
of resources, which could have an adverse effect on our operating results.

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

Our future business and results of operations depend in
significant part upon the continued contributions of our key technical and
senior management personnel, including Jiang Huai Lin, our Chairman and Chief
Executive Officer, Jackie You Kazmerzak, our Chief Financial Officer, Zhi Qiang
Zhao, our Chief Operating Officer, Yi Fu Liu, our Chief Marketing Officer and
Zhi Xiong Huang, our Chief Technology Officer. They also depend in significant
part upon our ability to attract and retain additional qualified management,
technical, marketing and sales and support personnel for our operations. If we
lose a key employee or if a key employee fails to perform in his or her current
position, or if we are not able to attract and retain skilled employees as
needed, our business could suffer. Significant turnover in our senior management
could significantly deplete our institutional knowledge held by our existing
senior management team. We depend on the skills and abilities of these key
employees in managing the technical, marketing and sales aspects of our
business, any part of which could be harmed by further turnover.

We may be exposed to potential risks relating to our
internal controls over financial reporting and our ability to have the operating
effectiveness of our internal controls attested to by our independent
auditors.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002,
or SOX 404, the SEC adopted rules requiring public companies to include a report
of management on their internal controls over financial reporting in their
annual reports, on Form 10-K. We are subject to this requirement commencing with
our fiscal year ending December 31, 2008 and a report of our management is
included under Item 9A of this Annual Report on Form 10-K. In addition, SOX 404
requires the independent registered public accounting firm auditing a companys
financial statements to also attest to and report on the operating effectiveness of such companys internal controls.
This annual report includes an attestation report since we are deemed to be an
accelerated filer. We can provide no assurance that we will comply with all of
the requirements imposed thereby. There can be no assurance that we will receive
a positive attestation from our independent registered public accountants. In
the event we identify significant deficiencies or material weaknesses in our
internal controls that we cannot remediate in a timely manner or we are unable
to receive a positive attestation from our independent registered public
accountants with respect to our internal controls, investors and others may lose
confidence in the reliability of our financial statements.

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Our holding company structure may limit the payment of
dividends.

We have no direct business operations, other than our ownership
of our subsidiaries. While we have no current intention of paying dividends,
should we decide in the future to do so, as a holding company, our ability to
pay dividends and meet other obligations depends upon the receipt of dividends
or other payments from our operating subsidiaries and other holdings and
investments. In addition, our operating subsidiaries, from time to time, may be
subject to restrictions on their ability to make distributions to us, including
as a result of restrictive covenants in loan agreements, restrictions on the
conversion of local currency into U.S. dollars or other hard currency and other
regulatory restrictions as discussed below. If future dividends are paid in RMB,
fluctuations in the exchange rate for the conversion of RMB into U.S. dollars
may reduce the amount received by U.S. stockholders upon conversion of the
dividend payment into U.S. dollars.

Chinese regulations currently permit the payment of dividends
only out of accumulated profits as determined in accordance with Chinese
accounting standards and regulations. Our subsidiaries in China are also
required to set aside a portion of their after tax profits according to Chinese
accounting standards and regulations to fund certain reserve funds. Currently,
our subsidiaries in China are the only sources of revenues or investment
holdings for the payment of dividends. If they do not accumulate sufficient
profits under Chinese accounting standards and regulations to first fund certain
reserve funds as required by Chinese accounting standards, we will be unable to
pay any dividends.

RISKS RELATING TO OUR COMMERCIAL RELATIONSHIP WITH
IASPEC

Jiang Huai Lins association with iASPEC could pose a
conflict of interest which may result in iASPEC decisions that are adverse to
our business.

Jiang Huai Lin, our president and Chief Executive Officer and
the beneficial owner of 38.61% of our common stock also beneficially owns 100%
of the equity interests in iASPEC, from whom we derived 39.1%, 48.6% and 48% of
our revenue in the fiscal years ended December 31, 2010, 2009 and 2008,
respectively pursuant to existing commercial arrangements. As a result,
conflicts of interest may arise from time to time and these conflicts may result
in management decisions that could negatively affect our operations and
potentially result in the loss of opportunities.

If iASPEC or its shareholders violate our contractual
arrangements with it, our business could be disrupted and we may have to resort
to litigation to enforce our rights which may be time consuming and
expensive.

Our operations are currently dependent upon our commercial
relationship with iASPEC. During the fiscal years ended December 31, 2010, 2009
and 2008, we derived 39.1%, 48.6% and 48% of our revenues, respectively, from
the provision of services to iASPEC customers. A significant portion of these
revenues have not yet been collected. Amounts owed by iASPEC under the
Management Service Agreement for each quarter will be due and payable no later
than the last day of the month following the end of each such quarter. If iASPEC
or its shareholders are unwilling or unable to perform their obligations under
our commercial arrangements with it, including payment of revenues under the
Management Service Agreement as they become due each quarter, we will not be
able to conduct our operations in the manner currently planned. In addition,
iASPEC may seek to renew these agreements on terms that are disadvantageous to
us. Although we have entered into a series of agreements that provide us with
substantial ability to control iASPEC, we may not succeed in enforcing our
rights under them. If we are unable to renew these agreements on favorable
terms, or to enter into similar agreements with other parties, our business may
not be able to operate or expand, and our operating expenses may significantly
increase.

Uncertainties in the PRC legal system may impede our
ability to enforce the commercial agreements that we have entered into with
iASPEC or any arbitral award thereunder and any inability to enforce these
agreements could materially and adversely affect our business and
operation.

While disputes under the Management Service Agreement and the
Option Agreement with iASPEC are subject to binding arbitration before the
Shenzhen Branch of the China International Economic and Trade Arbitration
Commission, or CIETAC, in accordance with CIETAC Arbitration Rules, the
agreements are governed by PRC law and an arbitration award may be challenged in accordance with PRC law. For example, a claim
that the enforcement of an award in our favor will be detrimental to the public
interest, or that an issue does not fall within the scope of the arbitration
would require us to engage in administrative and judicial proceedings to defend
an award. Chinas legal system is a civil law system based on written statutes
and unlike common law systems, it is a system in which decided legal cases have
little value as precedent. As a result, Chinas administrative and judicial
authorities have significant discretion in interpreting and implementing
statutory and contractual terms, and it may be more difficult to evaluate the
outcome of administrative and judicial proceedings and the level of legal
protection available than in more developed legal systems. These uncertainties
may impede our ability to enforce the terms of the Management Service Agreement,
the Option Agreement and the other contracts that we may enter into with iASPEC.
Any inability to enforce the Management Service Agreement and Option Agreement
or an award thereunder could materially and adversely affect our business and
operation.

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If iASPEC fails to comply with the confidentiality
requirements of certain of its customer contracts, then iASPEC could be subject
to sanctions and could lose its business license which in turn would
significantly disrupt or shut down our operations.

The business and operations of iASPEC, the owner and licensor
to us of the copyrighted software applications and other intellectual property
that are essential to the operation of our business, is subject to Chinese
contractual obligations and laws and regulations that restrict its use of
security information and other information that it obtains from its customers in
the public security sector. For some of its contracts with government agencies,
iASPEC has agreed to keep confidential all technical and commercial secrets
obtained during the performance of services under the contract. iASPEC or its
shareholders could violate these contractual obligations and laws and
regulations by inadvertently or intentionally disclosing confidential
information or by otherwise failing to operate its business in a manner that
complies with these contractual and legal obligations. A violation of these
agreements could result in the significant disruption or shut down of our
business or adversely affect our reputation in the market. If iASPEC or its
shareholders violate these contractual and legal obligations, we may have to
resort to litigation to enforce our rights under our contractual obligations
with iASPEC. This litigation could result in the disruption of our business,
diversion of our resources and the incurrence of substantial costs.

All of the share capital of iASPEC is held by our major
shareholder, who may cause these agreements to be amended in a manner that is
adverse to us.

Our major shareholder, Mr. Jiang Huai Lin, owns and controls
iASPEC. As a result, Mr. Lin may be able to cause our commercial arrangements
with iASPEC to be amended in a manner that will be adverse to our company, or
may be able to cause these agreements not to be renewed, even if their renewal
would be beneficial for us. Although we have entered into an agreement that
prevents the amendment of these agreements without the approval of the members
of our Board other than Mr. Lin, we can provide no assurances that these
agreements will not be amended in the future to contain terms that might differ
from the terms that are currently in place. These differences may be adverse to
our interests.

Our arrangements with iASPEC and its shareholders may be
subject to a transfer pricing adjustment by the PRC tax authorities which could
have an adverse effect on our income and expenses.

We could face material and adverse tax consequences if the PRC
tax authorities determine that our contracts with iASPEC and its shareholders
were not entered into based on arms length negotiations. Although our
contractual arrangements are similar to other companies conducting similar
operations in China, if the PRC tax authorities determine that these contracts
were not entered into on an arms length basis, they may adjust our income and
expenses for PRC tax purposes in the form of a transfer pricing adjustment. Such
an adjustment may require that we pay additional PRC taxes plus applicable
penalties and interest, if any.

The shares purchased by the investors in our 2007 private
placement transaction are subject to redemption in the event that the PRC
government takes action that unwinds our restructuring transaction. Any such
redemption would materially and adversely affect our liquidity and capital
resources since we would have to return the funds raised in the private
placement.

If any PRC governmental agency takes action that materially and
adversely affects the transactions contemplated by the restructuring agreement
and we are unable to reverse the adverse governmental action or otherwise
address the material adverse effect to the reasonable satisfaction of the
investors in the private placement transaction that closed on January 31, 2007
and February 5, 2007, within 60 days of the occurrence of such governmental
action, then if asked, we are obligated, as liquidated damages, to redeem the
shares purchased by such investors, within 30 days of their demand, for an
amount equal to the investors entire investment amount without interest. If the
PRC government takes action that triggers this redemption right, then our
liquidity and capital resources would be materially adversely affected as we
would be required to return the funds raised in the private placements. If we are required to
return such funds we may required to sell assets or to seek financing on terms
that are not favorable, if available at all, and our financial condition could
be thereby materially and adversely affected.

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The exercise of our option to purchase part or all of the
equity interests in or assets of iASPEC under the Option Agreement might be
subject to approval by the PRC government. Our failure to obtain this approval
may impair our ability to substantially control iASPEC and could result in
actions by iASPEC that conflict with our interests.

Our Option Agreement with iASPEC gives our Chinese operating
subsidiary, IST, the option to purchase all or part of the equity interests in
or assets of iASPEC, however, the option may not be exercised by IST if the
exercise would violate any applicable laws and regulations in China or cause any
license or permit held by, and necessary for the operation of iASPEC, to be
cancelled or invalidated. Under the laws of China, if a foreign entity, through
a foreign investment company that it invests in, acquires a domestic related
company, Chinas regulations regarding Mergers and Acquisitions would
technically apply to the transaction. Application of these regulations requires
an examination and approval of the transaction by Chinas Ministry of Commerce,
or MOFCOM, or its local counterparts. Also, an appraisal of the equity or assets
to be acquired is mandatory. However, the Zhong Lun Law Firm, our local PRC
counsel has advised us that Shenzhen and other local counterparts of MOFCOM hold
the view that such a transaction would not require their approval. Therefore, we
do not believe at this time that an approval and an appraisal are required for
IST to exercise its option to acquire iASPEC in Shenzhen. In light of the
different views on this issue, however, it is possible that the central MOFCOM
office in Beijing will issue a standardized opinion imposing the approval and
appraisal requirement. If we are not able to purchase the equity or assets of
iASPEC, then we will lose a substantial portion of our ability to control iASPEC
and our ability to ensure that iASPEC will act in our interests.

Our right to elect a majority of the members on iASPECs
Board of Directors and other provisions of the Management Service Agreement may
be viewed by iASPECs customers as a change in control of iASPEC, which could
subject iASPEC to sanctions and loss of its business license, which in turn
would significantly disrupt or possibly terminate our operations.

Our new commercial arrangement with iASPEC gives us the right
to designate two Chinese citizens to serve as senior managers of iASPEC, serve
on iASPECs Board of Directors and assist in managing the business and
operations of iASPEC. In addition, iASPEC will require the affirmative vote of
the majority of the our Board of Directors, as well as at least one non-insider
director, for completing certain material actions with respect to iASPEC,
including, but not limited to: (a) the nomination, appointment, election or
replacement of any board members; (b) the distribution of any dividend or
profits; (c) any merger, division, change of corporate form, dissolution or
liquidation; (d) any reimbursement of net losses or other payments or transfers
of funds from IST to iASPEC; (e) the formation or disposition of a subsidiary or
the acquisition or disposition of any interest in any other entity; and (f) the
encumbrance of any assets under any lien not in the ordinary course of business.
However, fulfillment of certain PGIS contracts with PRC Government customers is
restricted to entities, such as iASPEC, that possess the necessary PRC
government licenses and approvals, and any change in control may be viewed under
PRC law as creating a new entity. If iASPECs government customers view these
Management Service Agreement provisions as a change in control of iASPEC or as
evidence of iASPECs failure to operate its business in a manner that complies
with its contractual obligations or with related laws and regulations. Such a
perception could result in the cancellation or invalidation of iASPECs licenses
and permits. A loss by iASPEC of its licenses and permits could result in the
significant disruption or possible termination of our business or adversely
affect our reputation in the market.

RISKS RELATED TO DOING BUSINESS IN CHINA

Changes in China's political or economic situation could
  harm us and our operating results.

Economic reforms adopted by the Chinese government have had a
positive effect on the economic development of the country, but the government
could change these economic reforms or any of the legal systems at any time.
This could either benefit or damage our operations and profitability. Some of
the things that could have this effect are:

- Level of government involvement in the economy;
- Control of foreign exchange;
- Methods of allocating resources;
- Balance of payments position;
- International trade restrictions; and
- International conflict.

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The Chinese economy differs from the economies of most
countries belonging to the Organization for Economic Cooperation and
Development, or OECD, in many ways. For example, state-owned enterprises still
constitute a large portion of the Chinese economy, and weak corporate governance
and the lack of a flexible currency exchange policy still prevail in China. As a
result of these differences, we may not develop in the same way or at the same
rate as might be expected if the Chinese economy was similar to those of the
OECD member countries.

Uncertainties with respect to the PRC legal system could
  limit the legal protections available to you and us.

We conduct substantially all of our business through our
operating subsidiaries in the PRC. Our operating subsidiaries are generally
subject to laws and regulations applicable to foreign investments in China and,
in particular, laws applicable to FIEs. The PRC legal system is based on written
statutes, and prior court decisions may be cited for reference but have limited
precedential value. Since 1979, a series of new PRC laws and regulations have
significantly enhanced the protections afforded to various forms of foreign
investments in China. However, since the PRC legal system continues to evolve
rapidly, the interpretations of many laws, regulations, and rules are not always
uniform, and enforcement of these laws, regulations, and rules involve
uncertainties, which may limit legal protections available to you and us. In
addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention. In addition, most of
our executive officers and directors are residents of China and not of the
United States, and substantially all the assets of these persons are located
outside the United States. As a result, it could be difficult for investors to
affect service of process in the United States or to enforce a judgment obtained
in the United States against our Chinese operations and subsidiary.

You may have difficulty enforcing judgments against us.

Most of our assets are located outside of the United States and
most of our current operations are conducted in the PRC. In addition, most of
our directors and officers are nationals and residents of countries other than
the United States. A substantial portion of the assets of these persons is
located outside the United States. As a result, it may be difficult for you to
effect service of process within the United States upon these persons. It may
also be difficult for you to enforce in U.S. courts judgments on the civil
liability provisions of the U.S. federal securities laws against us and our
officers and directors, most of whom are not residents in the United States and
the substantial majority of whose assets are located outside of the United
States. In addition, there is uncertainty as to whether the courts of the PRC
would recognize or enforce judgments of U.S. courts. Our counsel as to PRC law
has advised us that the recognition and enforcement of foreign judgments are
provided for under the PRC Civil Procedures Law. Courts in China may recognize
and enforce foreign judgments in accordance with the requirements of the PRC
Civil Procedures Law based on treaties between China and the country where the
judgment is made or on reciprocity between jurisdictions. China does not have
any treaties or other arrangements that provide for the reciprocal recognition
and enforcement of foreign judgments with the United States. In addition,
according to the PRC Civil Procedures Law, courts in the PRC will not enforce a
foreign judgment against us or our directors and officers if they decide that
the judgment violates basic principles of PRC law or national sovereignty,
security, or the public interest. So it is uncertain whether a PRC court would
enforce a judgment rendered by a court in the United States.

The PRC government exerts substantial influence over the
  manner in which we must conduct our business activities.

The PRC government has exercised and continues to exercise
substantial control over virtually every sector of the Chinese economy through
regulation and state ownership. Our ability to operate in China may be harmed by
changes in its laws and regulations, including those relating to taxation,
import and export tariffs, environmental regulations, land use rights, property,
and other matters. We believe that our operations in China are in material
compliance with all applicable legal and regulatory requirements. However, the
central or local governments of the jurisdictions in which we operate may impose
new, stricter regulations or interpretations of existing regulations that would
require additional expenditures and efforts on our part to ensure our compliance
with such regulations or interpretations.

Accordingly, government actions in the future, including any
decision not to continue to support recent economic reforms and to return to a
more centrally planned economy or regional or local variations in the
implementation of economic policies, could have a significant effect on economic
conditions in China or particular regions thereof and could require us to divest
ourselves of any interest we then hold in Chinese properties or joint ventures.

If we fail to obtain or maintain all licenses and
approvals required to operate our businesses in the PRC, our business and
operations may be adversely affected.

Fulfillment of certain PGIS contracts with PRC Government
customers is restricted to entities possessing the necessary government licenses
and approvals which our subsidiary IST does not have. We currently perform PGIS
contracts through iASPEC, which possesses the requisite licenses and approvals,
pursuant to our Management Services Agreement with iASPEC, whereby iASPEC
exclusively engages IST as its subcontractor to provide iASPEC with outsourcing
services (to the extent that those services do not violate any special
governmental permits held by iASPEC and do not involve the improper transfer of
any sensitive confidential governmental or other data). If the PRC government
determines that we are operating without the requisite licenses we may become
subject to administrative penalties or an order to discontinue our business
operations, both of which could have a material adverse effect on our business
and results of operations.

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Future inflation in China may inhibit our ability to conduct
  business in China.

In recent years, the Chinese economy has experienced periods of
rapid expansion and highly fluctuating rates of inflation. During the past ten
years, the rate of inflation in China has been as high as 5.9% and as low as
-0.8%. These factors have led to the adoption by the Chinese government, from
time to time, of various corrective measures designed to restrict the
availability of credit or regulate growth and contain inflation. High inflation
may in the future cause the Chinese government to impose controls on credit
and/or prices, or to take other action, which could inhibit economic activity in
China, and thereby harm the market for our products and our company.

Restrictions on currency exchange may limit our ability
to receive and use our sales effectively.

The majority of our sales will be settled in RMB, and any
future restrictions on currency exchanges may limit our ability to use revenue
generated in RMB to fund any future business activities outside China or to make
dividend or other payments in U.S. dollars. Although the Chinese government
introduced regulations in 1996 to allow greater convertibility of the RMB for
current account transactions, significant restrictions still remain, including
primarily the restriction that FIEs may only buy, sell or remit foreign
currencies after providing valid commercial documents, at those banks in China
authorized to conduct foreign exchange business. In addition, conversion of RMB
for capital account items, including direct investment and loans, is subject to
governmental approval in China, and companies are required to open and maintain
separate foreign exchange accounts for capital account items. We cannot be
certain that the Chinese regulatory authorities will not impose more stringent
restrictions on the convertibility of the RMB.

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

The value of our common stock will be indirectly affected by
the foreign exchange rate between the U.S. dollar and RMB and between those
currencies and other currencies in which our sales may be denominated.
Appreciation or depreciation in the value of the RMB relative to the U.S. dollar
would affect our financial results reported in U.S. dollar terms without giving
effect to any underlying change in our business or results of operations.
Fluctuations in the exchange rate will also affect the relative value of any
dividend we issue that will be exchanged into U.S. dollars, as well as earnings
from, and the value of, any U.S. dollar-denominated investments we make in the
future.

Since July 2005, the RMB has no longer been pegged to the U.S.
dollar. Although the Peoples Bank of China regularly intervenes in the foreign
exchange market to prevent significant short-term fluctuations in the exchange
rate, the RMB may appreciate or depreciate significantly in value against the
U.S. dollar in the medium to long term. Moreover, it is possible that in the
future PRC authorities may lift restrictions on fluctuations in the RMB exchange
rate and lessen intervention in the foreign exchange market.

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

Restrictions under PRC law on our PRC subsidiaries
  ability to make dividends and other distributions could materially and adversely
  affect our ability to grow, make investments or acquisitions that could benefit
  our business, pay dividends to you, and otherwise fund and conduct our business.

Substantially all of our sales are earned by our PRC
subsidiaries. However, PRC regulations restrict the ability of our PRC
subsidiaries to make dividends and other payments to their offshore parent
companies. PRC legal restrictions permit payments of dividends by our PRC
subsidiaries only out of their accumulated after-tax profits, if any, determined
in accordance with PRC accounting standards and regulations. Our PRC
subsidiaries are also required under PRC laws and regulations to allocate at
least 10% of their annual after-tax profits determined in accordance with PRC
GAAP to a statutory general reserve fund until the amounts in said fund reaches
50% of their registered capital. Allocations to these statutory reserve funds can only be used for specific purposes and are
not transferable to us in the form of loans, advances, or cash dividends. Any
limitations on the ability of our PRC subsidiaries to transfer funds to us could
materially and adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our business, pay dividends and
otherwise fund and conduct our business.

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Failure to comply with PRC regulations relating to the
  establishment of offshore special purpose companies by PRC residents may subject
  our PRC resident stockholders to personal liability, limit our ability to acquire
  PRC companies or to inject capital into our PRC subsidiaries, limit our PRC
  subsidiaries ability to distribute profits to us or otherwise materially
  adversely affect us.

In October 2005, SAFE issued the Notice on Relevant Issues in
the Foreign Exchange Control over Financing and Return Investment Through
Special Purpose Companies by Residents Inside China, generally referred to as
Circular 75, which required PRC residents to register with the competent local
SAFE branch before establishing or acquiring control over an offshore special
purpose company, or SPV, for the purpose of engaging in an equity financing
outside of China on the strength of domestic PRC assets originally held by those
residents. Amendments to registrations made under Circular 75 are required in
connection with any increase or decrease of capital, transfer of shares, mergers
and acquisitions, equity investment or creation of any security interest in any
assets located in China to guarantee offshore obligations. In the case of an SPV
which was established, and which acquired a related domestic company or assets,
before the implementation date of Circular 75, a retroactive SAFE registration
was required. Failure to comply with the requirements of Circular 75, may result
in fines and other penalties under PRC laws for evasion of applicable foreign
exchange restrictions. Any such failure could also result in the SPVs
affiliates being impeded or prevented from distributing their profits and the
proceeds from any reduction in capital, share transfer or liquidation to the
SPV, or from engaging in other transfers of funds into or out of China.

We have asked our stockholders who are PRC residents as defined
in Circular 75 to register with the relevant branch of SAFE, as currently
required, in connection with their equity interests in us and our acquisitions
of equity interests in our PRC subsidiaries. However, we cannot provide any
assurances that they can obtain the above SAFE registrations required by
Circular 75. Moreover, because of uncertainty over how Circular 75 will be
interpreted and implemented, and how or whether SAFE will apply it to us, we
cannot predict how it will affect our business operations or future strategies.
For example, our present and prospective PRC subsidiaries ability to conduct
foreign exchange activities, such as the remittance of dividends and foreign
currency-denominated borrowings, may be subject to compliance with Circular 75
by our PRC resident beneficial holders.

In addition, such PRC residents may not always be able to
complete the necessary registration procedures required by Circular 75. We also
have little control over either our present or prospective direct or indirect
stockholders or the outcome of such registration procedures. A failure by our
PRC resident beneficial holders or future PRC resident stockholders to comply
with Circular 75, if SAFE requires it, could subject these PRC resident
beneficial holders to fines or legal sanctions, restrict our overseas or
cross-border investment activities, limit our subsidiaries ability to make
distributions or pay dividends or affect our ownership structure, which could
adversely affect our business and prospects.

We may be unable to complete a business combination
transaction efficiently or on favorable terms due to complicated merger and
acquisition regulations which became effective on September 8, 2006.

On August 9, 2006, six PRC regulatory agencies, including the
China Securities Regulatory Commission, or CSRC, promulgated the Regulation on
Mergers and Acquisitions of Domestic Companies by Foreign Investors, which
became effective on September 8, 2006, and was amended in 2009. This new
regulation, among other things, governs the approval process by which a PRC
company may participate in an acquisition of assets or equity interests.
Depending on the structure of the transaction, the new regulation will require
the PRC parties to make a series of applications and supplemental applications
to the government agencies. In some instances, the application process may
require the presentation of economic data concerning a transaction, including
appraisals of the target business and evaluations of the acquirer, which are
designed to allow the government to assess the transaction. Government approvals
will have expiration dates by which a transaction must be completed and reported
to the government agencies. Compliance with the new regulations is likely to be
more time consuming and expensive than in the past and the government can now
exert more control over the combination of two businesses. Accordingly, due to
the new regulation, our ability to engage in business combination transactions
has become significantly more complicated, time consuming and expensive, and we
may not be able to negotiate a transaction that is acceptable to our
stockholders or sufficiently protect their interests in a transaction.

The new regulation allows PRC government agencies to assess the
economic terms of a business combination transaction. Parties to a business
combination transaction may have to submit to MOFCOM and other relevant
government agencies an appraisal report, an evaluation report and the acquisition
agreement, all of which form part of the application for approval, depending on
the structure of the transaction. The regulations also prohibit a transaction at
an acquisition price obviously lower than the appraised value of the PRC
business or assets and in certain transaction structures, require that
consideration must be paid within defined periods, generally not in excess of a
year. The regulation also limits our ability to negotiate various terms of the
acquisition, including aspects of the initial consideration, contingent
consideration, holdback provisions, indemnification provisions and provisions
relating to the assumption and allocation of assets and liabilities. Transaction
structures involving trusts, nominees and similar entities are prohibited.
Therefore, such regulation may impede our ability to negotiate and complete a
business combination transaction on financial terms that satisfy our investors
and protect our stockholders economic interests.

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Under the New Enterprise Income Tax Law, we may be
classified as a resident enterprise of China. Such classification will likely
result in unfavorable tax consequences to us and our non-PRC stockholders.

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

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

We may be deemed to be a resident enterprise by Chinese tax
authorities. If the PRC tax authorities determine that we are a resident
enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC
tax consequences could follow. First, we may be subject to the enterprise income
tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise
income tax reporting obligations. In our case, this would mean that income such
as interest on financing proceeds and non-China source income would be subject
to PRC enterprise income tax at a rate of 25%. Second, although under the EIT
Law and its implementing rules dividends paid to us from our PRC subsidiaries
would qualify as tax-exempt income, we cannot guarantee that such dividends
will not be subject to a 10% withholding tax, as the PRC foreign exchange
control authorities, which enforce the withholding tax, have not yet issued
guidance with respect to the processing of outbound remittances to entities that
are treated as resident enterprises for PRC enterprise income tax purposes.
Finally, it is possible that future guidance issued with respect to the new
resident enterprise classification could result in a situation in which a 10%
withholding tax is imposed on dividends we pay to our non-PRC stockholders and
with respect to gains derived by our non-PRC stockholders from transferring our
shares. We are actively monitoring the possibility of resident enterprise
treatment for the 2011 tax year and are evaluating appropriate organizational
changes to avoid this treatment, to the extent possible.

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

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

The Chinese State Administration of Taxation, or SAT, released
a circular on December 15, 2009 that addresses the transfer of shares by
nonresident companies, generally referred to as Circular 698. Circular 698,
which is effective retroactively to January 1, 2008, may have a significant
impact on many companies that use offshore holding companies to invest in
China.

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Circular 698, which provides parties with a short period of
time to comply with its requirements, indirectly taxes foreign companies on
gains derived from the indirect sale of a Chinese company. Where a foreign
investor indirectly transfers equity interests in a Chinese resident enterprise
by selling the shares in an offshore holding company, and the latter is located
in a country or jurisdiction where the effective tax burden is less than 12.5%
or where the offshore income of his, her, or its residents is not taxable, the
foreign investor is required to provide the tax authority in charge of that
Chinese resident enterprise with the relevant information within 30 days of the
transfers. Moreover, where a foreign investor indirectly transfers equity
interests in a Chinese resident enterprise through an abuse of form of
organization and there are no reasonable commercial purposes such that the
corporate income tax liability is avoided, the PRC tax authority will have the
power to re-assess the nature of the equity transfer in accordance with PRCs
substance-over-form principle and deny the existence of the offshore holding
company that is used for tax planning purposes. There is uncertainty as to the
application of Circular 698. For example, while the term indirectly transfer
is not defined, it is understood that the relevant PRC tax authorities have
jurisdiction regarding requests for information over a wide range of foreign
entities having no direct contact with China. Moreover, the relevant authority
has not yet promulgated any formal provisions or formally declared or stated how
to calculate the effective tax in the country or jurisdiction and to what extent
and the process of the disclosure to the tax authority in charge of that Chinese
resident enterprise. In addition, there are not any formal declarations with
regard to how to decide abuse of form of organization and reasonable
commercial purpose, which can be utilized by us to balance if our Company
complies with the Circular 698. As a result, we may become at risk of being
taxed under Circular 698 and we may be required to expend valuable resources to
comply with Circular 698 or to establish that we should not be taxed under
Circular 698, which could have a material adverse effect on our financial
condition and results of operations.

We may be exposed to liabilities under the Foreign Corrupt
  Practices Act and Chinese anti-corruption laws, and any determination that we
  violated these laws could have a material adverse effect on our business.

We are subject to the Foreign Corrupt Practice Act, or FCPA,
and other laws that prohibit improper payments or offers of payments to foreign
governments and their officials and political parties by U.S. persons and
issuers as defined by the statute, for the purpose of obtaining or retaining
business. We have operations, agreements with third parties, and make most of
our sales in China. The PRC also strictly prohibits bribery of government
officials. Our activities in China create the risk of unauthorized payments or
offers of payments by the employees, consultants, sales agents, or distributors
of our Company, even though they may not always be subject to our control. It is
our policy to implement safeguards to discourage these practices by our
employees. However, our existing safeguards and any future improvements may
prove to be less than effective, and the employees, consultants, sales agents,
or distributors of our Company may engage in conduct for which we might be held
responsible. Violations of the FCPA or Chinese anti-corruption laws may result
in severe criminal or civil sanctions, and we may be subject to other
liabilities, which could negatively affect our business, operating results and
financial condition. In addition, the U.S. government may seek to hold our
Company liable for successor liability FCPA violations committed by companies in
which we invest or that we acquire.

RISKS RELATED TO THE MARKET FOR OUR STOCK

We may be subject to penny stock regulations and restrictions
  and you may have difficulty selling shares of our common stock.

The SEC has adopted regulations which generally define
so-called penny stocks to be an equity security that has a market price less
than $5.00 per share or an exercise price of less than $5.00 per share, subject
to certain exemptions. Our common stock may become a penny stock and subject
to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes
additional sales practice requirements on broker-dealers that sell such
securities to persons other than established customers and accredited
investors (generally, individuals with a net worth in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses). For
transactions covered by Rule 15g-9, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. As a result, this rule may
affect the ability of broker-dealers to sell our securities and may affect the
ability of purchasers to sell any of our securities in the secondary market,
thus possibly making it more difficult for us to raise additional capital.

For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction in penny stock, of a disclosure
schedule prepared by the SEC relating to the penny stock market. Disclosure is
also required to be made about sales commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stock.

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There can be no assurance that our common stock will qualify
for exemption from the Penny Stock Rule. In any event, even if our common stock
were exempt from the Penny Stock Rule, we would remain subject to Section
15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any
person from participating in a distribution of penny stock, if the SEC finds
that such a restriction would be in the public interest.

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

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

- our earnings releases, actual or anticipated changes in our earnings,
  fluctuations in our operating results or our failure to meet the expectations
  of financial market analysts and investors;
- changes in financial estimates by us or by any securities analysts who
  might cover our stock;
- speculation about our business in the press or the investment community;
- significant developments relating to our relationships with our customers
  or suppliers;
- stock market price and volume fluctuations of other publicly traded
  companies and, in particular, those that are in the our industries;
- customer demand for our products;
- investor perceptions of the our industry in general and our company in
  particular;
- the operating and stock performance of comparable companies;
- general economic conditions and trends;
- major catastrophic events;
- announcements by us or our competitors of new products, significant
  acquisitions, strategic partnerships or divestitures;
- changes in accounting standards, policies, guidance, interpretation or
  principles;
- loss of external funding sources;
- sales of our common stock, including sales by our directors, officers or
  significant stockholders; and
- additions or departures of key personnel.

Securities class action litigation is often instituted against
companies following periods of volatility in their stock price. This type of
litigation could result in substantial costs to us and divert our managements
attention and resources. Moreover, securities markets may from time to time
experience significant price and volume fluctuations for reasons unrelated to
operating performance of particular companies. For example, in July 2008, the
securities markets in the United States, China and other jurisdictions
experienced the largest decline in share prices since September 2001. These
market fluctuations may adversely affect the price of our common stock and other
interests in our company at a time when you want to sell your interest in us.

We do not intend to pay dividends for the foreseeable
future.

For the foreseeable future, we intend to retain any earnings to
finance the development and expansion of our business, and we do not anticipate
paying any cash dividends on our common stock. Accordingly, investors must be
prepared to rely on sales of their common stock after price appreciation to earn
an investment return, which may never occur. Investors seeking cash dividends
should not purchase our common stock. Any determination to pay dividends in the
future will be made at the discretion of our board of directors and will depend
on our results of operations, financial condition, contractual restrictions,
restrictions imposed by applicable law and other factors our board deems
relevant.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

We have no outstanding or unresolved comments from the SEC
staff.

ITEM 2.    PROPERTIES.

All land in China is owned by the state or collectives.
Individuals and companies are permitted to acquire rights to use land or land
use rights for specific purposes. In the case of land used for industrial
purposes, the land use rights are granted for a period of 50 years. This period
may be renewed at the expiration of the initial and any subsequent terms
according to the relevant Chinese laws. Granted land use rights are transferable
and may be used as security for borrowings and other obligations.

- 30 -

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Prior to June 2007, our subsidiary IST occupied space in
offices pursuant to a six month rental agreement. In June 2007, we moved into
our new executive offices located on the 21st Floor of the Everbright Bank
Bldg., Zhuzilin, Futian District, Shenzhen, China, for which IST currently has
land use rights. Our new executive offices consist of approximately 1,200 square
meters, all of which are dedicated to administrative office space. We have fully
paid the land use fees. Our other property primarily consists of computer
equipment, servers, licensed software, some furniture and fixtures. There is no
lien on any of our property and we currently do not have any intention to make
large scale improvements or developments with respect to these properties.

iASPEC and Bocom lease offices, employee dormitories and
factory space in Shenzhen, Guangzhou, Beijing and Wuhan in the PRC, pursuant to
lease agreements that will expire on various dates through November 2011. Rent
expense for the years ended December 31, 2010, 2009 and 2008, was approximately
$380,000, $386,200 and $337,000, respectively.

We believe that all our properties have been adequately
maintained, are generally in good condition, and are suitable and adequate for
our business.

ITEM 3.    LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits
  and legal proceedings which arise in the ordinary course of business. However,
  litigation is subject to inherent uncertainties, and an adverse result in these
  or other matters may arise from time to time that may harm our business. We
  are currently not aware of any such legal proceedings or claims that we believe
  will have a material adverse affect on our business, financial condition or
  operating results.

ITEM 4.    (REMOVED AND RESERVED).

PART II

|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
      STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
|------- | -------------------------------------------------------------------------------------------------------------------

Market Information

Our common stock is traded on the Nasdaq Global Select Market
under the symbol CNIT.

The following table sets forth, for the periods indicated, the
high and low closing prices of our common stock. These prices reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions.

|                             |   | Closing
      Prices(1) | 
|---------------------------- | - | ----------------------- | 
|                             |   | High                    | 
|Year Ended December 31, 2010 |   |                         | 
|1stQuarter                   | $ | 6.5                     | 
|2ndQuarter                   |   | 7                       | 
|3rdQuarter                   |   | 5.92                    | 
|4thQuarter                   |   | 6.75                    | 
|                             |   |                         | 
|Year Ended December 31, 2009 |   |                         | 
|1stQuarter                   | $ | 3.93                    | 
|2ndQuarter                   |   | 3.99                    | 
|3rdQuarter                   |   | 5.54                    | 
|4thQuarter                   |   | 7.85                    | 

(1)The above table sets forth the range of
high and low closing prices per share of our common stock as reported by
www.quotemedia.com for the periods indicated.

Approximate Number of Holders of Our Common Stock

As of February 28, 2011, there were approximately 9,372 holders
of record of our common stock. This number excludes the shares of our common
stock owned by stockholders holding stock under nominee security position
listings.

- 31 -

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Dividend Policy

We have never declared dividends or paid cash dividends. Our
board of directors will make any future decisions regarding dividends. We
currently intend to retain and use any future earnings for the development and
expansion of our business and do not anticipate paying any cash dividends in the
near future.

Securities Authorized for Issuance Under Equity Compensation
Plans

On June 13, 2007, our Board of Directors authorized the
establishment of the China Information Security Technology, Inc. Equity
Incentive Plan, or Plan, whereby we are authorized to issue shares of our common
stock to certain employees, consultants and directors. At that time we reserved
8,000,000 shares of our common stock for issuance under the Plan.

On November 27, 2007, we issued 70,000 shares of common stock
to our senior management and an outside consultant as bonus awards.

On March 20, 2008 our Board of Directors approved the grant of
400,000 stock awards to certain employees of the Company. These newly granted
shares vested quarterly at 1/4 over a one-year period following the grant.

On February 2, 2009, we granted eligible employees a total of
60,000 shares of our common stock as compensation under the Plan.

On January 12, 2010, we granted eligible employees a total of
213,363 shares of common stock as compensation under the Plan.

On September 25, 2010, the Company granted eligible employees a
total of 250,000 shares of the Company's common stoc k as compensation under the
Plan.

On February 8, 2011, the Company granted eligible employees a
total of 250,000 shares of the Companys common stock as compensation under
Plan.

Recent Sales of Unregistered Securities

We have not sold any equity securities during the fiscal year
  ended December 31, 2010 that were not previously disclosed in a quarterly report
  on Form 10-Q or a current report on Form 8-K that was filed during the 2010
  fiscal year.

Purchases of Equity Securities

No repurchases of our common stock were made during the fourth
quarter of 2010.

ITEM 6.    SELECTED FINANCIAL DATA.

The selected consolidated statement of income and comprehensive
income data for the years ended December 31, 2010, 2009 and 2008 and the
selected balance sheet data as of December 31, 2010 and 2009 are derived from
our audited consolidated financial statements included elsewhere in this report.
The selected consolidated financial data for the years ended December 31, 2007
and 2006 and the selected balance sheet data as of December 31, 2008 and 2007
are derived from our audited consolidated financial statements not included in
this report.

The following selected historical financial information should
be read in conjunction with our consolidated financial statements and related
notes and the information contained in Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations.

For business combinations during the years ended December 31,
2008, 2009 and 2010, see Item 1, Acquisitions, in this Report.

- 32 -

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(All amounts, except for share and per share amounts, in U.S.
  dollars)

|                                                                  |   | 2010        |  |   | 2009        |  |   | 2008        |  |   | 2007       |  |   | 2006       | 
|----------------------------------------------------------------- | - | ----------- |  | - | ----------- |  | - | ----------- |  | - | ---------- |  | - | ---------- | 
|Revenues                                                          | $ | 163,845,597 |  | $ | 100,996,094 |  | $ | 85,301,184  |  | $ | 30,342,709 |  | $ | 2,175,204  | 
|Income From Operations                                            |   | 42,563,452  |  |   | 32,156,443  |  |   | 23,882,882  |  |   | 13,310,477 |  |   | 1,881,233  | 
|Net Income                                                        | $ | 35,473,630  |  | $ | 30,137,645  |  | $ | 24,028,173  |  | $ | 13,421,452 |  | $ | 1,594,649  | 
|Income from Operations Per Share                                  |   |             |  |   |             |  |   |             |  |   |            |  |   |            | 
|Basic                                                             | $ | 0.82        |  | $ | 0.66        |  | $ | 0.51        |  | $ | 0.34       |  | $ | 0.06       | 
|Diluted                                                           | $ | 0.82        |  | $ | 0.66        |  | $ | 0.51        |  | $ | 0.33       |  | $ | 0.06       | 
|Total Assets                                                      | $ | 339,401,724 |  | $ | 250,828,938 |  | $ | 148,468,182 |  | $ | 88,853,795 |  | $ | 2,209,040  | 
|Total Current Liabilities                                         |   | 100,222,271 |  |   | 75,823,003  |  |   | 25,463,055  |  |   | 4,787,196  |  |   | 564,391    | 
|Total Long Term Liabilities                                       |   | 13,603,759  |  |   | 7,107,101   |  |   |             |  |   |            |  |   |            | 
|Net Assets                                                        | $ | 225,575,694 |  | $ | 167,898,834 |  | $ | 123,005,127 |  | $ | 84,066,599 |  | $ | 1,644,649  | 
|Weighted Average Number of Shares
      Outstanding               |   |             |  |   |             |  |   |             |  |   |            |  |  
|Basic                                                             |   | 51,814,433  |  |   | 48,676,391  |  |   | 46,398,600  |  |   | 39,718,967 |  |   | 26,958,104 | 
|Diluted                                                           |   | 52,145,011  |  |   | 48,676,391  |  |   | 46,852,827  |  |   | 40,152,855 |  |   | 26,958,104 | 
|Total Equity                                                      | $ | 225,575,694 |  | $ | 167,898,834 |  | $ | 123,005,127 |  | $ | 84,066,599 |  | $ | 1,644,649  | 
|Capital Stock (excluding long term debt and
      treasury stock) | $ | 255,115     |  | $ | 233,548     |  | $ | 209,121     |  | $ | 190,891    |  | $ | 50,000     | 
|Number of Shares Issued and Outstanding                           |   | 52,061,787  |  |   | 49,905,141  |  |   | 47,462,404  |  |   | 45,639,396 |  |   | 31,550,298 | 
|Net Income Per Share                                              |   |             |  |   |             |  |   |             |  |   |            |  |   |            | 
|Basic                                                             | $ | 0.66        |  | $ | 0.62        |  | $ | 0.51        |  | $ | 0.34       |  | $ | 0.06       | 
|Diluted                                                           | $ | 0.66        |  | $ | 0.62        |  | $ | 0.51        |  | $ | 0.33       |  | $ | 0.06       | 

|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS.
|------- | --------------------------------------------------------------------------------------------

The following managements discussion and analysis should be
read in conjunction with our financial statements and the notes thereto and the
other financial information appearing elsewhere in this report. In addition to
historical information, the following discussion contains certain
forward-looking information. See Special Note Regarding Forward Looking
Statements above for certain information concerning those forward looking
statements. Our financial statements are prepared in U.S. dollars and in
accordance with U.S. GAAP.

Overview

We are a leading provider of integrated solutions for the
Geographic Information Systems, or GIS, Digital Public Security Technology, or
DPST and the Digital Hospital Information Systems, or DHIS markets, in the PRC.
We provide a broad portfolio of fully integrated solutions and services,
encompassing both software development and display technologies.

We were founded in 1993 and are headquartered in Shenzhen,
China. As of December 31, 2010, we had 1,453 employees and 27 sales offices
nationwide.

Our customers are mostly public sector entities that use our
products and services to improve the service quality and management level and
efficiency of public security, traffic control, fire control, medical rescue,
border control, and surveying and mapping. Our typical customers include some of
the most important governmental departments in China, including the State Bureau
of Surveying and Mapping, the State Grid Corporation, the Ministry of Public
Security, the public security, fire fighting, traffic and police departments of
several provinces, the Shenzhen General Station of Exit and Entry Frontier
Inspection, and several provincial personnel, urban planning, civil
administration, land resource, and mapping and surveying bureaus. Over the past
several years, we have diversified our customer base beyond our local reach.In the future, we expect to continually expand our market and product
offerings in the public and private sectors, through geographic expansion and
enhancement of our technical capabilities.

We generate revenues through the sale of our hardware and
software products and through the provision of related support services. A
significant portion of our operations are conducted through iASPEC, our variable
interest entity. iASPEC is a PRC domestic company owned by Jiang Huai Lin, our
Chairman and Chief Executive Officer, who is a PRC citizen and resident. iASPEC
is able to obtain governmental licenses that are restricted to PRC entities that
have no foreign ownership. These licenses allow iASPEC to perform PGIS services
for PRC governmental customers. Under our Amended and Restated Management
Services Agreement among our subsidiary, IST, iASPEC and Mr. Lin, IST is
entitled to receive 95% of the net received profit of iASPEC during the term of
the Agreement, less costs and expenses related to sales and operations, and
accrued but uncollected accounts receivable. In fiscal years 2010, 2009 and
2008, 39.1%, 48.6% and 48% of our revenues, respectively, were generated under
this exclusive commercial arrangement with iASPEC.

- 33 -

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Fiscal Year 2010 Financial Performance Highlights

We continued to experience strong demand for our products and
services during the fiscal year ended December 31, 2010, which resulted in
revenue and net income growth. The following are some financial highlights for
the year:

- Revenue: Revenue increased $62.85 million, or 62.23%, to
  $163.85 million for the fiscal year ended December 31, 2010, from $101 million
  for 2009.
- Gross profit: Gross profit increased $19.91 million, or
  39.31%, to $70.56 million for the fiscal year ended December 31, 2010, from
  $50.65 million for 2009. Gross margin decrease by 708 basis points to 43.07%
  in 2010 from 50.15% in 2009.
- Income from continuing operations: Income from continuing
  operations increased $5.34 million, or 17.71%, to $35.47million for the fiscal
  year ended December 31, 2010, from $30.14 million for 2009. Operating margin
  (defined as income from continuing operations as a percentage of revenue)
  decrease by 819 basis points to 21.65% in 2010 from 29.84% in 2009.
- Net income attributable to the company: Net income was $34.40
  million for the fiscal year ended December 31, 2010, as compared to $30.09
  million for 2009, a 14.31% increase. As a result, net margin contracted by 880
  basis points to 21 % in 2010 from 29.80% in 2009.
- Fully diluted net income per share from continuing
  operations: Fully diluted net income per share from continuing
  operations was $0.66 for the fiscal year ended December 31, 2010, as compared
  to $0.62 for the same period in 2009, representing a growth of 6.45%.

The total value of our backlog of contracts as of December 31,
2010 is estimated to be approximately $28.88 million.

Principal Factors Affecting Our Financial
Performance

Demand for Software Products and Services

The revenue growth and profitability of our business depend on
the overall market demand for software products and related services. Over the
past two decades, the PRC government has encouraged the development and use of
new technologies for information and communication and their application in all
spheres of government, industry, education and culture. The term
Informatization or xinxihua has been coined in China to describe the overall
process of ICT application in China and has in recent years become a linchpin of
central and many local economic development strategies.

For example, the Golden Shield Program promotes the use of
information technology for public security services. The Digital City Program
aims to ultimately integrate the functions of multiple government departments by
using the GIS technology. The Golden Health Program strives to improve the
efficiency of public health care by using digital hospital technologies. All
these initiatives are of top priority to the Chinese government and are driving
the demand for our DPST, GIS and DHIS offerings.

Taxation

CNIT is subject to United States tax at a tax rate of 34%. No
provision for income taxes in the United States has been made as CNIT has no
income taxable in the United States.

CPSH and HPC Intl was incorporated in the BVI, but is not
subject to taxation in that jurisdiction.

ISSI, ISIID, Kwong Tai and HPC HK were incorporated in Hong
Kong and under the current laws of Hong Kong, are subject to Profits Tax of
16.5%.

Under the EIT Law, Geo, Iaspec, Bocom and Zhongtian, are
approved as high-technology enterprises and are subject to EIT at a rate of 15%
in 2010. ISS and Huipu are subject to EIT at a rate of 22% in 2010. IST enjoys a
two-year tax exemption, followed by a 50% exemption for three years, retroactive
to as of January 1, 2007. Year 2010 was the forth year that IST was entitled to
the tax holiday and subject to a favorable tax rate of 11%. Since the EIT Law
permits companies, such as IST, that were previously exempt from taxes or that
had concessional rates to retain their preferences until the original expiration
date, the EIT Law does not impact ISTs income tax qualification to enjoy a 50%
tax exemption in fiscal year 2010 and will continue to qualify for a 50% tax
exemption for the one year thereafter.

- 34 -

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Business Segment Information

Segment information is consistent with how management reviews
the businesses, makes investing and resource allocation decisions and assesses
operating performance. Transfers and sales between reportable segments, if any,
are recorded at cost.

Our segment reporting follows the organizational structure as
reflected in our internal management reporting systems, which are the basis for
assessing the financial performance of the business segments and for allocating
resources to the business segments.

We report financial and operating information in the following
four segments:

- GIS Segment, which includes the PGIS and Civil-Use GIS sales;
- DPST Segment, formerly known as the Digital Information Security
  Technology Segment, which includes revenues from information security related
  projects;
- DHIS Segment, which includes revenues from digital information systems
  provided to hospitals or medical institutes;
- Other Products and Services, which include new offerings under market
  assessment or development outside the existing main business segments. When a meaningful stand-alone
segment is formed, such a new segment will be separated from this category.

We also provide general corporate services to our segments and
these costs are reported as Corporate and others.

For more information regarding our operating segments, see Note
16 (Consolidated Segment Data) to our audited consolidated financial statements
included elsewhere in this report.

Results of Operations

Comparison of Fiscal Years Ended December 31, 2010 and
2009

The following table sets forth key components of our results of
operations for fiscal years ended December 31, 2010 and 2009, both in dollars
and as a percentage of our revenue.

|                                                                      |   | 2010        |   |  | 2009       | 
|--------------------------------------------------------------------- | - | ----------- | - |  | ---------- | 
|                                                                      |   |             |   |  | Percentage | 
|                                                                      |   | Amount      |   |  | of Revenue | 
|Revenue                                                               | $ | 163,845,597 |   |  | 100.00%    | 
|Costs of revenue                                                      |   | 93,282,442  |   |  | 56.93%     | 
|Gross Profit                                                          |   | 70,563,155  |   |  | 43.07%     | 
|Administrative expenses                                               |   | (18,623,523 | ) |  | 11.37%     | 
|Research and development expenses                                     |   | (3,016,693  | ) |  | 1.84%      | 
|Selling expenses                                                      |   | (6,359,487  | ) |  | 3.88%      | 
|Income from operations                                                |   | 42,563,452  |   |  | 25.98%     | 
|Subsidy income                                                        |   | 948,630     |   |  | 0.58%      | 
|Other income, net(expenses)                                           |   | 1,237,933   |   |  | 0.76%      | 
|Interest income                                                       |   | 126,459     |   |  | 0.08%      | 
|Interest expenses                                                     |   | (1,539,407  | ) |  | 0.94%      | 
|Income from continuing operations before income taxes                 |   | 43,337,067  |   |  | 26.45%     | 
|Income tax expense                                                    |   | (7,863,437  | ) |  | 4.80%      | 
|Income from continuing operations                                     |   | 35,473,630  |   |  | 21.65%     | 
|Income from discontinued operations
      (net of income taxes of $0) |   | -           |   |  | -          | 
|Net income                                                            |   | 35,473,630  |   |  | 21.65%     | 
|Less: Net Income Attributable to the Non-controlling
      Interest   |   | (1,071,626  | ) |  | -0.65%     | 
|Net Income Attributable to the Company                                | $ | 34,402,004  |   |  | 21.00%     | 

- 35 -

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Revenue.

Our revenue is generated from our hardware and software
products and through the related after-sales services. For the year ended
December 31, 2010, our revenue was $163.85 million, compared to $101 million for
the year ended December 31, 2009, an increase of $62.85 million, or 62.23%. The
total revenue exceeded our plan primarily because progress on a few contracts
was accelerated at clients requests. In addition, our new offering of display technology products turned out faster than expected.
Finally, we also liquidated some of HPCs inventory that is not aligned with the
new strategic direction as part of the restructuring process. During the year,
Huipu, which was acquired in October 2009, contributed $42.26 million to
revenues. Excluding the impact of Huipu, organic revenue growth was 26.23%.

Software sales increased by 41.66% to $90.42 million for the
year ended December 31, 2010, from $63.83 million for the year ended December
31, 2009. Software sales constituted 55.19% of our total revenue, as compared to
63.20% during the prior year. Excluding the impact of Huipu, software sales were
74.37% of organic revenues, which reflects our continued commitment to our core
competency in software.

Product sales increased by $36.54 million, or 217.72%, for the
year ended December 31, 2010, as compared to $16.78 million in 2009 primarily
due to the sales of display technology products and the
liquidation of HPCs inventory described earlier. Product sales constituted
32.55% of total revenue during the current period as compared with 16.62% during
the prior year. Excluding the impact of Huipu, the percentage of organic product
revenues decreased to 11.99% for the year 2010, from 12.35% for the prior year.

Sales of system integration services decreased by 14.40% for
the year ended December 31, 2010, as compared to 2009. As a percentage of
revenue, it declined from 18.83% during the year ended December 31, 2009 to
9.94% during 2010. Excluding the impact of Huipu, system integration was 13.39%
of organic revenues.

Other revenue increased by 179.60%, from $1.37 million in the
year ended December 31, 2009 to $3.82 million in 2010. Other revenue mainly
derived from maintenance services in the year ended December 31, 2009, while in
2010, other income consisted of both maintenance services and royalty income
from Huipu by licensing other manufacturers to use the HPC trademark.

The following table shows our revenue by segment:

|                            |   | Year
      Ended December 31, |  |   | Change      | 
|--------------------------- | - | ----------------------------- |  | - | ----------- | 
|                            |   | 2010                          |  |   | 2009        | 
|DPST Segment                | $ | 70,642,366                    |  | $ | 54,197,481  | 
|GIS Segment                 |   | 70,916,352                    |  |   | 36,826,430  | 
|DHIS Segment(1)             |   | 18,175,542                    |  |   | 9,972,183   | 
|Other Products and Services |   | 4,111,337                     |  |   | -           | 
|Total sales                 | $ | 163,845,597                   |  | $ | 100,996,094 | 

GIS accounted for 43.28% of the total revenue while DPST, DHIS
and Other Products and Services represented 43.12%,11.09% and 2.51%,
respectively. These compared to 36.46%, 53.66%, 9.88% and nil of the total
revenue for the year ended December 31, 2009. The shifts in segment weights
reflected the GIS and DHIS segments outpacing DPST in their growth momentum.
This is the direct result of our focus in the last few years on targeting at
areas with the highest barriers-to-entry and developing sustainable competitive
advantages in the GIS and DHIS segments, in anticipation of accelerating market
growth in the coming years. The addition of Other Products and Services
represents our new market developments, primarily in display technology
products.

Cost of Revenue and Gross Profit. As indicated in
the table below, our cost of revenues increased $42.94 million, or 85.29%, to
$93.28 million, for the year ended December 31, 2010, from $50.34 million for
the year 2009. As a percentage of revenues, our cost of revenue increased to
56.93% during the year 2010, from 49.89% in 2009. As a result, gross profit as a
percentage of revenue was 43.07% for the year ended December 31, 2010, a
decrease of 7.08%, from 50.15% in 2009. Huipu yielded a gross margin of 16.81%.
Excluding the impact of Huipu, gross margin of organic business was 52.19%,
exceeding the organic gross margin of 51.84% in 2009. Such an increase in
organic gross margin is primarily due to the increased weight of software
business relative to total organic business.

- 36 -

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|                   |   | **Year
      Ended December 31, 2010** |  |  | **Yesr
      Ended December 31, 2009** | 
|------------------ | - | -------------------------------------- |  |  | -------------------------------------- | 
|                   |   | **Revenue**                            |  |  | %                                      | 
|Products           | $ | 53,328,214                             |  |  | 32.54%                                 | 
|Software           |   | 90,419,181                             |  |  | 55.19%                                 | 
|System integration |   | 16,278,860                             |  |  | 9.94%                                  | 
|Others             |   | 3,819,342                              |  |  | 2.33%                                  | 
|Subtotal           | $ | 163,845,597                            |  |  | 100.00%                                | 

The decrease in the overall gross margin resulted from a number
of  factors. First, during the year 2010, our product sales
increased in weight relative to total revenues. Such increase was accelerated
due to the clearance of HPCs non-strategic inventory as well as our faster-than
expected sales of display technology products. Since the
average gross margin of products is lower than the other categories of revenues,
the overall gross margin declined. Meanwhile, gross margin of product categories
declined by 557 basis points mostly because the clearance of HPCs non-strategic
inventory was done at cost and the sales of the new display technology products did not enjoy economies of scale due to the low volume in
the beginning. In addition, we experienced decline of gross margins of software
on a year-over-year basis. This is because we were engaged in larger software
projects on average than 2009, and larger projects generally offer lower profit
margin than smaller ones. The negative impact on gross margin from the above
factors was partially mitigated by the improvement in profitability in system
integration and increased weight in other revenues.

For the year ended December 31, 2010, approximately $41.70
million of our cost of revenues was attributable to our DPST segment, $39.70
million was attributable to our GIS segment, $8.02 million was attributable to
our DHIS segment and $3.86 million was attributable to our Other Products and
Services segement, compared to $31.67 million to DPST, $15.41 million to GIS ,
$3.27 million by DHIS and nil by others, respectively, during 2009.

Administrative Expenses. 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. Total
administrative expenses increased by $5.97 million, or 47.18%, to $18.62 million
for the year ended December 31, 2010, from $12.65 million in the year 2009. As a
percentage of revenue, administrative expenses decreased to 11.37% for the year
2010, from 12.53% for the year 2009. Some notable changes that resulted in the
increase of administrative expenses are: 1) the increase of stock based
compensation expenses of $1.67 million; 2) the increase of depreciation and
amortization expenses of $1.85 million partly because the depreciation and
amortization expenses of HPC impacted the full year of 2010 whereas they only
affected the last three months of fiscal year 2009. Also contributing to the
increase was the addition of properties, plants and equipment for future
business growth and 3) the addition of provision for long term investment in
Tianhe of $0.85 million. 4) the increase of bad debt provision for accounts
receivable of $0.89 million. Also contributing to the increase were the expenses
incurred in new representative offices.

Research and Development Expenses. Research and
development expenses consist primarily of personnel-related expenses as well as
costs associated with new software product development and enhancement. For the
year ended December 31, 2010, research and development expenses increased to
$3.02 million, from $2.71 million in the year 2009, a $0.31 million, or 11.5%
increase. As a percentage of revenue, the research and development expenses
decreased 0.84% to 1.84% for 2010, from 2.68% in 2009. Such decrease was due to
the fact that research and development investments made from prior years are
yielding scalable effects in revenue growth.

Selling Expenses. Selling expenses consist
primarily of compensation and benefits to our sales and marketing staff, sales
and after-sales traveling cost, and other sales related costs. Selling expenses
increased $3.22 million for the year ended December 31, 2010, or 102.77%, to
$6.36 million, from $3.14 million in 2009. As a percentage of revenue, our
selling expenses increased to 3.88% for 2010, from 3.11% in 2009. The selling
expenses outpacing revenue growth reflects our heightened efforts in national
market expansion.

Subsidy Income. For the year ended December 31,
2010 and 2009, in connection with research and development activities in a
designated locale, we received approximately $948,630, $833,429, respectively as
a subsidy from the local governmental agency in China.

Income Tax Expense. Income tax expense increased
  $3.98 million for the year ended December 31, 2010, or 102.28%, to $7.86 million,
  from $3.89 million in 2009. The increase was mainly due to the increase in pre-tax
  income and an increase in our effective income tax rate from 11.43% in 2009
  to 18.14% in 2010 as a result of the tax unification program in China.

- 37 -

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Non-controlling Interest. Non-controlling
interest of $1,071,626 for the year ended December 31, 2010 represents the
$893,316 fee retained by iASPEC under the Management Service Agreement and
$178,310 of Geos profit attributable to its 47.46% non-controlling
interest.

Net income attributable to the Company. As a
result of the factors described above, net income attributable to the Company
increased $4.31 million, or 14.31%, to $34.4 million for the year ended December
31, 2010, from $30.09 million for 2009.

Comparison of Fiscal Years Ended December 31, 2009 and
2008

The following table sets forth key components of our results of
operations for fiscal years ended December 31, 2009 and 2008, both in dollars
and as a percentage of our revenue.

|                                                                      |   | 2009        |   |  | 2008       | 
|--------------------------------------------------------------------- | - | ----------- | - |  | ---------- | 
|                                                                      |   |             |   |  | Percentage | 
|                                                                      |   | Amount      |   |  | of Revenue | 
|Revenue                                                               | $ | 100,996,094 |   |  | 100.00%    | 
|Costs of revenue                                                      |   | 50,344,427  |   |  | 49.85%     | 
|Gross Profit                                                          |   | 50,651,667  |   |  | 50.15%     | 
|Administrative expenses                                               |   | (12,653,175 | ) |  | 12.53%     | 
|Research and development expenses                                     |   | (2,705,669  | ) |  | 2.68%      | 
|Selling expenses                                                      |   | (3,136,380  | ) |  | 3.11%      | 
|Income from operations                                                |   | 32,156,443  |   |  | 31.84%     | 
|Subsidy income                                                        |   | 833,429     |   |  | 0.83%      | 
|Other income, net                                                     |   | 1,153,288   |   |  | 1.14%      | 
|Interest income                                                       |   | 270,666     |   |  | 0.27%      | 
|Interest expenses                                                     |   | (388,686    | ) |  | 0.38%      | 
|Income from continuing operations before income taxes                 |   | 34,025,140  |   |  | 33.70%     | 
|Income tax expense                                                    |   | (3,887,495  | ) |  | 3.85%      | 
|Income from continuing operations                                     |   | 30,137,645  |   |  | 29.84%     | 
|Income from discontinued operations (net
      of income taxes of $0) |   | -           |   |  | -          | 
|Net income                                                            |   | 30,137,645  |   |  | 29.84%     | 
|Less: Net Income Attributable to the Non-controlling
      Interest   |   | (43,076     | ) |  |            | 
|Net Income Attributable to the Company                                | $ | 30,094,569  |   |  | 29.80%     | 

Revenue. Our revenue is generated from our
hardware and software products and through the related after-sales services. For
the year ended December 31, 2009, our revenue was $101 million, compared to
$85.30 million for the year ended December 31, 2008, an increase of $15.70
million, or 18.40%. Our increase in revenues during 2009 was attributable to an
increase in our software sales of 82.58% to $63.83 million, from $34.96 million
for the year ended December 31, 2008. Software sales constituted 63.20% of our
total revenue.

Sales of hardware products included $4.68 million contributed
by Huipu in November and December of 2009. Sales of hardware products and system
integration services decreased by 37.42% and 1.61%, respectively, for the year
ended December 31, 2009, as compared to 2008.

These changes are reflective of our increased focus on high
value-added offerings surrounding our core competency, which warrant higher
gross margin

The following table shows our revenue by segment:

|                |   | Year
      Ended December 31, |  |   | Change     | 
|--------------- | - | ----------------------------- |  | - | ---------- | 
|                |   | 2009                          |  |   | 2008       | 
|DPST Segment    | $ | 54,197,481                    |  | $ | 50,968,985 | 
|GIS Segment     |   | 36,826,430                    |  |   | 34,281,398 | 
|DHIS Segment(1) |   | 9,972,183                     |  |   | 50,801     | 
|Total sales     | $ | 100,996,094                   |  | $ | 85,301,184 | 

- 38 -

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(1) The DHIS segment was started in November 2008, so the
full-year comparison is skewed by the difference in time periods that
contributed to the consolidated results.

Cost of Revenue and Gross Profit. As indicated in
the table below, our cost of revenues increased $4.12 million, or 8.92%, to
$50.34 million, for the year ended December 31, 2009, from $46.22 million for
the year 2008. As a percentage of revenues, our cost of revenue decreased to
49.85% during the year 2009, from 54.19% in 2008. As a result, gross profit as a
percentage of revenue was 50.15% for the year ended December 31, 2009, an
increase of 4.34%, from 45.81% in 2008.

|                   |   | Year
      Ended December 31, 2009 |  |  | Year
      Ended December 31, 2008 | 
|------------------ | - | ---------------------------------- |  |  | ---------------------------------- | 
|                   |   | Revenue                            |  |  | %                                  | 
|Products           | $ | 16,784,910                         |  |  | 16.62%                             | 
|Software           |   | 63,827,233                         |  |  | 63.20%                             | 
|System integration |   | 19,017,962                         |  |  | 18.83%                             | 
|Others             |   | 1,365,989                          |  |  | 1.35%                              | 
|Subtotal           | $ | 100,996,094                        |  |  | 100%                               | 

The increase is the result of three counter-active factors.
First, during the year 2009, we sharpened our focus on high value-added
offerings surrounding our core competency, which led to the weight of software
contribution to revenue to 63.20% in 2009 from 41.0% in 2008. The gross margin
of software is 65.17%, significantly higher than those of hardware of 19.2% and
system integration of 25.1%. In the meantime, we experienced decline of gross
margins of software and system integration sub-categories on a year-over-year
basis. This is because we were engaged in larger projects on average than 2008,
and larger projects generally offer lower profit margin than smaller ones.
Finally, as we focused our product business on high-end hardware, the gross
margin of our product subcategory increased significantly from 2008. In the end,
the benefit of the product mix change in favor of software and the improvement
in profitability of hardware business out-weighed the decline in profitability
of software and system integration business. Consequently, the gross margin
improved year-over-year.

For the year ended December 31, 2009, approximately $31.67
million of our cost of revenues was attributable to our DPST segment, $15.41
million was attributable to our GIS segment and $3.27 million was attributable
to our DHIS segment, compared to $31.51 million to DPST, $14.68 million to GIS
and $35,577 by DHIS, respectively, during the year 2008. Gross margins for all
segments improved.

Administrative Expenses. 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. Total
administrative expenses increased by $2.49 million, or 24.55%, to $12.65 million
for the year ended December 31, 2009, from $10.16 million in the year 2008. As a
percentage of revenue, administrative expenses increased to 12.53% for the year
2009, from 11.91% for the year 2008. Such a ratio incline reflects our efforts
in enhancing managerial capabilities which lead to higher compensation to staff
and increased head count. Such investment shall yield managerial efficiency in
the long run.

Research and Development Expenses. Research and
development expenses consist primarily of R&D personnel-related expenses as
well as costs associated with new software product development and enhancement.
For the year ended December 31, 2009, research and development expenses
increased to $2.71 million, from $2.60 million in the year 2008, a $0.11
million, or 4.21%, increase. As a percentage of revenue, the research and
development expenses decreased 0.36% to 2.68% for 2009, from 3.04% in 2008. This
ratio decline reflects the revenue scalability of the R&D results.

Selling Expenses. Selling expenses consist
primarily of compensation and benefits to our sales and marketing staffs,
business travels after-sale support, transportation costs and other sales
related costs. Selling expenses increased $0.7 million for the year ended
December 31, 2009, or 28.69%, to $3.14 million, from $2.44 million in 2008. As a
percentage of revenue, our selling expenses decreased to 2.68% for 2009, from
2.86% in 2008.

Subsidy Income. For the year ended December 31,
2009, in connection with research and development activities in a designated
locale, we received approximately $833,429 as a subsidy from the local
governmental agency in China.

Income Tax Expense. Income tax expense increased
$2.34 million for the year ended December 31, 2009, or 151.21%, to $3.89
million, from $1.55 million in 2008. The increase was mainly due to the increase
in pre-tax income and an increase in our effective income tax rate from 6.23% in
2008 to 11.43% in 2009. Our subsidiaries, ISS, Zhongtian and Huipu are subject
to EIT at a rate of 20% of assessable profits in 2009, compared to 18% for 2008,
an increase of 2%. Our VIE, iASPEC (exclusive of Geo) acquired the high
technology enterprise qualification during 2009, and became subject to EIT at a
rate of 15%, decrease of 3% compared with 18% in 2008. As a High-Tech
Enterprise, Geo is subject to EIT at a rate of 15% of assessable profits. However, after offsetting accumulated
losses from prior years, Geo had no assessable profits subject to EIT for the
year ended December 31, 2009. As a software company, IST was entitled to a
two-year exemption from EIT followed by a 50% tax exemption for the next 3
years. In 2008, IST enjoyed tax exemption. From 2009 through 2011, IST is
subject to a favorable tax rate of 10%, 11% and 12%, respectively.

- 39 -

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Non-controlling Interest. Non-controlling
interest of $43,076 for the year ended December 31, 2009 represents the $180,000
fee retained by iASPEC under the Management Service Agreement, and $136,926 of
Geos losses attributable to its 43%non-controlling interest.

Net income attributable to the Company. As a
result of the factors described above, net income attributable to the Company
increased $6.31 million, or 26.52%, to $30.09 million for the year ended
December 31, 2009, from $23.79 million for 2008. During November and December of
2009, Huipu generated a net loss of $197,803. This near break-even result is in
line with our expectation, as Huipu is going through significant strategic
changes and restructuring upon the close of our acquisition on October 14, 2009.
We believe that as Huipu completes the restructuring process, it will realize
the economies of scale and optimize efficiency to realize the goals set in the
earn-out provisions, which is to earn a minimum of $3.2 million in net profit
for 2010.

Liquidity and Capital Resources

As of December 31, 2010, we had cash and cash equivalents of
$18.17 million. The following table summarizes the key cash flow components from
our condensed consolidated statements of cash flows for the periods indicated.

Cash Flow(all amounts in U.S. dollars)

|                                                             |   | Year
      Ended December 31, |  
|------------------------------------------------------------ | - | ----------------------------- | -
|                                                             |   | 2010                          |  
|Net cash provided by operating activities                    | $ | 26,949,537                    |  
|Net cash used in investing activities                        |   | (62,355,594                   | )
|Net cash provided by financing activities                    |   | 38,564,344                    |  
|Effects of exchange rate change on cash and cash equivalents |   | 1,529,937                     |  
|Net increase (decrease) in cash and cash equivalents         |   | 4,688,224                     |  
|Cash and cash equivalents at beginning of the year           |   | 13,478,633                    |  
|Cash and cash equivalents at end of the year                 | $ | 18,166,857                    |  

Operating Activities

Net cash provided by operating activities was $26.95 million
for the year ended December 31, 2010, an increase of $15.47 million or, 134.8%,
from $11.48 million net cash provided by operating activities for 2009. This
increase far outpaced revenue growth of 62.23%. Such an increase was primarily
due to the improvements in working capital turnover, including the speeding up
of the turn-over of accounts receivable and inventories.

For fiscal 2009, net cash provided by our operating activities
increased by $6.93 million, or 152.4%, as compared to fiscal 2008. Such an
increase in net cash provided by operating activities, while revenues expanded
by 18.4%, reflected improved operating cash flow management in 2009. The
increase was mainly due to the improvement in working capital turnover.

Investing Activities

Net cash used in our investing activities was $62.36 million
for the year ended December 31, 2010, as compared to $14.66 million net cash
used in investing activities for 2009. Approximately $25.31 million of the total
was used as the deposit for purchasing land use rights under local government
incentives. Details have been provided in Footnote 10(a), Item 1, Part I of this
report and Footnote 17 (Subsequent Event), Item 1, Part I of the Form 10Q/A for
the quarterly period ended June 30, 2010. Approximately $32.82 million was used
to purchase machineries, equipment and software as an investment for future
business expansion.

For fiscal 2009, net cash used by our investing activities decreased
  by $6.38 million, or 30.3%, as compared to fiscal 2008. The decrease was mainly
  due to a decrease in cash used for acquisitions of $8.02 million, with Huipu
  being the only acquisition in 2009, as compared with 3 acquisitions completed
  in 2008, a decrease in proceeds from investments of $3.45 million and a decrease
  of capital expenditure of $1.8 million.

- 40 -

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Financing Activities

Net cash provided by our financing activities increased to
$38.56 million during the year ended December 31, 2010, as compared to $7.11
million during 2009. The increase was mainly attributable to the net proceeds of
$9.38 million raised in issuing of common stock, an increase in net bank
borrowings of $22.44 million, and an increase in net borrowings from
shareholders long-term loan of $5 million. Geo also received capital injection
of $1.74 million from minority shareholders.

For fiscal 2009, net cash provided by our financing activities
increased by $1.89 million, as compared to fiscal 2008. The increase was mainly
due to an increase in net borrowings under short-term bank loans of $1.2
million, a decrease in long-term loan repayment of $734,000 and a purchase of
treasury stock in 2009 of $11,500.

Loan Facilities

As of December 31, 2010, the amount, maturity date and duration
of each of our loan facilities were as follows:

|Lender                                                         |  | Terms                                                                                                                                                                                                                                                     |  | Loan Period                                  |  |  | Interest Rate Per
      annum |  |   | 2010      | 
|-------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------- |  |  | ----------------------------- |  | - | --------- | 
|China Merchants Bank,
      WuhanDonghu Branch                 |  | Principal amount
      of RMB 3,000,000 ($455,100). Fixed interest rate; interest is payable
      monthly and principal is due at maturity. The loan is collateralized by Geo's land and office buildings                                                |  | November 24,
      2010 to November 24,2011  |  |  | 5.36%                         |  | $ | 455,100   | 
|China Merchants Bank, WuhanDonghu Branch                       |  | Principal amount of RMB 3,000,000($455,100 ). Fixed interest rate;
      interests is payable monthly and principal is due at maturity. The loan
      is collateralized by Geo's land and office buildings                                               |  | November 15, 2010 to November
      15,2011  |  |  | 5.84%                         |  |   | 455,100   | 
|China Merchants Bank,
      WuhanDonghu Branch                 |  | Principal amount
      of RMB5,000,000 ($758,500). Fixed interest rate; interest is payable
      monthly and principal is due at maturity. The loan is collateralized by Geo's land and office buildings                                                 |  | December 03,
      2010 to December 3, 2011  |  |  | 5.84%                         |  |   | 758,500   | 
|Bank of China, Shenzhen Longgang Branch                        |  | Principal amount of RMB4,000,000
      ($606,800). Variable interest rate; interest is payable monthly and
      principal is due at maturity. The loan is guaranteed by IST.                                                                             |  | October 22, 2010 to October 22,
      2011   |  |  | 6.116% per PBOC Rate          |  |   | 606,800   | 
|Industrial and Commercial
      Bank of China, Shenzhen Branch |  | Principal amount
      of RMB2,500,000 ($379,250).Fixed interest rate; interest is payable
      monthly and principal is due at maturity. The loan is collateralized by
      accounts receivable of RMB3,575,400 ($542,388) and guaranteed by iASPEC.   |  | October11,2010
      to April 10, 2011       |  |  | 5.35%                         |  |   | 379,250   | 
|Industrial and Commercial Bank of China,
      Shenzhen Branch |  | Principal amount of RMB3,960,000
      ($600,732). Fixed interest rate; interest is payable monthly and principal
      is due at maturity. The loan is collateralized by accounts receivable of
      RMB 4,411,080 ($669,161) and guaranteed by iASPEC. |  | November 11, 2010 to January
      11, 2011  |  |  | 5.36%                         |  |   | 600,732   | 
|Bank of China, Shenzhen
      Longgang Branch                  |  | Principal amount
      of RMB10,000,000 ($1,517,000). Fixed interest rate; interest is payable
      monthly and principal is due at maturity. The loan is guaranteed by IST.                                                                             |  | February 26,
      2010 to February 26, 2011 |  |  | 4.86%                         |  |   | 1,517,000 | 
|Bank of China, Shenzhen Longgang Branch                        |  | Principal amount of RMB16,000,000
      ($2,427,200). Fixed interest rate; interest is payable monthly and
      principal is due at maturity. The loan is guaranteed by IST.                                                                             |  | March 31, 2010 to March 31,
      2011       |  |  | 4.86%                         |  |   | 2,427,200 | 

- 41 -

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|Ping An Bank              |  | Principal amount
      of RMB 32,600,000 ($4,945,420). Fixed interest rate; interest is payable
      monthly and principal is due at maturity. The loan is collateralized by
      Huipu's land and office buildings                                                                                                           |  | March 31, 2010
      to March 30, 2011     |  |  | 5.31%                            |  |  | 4,945,420 | 
|------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ |  |  | -------------------------------- |  |  | --------- | 
|Ping An Bank              |  | Principal amount of RMB
      40,000,000 ($6,068,000). Fixed interest rate; interest is payable monthly
      and principal is due at maturity. The loan is collateralized by Huipu's
      land and office buildings.                                                                                                          |  | June 30, 2010 to June 30,2011              |  |  | 5.31%                            |  |  | 6,068,000 | 
|Shenzhen Development Bank |  | Principal amount
      of RMB15,000,000 ($2,275,500). Quarterly fixed interest rate; interest is
      payable monthly and principal is due at maturity.                                                                                                                                                                        |  | August 6, 2010
      to February 3, 2011   |  |  | 4.86%                            |  |  | 2,275,500 | 
|DBS Bank                  |  | Principal amount of RMB2,112,270
      ($320,432). Fixed interest rate; interest is payable monthly and principal
      is due at maturity. The loan is collateralized by Bocom's bank deposit.                                                                                                                                 |  | Within 90 days per bank
      contracts    |  |  | 5.83%                            |  |  | 320,432   | 
|DBS Bank                  |  | Principal amount
      of USD1,093,960. Fixed interest rate; interest is payable monthly and
      principal is due at maturity. The loan is guaranteed by Huipu.                                                                                                                                                               |  | October 18,
      2010 to January 18, 2011 |  |  | 3.84%                            |  |  | 1,093,960 | 
|DBS Bank                  |  | Principal amount of USD999,600.
      Fixed interest rate; interest is payable monthly and principal is due at
      maturity. The loan is guaranteed by Huipu.                                                                                                                                                                 |  | October 21, 2010 to January
      25,2011  |  |  | 5.14%                            |  |  | 999,600   | 
|DBS Bank                  |  | Principal amount
      of USD423,584. Fixed interest rate; interest is payable monthly and
      principal is due at maturity. The loan is guaranteed by Huipu.                                                                                                                                                                 |  | October 27,
      2010 to January 25,2011  |  |  | 5.00%                            |  |  | 423,584   | 
|DBS Bank                  |  | Principal amount of RMB8,000,000
      ($1,213,600). Fixed interest rate; interest is payable monthly and
      principal are due at maturity. The loan is guaranteed by Huipu.                                                                                                                                                 |  | October 14, 2010 to January 21,
      2011 |  |  | 6.73%                            |  |  | 1,213,600 | 
|DBS Bank                  |  | Principal amount
      of RMB5,500,000 ($834,350)Fixed interest rate; interest is payable monthly
      and principal is due at maturity. The loan is guaranteed by Huipu.                                                                                                                                                      |  | October 27,
      2010 to January 27, 2011 |  |  | 6.75%                            |  |  | 834,350   | 
|DBS Bank                  |  | Principal amount of RMB1,153,882
      ($175,044). Fixed interest rate; interest is payable monthly and principal
      is due at maturity. The loan is guaranteed by Huipu.                                                                                                                                                    |  | October 29, 2010 to January 27,
      2011 |  |  | 5.36%                            |  |  | 175,044   | 
|Hang Seng Bank Limited    |  | Packing loan
      (PAC) of Principal amount of USD5,346,342. Fixed interest rate; interest
      is payable monthly and principal is due at maturity (90 days Per bank
      contracts). The loan is guaranteed by Huipus LC.                                                                                                 |  | Within 90 days
      per bank contracts    |  |  | 2.75% per annum
      over LIBOR |  |  | 5,346,342 | 
|Hang Seng Bank Limited    |  | Packing loan (PAC) negotiated
      under documentary credit with discrepancies (L/G) for principal amount of
      USD395,552. Principal is due at maturity (90 days per bank contract). The
      loan is collateralized and guaranteed by Huipus goods and export
      documentary credits, and guaranteed by the Company. |  | Within 90 days per bank
      contracts    |  |  | Interest free                    |  |  | 395,552   | 

- 42 -

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|DBS Bank                  |  | Packing loan
      (PAC) of principal amount of USD1,760,000. Fixed interest rate; interest
      is payable monthly and principal is due at maturity (90 days Per bank
      contract). The loan is guaranteed by Huipus LC. |  | Within 90 days
      per bank contracts      |  |  | Interest free |  |   | 1,760,000  | 
|------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------- |  |  | ------------- |  | - | ---------- | 
|Shenzhen Development Bank |  | Principal amount of RMB 15,000,000,
    ($2,275,500 )                                                                                                                                                                          |  | December 31, 2010 to December
      31, 2011 |  |  | 5.40%         |  |   | 2,275,500  | 
|Total                     |  |                                                                                                                                                                                                                                |  |                                              |  |  |               |  | $ | 35,326,566 | 

Obligations Under Material Contracts

The following table sets forth our material contractual obligations
  as of December 31, 2010:

|                            |  |   | Payments
      Due by Period | 
|--------------------------- |  | - | ---------------------------- | 
|                            |  |   |                              | 
|Contractual Obligations     |  |   | Total                        | 
|Operating Lease Obligations |  | $ | 289,606                      | 
|Purchase Obligations        |  |   | 5,107,788                    | 
|Total                       |  | $ | 5,397,394                    | 

Critical Accounting Policies

The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires our
management to make assumptions, estimates and judgments that affect the amounts
reported in the financial statements, including the notes thereto, and related
disclosures of commitments and contingencies, if any. We consider our critical
accounting policies to be those that require the more significant judgments and
estimates in the preparation of financial statements, including the
following:

|• | GoodwillASC 350-30-50, We review goodwill and
      intangible assets with indefinite lives for impairment on an annual basis
      and whenever events or circumstances indicate that the carrying value may
      not be recoverable. Goodwill is assessed for impairment using a two-step
      test. In the first step, the fair value of each reporting unit is compared
      to its carrying amount. If the fair value of the reporting unit exceeds
      the carrying amount, no impairment exists and we are not required to
      perform further testing. If the carrying amount exceeds its fair value,
      the second step must be performed to determine the implied fair value of
      the reporting units goodwill. If the carrying value of the reporting
      units goodwill exceeds its implied fair value, then an impairment loss is
      recorded in an amount equal to that excess. Determining the fair value of
      a reporting unit involves the use of significant estimates and
      assumptions. Valuation techniques we use to measure fair value is the
      income approach. It includes discounted cash flow measurements using a
      market discount rate. Our valuation techniques could yield variable
      results based on changes in assumptions such as the discount rate and
      long-term growth rate and forecasted revenue and expense. Our annual
      impairment analysis indicated a fair value for goodwill that was above its
      book value. Accordingly, no impairment loss was charged against earnings.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|• | Revenue RecognitionRevenues from products are
      recognized only when persuasive evidence of an arrangement exists,
      delivery has occurred or services have been rendered, the price to the
      customer is fixed or determinable, and collectability is reasonably
      assured. Generally, revenue is recognized (1) upon shipment for equipment
      and software, (2) as work is performed for professional services and (3)
      in equal periodic amounts over the term of the contract for software and
      hardware maintenance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

- 43 -

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|  | The majority of revenues are generated from fixed-price
      contracts, which provide for licenses to software products, and services
      to customize such software to meet customers' use. Generally, when the
      services are determined to be essential to the functionality of the
      delivered software, revenue is recognized using the percentage of
      completion method of accounting. The percentage of completion for each
      contract is estimated based on the ratio of direct labor hours incurred to
      total estimated direct labor hours. We review accounts receivables for
      allowances whenever events or changes in circumstances indicates that the
      related carrying amounts may not be recoverable, losses on accounts
      receivables are provided when they become evident.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|• | Accounts ReceivableWe regularly evaluates and
      monitors the creditworthiness of each customer on a case-by-case basis. We
      include any account balances that are determined to be uncollectible in an
      allowance for doubtful accounts. After all attempts to collect a
      receivable have failed, the receivable is written off against the
      allowance. The allowance for doubtful accounts at December 31, 2010 and
      2009, totaled $6,073,000 and $3,123,000 respectively, representing
      managements best estimate.                                                                                                                                                                                                                                                                           
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|• | InventoriesWe valued inventories at the lower of
      cost or market. Market 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. We perform an analysis of slow-moving or
      obsolete inventory periodically and any necessary valuation reserves,
      which could potentially be significant, are included in the period in
      which the evaluations are completed.                                                                                                                                                                                                                                                                                                                                 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|• | Income Taxes- Income taxes are provided on an
      asset and liability approach for financial accounting and reporting of
      income taxes. Deferred income taxes are recognized for all significant
      temporary differences at enacted rates and classified as current or
      non-current based upon the classification of the related asset or
      liability in the financial statements. A valuation allowance is provided
      to reduce the amount of deferred tax assets if it is considered more
      likely than not that some portion of, or all, the deferred tax asset will
      not be realized. The Company classifies interest and/or penalties related
      to unrecognized tax benefits, if any, as a component of income tax
      provisions.                                                     

Recent Accounting Pronouncements

In April 2010, the FASB issued Accounting Standards Update No.
2010-17, Revenue Recognition - Milestone Method (Topic 605) - Revenue
Recognition (ASU 2010-17). ASU 2010-17 provides guidance on defining the
milestone and determining when the use of the milestone method of revenue
recognition for research or development transactions is appropriate. It provides
criteria for evaluating if the milestone is substantive and clarifies that a
vendor can recognize consideration that is contingent upon achievement of a
milestone as revenue in the period in which the milestone is achieved, if the
milestone meets all the criteria to be considered substantive. ASU 2010-17 is
effective for us in fiscal 2011 and should be applied prospectively. The
adoption of ASU 2010-17 did not have any effect on the Companys financial
position or results of operations.

In January 2010, the FASB issued ASU 2010-06, Improving
Disclosures about Fair Value Measurements. ASU 2010-06 amends ASC Topic 820,
Fair Value Measurement and Disclosure (ASC 820) to require a number of
additional disclosures regarding fair value measurements. In addition to the new
disclosure requirements, ASU 2010-06 also amends ASC 820 to clarify that
reporting entities are required to provide fair value measurement disclosures
for each class of assets and liabilities. Prior to the issuance of ASU 2010-06,
the guidance in ASC 820 required separate fair value disclosures for each major
category of assets and liabilities.

ASU 2010-06 also clarifies the requirement for entities to
disclose information about both the valuation techniques and inputs used in
estimating Level 2 and Level 3 fair value measurements. Except for the
requirement to disclose information about purchases, sales, issuance and
settlements in the reconciliation of recurring Level 3 measurements on a gross
basis, all of the provisions of ASU 2010-06 are effective for interim and annual
reporting periods beginning after December 15, 2009, or January 1, 2010 for the
Company. The requirement to separately disclose purchases, sales, issuances and
settlements of recurring Level 3 measurements does not become effective until
fiscal years beginning after December 15, 2010, or January 1, 2011 for the
Company. The adoption of ASU 2010-06 is for disclosure purposes only and did not
have any effect on the Companys financial position or results of operations.

In June 2009, the FASB issued guidance now codified within ASC
Topic 810, Consolidation (ASC 810). ASC 810 requires entities to perform an
analysis to determine whether the enterprises variable interest or interests
give it a controlling financial interest in a variable interest entity. This
analysis identifies the primary beneficiary of a variable interest entity as one
with the power to direct the activities of a variable interest entity that most
significantly impact the entitys economic performance and obligation to absorb
losses of the entity that could potentially be significant to the variable interest. The guidance is effective as of the
beginning of the annual reporting period commencing after November 15, 2009, or
January 1, 2010 for the Company, with early adoption prohibited. The adoption of
the guidance codified within ASC 810 did not have any effect on the Companys
financial position or results of operations.

- 44 -

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In October 2009, the FASB issued ASU 2009-13,
Multiple-Deliverable Revenue Arrangements, (amendments to FASB ASC Topic 605,
Revenue Recognition) (ASU 2009-13) and ASU 2009-14, Certain Arrangements That
Include Software Elements, (amendments to FASB ASC Topic 985, Software) (ASU
2009-14). ASU 2009-13 requires entities to allocate revenue in an arrangement
using estimated selling prices of the delivered goods and services based on a
selling price hierarchy. The amendments eliminate the residual method of revenue
allocation and require revenue to be allocated using the relative selling price
method. ASU 2009-14 removes tangible products from the scope of software revenue
guidance and provides guidance on determining whether software deliverables in
an arrangement that includes a tangible product are covered by the scope of the
software revenue guidance. ASU 2009-13 and ASU 2009-14 should be applied on a
prospective basis for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. The Company considered the adoption of ASU 2009-13 or ASU 2009-14
would have no material impact to consolidated results of operations and
financial condition.

Seasonality

The first quarter of the calendar year is typically the slowest
season of the year due to the Chinese New Year holiday. During this period,
accounts receivable collection is very slow and we also need to prepare for
upcoming busier seasons by making payments for inventory.

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.

Off-Balance Sheet Arrangements

We do not have any off-balance arrangements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.

Interest Rate Risk

We deposit surplus funds with Chinese banks earning daily
interest. We do not invest in any instruments for trading purposes. Most of our
outstanding debt instruments carry fixed rates of interest. Our operations
generally are not directly sensitive to fluctuations in interest rates. The
amount of long-term debt outstanding as of December 31, 2010 and 2009 was $11
million and $2 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 December 31, 2010, would decrease net income before provision for
income taxes by approximately $235,000, or less than 1% for the fiscal year
ended December 31, 2010. Management monitors the banks prime rates in
conjunction with our cash requirements to determine the appropriate level of
debt balances relative to other sources of funds. We have not entered into any
hedging transactions in an effort to reduce our exposure to interest rate risk.

Foreign Exchange Risk

While our reporting currency is the U.S. dollars, substantially
all of our consolidated revenues and consolidated costs and expenses are
denominated in RMB. Substantially all of our assets are denominated in RMB
except for cash. As a result, we are exposed to foreign exchange risk as our
revenues and results of operations may be affected by fluctuations in the
exchange rate between U.S. dollars and RMB. If the RMB depreciates against the
U.S. dollars, the value of our RMB revenues, earnings and assets as expressed in
our U.S. dollars 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 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 equity. An average appreciation
(depreciation) of the RMB against the U.S. dollars of 5% would increase
(decrease) our comprehensive income by $10.46 million based on our outstanding revenues, costs and expenses,
assets and liabilities denominated in RMB as of December 31, 2010. As of
December 31, 2010, our accumulated other comprehensive income was $11.33
million. We have not entered into any hedging transactions in an effort to
reduce our exposure to foreign exchange risk.

- 45 -

---

The value of RMB against the U.S. dollars and other currencies
is affected by, among other things, changes in Chinas political and economic
conditions. Since July 2005, RMB has not been pegged to the U.S. dollars.
Although the Peoples Bank of China regularly intervenes in the foreign exchange
market to prevent significant short-term fluctuations in the exchange rate, RMB
may appreciate or depreciate significantly in value against the U.S. dollars in
the medium to long term. Moreover, it is possible that in the future, PRC
authorities may lift restrictions on fluctuations in RMB 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Consolidated Financial Statements

The full text of our audited consolidated financial statements
as of December 31, 2010 and 2009 begins on page F-1 of this report.

Quarterly Financial Results

The following table sets forth certain unaudited financial
information for each of the eight quarters ended December 31, 2010. The
consolidated financial statements for each of these quarters have been prepared
on the same basis as the audited consolidated financial statements included in
this annual report and, in the opinion of management, include all adjustments
necessary for the fair presentation of the results of operations for these
periods. This information should be read together with our audited consolidated
financial statements and the related notes included elsewhere in this annual
report.

(All amounts in U.S. dollars, except for per share amounts)

|2010                       |   | 1st Quarter |  |   | 2nd Quarter |  |   | 3rd Quarter |  |   | 4th Quarter | 
|-------------------------- | - | ----------- |  | - | ----------- |  | - | ----------- |  | - | ----------- | 
|                           |   |             |  |   |             |  |   |             |  |   |             | 
|Revenue                    | $ | 25,305,107  |  | $ | 33,516,888  |  | $ | 43,806,131  |  | $ | 61,217,471  | 
|Gross profit               |   | 11,117,453  |  |   | 16,798,306  |  |   | 21,085,593  |  |   | 21,561,803  | 
|Income before income taxes |   | 7,563,010   |  |   | 11,817,789  |  |   | 12,832,281  |  |   | 11,123,987  | 
|Net income                 |   | 6,391,927   |  |   | 9,654,180   |  |   | 10,470,688  |  |   | 8,956,835   | 
|Basic income per share     | $ | 0.12        |  |   | 0.18        |  | $ | 0.21        |  | $ | 0.16        | 
|Diluted income per share   | $ | 0.12        |  |   | 0.18        |  | $ | 0.21        |  | $ | 0.16        | 

|2009                       |   | 1st Quarter |  |   | 2nd Quarter |  |   | 3rd Quarter |  |   | 4th Quarter | 
|-------------------------- | - | ----------- |  | - | ----------- |  | - | ----------- |  | - | ----------- | 
|                           |   |             |  |   |             |  |   |             |  |   |             | 
|Revenue                    | $ | 14,980,184  |  | $ | 25,787,919  |  | $ | 28,680,681  |  | $ | 31,547,310  | 
|Gross profit               |   | 7,483,264   |  |   | 12,266,751  |  |   | 15,119,997  |  |   | 15,781,655  | 
|Income before income taxes |   | 4,565,212   |  |   | 8,963,025   |  |   | 11,346,512  |  |   | 9,150,391   | 
|Net income                 |   | 3,976,816   |  |   | 7,871,225   |  |   | 9,548,567   |  |   | 8,741,037   | 
|Basic income per share     | $ | 0.08        |  | $ | 0.16        |  | $ | 0.20        |  | $ | 0.18        | 
|Diluted income per share   | $ | 0.08        |  | $ | 0.16        |  | $ | 0.20        |  | $ | 0.18        | 

Earnings per share are computed independently for each of the
quarters presented. Therefore, the sum of the quarterly net earnings per share
will not necessarily equal the total for the year.

- 46 -

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|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
      ACCOUNTING AND FINANCIAL DISCLOSURE.
|------- | -------------------------------------------------------------------------------------------

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer
to controls and other procedures designed to ensure that information required to
be disclosed in the reports we file or submit under the Securities Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.

As required by Rule 13a-15(e), our management has carried out
an evaluation, with the participation and under the supervision of our Chief
Executive Officer, Mr. Jiang Huai Lin and our Chief Financial Officer, Ms.
Jackie You Kazmerzak, of the effectiveness of the design and operation of our
disclosure controls and procedures, as of December 31, 2010. Based upon, and as
of the date of this evaluation, Mr. Lin and Ms. Kazmerzak, determined that, as
of December 31, 2010, and as of the date of this report, our disclosure controls
and procedures were effective.

Managements Annual Report on Internal Control Over
Financial Reporting

Management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company. Internal
control over financial reporting refers to the process designed by, or under the
supervision of, our chief executive officer and chief financial officer, and
effected by our Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of our financial reporting and
the preparation of financial statements for external purposes in accordance with
U.S. GAAP, and includes those policies and procedures that:

|• | pertain to the maintenance of records that in reasonable
      detail accurately and fairly reflect the transactions and dispositions of
      our assets;                                                                                                                                                       
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                  
|• | provide reasonable assurance that transactions are
      recorded as necessary to permit preparation of financial statements in
      accordance with U.S. GAAP, and that our receipts and expenditures are
      being made only in accordance with the authorization of our management and
      directors; and
|  |                                                                                                                                                                                                                                                                                                                  
|• | provide reasonable assurance regarding prevention or
      timely detection of unauthorized acquisition, use or disposition of our
      assets that could have a material effect on the financial
    statements.                                                                                               

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

Management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2010. In making this assessment,
management used the framework set forth in the report entitled Internal Control
- Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission, or COSO. The COSO framework summarizes each of the
components of a companys internal control system, including (i) the control
environment, (ii) risk assessment, (iii) control activities, (iv) information
and communication, and (v) monitoring. Based on our assessment, we determined
that, as of December 31, 2010, the Companys internal control over financial
reporting was effective based on those criteria.

Our independent registered public accounting firm, BDO Limited,
has issued an audit report on our internal control over financial reporting.
Their audit report is set forth under Item 8 of this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over
financial reporting during the fourth quarter of fiscal year 2010 that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.

- 47 -

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ITEM 9B. OTHER INFORMATION.

We have no information to disclose that was required to be disclosed
  in a report on Form 8-K during fourth quarter of fiscal year 2010, but was not
  reported.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.

The information required by Item 10 of Part III is included in
our Proxy Statement for our 2010 Annual Meeting of Stockholders and is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by Item 11 of Part III is included in
our Proxy Statement for our 2010 Annual Meeting of Stockholders and is
incorporated herein by reference.

|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT ANDRELATED STOCKHOLDER MATTERS.
|-------- | ----------------------------------------------------------------------------------------------------

The information required by Item 12 of Part III is included in
our Proxy Statement for our 2010 Annual Meeting of Stockholders and is
incorporated herein by reference.

|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
      DIRECTORINDEPENDENCE.
|-------- | -------------------------------------------------------------------------------

The information required by Item 13 of Part III is included in
our Proxy Statement for our 2010 Annual Meeting of Stockholders and is
incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

The information required by Item 14 of Part III is included in
our Proxy Statement for our 2010 Annual Meeting of Stockholders and is
incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

Financial Statements and Schedules

The financial statements are set forth under Item 8 of this
annual report on Form 10-K. Financial statement schedules have been omitted
since they are either not required, not applicable, or the information is
otherwise included.

Exhibit List

The following exhibits are filed as part of this report or incorporated
  by reference:

|Exhibit No. |  | Description                                                                                                                                                                                                                                                      
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1*        |  | Amended
        and Restated Articles of Incorporation of the Company as filed with the
        Secretary of State of Nevada, as amended to date                                                                                                                 
|3.2         |  | Bylaws of the Company, adopted
        on February 13, 2008 (incorporated by reference to Exhibit 3.2 to the
        Current Report on Form 8-K filed by the Company on April 7, 2008)                                                                           
|4.1         |  | China Information
        Security Technology, Inc. 2007 Equity Incentive Plan (incorporated by
        reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the
        Company on June 13, 2007)                                               
|10.1        |  | Form of Securities Purchase Agreement,
        dated January 7, 2010, among the Company and the investors signatory thereto
        (incorporated by reference to Exhibit 10.1 to the Current Report on Form
        8-K filed by the Company on January 7, 2010)

- 48 -

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|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                  
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.2        |  | Placement Agency Agreement, between the Company and
      Rodman & Renshaw, LLC, dated January 7, 2010 (incorporated by
      reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the
      Company on January 7, 2010)                                                                                                                                                                                                     
|10.3        |  | Form of Securities Purchase Agreement, dated October 25,
      2007 (incorporated by reference to Exhibit 10.1 to the Current Report on
      Form 8-K filed by the Company on October 25, 2007)                                                                                                                                                                                                                                             
|10.4        |  | Securities Purchase Agreement, dated January 16, 2007,
      among the Company and the investors signatory thereto (incorporated by
      reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the
      Company on January 17, 2007)                                                                                                                                                                                        
|10.5        |  | Amendment No. 1 to the Securities Purchase Agreement,
      dated January 31, 2007, among the Company and the investors signatory
      thereto (incorporated by reference to Exhibit 10.2 to the Current Report
      on Form 8-K filed by the Company on February 1, 2007)                                                                                                                                                                 
|10.6        |  | Rescission; Termination and Share Exchange Agreement,
      dated January 31, 2007, among iASPEC Software Co., Ltd., its shareholders
      signatories thereto, including Jiang Huai Lin, Information Security
      Technology (China) Co., Ltd., China Public Security Holdings Limited and
      the Company (incorporated by reference to Exhibit 10.5 to the Current
      Report on Form 8-K filed by the Company on February 1, 2007)
|10.7        |  | Amended and Restated Business Turnkey Agreement, dated as
      of January 31, 2007, by and between Information Security Technology
      (China) Co., Ltd. and iASPEC Software Co., Ltd. and its shareholders party
      thereto (incorporated by reference to Exhibit 10.6 to the Current Report
      on Form 8-K filed by the Company on February 1, 2007)                                                                              
|10.8        |  | Management Service Agreement, dated as of August 1, 2007,
      among Information Security Technology (China) Co., Ltd., iASPEC Software
      Co., Ltd., Jiang Huai Lin and Jin Zhu Cai (incorporated by reference to
      Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on
      August 6, 2007)                                                                                                                    
|10.9        |  | Amended and Restated Management Services Agreement, dated
      as of December 13, 2009, among Information Security Technology (China)
      Co., Ltd., iASPEC Software Co., Ltd. and Jiang Huai Lin (incorporated by
      reference to Exhibit 10.5 to the Current Report on Form 8-K filed by the
      Company on December 17, 2009)                                                                                                     
|10.10       |  | Guaranty, dated August 1, 2007, by Jiang Huai Lin and Jin
      Zhu Cai (incorporated by reference to Exhibit 10.2 to the Current Report
      on Form 8-K filed by the Company on August 6, 2007)                                                                                                                                                                                                                                           
|10.11       |  | Purchase Option Agreement, dated August 1, 2007, among
      Information Security Technology (China) Co., Ltd., iASPEC Software Co.,
      Ltd., Jiang Huai Lin and Jin Zhu Cai (incorporated by reference to Exhibit
      10.3 to the Current Report on Form 8-K filed by the Company on August 6,
      2007)                                                                                                                             
|10.12       |  | Notice of Termination, dated August 1, 2007, among
      Information Security Technology (China) Co., Ltd., iASPEC Software Co.,
      Ltd., Jiang Huai Lin and Jin Zhu Cai (incorporated by reference to Exhibit
      10.4 to the Current Report on Form 8-K filed by the Company on August 6,
      2007)                                                                                                                                 
|10.13       |  | Letter Agreement, dated as of September 12, 2007, among
      Information Security Technology (China) Co., Ltd., iASPEC Software Co.,
      Ltd., Jiang Huai Lin and Jin Zhu Cai (incorporated by reference to Exhibit
      10.16 to the Registration Statement on Form SB-2/A filed by the Company on
      September 14, 2007)                                                                                                            
|10.14       |  | Share Purchase Agreement, dated as of November 7, 2007,
      by and among China Public Security Holdings Limited, Cheer Crown
      International Investment Limited, the Company, and Dongwei Gao
      (incorporated by reference to Exhibit 10.1 to the Current Report on Form
      8-K filed by the Company on November 9, 2007)                                                                                                       
|10.15       |  | Share Purchase Agreement, dated as of December 9, 2007,
      by and among China Public Security Holdings Limited, Bocom Venture Inc.,
      and the Company (incorporated by reference to Exhibit 10.1 to the Current
      Report on Form 8-K filed by the Company on December 13, 2007)                                                                                                                                                   
|10.16       |  | Share Purchase and Increase Capital Agreement, dated as
      of February 16, 2008, by and among iASPEC Software Co., Ltd., Wuhan Wuda
      Venture Capital Co., Ltd., Wuhan Wuda Geoinformatics Co., Ltd. and Song Ai
      Hong (incorporated by reference to Exhibit 10.1 to the Current Report on
      Form 8-K filed by the Company on February 19, 2008)                                                                             
|10.17       |  | Share Purchase and Increase Capital Agreement, dated as
      of February 16, 2008, by and among iASPEC                                                                                                                                                                                                                                                                                                                                      

- 49 -

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|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                    
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  | Software Co., Ltd. and Li Wei
        (incorporated by reference to Exhibit 10.1 to the Current Report on Form
        8-K filed by the Company on February 19, 2008)                                                                                                                                                          
|10.18       |  | Share Purchase
        Agreement, dated as of September 23, 2008, by and among China Public Security
        Holdings Limited, Wide Peace International Investments Limited, and the
        Company (incorporated by reference to Exhibit 10.2 to the Current Report
        on Form 8-K filed by the Company on July 3, 2008)
|10.19       |  | Equity Transfer Agreement, dated
        August 1, 2008, by and between Jiang Huai Lin and Jin Zhu Cai (incorporated
        by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by
        the Company on August 3, 2008)                                                                                    
|10.20       |  | Purchase Contract
        between Dell (China) Company Limited and Information Security Software
        (China) Company Ltd., dated January 1, 2008 (incorporated by reference
        to Exhibit 10.26 to the Annual Report on Form 10-K/A filed by the Company
        on August 12, 2009)                                  
|10.21       |  | General Purchase Contract between
        Huipu Electronics (Shenzhen) Co., Ltd. and iASPEC Software Co., Ltd.,
        dated August 26, 2008 (incorporated by reference to Exhibit 10.27 to the
        Annual Report on Form 10-K/A filed by the Company on November 18, 2009)                                               
|10.22       |  | Purchase Contract
        between iASPEC Software Co., Ltd. and Huipu Electronic (Shenzhen) Co.,
        Ltd., dated September 15, 2008 (incorporated by reference to Exhibit 10.25
        to the Annual Report on Form 10-K/A filed by the Company on November 18,
        2009)                                             
|10.23       |  | Sales Contract for Digital Court
        Storage System between the Shenzhen Intermediate Peoples Court and
        iASPEC Software Co., Ltd., dated April 3, 2008 (incorporated by reference
        to Exhibit 10.28 to the Annual Report on Form 10-K/A filed by the Company
        on November 18, 2009)                 
|10.24       |  | English Translation
        of Form of Employment Agreement (incorporated by reference to Exhibit
        10.7 to the Annual Report on Form 10-KSB filed by the Company on April
        16, 2007)                                                                                                                             
|10.25       |  | English Translation of Form of
        Non-Disclosure Agreement (incorporated by reference to Exhibit 10.8 to
        the Annual Report on Form 10-KSB filed by the Company on April 16, 2007)                                                                                                                                 
|10.26       |  | Form of Independent
        Director Agreement (incorporated by reference to Exhibit 10.1 to the Current
        Report on Form 8- K filed by the Company on August 16, 2007)                                                                                                                                                  
|10.27       |  | Form of Indemnification Agreement
        (incorporated by reference to Exhibit 10.2 to the Current Report on Form
        8-K filed by the Company on August 16, 2007)                                                                                                                                                        
|10.28       |  | Employment Agreement,
        dated January 25, 2007, between the Company and Jiang Huai Lin (incorporated
        by reference to Exhibit 10.29 to the Annual Report on Form 10-K/A filed
        by the Company on August 12, 2009)                                                                                          
|10.29*      |  | Employment Agreement, dated August
        11, 2009, between the Company and Jackie You Kazmerzak                                                                                                                                                                                                                              
|10.30       |  | Employment Agreement,
        dated August 12, 2008, between the Company and Zhi Xiong Huang (incorporated
        by reference to Exhibit 10.32 to the Annual Report on Form 10-K/A filed
        by the Company on August 12, 2009)                                                                                          
|10.31       |  | Employment Agreement, dated August
        12, 2008, between the Company and Zhiqiang Zhao (incorporated by reference
        to Exhibit 10.33 to the Annual Report on Form 10-K/A filed by the Company
        on August 12, 2009)                                                                                            
|14          |  | Amended and Restated
        Code of Ethics, adopted on December 25, 2007 (incorporated by reference
        to Exhibit 14 to the Annual Report on Form 10-K filed by the Company on
        March 31, 2008)                                                                                                                   
|21          |  | List of subsidiaries of the registrant
        (incorporated by reference to Exhibit 21 to the Annual Report on Form
        10-K filed by the Company on March 5, 2010)                                                                                                                                                       
|31.1*       |  | Certifications
        of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
        Act of 2002.                                                                                                                                                                                                           
|31.2*       |  | Certifications
        of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
        Act of 2002.                                                                                                                                                                                                           
|32.1*       |  | Certification
        of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
        Act of 2002.                                                                                                                                                                                                            
|32.2*       |  | Certification
        of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
        Act of 2002.                                                                                                                                                                                                            

*Filed herewith.

- 50 -

---

SIGNATURES

In accordance with section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this Report on Form 10-K to be
signed on its behalf by the undersigned, thereto duly authorized individual.

Date: March 8, 2011

CHINA INFORMATION TECHNOLOGY,
INC.

| | By: | /s/
      Jiang Huai Lin      
| | --- | ------------------------------
| |     | Jiang Huai Lin                
| |     | Chief Executive Officer       
| |     |                               
| | By: | /s/
      Jackie You Kazmerzak
| |     | Jackie You Kazmerzak          
| |     | Chief Financial Officer       

In accordance with the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

|Signature                      |  | Title                                        | Date         
|------------------------------ |  | -------------------------------------------- | -------------
|                               |  |                                              |              
|/s/ Jiang Huai Lin             |  | Chairman and Chief Executive Officer         | March 8, 2011
|Jiang Huai Lin                 |  | (Principal Executive Officer)                |              
|                               |  |                                              |              
|/s/ Jackie You
      Kazmerzak |  | Chief Financial Officer                      | March 8, 2011
|Jackie You Kazmerzak           |  | (Principal Financial and Accounting Officer) |              
|                               |  |                                              |              
|/s/ Zhiqiang Zhao              |  | Director and Chief Operating Officer         | March 8, 2011
|Zhiqiang Zhao                  |  |                                              |              
|                               |  |                                              |              
|/s/ Yun Sen Huang              |  | Director                                     | March 8, 2011
|Yun Sen Huang                  |  |                                              |              
|                               |  |                                              |              
|/s/ Qiang Lin                  |  | Director                                     | March 8, 2011
|Qiang Lin                      |  |                                              |              
|                               |  |                                              |              
|/s/ Remington Hu               |  | Director                                     | March 8, 2011
|Remington Hu                   |  |                                              |              

- 51 -

---

CHINA INFORMATION TECHNOLOGY, INC.INDEX TO
CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2010 AND 2009

|Contents                                                                                                         | Page(s)
|---------------------------------------------------------------------------------------------------------------- | -------
|                                                                                                                 |        
|Report of Independent
      Registered Public Accounting Firm                                                    | F-2    
|                                                                                                                 |        
|Consolidated Balance
      Sheets as of December 31, 2010 and 2009                                               | F-4    
|                                                                                                                 |        
|Consolidated Statements
      of Income for the years ended December 31, 2010, 2009 and 2008                     | F-6    
|                                                                                                                 |        
|Consolidated Statements
      of Comprehensive Income for the years ended December 31, 2010, 2009 and
      2008 | F-8    
|                                                                                                                 |        
|Consolidated Statements
      of Changes in Equity for the years ended December 31, 2010, 2009 and 2008          | F-8    
|                                                                                                                 |        
|Consolidated
      Statements of Cash Flows for the years ended December 31, 2010, 2009 and
      2008           | F-9    
|                                                                                                                 |        
|Notes to the
      Consolidated Financial Statements                                                             | F-11   

-F- 1 -

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF

CHINA INFORMATION TECHNOLOGY, INC.

We have audited the accompanying consolidated balance sheet of
China Information Technology, Inc. and its subsidiaries and variable interest
entity (the Company) as of December 31, 2010 and the related consolidated
statements of income, comprehensive income, changes in equity and cash flows for
the year ended December 31, 2010. We have also audited the Companys internal
control over financial reporting as of December 31, 2010, based on criteria
established in Internal Control  Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The
Companys management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Item 9A Report of the Companys Management on
Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on these financial statements and an opinion on the Companys internal
control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all
material respects. Our audit of the financial statements included examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.

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

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

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of the Company as of December 31, 2010 and the results of its operation
and its cash flows for the year ended December 31, 2010 in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2010, based on the
COSO criteria.

BDO Limited

Hong Kong, March 8, 2011

-F- 2 -

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM

Board of Directors and Shareholders 
  China Information Security Technology, Inc.

We have audited the accompanying consolidated balance sheet of
China Information Security Technology, Inc. and subsidiaries as of December 31,
2009, and the related consolidated statements of income, comprehensive income,
changes in equity, and cash flows for each of the years in the two-year period
ended December 31, 2009. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
China Information Security Technology, Inc. and subsidiaries as of December 31,
2009, and the results of their operations and their cash flows for each of the
years in the two-year period ended December 31, 2009 in conformity with
accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial
statements, during 2009 the provisions of new accounting standards relating to
business combinations and non-controlling interests were adopted.

/s/ GHP HORWATH, P.C.Denver, Colorado 
  March 5, 2010

-F- 3 -

---

CHINA INFORMATION TECHNOLOGY, INC.CONSOLIDATED
BALANCE SHEETSDECEMBER 31, 2010 AND 2009Expressed in U.S. dollars (Except for share amounts)

|                                                                                                  |  | NOTES |  |   | 2010        |  |   | 2009        | 
|------------------------------------------------------------------------------------------------- |  | ----- |  | - | ----------- |  | - | ----------- | 
|ASSETS                                                                                            |  |       |  |   |             |  |   |             | 
|                                                                                                  |  |       |  |   |             |  |   |             | 
|CURRENT ASSETS                                                                                    |  |       |  |   |             |  |   |             | 
|Cash and cash equivalents                                                                         |  |       |  | $ | 18,166,857  |  | $ | 13,478,633  | 
|Restricted cash                                                                                   |  |       |  |   | 8,344,147   |  |   | 5,859,910   | 
|Accounts receivable:                                                                              |  |       |  |   |             |  |   |             | 
|Billed, net of allowance for doubtful
      accounts of $ 6,073,000 and $3,123,000 , respectively |  |       |  |   | 31,172,599  |  |   | 23,907,035  | 
|Unbilled                                                                                          |  |       |  |   | 67,622,656  |  |   | 47,851,638  | 
|Bills receivable                                                                                  |  |       |  |   | 201,003     |  |   | -           | 
|Advances to suppliers                                                                             |  |       |  |   | 9,246,437   |  |   | 6,924,035   | 
|Amounts due from related parties                                                                  |  | 6     |  |   | 330,876     |  |   | 129,937     | 
|Inventories, net of provision of $578,000 and $184,000
      ,respectively                        |  | 7     |  |   | 19,931,866  |  |   | 10,936,004  | 
|Other receivables and prepaid expenses                                                            |  |       |  |   | 2,463,562   |  |   | 15,405,089  | 
|Deferred tax assets                                                                               |  | 13    |  |   | 1,565,006   |  |   | 1,719,327   | 
|TOTAL CURRENT ASSETS                                                                              |  |       |  |   | 159,045,009 |  |   | 126,211,608 | 
|                                                                                                  |  |       |  |   |             |  |   |             | 
|Deposit for software purchase                                                                     |  |       |  |   | 3,034,000   |  |   | 1,426,452   | 
|Deposit for purchase of land use rights                                                           |  | 10(a) |  |   | 26,566,377  |  |   | -           | 
|Long-term investments                                                                             |  | 8     |  |   | 3,296,252   |  |   | 2,862,016   | 
|Property, plant and equipment, net                                                                |  | 9     |  |   | 79,348,883  |  |   | 53,586,514  | 
|Land use rights, net                                                                              |  | 10(b) |  |   | 1,929,194   |  |   | 1,907,611   | 
|Intangible assets, net                                                                            |  | 10(c) |  |   | 13,725,274  |  |   | 13,556,141  | 
|Goodwill                                                                                          |  | 5     |  |   | 51,918,275  |  |   | 50,609,866  | 
|Deferred tax assets                                                                               |  | 13    |  |   | 538,460     |  |   | 668,730     | 
|TOTAL ASSETS                                                                                      |  |       |  | $ | 339,401,724 |  | $ | 250,828,938 | 
|                                                                                                  |  |       |  |   |             |  |   |             | 
|LIABILITIES AND EQUITY                                                                            |  |       |  |   |             |  |   |             | 
|                                                                                                  |  |       |  |   |             |  |   |             | 
|CURRENT LIABILITIES                                                                               |  |       |  |   |             |  |   |             | 
|Short-term bank loans                                                                             |  | 11    |  | $ | 35,326,566  |  | $ | 15,927,780  | 
|Accounts payable                                                                                  |  |       |  |   | 17,249,334  |  |   | 20,159,317  | 
|Bills payable                                                                                     |  | 12    |  |   | 20,536,475  |  |   | 12,658,029  | 
|Advances from customers                                                                           |  |       |  |   | 7,480,686   |  |   | 3,950,744   | 
|Amounts due to related parties                                                                    |  | 6     |  |   | 1,293,866   |  |   | 583,736     | 
|Accrued payroll and benefits                                                                      |  |       |  |   | 4,304,988   |  |   | 3,142,240   | 
|Other payables and accrued expenses                                                               |  |       |  |   | 6,953,561   |  |   | 14,252,918  | 
|Contingent consideration, current portion                                                         |  | 5     |  |   | 3,267,087   |  |   | 1,857,994   | 
|Income tax payable                                                                                |  | 13    |  |   | 3,809,708   |  |   | 3,290,245   | 
|TOTAL CURRENT LIABILITIES                                                                         |  |       |  |   | 100,222,271 |  |   | 75,823,003  | 
|                                                                                                  |  |       |  |   |             |  |   |             | 
|Long-term bank loans                                                                              |  | 11    |  |   | 5,863,205   |  |   | 1,907,100   | 
|Amounts due to related parties, long-term portion                                                 |  | 6     |  |   | 5,014,949   |  |   | -           | 
|Contingent consideration, net of current
      portion                                            |  | 5     |  |   | 901,171     |  |   | 2,635,397   | 
|Deferred tax liabilities                                                                          |  | 13    |  |   | 1,824,434   |  |   | 2,564,604   | 
|TOTAL LIABILITIES                                                                                 |  |       |  |   | 113,826,030 |  |   | 82,930,104  | 

-F- 4 -

---



|COMMITMENTS AND CONTINGENCIES                                                                                                                       |  |    |  |   | -           |   |   | -           |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | -- |  | - | ----------- | - | - | ----------- | -
|                                                                                                                                                    |  |    |  |   |             |   |   |             |  
|EQUITY                                                                                                                                              |  |    |  |   |             |   |   |             |  
|Common stock, par $0.01; authorized capital 200,000,000
      shares; shares issued and outstanding 2010: 52,061,787, 2009: 49,905,141
      shares |  | 15 |  |   | 255,115     |   |   | 233,548     |  
|Treasury stock, 6,000 shares, at cost                                                                                                               |  | 15 |  |   | (11,468     | ) |   | (11,468     | )
|Additional paid-in capital                                                                                                                          |  |    |  |   | 92,294,350  |   |   | 78,495,062  |  
|Reserve                                                                                                                                             |  | 14 |  |   | 12,968,985  |   |   | 8,345,371   |  
|Retained earnings                                                                                                                                   |  |    |  |   | 90,240,665  |   |   | 60,462,275  |  
|Accumulated other comprehensive income                                                                                                              |  |    |  |   | 11,325,040  |   |   | 5,016,575   |  
|Total equity of the Company                                                                                                                         |  |    |  |   | 207,072,687 |   |   | 152,541,363 |  
|Non-controlling interest                                                                                                                            |  |    |  |   | 18,503,007  |   |   | 15,357,471  |  
|Total equity                                                                                                                                        |  |    |  |   | 225,575,694 |   |   | 167,898,834 |  
|                                                                                                                                                    |  |    |  |   |             |   |   |             |  
|TOTAL LIABILITIES AND EQUITY                                                                                                                        |  |    |  | $ | 339,401,724 |   | $ | 250,828,938 |  

The accompanying notes are an integral part of these
consolidated financial statements

-F- 5 -

---

CHINA INFORMATION TECHNOLOGY, INC.CONSOLIDATED
STATEMENTS OF INCOMEYEARS ENDED DECEMBER 31, 2010, 2009 AND 2008Expressed in U.S. dollars (Except for share amounts)

|                                                                                                                                   |  | NOTES |  |   | 2010        |   |   | 2009        |   |   | 2008       |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ----- |  | - | ----------- | - | - | ----------- | - | - | ---------- | -
|                                                                                                                                   |  |       |  |   |             |   |   |             |   |   |            |  
|Revenue - Products                                                                                                                 |  |       |  | $ | 53,328,214  |   | $ | 16,784,910  |   | $ | 26,822,325 |  
|Revenue - Software                                                                                                                 |  |       |  |   | 90,419,181  |   |   | 63,827,233  |   |   | 34,958,401 |  
|Revenue - System integration                                                                                                       |  |       |  |   | 16,278,860  |   |   | 19,017,962  |   |   | 19,328,312 |  
|Revenue - Others                                                                                                                   |  |       |  |   | 3,819,342   |   |   | 1,365,989   |   |   | 4,192,146  |  
|TOTAL REVENUE                                                                                                                      |  |       |  |   | 163,845,597 |   |   | 100,996,094 |   |   | 85,301,184 |  
|                                                                                                                                   |  |       |  |   |             |   |   |             |   |   |            |  
|Cost - Products sold                                                                                                               |  |       |  |   | 46,052,309  |   |   | 13,560,279  |   |   | 25,049,072 |  
|Cost - Software sold                                                                                                               |  |       |  |   | 38,574,738  |   |   | 22,229,542  |   |   | 5,628,436  |  
|Cost - System integration                                                                                                          |  |       |  |   | 8,259,899   |   |   | 14,251,391  |   |   | 12,196,185 |  
|Cost - Others                                                                                                                      |  |       |  |   | 395,496     |   |   | 303,215     |   |   | 3,348,627  |  
|TOTAL COST                                                                                                                         |  |       |  |   | 93,282,442  |   |   | 50,344,427  |   |   | 46,222,320 |  
|                                                                                                                                   |  |       |  |   |             |   |   |             |   |   |            |  
|GROSS PROFIT                                                                                                                       |  |       |  |   | 70,563,155  |   |   | 50,651,667  |   |   | 39,078,864 |  
|                                                                                                                                   |  |       |  |   |             |   |   |             |   |   |            |  
|Administrative expenses                                                                                                            |  |       |  |   | 18,623,523  |   |   | 12,653,175  |   |   | 10,158,863 |  
|Research and development expenses                                                                                                  |  |       |  |   | 3,016,693   |   |   | 2,705,669   |   |   | 2,596,430  |  
|Selling expenses                                                                                                                   |  |       |  |   | 6,359,487   |   |   | 3,136,380   |   |   | 2,440,689  |  
|INCOME FROM OPERATIONS                                                                                                             |  |       |  |   | 42,563,452  |   |   | 32,156,443  |   |   | 23,882,882 |  
|                                                                                                                                   |  |       |  |   |             |   |   |             |   |   |            |  
|Subsidy income                                                                                                                     |  |       |  |   | 948,630     |   |   | 833,429     |   |   | 738,482    |  
|Other income, net                                                                                                                  |  |       |  |   | 1,237,933   |   |   | 1,153,288   |   |   | 200,439    |  
|Interest income                                                                                                                    |  |       |  |   | 126,459     |   |   | 270,666     |   |   | 214,850    |  
|Interest expense                                                                                                                   |  |       |  |   | (1,539,407  | ) |   | (388,686    | ) |   | (179,130   | )
|                                                                                                                                   |  |       |  |   |             |   |   |             |   |   |            |  
|INCOME FROM CONTINUING OPERATIONS
      BEFORE INCOME TAXES                                                                        |  |       |  |   | 43,337,067  |   |   | 34,025,140  |   |   | 24,857,523 |  
|                                                                                                                                   |  |       |  |   |             |   |   |             |   |   |            |  
|Income tax expense                                                                                                                 |  | 13    |  |   | (7,863,437  | ) |   | (3,887,495  | ) |   | (1,547,509 | )
|                                                                                                                                   |  |       |  |   |             |   |   |             |   |   |            |  
|INCOME FROM CONTINUING OPERATIONS                                                                                                  |  |       |  |   | 35,473,630  |   |   | 30,137,645  |   |   | 23,310,014 |  
|                                                                                                                                   |  |       |  |   |             |   |   |             |   |   |            |  
|INCOME FROM DISCONTINUED OPERATIONS NET OF
      AMOUNT ATTRIBUTABLE TO NON-CONTROLLING INTEREST (NET OF INCOME TAXES OF
      $0) |  |       |  |   | -           |   |   | -           |   |   | 718,159    |  
|                                                                                                                                   |  |       |  |   |             |   |   |             |   |   |            |  
|NET INCOME                                                                                                                         |  |       |  |   | 35,473,630  |   |   | 30,137,645  |   |   | 24,028,173 |  
|                                                                                                                                   |  |       |  |   |             |   |   |             |   |   |            |  
|Less: Net income attributable to the
      non-controlling interest                                                                |  | 3     |  |   | (1,071,626  | ) |   | (43,076     | ) |   | (241,197   | )
|                                                                                                                                   |  |       |  |   |             |   |   |             |   |   |            |  
|                                                                                                                                   |  |       |  |   |             |   |   |             |   |   |            |  
|NET INCOME ATTRIBUTABLE TO THE COMPANY                                                                                             |  |       |  | $ | 34,402,004  |   | $ | 30,094,569  |   | $ | 23,786,976 |  
|                                                                                                                                   |  |       |  |   |             |   |   |             |   |   |            |  
|                                                                                                                                   |  |       |  |   |             |   |   |             |   |   |            |  
|WEIGHTED AVERAGE NUMBER OF SHARES
      OUTSTANDING                                                                                |  |       |  |   |             |   |   |             |   |   |            |  
|Basic                                                                                                                              |  | 4     |  |   | 51,814,433  |   |   | 48,676,391  |   |   | 46,398,600 |  
|Diluted                                                                                                                            |  | 4     |  |   | 52,145,011  |   |   | 48,676,391  |   |   | 46,852,827 |  

-F- 6 -

---



|EARNINGS PER SHARE                     |   |      |  |   |      |  |   |      | 
|-------------------------------------- | - | ---- |  | - | ---- |  | - | ---- | 
|Basic - From continuing operations     | $ | 0.66 |  | $ | 0.62 |  | $ | 0.50 | 
|Basic - From discontinued operations   |   | -    |  |   | -    |  |   | 0.01 | 
|                                       | $ | 0.66 |  | $ | 0.62 |  | $ | 0.51 | 
|                                       |   |      |  |   |      |  |   |      | 
|Diluted - From continuing operations   | $ | 0.66 |  | $ | 0.62 |  | $ | 0.49 | 
|Diluted - From discontinued operations |   | -    |  |   | -    |  |   | 0.02 | 
|                                       | $ | 0.66 |  | $ | 0.62 |  | $ | 0.51 | 

The accompanying notes are an integral part of these
consolidated financial statements

-F- 7 -

---

CHINA INFORMATION  TECHNOLOGY, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEYEARS
ENDED DECEMBER 31, 2010, 2009 AND 2008Expressed in U.S. dollars

|                                                                              |   | 2010       |   |   | 2009       |   |   | 2008       |  
|----------------------------------------------------------------------------- | - | ---------- | - | - | ---------- | - | - | ---------- | -
|                                                                              |   |            |   |   |            |   |   |            |  
|Net income                                                                    | $ | 35,473,630 |   | $ | 30,137,645 |   | $ | 24,028,173 |  
|                                                                              |   |            |   |   |            |   |   |            |  
|Foreign currency translation gain                                             |   | 6,668,353  |   |   | 375,380    |   |   | 4,580,443  |  
|                                                                              |   |            |   |   |            |   |   |            |  
|Comprehensive income                                                          |   | 42,141,983 |   |   | 30,513,025 |   |   | 28,608,616 |  
|                                                                              |   |            |   |   |            |   |   |            |  
|Less: comprehensive income attributable to
      the non-controlling interest |   | (1,431,514 | ) |   | (46,574    | ) |   | (1,644,747 | )
|                                                                              |   |            |   |   |            |   |   |            |  
|Comprehensive income attributable to the
      Company                        | $ | 40,710,469 |   | $ | 30,466,451 |   | $ | 26,963,869 |  

The accompanying notes are an integral part of these
consolidated financial statements

-F- 8 -

---

CHINA INFORMATION TECHNOLOGY, INC.CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITYYEARS ENDED DECEMBER 31, 2010, 2009
AND 2008Expressed in U.S. dollars (Except for share amounts)

AccumulatedCommon stock
      
      
      Treasury stock
      
      
      Additional
      
      
      
      
      
      
      
      
      other
      
      
      Non-Par value $0.01
      
      
      Par value $0.01
      
      
      Paid-in
      
      
      
      
      
      Retained
      
      
      comprehensive
      
      
      controllingShares
      
      
      Amount
      
      
      Shares
      
      
      Amount
      
      
      Capital
      
      
      Reserve
      
      
      earnings
      
      
      income
      
      
      interest
      
      
      TotalBALANCE AS AT January 1, 2008
      
      45,639,396
      
      $
      190,891
      
      
      -
      
      $
      -
      
      $
      57,421,150
      
      $
      1,755,552
      
      $
      13,170,549
      
      $
      1,467,800
      
      $
      10,060,657
      
      $
      84,066,599Common stock issued upon the cashless exercise
        of warrants (Note 15)
      
      298,008
      
      
      2,980
      
      
      -
      
      
      -
      
      
      (2,980
      )
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -Common stock issued and to be issued for
        business acquisitions (Note 15)
      
      1,125,000
      
      
      11,250
      
      
      -
      
      
      -
      
      
      5,108,428
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      5,119,678Stock-based compensation (Note 15)
      
      400,000
      
      
      4,000
      
      
      -
      
      
      -
      
      
      1,600,741
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      1,604,741Non-controlling interests arising from acquisition
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      3,605,493
      
      
      3,605,493Net income for the year
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      23,786,976
      
      
      -
      
      
      241,197
      
      
      24,028,173Foreign currency translation gain
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      3,176,893
      
      
      1,403,550
      
      
      4,580,443Transfer to reserve (Note 14)
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      3,209,045
      
      
      (3,209,045
      )
      
      -
      
      
      -
      
      
      -BALANCE AS AT DECEMBER 31,2008
      
      47,462,404
      
      
      209,121
      
      
      -
      
      
      -
      
      
      64,127,339
      
      
      4,964,597
      
      
      33,748,480
      
      
      4,644,693
      
      
      15,310,897
      
      
      123,005,127Purchase of treasury stock (Note 15)
      
      -
      
      
      -
      
      
      (6,000
      )
      
      (11,468
      )
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      (11,468
      )Common stock issued upon achieving earn-out
        target (Note 5)
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      5,745,728
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      5,745,728Common stock issued for business acquisitions (Note 5)
      
      2,382,737
      
      
      23,827
      
      
      -
      
      
      -
      
      
      8,438,995
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      8,462,822Stock-based compensation (Note 15)
      
      60,000
      
      
      600
      
      
      -
      
      
      -
      
      
      183,000
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      183,600Net income for the year
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      30,094,569
      
      
      -
      
      
      43,076
      
      
      30,137,645Foreign currency translation gain
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      371,882
      
      
      3,498
      
      
      375,380Transfer to reserve (Note 14)
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      3,380,774
      
      
      (3,380,774
      )
      
      -
      
      
      -
      
      
      -BALANCE AS AT DECEMBER 31,2009
      
      49,905,141
      
      
      233,548
      
      
      (6,000
      )
      
      (11,468
      )
      
      78,495,062
      
      
      8,345,371
      
      
      60,462,275
      
      
      5,016,575
      
      
      15,357,471
      
      
      167,898,834Issuance of common stock in private placements
      
      1,652,033
      
      
      16,520
      
      
      -
      
      
      -
      
      
      9,113,232
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      9,129,752Common stock issued upon the exercise of warrants (Note
        15)
      
      41,250
      
      
      413
      
      
      -
      
      
      -
      
      
      253,275
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      253,688Stock-based compensation (Note 15)
      
      463,363
      
      
      4,634
      
      
      -
      
      
      -
      
      
      2,394,876
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      2,399,510Common stock released upon achieving earn-out
        target (Note 5)
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      1,850,405
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      1,850,405Net income for the year
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      34,402,004
      
      
      -
      
      
      1,071,626
      
      
      35,473,630Foreign currency translation gain
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      6,308,465
      
      
      359,888
      
      
      6,668,353Capital injection to Geo
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      1,714,022
      
      
      1,714,023Imputed interests in relation to shareholders loan
        (Note 6)
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      187,500
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      187,500Transfer to reserve
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      4,623,614
      
      
      (4,623,614
      )
      
      -
      
      
      -
      
      
      -BALANCE AS AT DECEMBER 31,2010
      
      52,061,787
      
      $
      255,115
      
      
      (6,000
      )
      $
      (11,468
      )
      $
      92,294,350
      
      $
      12,968,985
      
      $
      90,240,665
      
      $
      11,325,040
      
      $
      18,503,007
      
      $
      225,575,694


The accompanying notes are an integral part of these
consolidated financial statements

-F- 9 -

---

CHINA INFORMATION TECHNOLOGY, INC.CONSOLIDATED
STATEMENTS OF CASH FLOWSYEARS ENDED DECEMBER 31, 2010, 2009 AND 2008Expressed in U.S. dollars

|                                                                                           |   | 2010        |   |   | 2009        |   |   | 2008        |  
|------------------------------------------------------------------------------------------ | - | ----------- | - | - | ----------- | - | - | ----------- | -
|OPERATING ACTIVITIES                                                                       |   |             |   |   |             |   |   |             |  
|Net income                                                                                 | $ | 35,473,630  |   | $ | 30,137,645  |   | $ | 24,028,173  |  
|Adjustments to reconcile net
      income to net cash provided by operating activities:    |   |             |   |  
|Operating cash flows from discontinued operations                                          |   | -           |   |   | -           |   |   | (718,153    | )
|Provision for losses on accounts receivable                                                |   | 3,652,136   |   |   | 2,765,837   |   |   | 472,750     |  
|Depreciation                                                                               |   | 7,715,013   |   |   | 4,069,363   |   |   | 2,991,266   |  
|Amortization of intangible assets and land
      use rights                                |   | 1,794,555   |   |   | 1,786,201   |   |   | 1,354,567   |  
|Stock-based compensation                                                                   |   | 3,130,000   |   |   | 1,453,110   |   |   | 1,604,741   |  
|Loss on disposal of property and equipment,
      net                                      |   | 339,601     |   |   | 62,803      |   |   | 2,533       |  
|Loss on write-off of land use rights                                                       |   | 232,938     |   |   | -           |   |   | -           |  
|Provision for obsolete inventories                                                         |   | 378,619     |   |   | 183,714     |   |   | -           |  
|Change in fair value of contingent consideration                                           |   | (325,132    | ) |   | (1,108,759  | ) |   | -           |  
|Change in deferred income tax                                                              |   | 110,200     |   |   | (1,268,670  | ) |   | -           |  
|Impairment of long-term investment                                                         |   | 855,176     |   |   | 233,211     |   |   | -           |  
|Imputed interests in relation to shareholder's
      loan                                  |   | 187,500     |   |   | -           |   |   | -           |  
|Changes in operating assets and liabilities,
      net of effects of business acquisitions |   |             |   |  
|Increase in restricted cash                                                                |   | (743,913    | ) |   | (5,856,949  | ) |   | -           |  
|Increase in accounts receivable                                                            |   | (27,889,936 | ) |   | (24,850,334 | ) |   | (30,169,244 | )
|(Increase) decrease in advances to suppliers                                               |   | (2,044,930  | ) |   | 3,001,469   |   |   | -           |  
|Decrease (increase) in other receivables and prepaid expenses                              |   | 11,758,974  |   |   | (13,366,450 | ) |   | (553,400    | )
|Increase in inventories                                                                    |   | (8,943,882  | ) |   | (1,219,083  | ) |   | (472,829    | )
|Increase in accounts payable                                                               |   | 3,761,608   |   |   | 11,068,019  |   |   | 4,633,198   |  
|Increase (decrease) in advances from customers                                             |   | 3,324,359   |   |   | 1,416,715   |   |   | (801,288    | )
|Increase in amounts due to related parties                                                 |   | 457,735     |   |   | 132,774     |   |   | 372,391     |  
|(Decrease) increase in other payables and accrued                                          |   | (6,673,381  | ) |   | 1,149,194   |   |   | 896,447     |  
|expenses and other liabilities                                                             |   |             |   |   |             |   |   |             |  
|Increase in income tax payable                                                             |   | 398,667     |   |   | 1,687,973   |   |   | 906,825     |  
|Net cash provided by operating activities                                                  |   | 26,949,537  |   |   | 11,477,783  |   |   | 4,547,977   |  
|                                                                                           |   |             |   |   |             |   |   |             |  
|INVESTING ACTIVITIES                                                                       |   |             |   |   |             |   |   |             |  
|Increase in restricted cash in relation to bank borrowings                                 |   | (1,483,976  | ) |   | -           |   |   | -           |  
|Cash acquired in Bocom acquisition                                                         |   | -           |   |   | -           |   |   | 713,876     |  
|Cash acquired in Geo acquisition                                                           |   | -           |   |   | -           |   |   | 2,443,677   |  
|Cash acquired in Zhongtian acquisition                                                     |   | -           |   |   | -           |   |   | 233,243     |  
|Cash acquired in HPC acquisition                                                           |   | -           |   |   | 2,508,394   |   |   | -           |  
|Consideration paid for acquisition of Geo                                                  |   | -           |   |   | -           |   |   | (7,049,073  | )
|Consideration paid for acquisition of Zhongtian                                            |   | -           |   |   | -           |   |   | (9,852,455  | )
|Consideration paid for acquisition of HPC                                                  |   | -           |   |   | (8,000,000  | ) |   | -           |  
|Purchase of land use rights                                                                |   | (232,938    | ) |   | -           |   |   | -           |  
|Proceeds from sale of short-term investments                                               |   | -           |   |   | 5,864,400   |   |   | -           |  

-F- 10 -

---



|Purchase of short-term investments                                            |   | -           |   |   | -           |   |   | (5,655,605  | )
|----------------------------------------------------------------------------- | - | ----------- | - | - | ----------- | - | - | ----------- | -
|Proceeds from sale of marketable securities                                   |   | -           |   |   | -           |   |   | 14,966,752  |  
|Refund of investment in former Joint Venture                                  |   | -           |   |   | 4,398,300   |   |   | -           |  
|Investing cash flows from discontinued operations                             |   | -           |   |   | -           |   |   | (8,576,575  | )
|Proceeds from sale of property and equipment                                  |   | 142,049     |   |   | 78,238      |   |   | 1,146,671   |  
|Deposit for purchase of land use rights                                       |   | (25,310,974 | ) |   | -           |   |   | -           |  
|Investment in Tianditu                                                        |   | (1,183,520  | ) |   | -           |   |   | -           |  
|Purchases of property and equipment                                           |   | (29,860,881 | ) |   | (16,872,380 | ) |   | (8,928,057  | )
|Capitalized and purchased software development
      costs                    |   | (1,466,554  | ) |   | (1,215,649  | ) |   | (487,541    | )
|Deposit for software purchase                                                 |   | (2,958,800  | ) |   | (1,425,577  | ) |   | -           |  
|Net cash used in investing activities                                         |   | (62,355,594 | ) |   | (14,664,274 | ) |   | (21,045,087 | )
|                                                                              |   |             |   |   |             |   |   |             |  
|FINANCING ACTIVITIES                                                          |   |             |   |   |             |   |   |             |  
|Borrowings under short-term loans                                             |   | 52,361,076  |   |   | 19,952,949  |   |   | 6,314,410   |  
|Borrowings from shareholders loan                                            |   | 6,035,580   |   |   | -           |   |   | -           |  
|Borrowings under long-term loans                                              |   | 8,491,756   |   |   | -           |   |   | -           |  
|Repayment of short-term loans                                                 |   | (35,938,146 | ) |   | (12,475,839 | ) |   | -           |  
|Repayment of shareholders loan                                               |   | (1,035,580  | ) |   | -           |   |   | -           |  
|Repayment of long-term loans                                                  |   | (2,477,995  | ) |   | (351,984    | ) |   | (1,086,312  | )
|Repurchase of common stock                                                    |   | -           |   |   | (11,468     | ) |   | -           |  
|Capital injection to Geo by minority shareholders                             |   | 1,744,213   |   |   | -           |   |   | -           |  
|Issued common stock                                                           |   | 9,383,440   |   |   | -           |   |   | -           |  
|Net cash provided by financing activities                                     |   | 38,564,344  |   |   | 7,113,658   |   |   | 5,228,098   |  
|                                                                              |   |             |   |   |             |   |   |             |  
|Effect of exchange rate changes on cash and
      cash equivalents            |   | 1,529,937   |   |   | (13,786     | ) |   | 1,079,082   |  
|                                                                              |   |             |   |   |             |   |   |             |  
|NET INCREASE (DECREASE) IN CASH AND CASH
      EQUIVALENTS                    |   | 4,688,224   |   |   | 3,913,381   |   |   | (10,189,930 | )
|CASH AND CASH EQUIVALENTS, BEGINNING                                          |   | 13,478,633  |   |   | 9,565,252   |   |   | 19,755,182  |  
|CASH AND CASH EQUIVALENTS, ENDING                                             | $ | 18,166,857  |   | $ | 13,478,633  |   | $ | 9,565,252   |  
|                                                                              |   |             |   |   |             |   |   |             |  
|Supplemental disclosure of cash flow information:                             |   |             |   |   |             |   |   |             |  
|Cash paid during the year                                                     |   |             |   |   |             |   |   |             |  
|Income
      taxes                                                            | $ | 7,360,151   |   | $ | 3,464,474   |   | $ | 650,648     |  
|Interest
      paid                                                           | $ | 1,331,258   |   | $ | 379,101     |   | $ | 158,650     |  
|                                                                              |   |             |   |   |             |   |   |             |  
|Supplemental disclosure of non-cash investing
      and financing activities: |   |             |   |   |             |   |  
|Property
      and equipment transfers from inventory                         | $ | 210,727     |   | $ | -           |   | $ | 78,784      |  

The accompanying notes are an integral part of these
consolidated financial statements

-F- 11 -

---

On February 1, 2008, 1,125,000 shares of common stock were issued
and a further 1,280,807 were reserved for issuance for the equity portion of the
purchase price of approximately $5,120,000 of Bocom and Zhongtian.

On November 11, 2009, 1,101,930 shares of common stock were issued
for the equity portion of the purchase price of approximately $8,462,800 of Huipu.

In 2009, upon achievement of earn out targets by ISS, Bocom and
Zhongtian, approximately 905,164 previously issued shares became no longer
returnable and resulted in additional equity purchase consideration and goodwill
of approximately $5,575,810.

In 2010, upon achievement of earn out target by Zhongtian,
355,164 previously issued shares became no longer returnable and resulted in
additional equity purchase consideration and goodwill of $1,850,405. Huipu
achieved earn out target in 2010 and 330,578 shares will be issued for equity
portion of purchase price of Huipu.

-F- 12 -

---

CHINA INFORMATION TECHNOLOGY, INC.NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2010, 2009 and 2008

1. ORGANIZATION AND PRINCIPAL ACTIVITIES

China Information Technology, Inc. (the "Company" or CNIT),
and its subsidiaries, is a provider of integrated solutions for Geographic
Information Systems (GIS), digital public security technology (DPST), and
digital hospital information systems (DHIS), as well as display technologies.
These services are provided through the Companys wholly-owned PRC subsidiaries,
Information Security Technology (PRC) Co., Ltd ("IST"), Information Security
Software (China) Co., Ltd (formerly, Information Security Development Technology
Co., Ltd), or "ISS," Shenzhen Bocom Multimedia Display Technology Co., Ltd
("Bocom"), Shenzhen Zhongtian Development Company Ltd (Zhongtian) and Huipu
Electronics (Shenzhen) Co., Ltd (Huipu), and through the Companys variable
interest entity ("VIE"), iASPEC Software Company Limited ("iASPEC"), and its
subsidiary, Wuda Geoinformatics Co., Ltd ("Geo").

On April 2, 2007, China Public Security Technology, Inc.
("CPST") entered into an Agreement and Plan of Merger (the "Merger Agreement")
with CNIT, a Nevada corporation and wholly-owned subsidiary of CPST. Pursuant to
the Merger Agreement, CPST agreed to merge with and into CNIT, with CNIT being
the surviving entity (the "Reincorporation Merger"). The Reincorporation Merger
became effective on April 7, 2008. The Reincorporation Merger was effected by an
exchange of shares of CPST into shares of CNIT on a one-for-one basis. As a
result of the Reincorporation Merger, CPST became domiciled in Nevada and its name
was changed to China Information Technology, Inc. All assets, liabilities,
contracts and obligations of CPST became the assets, liabilities, contracts and
obligations of CNIT. References to the Company are to CNIT as successor to CPST
and its subsidiaries.

Business Turnkey Agreement

On October 9, 2006, IST, entered into a Business Turnkey
Agreement, as amended (the Turnkey Agreement) with iASPEC Software Company
Limited, (formerly Shenzhen iASPEC Software Engineering Company Limited)
(iASPEC), a PRC company controlled by Mr. Lin, the Companys Chairman and
Chief Executive Officer (Mr Lin). iASPEC is a software development company
that provides public security information technology, Police-Use Geographic
Information Systems (PGIS) and Civil-Use Geographic Information Systems
(CGIS) operating services to government and private customers in the PRC.
Under the Turnkey Agreement, IST was to pay an annual fee of $180,000 to iASPEC
and was to perform all services necessary for iASPEC to fulfill its customer
contracts in exchange for 100% or 90% of the revenues from such contracts,
depending on the contract. In addition, under the Turnkey Agreement, iASPEC
granted IST an exclusive, royalty-free, transferable, worldwide perpetual
license to use and install iASPECs proprietary software. No other tangible
assets or liabilities were transferred to IST under the Turnkey Agreement.

Effective July 1, 2007, IST, iASPEC and iASPECs then
shareholders, Mr. Lin and Mr. Jin Zhu Cai, terminated the Turnkey Agreement, and
replaced it with a Management Service Agreement (MSA).

Management Service Agreement

Pursuant to the terms of the MSA, iASPEC granted IST a
ten-year, exclusive, royalty-free, transferable worldwide license to use and
install certain iASPEC software, along with copies of source and object codes
relating to such software. In addition, IST licensed back to iASPEC a
royalty-free, limited, non-exclusive license to the software, without right of
sub-license, for the sole purpose of permitting iASPEC to carry out its business
as presently conducted. IST has the right to designate two Chinese citizens to
serve as senior managers of iASPEC, to serve as a majority on iASPECs Board of
Directors, and to assist in managing the business and operations of iASPEC. In
addition, both iASPEC and IST will require the affirmative vote of a majority of
the Companys Board of Directors, including at least one non-insider director,
for certain material actions, as defined, with respect to iASPEC.

Under the MSA, IST receives 100% of the net received profit of
iASPEC, and reimburses iASPEC for all net losses incurred by iASPEC, as such
terms are defined in the MSA, and iASPEC is permitted to retain $180,000 per
year out of the net received profits. The MSA also provides that IST may advance
to iASPEC, at its sole discretion, amounts to be credited against ISTs future
obligations to iASPEC. Any such advances are treated as prepayments and not as
loans and iASPEC has no obligation to repay any such advances except by
crediting the amount of such advances against ISTs obligation to reimburse net
losses, or by adding the amount thereof to net received profit when and as
requested by IST. The parties to the MSA also agreed to the calculation of a
true-up amount, consisting of the cumulative net profit or net losses of
iASPEC from October 9, 2006 to June 30, 2007, when iASPEC commenced
its contractual relationship with IST, through the date of the MSA.

-F- 13 -

---

In connection with the MSA, IST also entered into an
immediately exercisable purchase option agreement (Option Agreement) with
iASPEC and its shareholders, pursuant to which the iASPEC shareholders granted
the Company or its designee(s) an exclusive, irrevocable option to purchase,
from time to time, all or a part of iASPECs shares or iASPECs assets from the
iASPEC shareholders for $1,800,000 in the aggregate. The option may not be
exercised if the exercise would violate any applicable laws and regulations in
the PRC or cause any license or permit held by, and necessary for the operation
of iASPEC, to be cancelled or invalidated.

The substance of the MSA and the Option Agreement is to:

| | • | Allow the Company to utilize the business licenses,
      contacts, permits and other resources of iASPEC in order for the Company
      to be able to expand its operations and business model;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                 
| | • | Provide the Company with effective control over all of
      iASPEC's operations;                                                                                                               
| |   |                                                                                                                                                                                                 
| | • | Allow the shareholders of iASPEC an opportunity to
      monetize a portion of their investment through the $1.8 million purchase
      option.                                                 

As a result of the MSA and the Option Agreement, on July 1,
2007 iASPEC became a Variable Interest Entity (VIE) of the Company. Accordingly,
this transaction has been accounted for on a basis similar to reorganization
between entities under common control, and iASPECs results are consolidated in
the Companys financial statements. To comply with PRC laws and regulations that
restrict foreign ownership of companies that provide public security information
technology and Geographic Information Systems software operating services to
certain government and other customers, the Company operates the restricted
aspect of its business through iASPEC.

Amended and Restated MSA

On December 13, 2009, IST, iASPEC and Mr. Lin, as the sole
iASPEC shareholder, amended and restated the MSA (the "Amended and Restated
MSA"), pursuant to which IST will continue to provide management and consulting
services to iASPEC, subject to the following changes:

| | • | iASPEC agreed that IST will be entitled to receive ninety
      five percent (95%) of the Net Received Profit, as defined, of iASPEC
      during the term of the Agreement. iASPEC is obligated to calculate and pay
      the Net Received Profit due to IST no later than the last day of the first
      month following the end of each fiscal quarter;                                                                                                                                              
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | • | Mr. Lin agreed to enter into a pledge agreement with IST
      to pledge all of his equity interests in iASPEC as security for his and
      iASPEC's fulfillment of their respective obligations under the MSA, and to
      register the pledge agreement with the local AIC (Administration for
      Industry and Commerce);                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | • | Mr. Lin confirmed his status as the sole iASPEC
      shareholder and his assumption of all of the obligations of the iASPEC
      shareholder under the agreement, including a confirmation of his
      continuing obligation under the written guaranty, dated August 1, 2007,
      executed by the then iASPEC shareholders in connection with the MSA;                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | • | Based on iASPECs needs for its development and
      operation, IST has the right, from time to time, at its sole discretion,
      to provide iASPEC with capital support                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | • | IST agreed that it will not interfere in any business of
      iASPEC covered by iASPECs PRC State Secret related Computer Information
      System Integration Certificate, including but not limited to, seeking
      access to relevant documents regarding such business; provided, however,
      that iASPEC agreed that it will cooperate with the requests of the Company
      as necessary to comply with the Companys reporting obligations to the
      Securities and Exchange Commission.

The Company has performed a reassessment of its VIE
relationship with iASPEC as a result of the Amended and Restated MSA and
concluded that iASPEC continues to be the Companys VIE.

In May 2008, IST entered into a contractual joint venture
agreement with Huipu to set up a joint venture project in manufacturing and
sales of LCD screens. According to the contract, the Company provided funds to
the project for equipment acquisition, repayable by Huipu if certain revenue
and income targets were not met. This contractual arrangement resulted in a
variable interest, as the Company was the primary beneficiary of the project.

-F- 14 -

---

In May 2008, IST also entered into a contractual joint venture
agreement with Lianchengwen Technology (Shenzhen) Co., Ltd. ("LTS"), to set up a
joint venture project in leasing LED screens. According to the contract, the
Company provided funds to the project for equipment acquisition, repayable by
LTS if certain revenue and income targets were not met. This contractual
arrangement also resulted in the creation of a variable interest, as the Company
was the primary beneficiary of the project.

Effective December 31, 2008, the contractual joint venture
agreements were terminated and the cash flows of these two JVs has been
eliminated from ISTs ongoing operations and IST has no continuing involvement
in the VIEs. Accordingly, the assets and liabilities and revenues and expenses
of the joint ventures are no longer included in the Companys consolidated
financial statements and $718,000, representing ISTs agreed-upon share of the
VIEs net income from inception through termination, has been recorded as income
from discontinued operations. The Company received a refund of its $4.1 million
investment in LTS in the second quarter of 2009. During the third quarter of
2009, the Company and Huipu agreed to offset the receivable for the refund of
ISTs investment in the joint venture of approximately $4.4 million, with
advances made by Huipu to iASPEC. In October 2009, the Company acquired Huipu in
a purchase transaction (Note 5).

On September 3, 2010, Wuda Geoinformatics Co., Ltd (Geo), a
majority-owned subsidiary of iASPEC Software Co, Ltd (iASPEC), the variable
interest entity of China Information Technology, Inc. (the Company), increased
its registered capital from RMB 60,000,000 (approximately $8,849,680) to RMB
79,200,000 (approximately $11,681,588). The RMB 19,200,000 (approximately
$2,831,900) increase was contributed by iASPEC, the minority shareholders of Geo
and a group of new shareholders, comprising of the management teams of both GEO
and iASPEC, including Mr. Jianghuai Lin, the Companys chief executive officer
and the sole shareholder of iASPEC.

The board of directors of iASPEC and the Company approved
iASPECs less than pro rata contribution of RMB 7,410,000 (approximately
$1,092,936), and approved the participation of the management teams of Geo and
iASPEC in the capital increase as an incentive and to align their interests with
the interests of Geo and iASPEC. As a result of the capital increase, the equity
interest owned by iASPEC in Geo was reduced from 57% to 52.54%, and the
management teams of Geo and iASPEC now hold 11.02% of the equity interest in
Geo.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Consolidation

The consolidated financial statements of the Company have been
prepared in accordance with U.S. generally accepted accounting principles. The
consolidated financial statements include the accounts of the Company, its
subsidiaries and its VIE for which the Company is the primary beneficiary. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

(b) Use of Estimates

The preparation of financial statements in conformity with U.S.
generally accepted accounting principles 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 revenue and expenses during the
reporting period. Management makes these estimates using the best information
available at the time the estimates are made; however actual results could
differ from those estimates.

(c) Economic and Political Risks

The majority of the Companys operations are conducted in the
PRC. Accordingly, the Companys business, financial condition and results of
operations may be influenced by the political, economic and legal environment in
the PRC, and by the general state of the PRC economy. The Company's operations
in the PRC are subject to special considerations and significant risks not
typically associated with companies in North America and Western Europe. These
include risks associated with, among others, the political, economic and legal
environment and foreign currency exchange. The Company's results may be
adversely affected by changes in the political and social conditions in the PRC,
and by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion, remittances abroad, and rates
and methods of taxation.

-F- 15 -

---

(d) Cash and Cash Equivalents

The Company considers all highly liquid investments purchased
and cash deposits with financial institutions with original maturities of three
months or less to be cash equivalents.

The Company maintains its cash accounts at credit worthy
financial institutions and closely monitors the movements of its cash positions.
At December 31, 2010 and 2009, approximately $18.17 million and $13.48 million,
respectively was held in bank accounts in the PRC.

(e) Restricted Cash

Restricted cash as of December 31, 2010 consists of security
deposits in bank accounts in the PRC that serve as collateral for the Company's
revolving working capital facility.

(f) Accounts Receivable, Bills Receivable and Concentration of
Risk

During the normal course of business, the Company extends
unsecured credit to its customers. The Company regularly evaluates and monitors
the creditworthiness of each customer on a case-by-case basis. The Company
includes any account balances that are determined to be uncollectible in an
allowance for doubtful accounts. After all attempts to collect a receivable have
failed, the receivable is written off against the allowance.

Bills receivable represent bank undertakings that essentially
guarantee payment of amounts thereunder. The undertakings are provided by banks
upon receipt of collateral deposits from the Companys customers or debtors.
Bills receivable can be sold at a discount before maturity, which is typically
within three months.

Accounts receivable include $67.62 million and $47.85 million
of unbilled accounts receivable at December 31, 2010 and 2009, respectively.
Unbilled accounts receivable consist of estimated future billings for work
performed but not yet invoiced to the customer. Unbilled accounts receivable are
generally invoiced upon the completion of work orders, which is estimated to be
within one year.

The Companys top five customers accounted for 16% of accounts
receivable as of December 31, 2010, of which no single customer accounted for
greater than 10% or more of accounts receivable. The Companys top five
customers accounted for 31% of accounts receivable as of December 31, 2009, of
which no single customer accounted for greater than 10% or more of accounts
receivable.

For the year ended December 31, 2010, no single customer
accounted for 10% or more of total revenue. For the year ended December 31,
2009, no single customer accounted for 10% or more of total revenue. For the
year ended December 31, 2008, one customers accounted for 13% of the revenue and
no other customer contributed greater than 10% of revenue. The allowance for
doubtful accounts at December 31, 2010 and 2009, totaled $6,073,000 and
$3,123,000 respectively, representing managements best estimate.

(g) Advances to Suppliers

Advances to suppliers represents cash deposits for the purchase
of inventory items from suppliers.

(h) Advances from Customers

Advances from customers represents cash received from customers
as advance payments for the purchase of the Companys products.

(i) Fair Value of Financial Instruments and Fair Value
Accounting

Financial Instruments

Management has estimated that the carrying amounts of
non-related party financial instruments approximate their fair values due to
their short-term maturities. The fair value of the amount due from (to) related
parties is not practicable to estimate due to the related party nature of the
underlying transactions.

-F- 16 -

---

Fair Value Accounting

Financial Accounting Standards Board Accounting Standards
Codification (ASC) No. 820.10 (FASB ASC 820.10) 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). As required
by FASB ASC 820.10, assets are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement. The three
levels of the fair value hierarchy under FASB ASC 820.10 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;  
|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).

During the year ended December 31, 2009, the Company completed
a business acquisition in which non-financial assets and liabilities were
initially measured at fair value using level 3 inputs.

(g) Inventories

Inventories are valued at the lower of cost or market. Market
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.

The Company performs an analysis of slow-moving or obsolete
inventory periodically and any necessary valuation reserves, which could
potentially be significant, are included in the period in which the evaluations
are completed.

For the years ended December 31, 2010 and 2009, approximately
40%, 33%, respectively of total inventory purchases were from five unrelated
suppliers. One supplier accounted for 10.6% of total inventory purchase in 2010
and no other suppliers accounted for greater than 10% of total inventory
purchases. Two suppliers accounted for 11.5% and 10.3% of total inventory
purchase in 2009 and no other suppliers accounted for greater than 10% of total
inventory purchases.

(k) Long-term Investments

Long-term investments are carried at cost. If a decline in the
fair value of a cost method investment is determined to be other than temporary,
an impairment charge is recorded and the fair value becomes the new cost basis
of the investment. Management evaluates all cost method investments for
impairment; however, the fair value of the cost method investments is not
required to be determined unless impairment indicators are present. When
impairment indicators exist, discounted cash flow analyses are generally used to
estimate the fair value.

(l) Property, plant and equipment

Property, plant and equipment are stated at cost less
accumulated amortization and depreciation. Amortization and depreciation is
provided over the assets' estimated useful lives, using the straight-line
method. Estimated useful lives of property, plant and equipment are as follows:

|Office buildings                                    | 20-50 years
|--------------------------------------------------- | -----------
|Plant and machinery                                 | 3-20 years 
|Electronics equipment, furniture and
      fixtures | 3-5 years  
|Motor vehicles                                      | 5 years    
|Purchased software                                  | 3-10 years 

Maintenance and repairs costs are expensed as incurred, whereas
significant renewals and betterments are capitalized.

(m) Land use rights

All land in the PRC is owned by the PRC government. The
government in the PRC, according to the PRC law, may sell the right to use the
land for a specified period of time. Thus, all of the Companys land purchases
in the PRC are considered to be leasehold land under operating lease arrangement
and are stated at cost less accumulated amortization and any recognized
impairment loss. The cost of the land use right is amortized on a straight-line
basis over the beneficial period, 46 years.

-F- 17 -

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(n) Intangible assets

Intangible assets represent technology-based intangible assets
acquired in connection with business acquisitions and software development costs
capitalized by the Companys subsidiaries.

Intangible assets are being amortized using the straight-line
method over the following estimated useful lives:

|Software development costs | 2-5 years  
|-------------------------- | -----------
|Technology                 | 10-20 years
|Trademarks                 | 20 years   
|Customer Base              | 2 years    

(o) 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.

(p) Long-Lived Assets

Long-lived assets held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. It is reasonably possible that
these assets could become impaired as a result of technology or other industry
changes. Determination of recoverability of assets to be held and used is
determined by comparing the carrying amount of an asset to future net
undiscounted cash flows to be generated by the assets. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets held for disposal, if any, are reported at the lower of the
carrying amount or fair value less costs to sell.

(q) Revenue Recognition

The Company generates its revenues primarily from three
sources, (1) hardware sales, (2) software sales and (3) system integration
services. The Company's revenue recognition policies are in accordance with SEC
Staff Accounting Bulletin No. 104,"Revenue Recognition" and Financial
Accounting Standards Board Accounting Standards Codification (FASB ASC)
No.605.35 ("FASB ASC 605.35") .

Revenues from hardware products are recognized only when
persuasive evidence of an arrangement exists, delivery has occurred and upon
receipt of customers' acceptance, the price to the customer is fixed or
determinable in accordance with the contract, and collectability is reasonably
assured.

Software revenues are generated from fixed-price contracts
which include the development of software products, and services to customize
such software to meet customers' needs. Generally, when the services are
determined to be essential to the functionality of the delivered software,
revenue is recognized using the percentage of completion method of accounting in
accordance with FASB ASC 605.35. The percentage of completion for each contract
is estimated based on the ratio of direct labor hours incurred to total
estimated direct labor hours. The Company provides post contract support (PCS),
which includes telephone technical support, that is not essential to the
functionality of the software. Although vendor-specific objective evidence does
not exist for PCS, because (1) the PCS fees are included in the total contract
amount, (2) the PCS service period is for less than one year, (3) the estimated
cost of providing PCS is not significant, and (4) unspecified upgrades/
enhancements offered are minimal and infrequent; the Company recognizes PCS
revenue together with the initial fee after delivery and customer acceptance of
the software products.

-F- 18 -

---

System integration revenues are generated from fixed-price
contracts which provide for software development and hardware integration, which
involves more than minor modifications to the functionality of the software and
hardware products. Accordingly, system integration revenues are accounted for in
accordance with FASB ASC 605.35, using the percentage of completion method of
accounting. The percentage of completion for each contract is estimated based on
the ratio of costs incurred to total estimated costs. Contract periods are
usually less than six months, and typical contract periods for PCS are 12
months.

System integration projects are billed in accordance with
contract terms, which typically require partial payment at the signing of the
contract, at delivery and customer acceptance dates, with the remainder due
within a stated period of time not exceeding 12 months. Occasionally, the
Company enters into contracts which allow a percentage of the total contract
price to be paid one to three years after completion of the system integration
project. Revenues on these extended payments are recognized upon completion of
the terms specified in the contract and when collectability is reasonably
assured.

No rights of return are allowed except for non-conforming
products, which have been insignificant based on historical experiences. If
non-conforming products are returned due to software issues, the Company will
provide upgrades or additional customization to suit customers' needs. In cases
where non-conformity is a result of integrated hardware, the Company returns the
hardware to the original vendor for replacement.

Unbilled accounts receivable consist of estimated future
billings for work performed but not yet invoiced to the customer. Unbilled
accounts receivable are generally invoiced within one year of completion of the
work performed. Changes in estimates for revenues, costs and profits are
recognized in the period in which they are determinable. When the Company's
estimates indicate that the entire contract will be performed at a loss, a
provision for the entire loss is recorded in the current accounting period.

(r) Treasury Stock

The Company repurchases its common stock from time to time in
the open market and holds such shares as treasury stock. The Company applies the
"cost method" and presents the cost to repurchase such shares as a reduction in
shareholders' equity. During the years ended December 31, 2010 and 2009, the
Company has repurchased 0 and 6,000 shares of common stock.

(s) Retirement Plan

Retirement benefits in the form of contributions under a
defined contribution retirement plan to the relevant authorities are charged to
earnings as incurred. Retirement benefit expenses for the years ended December
31, 2010, 2009 and 2008 were $820,939, $537,915 and $428,800, respectively.

(t) Stock-based compensation

The Company adopts ASC No. 718, Compensation  Stock
Compensation (formerly the SFAS No. 123 (revised 2004) Share-based Payment),
which requires that share-based payment transactions with employees, such as
share options, be measured based on the grant-date fair value of the equity
instrument issued and recognized as compensation expense over the requisite
service period, with a corresponding addition to equity. Under this method,
compensation cost related to employee share options or similar equity
instruments is measured at the grant date based on the fair value of the award
and is recognized over the period during which an employee is required to
provide service in exchange for the award, which generally is the vesting
period.

During the years ended December 31, 2010, 2009 and 2008, the
Company recognized approximately $3,130,000, $1,453,110, $1,604,741,
respectively of compensation expenses under the Plan. As of December 31, 2010
there was no unrecognized compensation expense.

(u) Foreign Currency Translation

The functional currency of the US and British Virgin Islands
(BVI) Companies is the United States dollars. The functional currency of the
Companys Hong Kong subsidiaries is the Hong Kong dollars.

The functional currency of the Companys wholly-owned PRC
subsidiaries and its VIE is the Chinese Renminbi Yuan, (RMB). RMB is not
freely convertible into foreign currencies. The Companys PRC subsidiaries and
their VIEs financial statements are maintained in the functional currency.
Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the
functional currency at rates of exchange prevailing at the balance sheet date.
Transactions denominated in currencies other than the functional currency are
translated into the functional currency at the exchange rates prevailing at the
dates of the transactions. Exchange gains or losses arising from foreign
currency transactions are included in the determination of net income for the
respective periods.

-F- 19 -

---

For financial reporting purposes the financial statements of
the Company, have been translated into United States dollars. Assets and
liabilities are translated at exchange rates at the balance sheet dates and
revenue and expenses are translated at average exchange rates, and equity is
translated at historical exchange rates. Any resulting translation adjustments
are not included in determining net income but are included in foreign exchange
adjustment to other comprehensive income, a component of equity.

The exchange rates adopted are as follows:

| |                              | December 31, | December 31,
| | ---------------------------- | ------------ | ------------
| |                              | 2010         | 2009        
| | Year end exchange rate       | 6.5920       | 6.81663     
| | Average yearly exchange rate | 6.7595       | 6.82082     

No representation is made that the RMB amounts could have been,
or could be, converted into United States dollars at the rates used in
translation.

(v) Accounting for Computer Software to be Sold, Leased or
Otherwise Marketed

The Company accounts for software development costs in
accordance with FASB ACS 985-20-Cost 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
expenses. Costs that are incurred to produce the finished products after
technological feasibility is established are capitalized and amortized over the
estimated economic life from 2 to 5 years. The Company performs periodic reviews
to ensure that unamortized program costs remain recoverable from future revenue.
During the years ended December 31, 2010, 2009 and 2008, $1,466,554, $1,079,148
and $483,849, respectively was capitalized. At December 31, 2010, 2009 and 2008,
unamortized capitalized software costs were $1,866,424, $1,240,439, and
$845,828, respectively.

(w) Subsidy Income

Subsidy income mainly represents the income we receive from the
local governmental agency in China for development and designated activities. We
have no continuing obligation under the subsidy provision.

(x) Income Taxes

Income taxes are provided on an asset and liability approach
for financial accounting and reporting of income taxes. Deferred income taxes
are recognized for all significant temporary differences at enacted rates and
classified as current or non-current based upon the classification of the
related asset or liability in the financial statements. A valuation allowance is
provided to reduce the amount of deferred tax assets if it is considered more
likely than not that some portion of, or all, the deferred tax asset will not be
realized. The Company classifies interest and/or penalties related to
unrecognized tax benefits, if any, as a component of income tax provisions.

The Company adopted the provisions of ASC No. 740 Income
Taxes (ASC 740), which clarifies the accounting for uncertainty in income
taxes recognized by prescribing a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. ASC 740 also provides
accounting guidance on de-recognition, classification, interest and penalties,
disclosure and transition.

(y) Segment reporting

Segment information is consistent with how management reviews
the businesses, makes investing and resource allocation decisions and assesses
operating performance. Transfers and sales between reportable segments, if any,
are recorded at cost.

In connection with the changes in the Company's business
portfolio and realignment of management, management conducted a review of its
operating business segments during the first quarter of 2009. The review
resulted in adding the Digital Hospital Information System Segment and merging
the Product Sales Segment into Digital Information Security Technology Segment.

-F- 20 -

---

The Company's new segment reporting, which has been used for
all periods presented, follows the organizational structure as reflected in its
internal management reporting systems, which are the basis for assessing the
financial performance of the business segments and for allocating resources to
the business segments.

The Company reports financial and operating information in the
following four segments:

|(1) | Digital Public Security Technology Segment (DPST,
      formerly known as Digital Information Security Technology Segment
      (DIST) ): includes revenues from information security related
      projects;                                                           
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                              
|(2) | Geographic Information Systems Segment ("GIS"): includes
      the Police-Use Geographic Information Systems ("PGIS") and Civil-Use GIS
      sales;                                                                                                                         
|    |                                                                                                                                                                                                                                                                              
|(3) | Digital Hospital Information System Segment ("DHIS"):
      includes revenues from digital information system provided to hospitals or
      medical institutes.                                                                                                             
|    |                                                                                                                                                                                                                                                                              
|(4) | Others Products and Services (OTHER): include new
      offerings under market assessment or development outside the existing main
      business segments. When a meaningful stand-alone segment is formed, such a
      new segment will be separated from this category.

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

All of the Companys revenues are earned in the PRC and
substantially all of the Companys assets are located in the PRC.

(z) Sales, use and other value added tax

Revenue is recorded net of applicable sales, use and value
added tax.

(aa) Business combinations and non-controlling interests

In December 2007, the FASB amended its guidance on accounting
for business combinations. The new accounting guidance resulted in a change in
our accounting policy effective January 1, 2009, and is being applied
prospectively to all business combinations subsequent to the effective date.
Among other things, the new guidance amends the principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling
interest in the acquiree and the goodwill acquired. It also establishes new
disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination. The adoption of this new accounting policy
did not have a significant impact on the Company's consolidated financial
statements, and the impact it will have on its consolidated financial statements
in future periods will depend on the nature and size of business combinations
completed subsequent to the date of adoption.

In December 2007, the FASB issued new accounting and disclosure
guidance related to non-controlling interests in subsidiaries (previously
referred to as minority interests), which resulted in a change in accounting
policy effective January 1, 2009. Among other things, the new guidance requires
that a non-controlling interest in a subsidiary be accounted for as a component
of equity separate from the parent's equity, rather than as a liability. The new
guidance is being applied prospectively, except for the presentation and
disclosure requirements, which have been applied retrospectively.

Accordingly, after adoption, non-controlling interests
(approximately $18.5 million and $15.4 million at December 31, 2010 and December
31, 2009, respectively) are classified as equity, a change from its previous
classification between liabilities and stockholders' equity. Earnings
attributable to non-controlling interest (approximately ($1,072,000, $43,000 and
$241,000 for 2010, 2009 and 2008, respectively) are included in net income,
although such earnings continue to be deducted to measure earnings per share.
Purchases and sales of non-controlling interests are reported in equity similar
to treasury stock transactions.

(ab) Recently Issued Accounting Guidance

In April 2010, the FASB issued Accounting Standards Update No.
2010-17, Revenue Recognition - Milestone Method (Topic 605) - Revenue
Recognition (ASU 2010-17). ASU 2010-17 provides guidance on defining the
milestone and determining when the use of the milestone method of revenue
recognition for research or development transactions is appropriate. It provides
criteria for evaluating if the milestone is substantive and clarifies that a
vendor can recognize consideration that is contingent upon achievement of a
milestone as revenue in the period in which the milestone is achieved, if the
milestone meets all the criteria to be considered substantive. ASU 2010-17 is
effective for us in fiscal 2011 and should be applied prospectively. The
adoption of ASU 2010-17 did not have any effect on the Companys financial position or results of operations.

-F- 21 -

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In January 2010, the FASB issued ASU 2010-06, Improving
Disclosures about Fair Value Measurements. ASU 2010-06 amends ASC Topic 820,
Fair Value Measurement and Disclosure (ASC 820) to require a number of
additional disclosures regarding fair value measurements. In addition to the new
disclosure requirements, ASU 2010-06 also amends ASC 820 to clarify that
reporting entities are required to provide fair value measurement disclosures
for each class of assets and liabilities. Prior to the issuance of ASU 2010-06,
the guidance in ASC 820 required separate fair value disclosures for each major
category of assets and liabilities.

ASU 2010-06 also clarifies the requirement for entities to
disclose information about both the valuation techniques and inputs used in
estimating Level 2 and Level 3 fair value measurements. Except for the
requirement to disclose information about purchases, sales, issuance and
settlements in the reconciliation of recurring Level 3 measurements on a gross
basis, all of the provisions of ASU 2010-06 are effective for interim and annual
reporting periods beginning after December 15, 2009, or January 1, 2010 for the
Company. The requirement to separately disclose purchases, sales, issuances and
settlements of recurring Level 3 measurements does not become effective until
fiscal years beginning after December 15, 2010, or January 1, 2011 for the
Company. The adoption of ASU 2010-06 is for disclosure purposes only and did not
have any effect on the Companys financial position or results of operations.

In October 2009, the FASB issued ASU 2009-13,
Multiple-Deliverable Revenue Arrangements, (amendments to FASB ASC Topic 605,
Revenue Recognition) (ASU 2009-13) and ASU 2009-14, Certain Arrangements That
Include Software Elements, (amendments to FASB ASC Topic 985, Software) (ASU
2009-14). ASU 2009-13 requires entities to allocate revenue in an arrangement
using estimated selling prices of the delivered goods and services based on a
selling price hierarchy. The amendments eliminate the residual method of revenue
allocation and require revenue to be allocated using the relative selling price
method. ASU 2009-14 removes tangible products from the scope of software revenue
guidance and provides guidance on determining whether software deliverables in
an arrangement that includes a tangible product are covered by the scope of the
software revenue guidance. ASU 2009-13 and ASU 2009-14 should be applied on a
prospective basis for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. The Company considered the adoption of ASU 2009-13 or ASU 2009-14
would have no material impact to consolidated results of operations and
financial condition.

In June 2009, the FASB issued guidance now codified within ASC
Topic 810, Consolidation (ASC 810). ASC 810 requires entities to perform an
analysis to determine whether the enterprises variable interest or interests
give it a controlling financial interest in a variable interest entity. This
analysis identifies the primary beneficiary of a variable interest entity as one
with the power to direct the activities of a variable interest entity that most
significantly impact the entitys economic performance and obligation to absorb
losses of the entity that could potentially be significant to the variable
interest. The guidance is effective as of the beginning of the annual reporting
period commencing after November 15, 2009, or January 1, 2010 for the Company,
with early adoption prohibited. The adoption of the guidance codified within ASC
810 did not have any effect on the Companys financial position or results of
operations.

3. VARIABLE INTEREST ENTITY

The Company is the primary beneficiary of iASPEC, pursuant to
the MSA, and iASPEC qualifies as a variable interest entity of the Company.
Accordingly, the assets and liabilities and revenues and expenses of iASPEC have
been included in the accompanying consolidated financial statements.

In order to facilitate iASPECs expansion and also to provide
financing for iASPEC to complete the acquisition of Geo, the Company advanced
RMB38 million (approximately $5.4 million) to iASPEC in two installments on
November 20, 2007 and May 8, 2008, respectively, to increase iASPECs registered
capital. In order to comply with PRC laws and regulations, the advance was made
to Mr. Lin, iASPECs then majority shareholder, who, upon the authority and
direction of the Board of Directors, forwarded the funds to iASPEC. The Company
has recorded the advance of these funds as an interest-free loan to iASPEC,
which was eliminated against additional capital of iASPEC in consolidation. The
increase in iASPECs registered capital does not affect ISTs exclusive option
to purchase iASPECs assets and shares under the MSA.

For the years ended December 31, 2010, 2009 and 2008,
$1,071,626 ($893,316 from iASPEC and $178,310 from Geo), $43,076 ($180,000 from
iASPEC and loss $136,924 from Geo) and $241,197 ($180,000 from iASPEC and
$61,197 from Geo), respectively have been attributed to non-controlling interest
in the consolidated statements of income of the Company.

-F- 22 -

---

At December 31, 2010, the consolidation of iASPEC and Geo,
resulted in an increase in assets (consisting primarily of cash at bank,
accounts and other receivables, inventories and property, plant and equipment)
of approximately $72.3 million, an increase in liabilities (consisting primarily
of accounts payable and short-term bank loans) of approximately $28.4 million,
and an increase in non-controlling interest of approximately $18.5 million. The
creditors of these entities do not have recourse to the general credit of the
Group. The Group will provide all of the needed financing for the VIEs. For the
years ended December 31, 2010, 2009 and 2008, the consolidation resulted in an
increase in net income attributable to the Company of approximately $17.0
million, $9.3 million and $10.6 million, respectively.

4. EARNINGS PER SHARE

Basic earnings per share are computed by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share 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 shared in the earnings of the entity. For purposes of the
computation of net income per share, shares issued in connection with
acquisitions that are returnable are considered contingently returnable shares
under FASB ASC 260, although classified as issued and outstanding, are not
included in the 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 the 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).

Components of basic and diluted earnings per share were as
follows for the years ended December 31, 2010, 2009 and 2008:

|                                                                                              |   | 2010       |  |   | 2009       |  |   | 2008       | 
|--------------------------------------------------------------------------------------------- | - | ---------- |  | - | ---------- |  | - | ---------- | 
|                                                                                              |   |            |  |   |            |  |   |            | 
|Income from continuing operations (net of
      income taxes and non- controlling interest)   | $ | 34,402,004 |  | $ | 30,094,569 |  | $ | 23,068,817 | 
|Income from discontinued operations (net of income taxes
      and non- controlling interest) | $ | -          |  | $ | -          |  | $ | 718,159    | 
|                                                                                              |   |            |  |   |            |  |   |            | 
|Weighted average outstanding shares of common stock                                           |   | 51,814,433 |  |   | 48,676,391 |  |   | 46,398,600 | 
|Effect of dilutive securities                                                                 |   |            |  |   |            |  |   |            | 
|Warrants                                                                                      |   | -          |  |   | -          |  |   | 131,905    | 
|Contingently issuable shares                                                                  |   | 330,578    |  |   | -          |  |   | 322,322    | 
|                                                                                              |   |            |  |   |            |  |   |            | 
|Earnings per share:                                                                           |   |            |  |   |            |  |   |            | 
|Basic - From continuing operations                                                            | $ | 0.66       |  | $ | 0.62       |  | $ | $0.50      | 
|Basic - From discontinued operations                                                          | $ | -          |  |   | -          |  | $ | 0.01       | 
|                                                                                              |   |            |  |   |            |  |   |            | 
|Diluted - From continuing operations                                                          | $ | 0.66       |  | $ | 0.62       |  | $ | 0.49       | 
|Diluted - From discontinued operations                                                        | $ | -          |  | $ | -          |  | $ | 0.02       | 

Warrants for the purchase of 400,000 shares were not included
in 2010, 2009 or 2008 as their effect would have been anti-dilutive.

5. BUSINESS ACQUISITIONS

Goodwill by segment as at December 31, 2010 and 2009 are as
follows:

|     |   | December 31, |  |   |           |  |   | Post-acquisition |   |   | Other      |  |   | December 31, | 
|---- | - | ------------ |  | - | --------- |  | - | ---------------- | - | - | ---------- |  | - | ------------ | 
|     |   | 2009         |  |   | Addition  |  |   | adjustment       |   |   | adjustment |  |   | 2010         | 
|DPST | $ | 19,361,635   |  | $ | -         |  | $ | -                |   | $ | 2,331      |  | $ | 19,363,966   | 
|GIS  |   | 13,414,819   |  |   | -         |  |   | -                |   |   | 2,077      |  |   | 13,416,896   | 
|DHIS |   | 17,833,412   |  |   | 1,850,405 |  |   | (552,376         | ) |   | 5,972      |  |   | 19,137,413   | 
|     | $ | 50,609,866   |  | $ | 1,850,405 |  | $ | (552,376         | ) | $ | 10,380     |  | $ | 51,918,275   | 

(a) Zhongtian

On October 31, 2008, the Company acquired 100% of the equity
interest of Kwong Tai International Technology Limited (Kwong Tai), a Hong
Kong company and its wholly-owned Chinese subsidiary, Shenzhen Zhongtian
Technology Development Company Ltd. (Zhongtian). Approximately $9,900,000
(approximately RMB67,617,000) of the purchase price was paid in cash and the
balance of the purchase price was paid through the issuance of 1,280,807 shares
of the Companys common stock in February 2009.

-F- 23 -

---

Under the terms of the purchase agreement, 355,164 shares of
the Companys common stock were to be returned if Zhongtian does not meet
certain net income targets in 2009, and an additional 355,164 shares of the
Companys common stock are to be returned if Zhongtian does not meet certain
income targets in 2010.

Zhongtian met net income targets in 2010 and 2009, resulting in
an increase to goodwill of $1,850,405 and $2,187,810 during the fourth quarter
of 2010 and 2009, respectively. The following table represents the purchase
price allocation of Kwong Tai and Zhongtian (collectively Zhongtian) including the additional goodwill.

Cash and cash equivalents
    $
    233,243Accounts receivable
    
    225,660Advances to suppliers
    
    -Inventory
    
    -Other current assets
    
    63,499Property and equipment
    
    174,566Goodwill
    
    14,027,833Intangible assets
    
    2,262,113Current liabilities
    
    (156,566
    )Total purchase price
    $
    16,830,348


The operating results of Zhongtian have been included in the
consolidated financial statements from November 1, 2008, the acquisition date.
Intangible assets include software with an estimated useful life of 10 years.
Goodwill, which has been allocated to the Companys DHIS segment, is not
expected to be deductible for tax purposes.

(b) Huipu

On October 14, 2009, the Company, through CPSH, acquired 100%
of the equity interests of Topwell Treasure Ltd.("Topwell"), a Hong Kong limited
company, for the purchase of Topwell and its wholly-owned Chinese subsidiary,
Huipu Electronics (Shenzhen) Co., Ltd. ("Huipu"), for an aggregate purchase
price of $16,000,000, pursuant to a Share Purchase Agreement, dated August 28,
2009. Huipu is a leading developer and manufacturer of customized LCD/LED
multi-screen display systems in China and the holder of numerous technology
patents, trademarks, certifications and licenses. As a result of the
acquisition, the Company is expected to penetrate to those markets with the
integrated system of the software and LCD/LED multi-screen display.

FASB ASC 805 Business Combinations, applying to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008, requires the consideration transferred shall be measured at the
acquisition date fair value.

The total acquisition date fair value of the consideration
transferred was estimated at $22.06 million, which included the initial payments
totaling approximately $8 million in cash, 1,101,930 shares of the Companys
common stock valued at $7.68 per share, representing the closing market price of
the Companys shares at acquisition date, and the estimated fair value of
acquisition-related contingent consideration to be paid to Huipus shareholders
totaling approximately $5.6 million.

The fair value estimate of the contingent consideration is
based on weighted probability (level 3 input) of achievement of After Tax Net
Income targets (ATNI) in 2010, 2011 and 2012, which could result in the issuance
of up to 1,101,930 additional shares of the Companys common stock. Actual
achievement of ATNI below $3.2 million would reduce the liability to zero and
achievement of ATNI of $6.8 million or more would increase the liability to $6.8
million. A change in fair value of the acquisition-related contingent
consideration could have a material effect on the statement of operations and
financial position in the period of the change in estimate. Due to the change in
estimate of the fair value of acquisition-related contingent consideration, a
gain of $0.33 million and $1.1 million was recorded under other income, net in
2010 and 2009, respectively. The following table represents the fair value
movement changes in the year 2010:

-F- 24 -

---



|Contingent consideration:                                                       |   |           |  
|------------------------------------------------------------------------------- | - | --------- | -
|Fair value as at December 31, 2009:                                             | $ | 4,493,391 |  
|Less: fair value changes during the year
      2010:                            |   | (325,133  | )
|Fair value as at December 31, 2010:                                             | $ | 4,168,258 |  
|Current portion
      (included issuable shares with fair value of $1,722,311): | $ | 3,267,087 |  
|Non-current portion:                                                            | $ | 901,171   |  

The following table summarizes the consideration paid for Huipu
and the amounts of the assets acquired and liabilities assumed recognized at the
acquisition date. Huipu achieved the earn out target in 2010, and 330,578 shares
will be issued for the equity portion of the purchase price of Huipu.

|Consideration                                                                                                                                                           |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------- | -
|Cash                                                                                                                                                                    | $ | 8,000,000   |  
|Equity instruments (1,101,930 shares of the Companys
      common stock)                                                                                               |   | 8,462,822   |  
|Contingent consideration arrangement                                                                                                                                    |   | 5,602,149   |  
|Fair value of total consideration transferred                                                                                                                           | $ | 22,064,971  |  
|                                                                                                                                                                        |   |             |  
|Acquisition-related cost(including in selling,
      general, and administrative expenses in the Company's income statement for
      the year ended December 31, 2009) | $ | 70,000      |  
|                                                                                                                                                                        |   |             |  
|Recognized amounts of identifiable assets acquired                                                                                                                      |   |             |  
|Financial assets                                                                                                                                                        | $ | 6,179,400   |  
|Inventory                                                                                                                                                               |   | 1,915,439   |  
|Deferred tax assets, net of allowance                                                                                                                                   |   | 1,314,720   |  
|Property, plant, and equipment                                                                                                                                          |   | 17,988,486  |  
|Land use rights, net                                                                                                                                                    |   | 1,907,611   |  
|Identifiable intangible assets                                                                                                                                          |   | 945,880     |  
|Financial liabilities                                                                                                                                                   |   | (26,296,245 | )
|Liability arising from a contingency                                                                                                                                    |   | (145,093    | )
|Deferred tax liability                                                                                                                                                  |   | (222,464    | )
|Total identifiable net assets                                                                                                                                           |   | 3,587,734   |  
|                                                                                                                                                                        |   |             |  
|Goodwill                                                                                                                                                                |   | 18,477,237  |  
|Total Purchase Price                                                                                                                                                    | $ | 22,064,971  |  

None of the goodwill recognized is expected to be deductible
for income tax purposes. The operating results of Topwell and Huipu have been
included in the consolidated financial statements from the acquisition date.
Intangible assets include trade marks and patents with an estimated useful life
of 3 years. The goodwill of $18,477,237 arising from the acquisition consists
largely of the synergies from combining the operations of the Company and
Topwell. The goodwill was assigned to the Company's DPST and GIS segments.

6. RELATED PARTY BALANCES AND TRANSACTIONS

As of December 31, 2010 and 2009, amounts due from (to) related
parties consist of:

|                                                         |   | December 31, |  |   | December 31, | 
|-------------------------------------------------------- | - | ------------ |  | - | ------------ | 
|                                                         |   | 2010         |  |   | 2009         | 
|Due from related companies                               |   |              |  |   |              | 
|- Xiamen Yili Geo Information Technology
      Co., Ltd. | $ | 137,289      |  | $ | -            | 
|- Shenzhen Kewen
      Information Technology Co., Ltd.  |   | 193,587      |  |   | 129,937      | 
|                                                         | $ | 330,876      |  | $ | 129,937      | 
|                                                         |   |              |  |   |              | 
|Due to related companies                                 |   |              |  |   |              | 
|- Xiamen Yili Geo
      Information Technology Co., Ltd. | $ | -            |  | $ | 7,335        | 

-F- 25 -

---



|- Shenzhen Information
      Security Investment and Development Co., Ltd. |   | 697,820   |  |   | -       | 
|-------------------------------------------------------------------------- | - | --------- |  | - | ------- | 
|- Wuhan Geo Navigation and Communication
      Technology Co., Ltd.        |   | 596,046   |  |   | 576,401 | 
|                                                                           | $ | 1,293,866 |  | $ | 583,736 | 
|                                                                           |   |           |  |   |         | 
|Due to related party, long-term portion                                    |   |           |  |   |         | 
|- Shareholder                                                              | $ | 5,014,949 |  | $ | -       | 

Due from related companies, current portion

Approximately 8% of Xiamen Yili Geo Information Technology Co.,
Ltd. (Yili) is owned by Geo. The balance consists of accounts receivable from
sales.

Shenzhen Kewen Information Technology Co., Ltd. (Kewen) is a
private company owned by a member of the senior management of Zhongtian. The
balance consists of accounts receivable balances from sales during the year.

Due to related companies, current portion

Approximately 9% of Wuhan Geo Navigation and Communication
Technology Co., Ltd. (Geo Navigation) is owned by Geo. The balance represents
advances from Geo Navigation to Geo. These advances are non-interest bearing and
due on demand.

Shenzhen Information Security Investment and Development Co.,
Ltd. (ISID) is a company under the control of Mr Lin. The balance due to ISID
represents advances from ISID to Bocom. These advances are non-interest bearing
and due on demand.

Due to related party, long-term portion

The balance due to shareholder represents the personal loans
from Mr. Jianghuai Lin, the CEO of the Company, to the Company as of December
31, 2010.

On January 14, 2010, Mr. Lin loaned the Company a total of $5
million from the proceeds of the sale of his shares for use for general
corporate purposes and working capital. In consideration of the loan from Mr.
Lin, the Company's Board of Directors approved the issuance and delivery of a
one-year, non-interest bearing, convertible promissory note (the Original
Note) to Mr. Lin, in the principal amount of $5 million The note is due and
payable on January 14, 2011, and is convertible into shares of the Company's
common stock at a conversion price of $5.88 per share (the per share closing
price on the trading day prior to the delivery date of the Original Note).

On March 25, 2010, Mr. Lin surrendered the Original Note to the
Company and have asked the Company to void and rescind the Original Note, and
issue a replacement note (the New Note), in the principal amount of
$6,000,000, to reflect the principal amount of the Original Note as well as an
additional loan of $1,000,000 made to the Company on March 25, 2010. The new
additional loan of $1,000,000 has been repaid by the Company on 7 April 2010.

The New Note has omitted the conversion feature that was
contained in the Original Note and it is non-interest bearing. The maturity date
of the New Note is March 5, 2012 and the Company may prepay all or any part of
the amounts outstanding under this Note at any time before the maturity date
without the express written consent of Mr. Lin. In accounting for the New Note,
the Company accrues an interest expense at an interest rate of 5% per annum,
which is the market interest rate for USD denominated 2-year loans in China. The
imputed interests for the year ended December 31, 2010 is $187,500 and is
recognized as capital contribution by the shareholder.

(b) Revenue - related party

Amounts earned from Yili and Kewen during the years ended
December 31, 2010 and 2009 were as follows:

2010
    
    
    2009
    
    
    2008Revenue
    $
    630,975
    
    $
    470,422
    
    $
    65,297Cost of sales
    
    (247,892
    )
    
    (107,221
    )
    
    (19,084
    )Gross profit
    $
    383,083
    
    $
    363,201
    
    $
    46,213


(c) Rental expenses- related party

Rental expenses to Mr. Lin during the years ended
December 31, 2010, 2009 and 2008 were $110,795, 0, and 0 respectively.

-F- 26 -

---

(d) Guarantees of bank loans

Mr. Lin has provided personal guarantees for certain of the
Companys loans as follows:

|         |  |                                                         |  |   | December 31, |  |   | December 31 | 
|-------- |  | ------------------------------------------------------- |  | - | ------------ |  | - | ----------- | 
|Borrower |  | Lender                                                  |  |   | 2010         |  |   | 2009        | 
|ISIID    |  | Hang Seng Bank
      Limited                            |  |   | -            |  |   | 5,160,000   | 
|IASPEC   |  | Hang Seng Bank Limited                                  |  |   | -            |  |   | 4,401,000   | 
|IASPEC   |  | Industrial and
      Commercial Bank of China, Shenzhen |  |   | -            |  |   | 586,800     | 
|IASPEC   |  | Industrial and Commercial Bank of
      China, Shenzhen |  |   | -            |  |   | 733,500     | 
|IASPEC   |  | Industrial and
      Commercial Bank of China, Shenzhen |  |   | -            |  |   | 1,173,600   | 
|         |  |                                                         |  | $ | -            |  | $ | 12,054,900  | 

7. INVENTORIES

As of December 31, 2010 and 2009, inventories consist of:

2010
    
    
    2009Raw materials
    $
    5,274,081
    
    $
    3,385,758Work in Processes
    
    227,455
    
    
    344,875Finished goods
    
    4,700,253
    
    
    2,034,345Installations in process
    
    9,730,077
    
    
    5,171,026Total
    $
    19,931,866
    
    $
    10,936,004


8. LONG-TERM INVESTMENTS

As of December 31, 2010 and 2009, long-term investments consist
of:

|                                                                          |   | 2010      |  |   | 2009      | 
|------------------------------------------------------------------------- | - | --------- |  | - | --------- | 
|                                                                          |   |           |  |   |           | 
|Tianhe Navigation and Communication
      Technology Co., Ltd. ("Tianhe") | $ | 2,006,802 |  | $ | 2,788,666 | 
|Tianditu Co., Ltd (Tianditu)                                              |   | 1,213,600 |  |   | -         | 
|Xiamen Yili Geo Information Technology Co.,
      Ltd. ("Yili")           |   | 75,850    |  |   | 73,350    | 
|                                                                          | $ | 3,296,252 |  | $ | 2,862,016 | 

Geo holds a 20% ownership interest in Tianhe Navigation and
Communication Technology Co., Ltd. (Tianhe). Although Geo owns 20% of Tianhe,
Geos management does not have the ability to exercise significant influence
over operating and financial policies of Tianhe due to the following factors:

|a. | The Company and Geo do not participate in the policy
      making, operations, or financial processes of Tianhe;
|-- | ----------------------------------------------------------------------------------------------------------------
|b. | There are no intercompany transactions between the
      Company or Geo and Tianhe;                             
|c. | There is no interchange of managerial personnel                                                                 
|d. | The Company and Geo do not nominate or hold a board
      position at Tianhe.                                   
|e. | There is no technological or financial dependence between
      the Company or Geo and Tianhe.                  

As a result of the foregoing factors, the investment in Tianhe
is accounted for using the cost method of accounting.

Geo holds a 8% ownership interest in Tianditu which was set up
in 2010 to provide online map service.

Long-term investments also include Geos investments in Yili.
During the years ended December 31, 2010 and 2009, the Company received dividends
of RMB 749,700 (approximately $111,000) and RMB 750,000 (approximately
$110,000), respectively, in connection with its investment in Yili.

As at December 31, 2009, management determined that there was
an other-than temporary impairment in the value of its investment in Tianhe and
recorded an impairment loss of approximately $233,000. As at December 31, 2010,
the management reassessed the possible impairment to the investment to Tianhe
and determined that there was an other-than temporary impairment in the value of
its investment in Tianhe and recorded an impairment loss of approximately
$855,000.

-F- 27 -

---

9. PROPERTY, PLANT AND EQUIPMENT

As of December 31, 2010 and 2009, property, plant and equipment
consists of:

2010
    
    
    2009Office building
    $
    7,559,941
    
    $
    6,536,605Plant and machinery
    
    27,900,717
    
    
    17,844,918Electronic equipment,
      furniture and fixtures
    
    12,045,103
    
    
    11,405,355Motor vehicles
    
    1,102,159
    
    
    1,098,729Purchased software
    
    48,814,198
    
    
    27,036,904Total
    
    97,422,118
    
    
    63,922,511Less: accumulated depreciation
    
    (18,073,235
    )
    
    (10,335,997
    )Net Book Value
    $
    79,348,883
    
    $
    53,586,514


Depreciation expense for the years ended December 31, 2010,
2009, and 2008 was approximately $7,715,000, $4,069,000, and $2,991,000,
respectively.

10. LAND USE RIGHTS AND INTANGIBLE ASSETS

(a) Deposits for purchase of land use rights

As of December 31, 2010, deposits for purchase of land use
rights represent deposit for purchase of land use rights in Dongguan City of
approximately $18.20 million (RMB 119.96 million) by IST, and deposit for
expansion of land use rights in Fuyong County of Shenzhen of approximately $8.38
million (RMB 55.16 million) by Huipu.

(b) Land use rights

As of December 31, 2010 and 2009, land use rights consist of:

2010
    
    
    2009Land use rights
    $
    1,979,867
    
    $
    1,914,611Less: accumulated amortization
    
    (50,673
    )
    
    (7,000
    )Land use rights, net
    $
    1,929,194
    
    $
    1,907,611


Amortization expense for the years ended December 31, 2010,
2009, and 2008 was approximately $42,000, $7,000 and $0, respectively.

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

2011
    $
    42,3572012
    
    42,3572013
    
    42,3572014
    
    42,3572015
    
    42,357Thereafter
    
    1,717,409Total
    $
    1,929,194


(c) Intangible assets

As of December 31, 2010 and 2009, intangible assets consist of:

|                                        |   |            |  |  | 2010         |   |   |            |  |   |            |  |  | 2009         |   |   |            | 
|--------------------------------------- | - | ---------- |  |  | ------------ | - | - | ---------- |  | - | ---------- |  |  | ------------ | - | - | ---------- | 
|                                        |   | Cost       |  |  | Amortization |   |   | Net Value  |  |   | Cost       |  |  | Amortization |   |   | Net Value  | 
|Software and software development costs | $ | 7,333,720  |  |  | (2,227,226   | ) | $ | 5,106,494  |  | $ | 5,637,740  |  |  | (1,608,388   | ) | $ | 4,029,352  | 
|Technology                              |   | 7,436,182  |  |  | (2,291,836   | ) |   | 5,144,346  |  |   | 7,191,087  |  |  | (1,497,188   | ) |   | 5,693,899  | 
|Trademarks                              |   | 4,291,593  |  |  | (817,159     | ) |   | 3,474,434  |  |   | 4,150,143  |  |  | (354,111     | ) |   | 3,796,032  | 
|Customer base                           |   | 304,917    |  |  | (304,917     | ) |   | -          |  |   | 294,867    |  |  | (258,009     | ) |   | 36,858     | 
|Total                                   | $ | 19,366,412 |  |  | (5,641,138   | ) | $ | 13,725,274 |  | $ | 17,273,837 |  |  | (3,717,696   | ) | $ | 13,556,141 | 

-F- 28 -

---

Amortization expense for the years ended December 31, 2010,
2009, and 2008 was approximately $1,752,000, $1,780,000, and $1,355,000,
respectively.

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

2011
    $
    1,842,2882012
    
    1,752,8952013
    
    1,483,2072014
    
    1,475,5492015
    
    1,472,996Thereafter
    
    5,698,339Total
    $
    13,725,274


11. BANK LOANS

(a) Short-term bank loans

At December 31, 2010, the Company has the following bank
borrowings due in one year:

|Lender                                                         |  | Terms                                                                                                                                                                                                                                                     |  | Loan
      Period                           |  |  | Interest Rate Per
      annum |  |   | 2010      | 
|-------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------- |  |  | ----------------------------- |  | - | --------- | 
|China Merchants Bank,
      WuhanDonghu Branch                 |  | Principal amount
      of RMB 3,000,000 ($455,100). Fixed interest rate; interest is payable
      monthly and principal is due at maturity. The loan is collateralized by Geo's land and office buildings                                                |  | November 24, 2010 to November 24,2011       |  |  | 5.36%                         |  | $ | 455,100   | 
|China Merchants Bank, WuhanDonghu Branch                       |  | Principal amount of RMB 3,000,000
      ($455,100). Fixed interest rate; interest is payable monthly and principal
      is due at maturity. The loan is collateralized by Geo's land and office
      buildings                                          |  | November 15, 2010
      to November 15,2011 |  |  | 5.84%                         |  |   | 455,100   | 
|China Merchants Bank,
      WuhanDonghu Branch                 |  | Principal amount
      of RMB5,000,000 ($758,500). Fixed interest rate; interest is payable
      monthly and principal is due at maturity. The loan is collateralized by Geo's land and office buildings                                                 |  | December 03, 2010 to December 3, 2011       |  |  | 5.84%                         |  |   | 758,500   | 
|Bank of China, Shenzhen Longgang Branch                        |  | Principal amount of RMB4,000,000
      ($606,800). Variable interest rate; interest is payable monthly and
      principal is due at maturity. The loan is guaranteed by IST.                                                                             |  | October 22, 2010 to
      October 22, 2011  |  |  | 6.116% per PBOC Rate          |  |   | 606,800   | 
|Industrial and Commercial
      Bank of China, Shenzhen Branch |  | Principal amount
      of RMB2,500,000 ($379,250).Fixed interest rate; interest is payable
      monthly and principal is due at maturity. The loan is collateralized by
      accounts receivable of RMB3,575,400 ($542,388) and guaranteed by iASPEC.   |  | October11,2010 to April 10, 2011            |  |  | 5.35%                         |  |   | 379,250   | 
|Industrial and Commercial Bank of China,
      Shenzhen Branch |  | Principal amount of RMB3,960,000
      ($600,732). Fixed interest rate; interest is payable monthly and principal
      is due at maturity. The loan is collateralized by accounts receivable of
      RMB 4,411,080 ($669,161) and guaranteed by iASPEC. |  | November 11, 2010
      to January 11, 2011 |  |  | 5.36%                         |  |   | 600,732   | 
|Bank of China, Shenzhen
      Longgang Branch                  |  | Principal amount
      of RMB10,000,000 ($1,517,000). Fixed interest rate; interest is payable
      monthly and principal is due at maturity. The loan is guaranteed by IST.                                                                             |  | February 26, 2010 to February 26, 2011      |  |  | 4.86%                         |  |   | 1,517,000 | 

-F- 29 -

---



|Bank of China, Shenzhen
      Longgang Branch |  | Principal amount
      of RMB16,000,000 ($2,427,200). Fixed interest rate; interest is payable
      monthly and principal is due at maturity. The loan is guaranteed by IST.                                                   |  | March 31, 2010
      to March 31, 2011     |  |  | 4.86%                      |  |  | 2,427,200 | 
|--------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ |  |  | -------------------------- |  |  | --------- | 
|Ping An Bank                                  |  | Principal amount of RMB
      32,600,000 ($4,945,420). Fixed interest rate; interest is payable monthly
      and principal is due at maturity. The loan is collateralized by Huipu's
      land and office buildings           |  | March 31, 2010 to March 30,
      2011     |  |  | 5.31%                      |  |  | 4,945,420 | 
|Ping An Bank                                  |  | Principal amount
      of RMB 40,000,000 ($6,068,000). Fixed interest rate; interest is payable
      monthly and principal is due at maturity. The loan is collateralized by
      Huipu's land and office buildings.          |  | June 30, 2010
      to June 30,2011        |  |  | 5.31%                      |  |  | 6,068,000 | 
|Shenzhen Development Bank                     |  | Principal amount of RMB15,000,000
      ($2,275,500). Quarterly fixed interest rate; interest is payable monthly
      and principal is due at maturity.                                                                        |  | August 6, 2010 to February 3,
      2011   |  |  | 4.86%                      |  |  | 2,275,500 | 
|DBS Bank                                      |  | Principal amount
      of RMB2,112,270 ($320,432). Fixed interest rate; interest is payable
      monthly and principal is due at maturity. The loan is collateralized by
      Bocom's bank deposit.                           |  | Within 90 days
      per bank contracts    |  |  | 5.83%                      |  |  | 320,432   | 
|DBS Bank                                      |  | Principal amount of USD1,093,960.
      Fixed interest rate; interest is payable monthly and principal is due at
      maturity. The loan is guaranteed by Huipu.                                                               |  | October 18, 2010 to January 18,
      2011 |  |  | 3.84%                      |  |  | 1,093,960 | 
|DBS Bank                                      |  | Principal amount
      of USD999,600. Fixed interest rate; interest is payable monthly and
      principal is due at maturity. The loan is guaranteed by Huipu.                                                                 |  | October 21,
      2010 to January 25,2011  |  |  | 5.14%                      |  |  | 999,600   | 
|DBS Bank                                      |  | Principal amount of USD423,584.
      Fixed interest rate; interest is payable monthly and principal is due at
      maturity. The loan is guaranteed by Huipu.                                                                 |  | October 27, 2010 to January
      25,2011  |  |  | 5.00%                      |  |  | 423,584   | 
|DBS Bank                                      |  | Principal amount
      of RMB8,000,000 ($1,213,600). Fixed interest rate; interest is payable
      monthly and principal is due at maturity. The loan is guaranteed by Huipu.                                                  |  | October 14,
      2010 to January 21, 2011 |  |  | 6.73%                      |  |  | 1,213,600 | 
|DBS Bank                                      |  | Principal amount of RMB5,500,000
      ($834,350)Fixed interest rate; interest is payable monthly and principal
      is due at maturity. The loan is guaranteed by Huipu.                                                      |  | October 27, 2010 to January 27,
      2011 |  |  | 6.75%                      |  |  | 834,350   | 
|DBS Bank                                      |  | Principal amount
      of RMB1,153,882 ($175,044). Fixed interest rate; interest is payable
      monthly and principal is due at maturity. The loan is guaranteed by Huipu.                                                    |  | October 29,
      2010 to January 27, 2011 |  |  | 5.36%                      |  |  | 175,044   | 
|Hang Seng Bank Limited                        |  | Packing loan (PAC) of principal
      amount of USD5,346,342. Fixed interest rate; interest is payable monthly
      and principal is due at maturity (90 days per bank contracts). The loan is
      guaranteed by Huipus LC. |  | Within 90 days per bank
      contracts    |  |  | 2.75% per annum over LIBOR |  |  | 5,346,342 | 

-F- 30 -

---



|Hang Seng Bank Limited    |  | Packing loan
      (PAC) negotiated under documentary credit with discrepancies (L/G) for
      principal amount of USD395,552. Principal is due at maturity (90 days per
      bank contract). The loan is collateralized and guaranteed by Huipus goods
      and export documentary credits, and guaranteed by the Company. |  | Within 90 days
      per bank contracts      |  |  | Interest free |  |   | 395,552    | 
|------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------- |  |  | ------------- |  | - | ---------- | 
|DBS Bank                  |  | Packing loan (PAC) of Principal
      amount of USD1,760,000. Fixed interest rate; interest is payable monthly
      and principal is due at maturity (90 days per bank contract). The loan is
      guaranteed by Huipus LC.                                                                                                  |  | Within 90 days per bank
      contracts      |  |  | Interest free |  |   | 1,760,000  | 
|Shenzhen Development Bank |  | Principal amount of
    RMB 15,000,000, ($2,275,500 )                                                                                                                                                                                                                                                                           |  | December 31,
      2010 to December 31, 2011 |  |  | 5.40%         |  |   | 2,275,500  | 
|                          |  |                                                                                                                                                                                                                                                                                                                                 |  |                                              |  |  |               |  |   |            | 
|Total                     |  |                                                                                                                                                                                                                                                                                                                                 |  |                                              |  |  |               |  | $ | 35,326,566 | 

At December 31, 2009, the Company has the following bank
borrowings due in one year:

|Lender                                          |  | Terms                                                                                                                                                                                                                                                                                                                                                                 |  | Loan Period                                |  |  | Interest rate per
      annum |  |   | 2009      | 
|----------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ |  |  | ----------------------------- |  | - | --------- | 
|China Merchants Bank, Wuhan
      Donghu Branch |  | Principal amount
      of RMB5,000,000 ($733,500). Fixed interest rate; interest is payable
      monthly and principal is due at maturity. The loan is collateralized by
      Geo's land and office buildings.                                                                                                                                                      |  | June 25, 2009
      to June 24, 2010       |  |  | 5.58%                         |  | $ | 733,500   | 
|China Merchants Bank, Wuhan Donghu Branch       |  | Principal amount of RMB3,000,000
      ($440,100). Fixed interest rate; interest is payable monthly and principal
      is due at maturity. The loan is collateralized by Geo's land and office
      buildings.                                                                                                                                                      |  | October 12, 2009 to October 12,
      2010 |  |  | 5.58%                         |  |   | 440,100   | 
|China Merchants Bank, Wuhan
      Donghu Branch |  | Principal amount
      of RMB4,000,000 ($586,800). Fixed interest rate; interest is payable
      monthly and principal is due at maturity. The loan is collateralized by
      Geo's land and office buildings.                                                                                                                                                      |  | December 2,
      2009 to December 2, 2010 |  |  | 5.58%                         |  |   | 586,800   | 
|Hang Seng Bank Limited                          |  | Principal amount of HKD
      40,000,000 ($5,160,000 ).Weighted average interest rate; interest is
      payable monthly and principal is due at maturity. The loan is guaranteed
      by Mr. Lin, iASPEC, Bocom, CPSH and the Company and through June 25, 2009
      was collateralized by a three-month fixed deposit of RMB40,000,000
      ($5,868,000) of IST. |  | June 18, 2009 to October 31,
      2010    |  |  | 2.75% over HIBOR              |  |   | 5,160,000 | 

-F- 31 -

---



|Industrial and Commercial
      Bank of China, Shenzhen Branch |  | Principal amount
      of RMB4,000,000 ($586,800). Fixed interest rate; interest is payable
      monthly and principal is due at maturity. The loan is collateralized by
      RMB 4,880,000 ($715,900) accounts receivable and guaranteed by Mr. Lin.     |  | November 5,
      2009 to April 1, 2010      |  |  | 5.589%                                                                 |  |   | 586,800    | 
|-------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------- |  |  | ---------------------------------------------------------------------- |  | - | ---------- | 
|Industrial and Commercial Bank of China,
      Shenzhen Branch |  | Principal amount of RMB5,000,000
      ($733,500). Fixed interest rate; interest is payable monthly and principal
      is due at maturity. The loan is collateralized by RMB 6,912,495
      ($1,014,000) accounts receivable and guaranteed by Mr. Lin.   |  | November 10, 2009 to April 29,
      2010    |  |  | 5.589%                                                                 |  |   | 733,500    | 
|Industrial and Commercial
      Bank of China, Shenzhen Branch |  | Principal amount
      of RMB8,000,000 ($1,173,600). Fixed interest rate; interest is payable
      monthly and principal is due at maturity. The loan is collateralized by
      RMB 9,166,603 ($1,344,700) accounts receivable and guaranteed by Mr. Lin. |  | December 29,
      2009 to May 7, 2010       |  |  | 5.589%                                                                 |  |   | 1,173,600  | 
|Hang Seng Bank Limited                                         |  | Principal amount of RMB
      30,000,000 ($4,401,000 ). The loan is guaranteed by Mr. Lin, iASPEC, IST,
      PST.                                                                                                                                          |  | September 1, 2009 to October
      30, 2010  |  |  | 120% of PBOCs interest rate
      for Renminbi loan during the period |  |   | 4,401,000  | 
|Shenzhen Commercial Bank                                       |  | Principal amount
      of RMB 14,400,000 ($2,112,480 ). Principal of RMB1,200,000($176,000) is
      payable monthly through the maturity date. Interest is payable monthly.
      The loan is guaranteed by Huipu.                                         |  | December 31,
      2009 to December 30, 2010 |  |  | 7.128%                                                                 |  |   | 2,112,480  | 
|                                                               |  |                                                                                                                                                                                                                                                             |  |                                              |  |  |                                                                        |  | $ | 15,927,780 | 

(b) Long-term bank loans

The total outstanding balance of long-term bank loan as of
December 31, 2010 is RMB 38,650,000 ($5,863,205).

On January 1, 2010, Huipu obtained a RMB 27,400,000
($4,156,580) long-term loan from PingAn Bank. The loan has a fixed interest rate
of 7.128% per annum and matures on October 17, 2011. Interest on the loan is
payable monthly, and principal is due at maturity.

On September 25, 2010, Huipu obtained an operational loan of
RMB 30,000,000 ($4,491,000) from Shenzhen Development Bank. At December 31,
2010, the total outstanding balance of this long-term bank loan is RMB
26,250,000 ($3,982,125).The loan has a fixed interest rate of 5.4% per annum and
matures on September 24, 2012. Interest on the loan is payable monthly, and
principal of RMB 1,250,000 ($187,000) is payable monthly through the maturity
date.

12. BILLS PAYABLE

The Company has total available bills payable facilities of
$19.19 million and $16.5 million with various banks, of which $2 million and
$3.8 million were unutilized as of December 31, 2010 and 2009 respectively. The
funds borrowed under these facilities are generally repayable within 6 months.
The bills payable are non-interest bearing and do not have any restrictions or
covenants attached.

-F- 32 -

---

13. INCOME TAXES

Pre-tax income for the years ended December 31, 2010, 2009 and
2008 was taxable in the following jurisdictions:

| |                                  |   | 2010       |   |   | 2009       |   |   | 2008       |  
| | -------------------------------- | - | ---------- | - | - | ---------- | - | - | ---------- | -
| | PRC                              | $ | 48,017,784 |   | $ | 34,764,245 |   | $ | 28,954,455 |  
| | Others                           |   | (4,680,717 | ) |   | (739,105   | ) |   | (4,096,932 | )
| | Total income before income taxes | $ | 43,337,067 |   | $ | 34,025,140 |   | $ | 24,857,523 |  

United States

The Company was incorporated in Nevada and is subject to United
States of America tax law. It is management's intention to reinvest all the
income attributable to the Company earned by its operations outside the United
States of America (the "U.S."). Accordingly, no U.S. corporate income taxes are
provided in these condensed consolidated financial statements.

BVI

Under the current laws of the BVI, dividends and capital gains
arising from the Company's investments in the BVI are not subject to income
taxes.

PRC

The income tax provision consists of the following:

2010
      
      
      2009
      
      
      2008Current taxes
      $
      7,758,819
      
      $
      5,156,165
      
      $
      1,547,509Deferred taxes
      
      104,618
      
      
      (1,268,670
      )
      
      -Provision for income taxes
      $
      7,863,437
      
      $
      3,887,495
      
      $
      1,547,509


The reconciliation of income taxes for income tax computed at
the PRC federal statutory rate to income tax expenses is as follows:

|                                     |   | 2010       |   |   | 2009       |   |   | 2008       |  
|------------------------------------ | - | ---------- | - | - | ---------- | - | - | ---------- | -
|                                     |   |            |   |   |            |   |   |            |  
|PRC federal statutory tax rate       |   | 25%        |   |   | 25%        |   |   | 25%        |  
|                                     |   |            |   |   |            |   |   |            |  
|Computed expected income tax expense | $ | 10,834,267 |   | $ | 8,506,285  |   | $ | 6,214,381  |  
|Tax concession                       |   | (4,685,218 | ) |   | (4,434,779 | ) |   | (6,243,500 | )
|Permanent differences                |   | 660,272    |   |   | 691,797    |   |   | 239,293    |  
|Non-deductible tax loss              |   | 1,249,916  |   |   | 145,647    |   |   | 1,024,233  |  
|Other differences                    |   | (195,800   | ) |   | (1,021,455 | ) |   | 313,102    |  
|                                     |   |            |   |   |            |   |   |            |  
|Income taxes                         | $ | 7,863,437  |   | $ | 3,887,495  |   | $ | 1,547,509  |  

The significant components of deferred tax assets and deferred
tax liabilities were as follows as at December 31, 2010 and December 31, 2009:

-F- 33 -

---



|                                          |   | December 31, 2010 |   |   | December 31, 2009 |  
|----------------------------------------- | - | ----------------- | - | - | ----------------- | -
|                                          |   | Deferred Tax      |   |   | Deferred Tax      |  
|                                          |   | Assets            |   |   | Liabilities       |  
|Fixed assets                              | $ | 275,209           |   | $ | (205,199          | )
|Intangible assets                         |   | 95,517            |   |   | (1,619,235        | )
|Inventory valuation                       |   | 258,339           |   |   | -                 |  
|Accounts receivable allowance             |   | 1,191,001         |   |   | -                 |  
|Salary payable                            |   | 47,174            |   |   | -                 |  
|Subsidy income                            |   | 68,493            |   |   | -                 |  
|Equity investments                        |   | 167,733           |   |   | -                 |  
|Loss carry-forwards                       |   | 593,595           |   |   | -                 |  
|Gross deferred tax assets and liabilities |   | 2,697,061         |   |   | (1,824,434        | )
|                                          |   |                   |   |   |                   |  
|Valuation allowance                       |   | (593,595          | ) |   | -                 |  
|                                          |   |                   |   |   |                   |  
|Total deferred tax assets and liabilities | $ | 2,103,466         |   | $ | (1,824,434        | )

The breakdown between current and long-term deferred tax
assets/(liabilities) was as follows as at December 31, 2010 and 2009:

| |                                              |   | December 31, 2010 |   |   | December 31, 2009 |  
| | -------------------------------------------- | - | ----------------- | - | - | ----------------- | -
| |                                              |   |                   |   |   |                   |  
| | Current deferred tax assets                  | $ | 1,565,006         |   | $ | 1,719,327         |  
| | Current deferred tax liabilities             |   | -                 |   |   | -                 |  
| | Long-term deferred tax assets                |   | 538,460           |   |   | 668,730           |  
| | Long-term deferred tax liabilities           |   | (1,824,434        | ) |   | (2,564,604        | )
| |                                              |   |                   |   |   |                   |  
| | Total net deferred tax assets/ (liabilities) | $ | 279,032           |   | $ | (176,547          | )

As at December 31, 2010, deferred tax assets related to loss
carry forwards represented HPCs accumulated losses for prior years of
$2,374,000.

FASB ASC 740 requires that deferred tax assets be reduced by a
valuation allowance if it is more likely than not that some portion or all of
the deferred tax asset will not be realized. In accordance with proactive
communication with local tax bureau, the management determined that $3,100,000
of the accumulative losses of HPC could not be utilized to deduct against future
taxable profit as it had been denied by the local tax bureau. The management
derecognized the corresponding deferred tax assets and wrote off the
corresponding valuation allowance therefore.

The management expects that there may not be sufficient taxable
income in the future to realize this portion of the deferred tax assets, the
valuation allowance amounting to approximately $593,600 existed as at December
31, 2010.

Geo, iASPEC, Zhongtian and Bocom are all governed by the Income
Tax Laws of the PRC, and are approved as high-technology enterprises subject to
the PRC enterprise income tax (EIT) at 15% in 2010.

ISS and Huipu are subject to the PRC EIT at 22% in 2010.

The China Unified Corporate Income Tax Law (the Unified Tax
Law) was released on March 6, 2007 and on November 28, 2007, the State Council
of China passed the Implementing Rules for the EIT Law ("Implementing Rules"),
both of which became effective on January 1, 2008, resulting in an increase in
the PRC federal statutory tax rate to 25%. The Unified Tax Law is to be phased
in over five years. Companies that were subject to an income tax of 15% in 2007
will pay 18% in 2008, 20% in 2009, 22% in 2010, 24% in 2011 and 25% from 2012.

As a wholly-owned foreign investment enterprise, IST is
entitled to enjoy a two-year tax exemption, followed by a 50% exemption for
three years thereafter as approved by PRC tax authorities. Under the EIT Law,
companies that were previously exempt from taxes or that had concessional rates
are to retain their preferences until the original expiration date. The Unified
Tax Law does not impact ISTs income tax qualification to enjoy a tax exemption
in fiscal year 2010 and IST will continue to qualify for a 50% tax exemption.
Therefore, IST is subjected to the PRC EIT at 11% in 2010, and will continue to
qualify for a 50% tax exemption for the one year thereafter. EIT exemptions
claimed by IST may become payable if IST were to dissolve within the next 10
years. However, management believes that the PRC tax authorities will not
request payment of any such amounts.

The Company recognizes that virtually all tax position in the
PRC are not free of some degree of uncertainty due to tax law and policy changes
by the State. However, the Company cannot reasonably quantify political risk
factors and thus must depend on guidance issued by current State officials.

Based on all known facts and circumstances and current tax law,
the Company believes that the total amount of unrecognized tax benefits as of
December 31, 2010, is not material to its results of operations, financial
condition or cash flows. The Company also believes that the total amount of
unrecognized tax benefits as of December 31, 2010, if recognized, would not have a material effect on its effective
tax rate. The Company further believes that there are no tax positions for which
it is reasonably possible, based on current Chinese tax law and policy, that the
unrecognized tax benefits will significantly increase or decrease over 12 months
producing, individually or in the aggregate, a material effect on the Companys
results of operations, financial condition or cash flows.

-F- 34 -

---

The Companys policy is to recognize interest and penalties
accrued on any unrecognized tax benefits as a component of income tax expense.
As of the date of adoption of FIN 48, the Company did not have any accrued
interest or penalty associated with any unrecognized tax benefits, nor was any
interest expense recognized for the years ended 2010, 2009 and 2008.

Since the Company intends to reinvest its earnings to further
expand its businesses in the PRC, PRC subsidiaries do not
intend to declare dividends to their immediate parent companies in the foreseeable
future. Accordingly, the Company has not recorded any withholding tax on the
cumulative amount of distributed and undistributed retained earnings. Should the
Company's PRC subsidiaries distribute all of their profits generated after December 31, 2007,
the aggregate withholding tax amount would have been approximately $7.71 million
and $4.73 million as of December 31, 2010 and December 31, 2009, respectively.

14. RESERVE AND DISTRIBUTION OF PROFIT

In accordance with relevant PRC regulations and the Articles of
Association of IST, ISS, iASPEC, Bocom , Zhongtian and HPC SZ, appropriations of
net income, as reflected in their PRC statutory financial statements, are to be
allocated to statutory reserve, as determined by resolution of the Board of
Directors. For the years ended December 31, 2010, 2009, and 2008, $4,623,614,
$3,380,774, and $3,209,045, respectively, were appropriated.

15. EQUITY

(a) Issuance of new shares

On February 1, 2008, the Company issued 1,125,000 shares of common
stock in connection with the acquisition of Bocom.

On June 11, 2008, the Company issued 298,008 shares of common
stock in connection with the exercise of 440,632 warrants.

On June 20, 2008, September 20, 2008 and December 20, 2008, the
Company issued 100,000, 100,000 and 200,000 shares of common stock respectively
in connection with the Plan. (see (c) below).

On February 2, 2009, the Company issued 60,000 shares of common
stock  in connection with the Equity Incentive Plan. (see (c) below).

On February 23, 2009, the Company issued 1,280,807 shares of
common stock in connection with the acquisition of Zhongtian.

On March 10, 2009, the Company repurchased 6,000 shares of
common stock from open market and held such shares as treasury stock.

On November 11, 2009, the Company issued 1,101,930 shares of
common stock in connection with the acquisition of Topwell and Huipu.

On January 12, 2010, the Company issued 1,652,033 shares of
common stock to certain purchasers at $6.15 per share, for the purpose of
funding the Company with working capital. The purchasers also received from the
Company additional warrants to purchase an aggregate of 813,008 shares of common
stock at an exercise price of $6.15. The warrants expired 45 days after the
initial issuance date.

On January 12, 2010 and September 25, 2010, the Company granted
213,363 and 250,000 shares, respectively of the Companys common stocks as
compensation under the Plan. (see (c) below).

On January 21, 2010, the Purchasers exercised the warrants and
purchased 41,250 shares of common stock at an exercise price of $6.15.

-F- 35 -

---

(b) Equity Transfer Agreement

On July 1, 2008, Mr. Lin, entered into an equity transfer
agreement (the Equity Transfer Agreement) with Mr. Jin Zhu Cai (Mr. Cai),
the owner of the 24% minority interest in iASPEC, pursuant to which, Mr. Lin
agreed to purchase Mr. Cais Minority Interest in iASPEC from Mr. Cai, for a
total consideration of RMB60 million (approximately $8.72 million) (the
Purchase Price). The Purchase Price was paid in 1,527,855 shares of restricted
common stock of the Company owned by Mr. Lin, valued at $5.708 per share (based
on a 5-day average of the Companys share price during the week of June 23,
2008). Mr. Lin delivered the shares in September 2008. As a result of the Equity
Transfer Agreement, Mr. Lin now holds 100% of the equity interest of iASPEC.

(c) Stock-based compensation

Effective June 13, 2007, the Board of Directors of the Company
adopted the China Information Security Technology, Inc. 2007 Equity Incentive
Plan (The Plan). The Plan provides for grants of stock options, stock
appreciation rights, performance units, restricted stock, restricted stock units
and performance shares. A total of 8,000,000 shares of the Companys common
stock may be issued pursuant to Awards granted under the Plan.

On November 30, 2007, subject to ratification of the Plan by
the stockholders, the Company issued options to certain employees to purchase
490,000 shares of the Companys common stock, par value $0.01, with an exercise
price of $9.48 per share. The options were to vest on December 5, 2008 and
expire on December 5, 2011.

On March 3, 2008, the Company's Board of Directors voided and
canceled the grant of the stock options, and on March 20, 2008 approved the
grant of 400,000 shares of common stock to the employees. The fair value of the
Companys common stock based on quoted market prices on March 20, 2008 was $4.30
per share. Since the cancellation and grant of the replacement award occurred
concurrently, they were treated as a modification of the terms of the cancelled
award. 100,000 shares of common stock became vested on June 20, 2008 and
September 20, 2008, respectively, and the remaining 200,000 shares of common
stock were vested on December 20, 2008.

The Company uses the Black-Scholes option pricing model to
measure the fair value of stock options granted. The determination of the fair
value of stock-based compensation awards on the date of grant using an
option-pricing model is affected by the Companys stock price, as well as by
assumptions regarding a number of complex and subjective variables, including
the expected volatility of the Companys stock price over the term of the
awards, actual and projected employee stock option exercise behaviors, risk-free
interest rate and expected dividends. The expected term represents the weighted
average period of time that stock-based awards are expected to be outstanding,
giving consideration to employees expected exercise and post-vesting employment
termination behavior. Expected volatilities are based on historical volatilities
of the Companys common stock. The risk-free interest rate is based on the U.S.
T-bill with maturity terms similar to the expected term on the stock-based
awards. The Company does not anticipate paying any cash dividends in the
foreseeable future. Forfeitures are estimated at the time of the grant and
revised in subsequent periods if actual forfeitures differ from those estimates.
The Company uses historical data to estimate pre-vesting option forfeitures and
record stock-based compensation expense only for those awards that are expected
to vest.

On February 2, 2009, the Company granted eligible employees a
total of 60,000 shares of the Companys common stock as compensation under the
Plan.

On January 12, 2010, the Company granted eligible employees a
total of 213,363 shares of the Company's common stock as compensation under the
Plan. The fair value of these shares of approximately $1.27 million, based on
the quoted market price, was accrued as of December 31, 2009 as the compensation
was for services provided in 2009.

On September 25, 2010, the Company granted eligible employees a
total of 250,000 shares of the Company's common stock as compensation under the
Plan. The fair value of these shares of approximately $1.13 million based on
quoted market price was recognized as stock-based compensation for the year
ended December 31, 2010.

As of December 31, 2010, $2million related to bonus were
accrued for stock based compensation and not yet issued.

As of December 31, 2010, there was no unrecognized compensation
expenses related to the non-vested options.

-F- 36 -

---



16. CONSOLIDATED SEGMENT DATA

|                                           |   | **2010**    |  |   | **2009**    |  |   | **2008**   | 
|------------------------------------------ | - | ----------- |  | - | ----------- |  | - | ---------- | 
|Revenues(1)                                |   |             |  |   |             |  |   |            | 
|DPST
      Segment                         | $ | 70,642,366  |  | $ | 54,197,481  |  | $ | 50,968,985 | 
|GIS Segment                                |   | 70,916,352  |  |   | 36,826,430  |  |   | 34,281,398 | 
|DHIS
      Segment                         |   | 18,175,542  |  |   | 9,972,183   |  |   | 50,801     | 
|Others Products and
      Services Segment |   | 4,111,337   |  |   | -           |  |   | -          | 
|                                           | $ | 163,845,597 |  | $ | 100,996,094 |  | $ | 85,301,184 | 

(1) Revenues by operating segments exclude intercompany
transactions.

|                                                              |   | 2010       |   |   | 2009       |   |   | 2008       |  
|------------------------------------------------------------- | - | ---------- | - | - | ---------- | - | - | ---------- | -
|Income from operations:                                       |   |            |   |   |            |   |   |            |  
|DPST
      Segment                                            | $ | 16,582,140 |   | $ | 13,983,421 |   | $ | 13,180,933 |  
|GIS Segment                                                   |   | 22,406,553 |   |   | 15,382,648 |   |   | 14,876,341 |  
|DHIS
      Segment                                            |   | 8,416,287  |   |   | 5,306,292  |   |   | (199,534   | )
|Others Products and
      Services Segment                    |   | 87,278     |   |   | -          |   |   | -          |  
|Corporate
      and others(2)                                 |   | (4,928,806 | ) |   | (2,515,918 | ) |   | (3,974,858 | )
|Income from operations                                        |   | 42,563,452 |   |   | 32,156,443 |   |   | 23,882,882 |  
|                                                              |   |            |   |   |            |   |   |            |  
|Corporate other income
      (expenses), net                  |   | 2,186,563  |   |   | 1,986,717  |   |   | 938,921    |  
|Corporate
      interest income                               |   | 126,459    |   |   | 270,666    |   |   | 214,850    |  
|Corporate interest
      expense                              |   | (1,539,407 | ) |   | (388,686   | ) |   | (179,130   | )
|Income from continuing operations before
      income taxes   |   | 43,337,067 |   |   | 34,025,140 |   |   | 24,857,523 |  
|                                                              |   |            |   |   |            |   |   |            |  
|Income tax expense                                            |   | (7,863,437 | ) |   | (3,887,495 | ) |   | (1,547,509 | )
|Income from continuing operations                             |   | 35,473,630 |   |   | 30,137,645 |   |   | 23,310,014 |  
|                                                              |   |            |   |   |            |   |   |            |  
|Income from discontinued operations, net of taxes of $0       |   | -          |   |   | -          |   |   | 718,159    |  
|Net income                                                    |   | 35,473,630 |   |   | 30,137,645 |   |   | 24,028,173 |  
|                                                              |   |            |   |   |            |   |   |            |  
|Net income attributable to the
      non-controlling interest |   | (1,071,626 | ) |   | (43,076    | ) |   | (241,197   | )
|Net income attributable to the Company                        | $ | 34,402,004 |   | $ | 30,094,569 |   | $ | 23,786,976 |  

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

Non-cash employee compensation by segment for the years ended
December 31, 2010, 2009, and 2008 are as follows:

|                                           |   | 2010      |  |   | 2009      |  |   | 2008      | 
|------------------------------------------ | - | --------- |  | - | --------- |  | - | --------- | 
|Non-cash employee compensation:            |   |           |  |   |           |  |   |           | 
|DPST
      Segment                         | $ | 692,040   |  | $ | 469,200   |  | $ | 1,323,911 | 
|GIS Segment                                |   | 300,790   |  |   | 212,181   |  |   | 152,451   | 
|DHIS
      Segment                         |   | 122,070   |  |   | 97,339    |  |   | -         | 
|Others Products and
      Services Segment |   | 24,420    |  |   | -         |  |   | -         | 
|Corporate
      and others(2)              |   | 1,990,680 |  |   | 674,390   |  |   | 128,379   | 
|                                           | $ | 3,130,000 |  | $ | 1,453,110 |  | $ | 1,604,741 | 

Depreciation and amortization by segment for the years ended
December 31, 2010, 2009 and 2008 are as follows:

|                                           |   | 2010      |  |   | 2009      |  |   | 2008      | 
|------------------------------------------ | - | --------- |  | - | --------- |  | - | --------- | 
|Depreciation and amortization:             |   |           |  |   |           |  |   |           | 
|DPST
      Segment                         | $ | 4,781,110 |  | $ | 2,808,663 |  | $ | 2,789,128 | 
|GIS Segment                                |   | 3,512,291 |  |   | 2,132,304 |  |   | 1,466,384 | 
|DHIS
      Segment                         |   | 1,019,300 |  |   | 871,597   |  |   | 47,515    | 
|Others Products and
      Services Segment |   | 153,956   |  |   | -         |  |   | -         | 
|Corporate
      and others(2)              |   | 42,911    |  |   | 43,000    |  |   | 42,806    | 
|                                           | $ | 9,509,568 |  | $ | 5,855,564 |  | $ | 4,345,833 | 

Total assets by segment as at December 31, 2010 and 2009 are as
follows:

-F- 37 -

---



|                                           |   | 2010        |  |   | 2009        | 
|------------------------------------------ | - | ----------- |  | - | ----------- | 
|Total assets                               |   |             |  |   |             | 
|DPST Segment                               | $ | 146,315,701 |  | $ | 115,003,084 | 
|GIS
      Segment                          |   | 145,201,005 |  |   | 98,140,496  | 
|DHIS Segment                               |   | 38,083,209  |  |   | 30,886,236  | 
|Others
      Products and Services Segment |   | 9,673,239   |  |   | -           | 
|Corporate and others                       |   | 128,570     |  |   | 6,799,122   | 
|                                           | $ | 339,401,724 |  | $ | 250,828,938 | 

17. COMMITMENTS AND CONTINGENCIES

iASPEC, Bocom, Zhongtian, and HPC lease offices, employee
dormitories and factory space in Shenzhen, Guangzhou, Beijing and Dongguan in
the PRC, under lease agreements that will expire on various dates through August
2012. Rent expense for the years ended December 31, 2010, 2009 and 2008 was
approximately $380,000, $386,200 and $337,000, respectively.

Future minimum lease payments under these lease agreements are
as follows:

Years Ending December 31,

2011
    $
    268,4722012
    
    21,134Total
    $
    289,606


On July 9, 2010, the Company entered into an agreement with the
  municipal government of Dongguan City, to purchase a land use right for a land
  of 101,764 square meters at a consideration of approximately $23.31 million
  (RMB 153.63 million) to be paid in cash in installments. As of December 31, 2010,
  the Company paid deposits of approximately $18.20 million (RMB 119.96 million).
  The Company will pay the remaining contracted amount within year 2011.

18. SUBSEQUENT EVENTS

We evaluated events that occurred subsequent to December 31,
2010, for recognition or disclosure in our financial statements and notes to our
financial statements. No significant events occurred subsequent to the balance
sheet date but prior to the filing of this report that would have a material
impact on the consolidation financial statements.

-F- 38 -

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EXHIBIT INDEX

|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                  
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1*        |  | Amended and Restated Articles
        of Incorporation of the Company as filed with the Secretary of State of
        Nevada, as amended to date                                                                                                                                                                                                                                                                                             
|3.2         |  | Bylaws of the Company, adopted on February 13, 2008
      (incorporated by reference to Exhibit 3.2 to the Current Report on Form
      8-K filed by the Company on April 7, 2008)                                                                                                                                                                                                                                                           
|4.1         |  | China Information Security Technology, Inc. 2007 Equity
      Incentive Plan (incorporated by reference to Exhibit 10.1 to the Current
      Report on Form 8-K filed by the Company on June 13, 2007)                                                                                                                                                                                                                                       
|10.1        |  | Form of Securities Purchase Agreement, dated January 7,
      2010, among the Company and the investors signatory thereto (incorporated
      by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by
      the Company on January 7, 2010)                                                                                                                                                                                  
|10.2        |  | Placement Agency Agreement, between the Company and
      Rodman & Renshaw, LLC, dated January 7, 2010 (incorporated by
      reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the
      Company on January 7, 2010)                                                                                                                                                                                                     
|10.3        |  | Form of Securities Purchase Agreement, dated October 25,
      2007 (incorporated by reference to Exhibit 10.1 to the Current Report on
      Form 8-K filed by the Company on October 25, 2007)                                                                                                                                                                                                                                             
|10.4        |  | Securities Purchase Agreement, dated January 16, 2007,
      among the Company and the investors signatory thereto (incorporated by
      reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the
      Company on January 17, 2007)                                                                                                                                                                                        
|10.5        |  | Amendment No. 1 to the Securities Purchase Agreement,
      dated January 31, 2007, among the Company and the investors signatory
      thereto (incorporated by reference to Exhibit 10.2 to the Current Report
      on Form 8-K filed by the Company on February 1, 2007)                                                                                                                                                                 
|10.6        |  | Rescission; Termination and Share Exchange Agreement,
      dated January 31, 2007, among iASPEC Software Co., Ltd., its shareholders
      signatories thereto, including Jiang Huai Lin, Information Security
      Technology (China) Co., Ltd., China Public Security Holdings Limited and
      the Company (incorporated by reference to Exhibit 10.5 to the Current
      Report on Form 8-K filed by the Company on February 1, 2007)
|10.7        |  | Amended and Restated Business Turnkey Agreement, dated as
      of January 31, 2007, by and between Information Security Technology
      (China) Co., Ltd. and iASPEC Software Co., Ltd. and its shareholders party
      thereto (incorporated by reference to Exhibit 10.6 to the Current Report
      on Form 8-K filed by the Company on February 1, 2007)                                                                              
|10.8        |  | Management Service Agreement, dated as of August 1, 2007,
      among Information Security Technology (China) Co., Ltd., iASPEC Software
      Co., Ltd., Jiang Huai Lin and Jin Zhu Cai (incorporated by reference to
      Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on
      August 6, 2007)                                                                                                                    
|10.9        |  | Amended and Restated Management Services Agreement, dated
      as of December 13, 2009, among Information Security Technology (China)
      Co., Ltd., iASPEC Software Co., Ltd. and Jiang Huai Lin (incorporated by
      reference to Exhibit 10.5 to the Current Report on Form 8-K filed by the
      Company on December 17, 2009)                                                                                                     
|10.10       |  | Guaranty, dated August 1, 2007, by Jiang Huai Lin and Jin
      Zhu Cai (incorporated by reference to Exhibit 10.2 to the Current Report
      on Form 8-K filed by the Company on August 6, 2007)                                                                                                                                                                                                                                           
|10.11       |  | Purchase Option Agreement, dated August 1, 2007, among
      Information Security Technology (China) Co., Ltd., iASPEC Software Co.,
      Ltd., Jiang Huai Lin and Jin Zhu Cai (incorporated by reference to Exhibit
      10.3 to the Current Report on Form 8-K filed by the Company on August 6,
      2007)                                                                                                                             
|10.12       |  | Notice of Termination, dated August 1, 2007, among
      Information Security Technology (China) Co., Ltd., iASPEC Software Co.,
      Ltd., Jiang Huai Lin and Jin Zhu Cai (incorporated by reference to Exhibit
      10.4 to the Current Report on Form 8-K filed by the Company on August 6,
      2007)                                                                                                                                 
|10.13       |  | Letter Agreement, dated as of September 12, 2007, among
      Information Security Technology (China) Co., Ltd., iASPEC Software Co.,
      Ltd., Jiang Huai Lin and Jin Zhu Cai (incorporated by reference to Exhibit
      10.16 to the Registration Statement on Form SB-2/A filed by the Company on
      September 14, 2007)                                                                                                            



---



|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                     
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.14       |  | Share Purchase Agreement, dated as of November 7, 2007,
      by and among China Public Security Holdings Limited, Cheer Crown
      International Investment Limited, the Company, and Dongwei Gao
      (incorporated by reference to Exhibit 10.1 to the Current Report on Form
      8-K filed by the Company on November 9, 2007)                          
|10.15       |  | Share Purchase Agreement, dated as of December 9, 2007,
      by and among China Public Security Holdings Limited, Bocom Venture Inc.,
      and the Company (incorporated by reference to Exhibit 10.1 to the Current
      Report on Form 8-K filed by the Company on December 13, 2007)                                                                      
|10.16       |  | Share Purchase and Increase Capital Agreement, dated as
      of February 16, 2008, by and among iASPEC Software Co., Ltd., Wuhan Wuda
      Venture Capital Co., Ltd., Wuhan Wuda Geoinformatics Co., Ltd. and Song Ai
      Hong (incorporated by reference to Exhibit 10.1 to the Current Report on
      Form 8-K filed by the Company on February 19, 2008)
|10.17       |  | Share Purchase and Increase Capital Agreement, dated as
      of February 16, 2008, by and among iASPEC Software Co., Ltd. and Li Wei
      (incorporated by reference to Exhibit 10.1 to the Current Report on Form
      8-K filed by the Company on February 19, 2008)                                                                                       
|10.18       |  | Share Purchase Agreement, dated as of September 23, 2008,
      by and among China Public Security Holdings Limited, Wide Peace
      International Investments Limited, and the Company (incorporated by
      reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the
      Company on July 3, 2008)                                         
|10.19       |  | Equity Transfer Agreement, dated August 1, 2008, by and
      between Jiang Huai Lin and Jin Zhu Cai (incorporated by reference to
      Exhibit 10.2 to the Current Report on Form 8-K filed by the Company on
      August 3, 2008)                                                                                                                           
|10.20       |  | Purchase Contract between Dell (China) Company Limited
      and Information Security Software (China) Company Ltd., dated January 1,
      2008 (incorporated by reference to Exhibit 10.26 to the Annual Report on
      Form 10-K/A filed by the Company on August 12, 2009)                                                                                 
|10.21       |  | General Purchase Contract between Huipu Electronics
      (Shenzhen) Co., Ltd. and iASPEC Software Co., Ltd., dated August 26, 2008
      (incorporated by reference to Exhibit 10.27 to the Annual Report on Form
      10-K/A filed by the Company on November 18, 2009)                                                                                      
|10.22       |  | Purchase Contract between iASPEC Software Co., Ltd. and
      Huipu Electronic (Shenzhen) Co., Ltd., dated September 15, 2008
      (incorporated by reference to Exhibit 10.25 to the Annual Report on Form
      10-K/A filed by the Company on November 18, 2009)                                                                                            
|10.23       |  | Sales Contract for Digital Court Storage System between
      the Shenzhen Intermediate Peoples Court and iASPEC Software Co., Ltd.,
      dated April 3, 2008 (incorporated by reference to Exhibit 10.28 to the
      Annual Report on Form 10-K/A filed by the Company on November 18, 2009)                                                                
|10.24       |  | English Translation of Form of Employment Agreement
      (incorporated by reference to Exhibit 10.7 to the Annual Report on Form
      10-KSB filed by the Company on April 16, 2007)                                                                                                                                                                          
|10.25       |  | English Translation of Form of Non-Disclosure Agreement
      (incorporated by reference to Exhibit 10.8 to the Annual Report on Form
      10-KSB filed by the Company on April 16, 2007)                                                                                                                                                                      
|10.26       |  | Form of Independent Director Agreement (incorporated by
      reference to Exhibit 10.1 to the Current Report on Form 8- K filed by the
      Company on August 16, 2007)                                                                                                                                                                                       
|10.27       |  | Form of Indemnification Agreement (incorporated by
      reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the
      Company on August 16, 2007)                                                                                                                                                                                             
|10.28       |  | Employment Agreement, dated January 25, 2007, between the
      Company and Jiang Huai Lin (incorporated by reference to Exhibit 10.29 to
      the Annual Report on Form 10-K/A filed by the Company on August 12, 2009)                                                                                                                                       
|10.29*      |  | Employment Agreement, dated August 11, 2009, between the
      Company and Jackie You Kazmerzak                                                                                                                                                                                                                                                                 
|10.30       |  | Employment Agreement, dated August 12, 2008, between the
      Company and Zhi Xiong Huang (incorporated by reference to Exhibit 10.32 to
      the Annual Report on Form 10-K/A filed by the Company on August 12, 2009)                                                                                                                                       
|10.31       |  | Employment Agreement, dated August 12, 2008, between the
      Company and Zhiqiang Zhao (incorporated by reference to Exhibit 10.33 to
      the Annual Report on Form 10-K/A filed by the Company on August 12, 2009)                                                                                                                                         



---



|Exhibit No. |  | Description                                                                                                                                                                                                 
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                             
|14          |  | Amended and
        Restated Code of Ethics, adopted on December 25, 2007 (incorporated by
        reference to Exhibit 14 to the Annual Report on Form 10-K filed by the
        Company on March 31, 2008)
|21          |  | List of subsidiaries of the
        registrant (incorporated by reference to Exhibit 21 to the Annual Report
        on Form 10-K filed by the Company on March 5, 2010)                                    
|31.1*       |  | Certifications
        of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
        Act of 2002.                                                                                        
|31.2*       |  | Certifications
        of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
        Act of 2002.                                                                                        
|32.1*       |  | Certification
        of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
        Act of 2002.                                                                                         
|32.2*       |  | Certification
        of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
        Act of 2002.                                                                                         

*Filed herewith.

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