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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, 2009

[    ]  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 SECURITY TECHNOLOGY,
INC.(Name of Small Business Issuer in Its Charter)

|NEVADA                                                               | 98-0575209                          
|-------------------------------------------------------------------- | ------------------------------------
|(State or Other Jurisdiction of Incorporation or
      Organization) | (I.R.S. Employer Identification No.)

21stFloor, Everbright Bank
Building, Zhuzilin, Futian District, Shenzhen, Guangdong, 518040Peoples Republic of China(Address of
Principal Executive Offices)

(+86) 755 -8370-8333(Registrants Telephone
Number, Including Area Code)

|Securities registered pursuant to Section 12(b) of the Act:Common Stock, Par Value $0.01 | Name of Each Exchange on Which Registered:
    The NASDAQ Stock Market LLC
|---------------------------------------------------------------------------------------- | --------------------------------------------------------------------------

Securities registered under 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 past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [ X ]          No [   ]

Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).Yes [   ]         
No [   ]

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

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition for "large accelerated filer,"
"accelerated filer," and "smaller reporting company" in Rule 12b-2 of the
Exchange Act. (Check one):

Large Accelerated Filer [   ]   
     Non-Accelerated Filer [   ]       Accelerated Filer [ X ]       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 ]

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The aggregate market value of the 20,992,548 shares of voting and non-voting common equity stock held by
non-affiliates of the registrant was $60,038,687.28 as of
June 30, 2009, the last business day of registrants most recently completed
second fiscal quarter, based on the last sale price of the registrants
common stock on such date of $2.86 per share, as reported by Quotemedia,
Inc.

There were a total of 51,805,787 shares of
the registrants common stock outstanding as of March 2, 2010.

Documents Incorporated by Reference:None

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TABLE OF CONTENTS

|         |                                                                                                                     | Page
|-------- | ------------------------------------------------------------------------------------------------------------------- | ----
|         |                                                                                                                     |     
|         | **PART I**                                                                                                          |     
|         |                                                                                                                     |     
|ITEM 1.  | BUSINESS.                                                                                                           | 5   
|ITEM 1A. | RISK FACTORS.                                                                                                       | 24  
|ITEM 1B. | UNRESOLVED STAFF COMMENTS.                                                                                          | 37  
|ITEM 2.  | DESCRIPTION OF PROPERTIES.                                                                                          | 37  
|ITEM 3.  | LEGAL PROCEEDINGS.                                                                                                  | 38  
|ITEM 4.  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.                                                                | 38  
|         |                                                                                                                     |     
|         | PART II                                                                                                             |     
|         |                                                                                                                     |     
|ITEM 5.  | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
      MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. | 38  
|ITEM 6.  | SELECTED FINANCIAL DATA.                                                                                            | 39  
|ITEM 7.  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS.                        | 40  
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.                                                         | 53  
|ITEM 8.  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.                                                                        | 54  
|ITEM 9.  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
      AND FINANCIAL DISCLOSURE.                         | 55  
|ITEM 9A. | CONTROLS AND PROCEDURES.                                                                                            | 55  
|ITEM 9B. | OTHER INFORMATION.                                                                                                  | 56  
|         |                                                                                                                     |     
|         | PART III                                                                                                            |     
|         |                                                                                                                     |     
|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.                                                             | 56  
|ITEM 11. | EXECUTIVE COMPENSATION.                                                                                             | 56  
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
      AND RELATED STOCKHOLDER MATTERS.               | 56  
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.                                    | 56  
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES.                                                                             | 56  
|         |                                                                                                                     |     
|         |                                                                                                                     |     
|         | PART IV                                                                                                             |     
|         |                                                                                                                     |     
|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES.                                                                            | 57  

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FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements relating
to us that are based on the beliefs of our management as well as assumptions
made by, and information currently available to, our management. When used in
this Report, the words anticipate, believe, estimate, expect, intend,
plan and similar expressions, as they relate to us or our management, are
intended to identify forward-looking statements. These statements reflect
management's current view of us concerning future events and are subject to
certain risks, uncertainties and assumptions, including among many others: our
potential inability to raise additional capital, 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, Securities and Exchange Commission regulations which affect trading in
the securities of penny stocks, and other risks and uncertainties. Should any
of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those described in this
Report as anticipated, estimated or expected.

USE OF CERTAIN DEFINED TERMS

Except as otherwise indicated by the context, references in
this report to:

- Bocom are to Shenzhen Bocom Multimedia Display Technology Co., Ltd, a PRC
  company,
- China and PRC, are to the People's Republic of China,
- CIST, we, us, or our and the Company are to the combined business
  of China Information Security Technology, Inc. and its wholly-owned
  subsidiary, CPSH; along with CPSH's wholly-owned subsidiaries, IST and ISSI,
  and ISSI's wholly-owned subsidiary, ISS; and ISIID, and its operating PRC
  subsidiary, Bocom; iASPEC, to whose operations we succeeded on October 9, 2006
  and who became our variable interest entity effective July 1, 2007, and its
  57% majority owned subsidiary, Geo; and Kwong Tai, and its wholly-owned PRC
  subsidiary, Zhongtian; and HPC, and its wholly-owned PRC subsidiary, Huipu,
- CPSH are to China Public Security Holdings Limited, a British Virgin
  Islands company,
- Geo, are to Wuda Geoinformatics Co., Ltd., a PRC company,
- Hong Kong, are to the Hong Kong Special Administrative Region of China,
- iASPEC are to iASPEC Software Co., Ltd., a PRC company,
- ISIID, are to Information Security International Investment and
  Development Limited, a Hong Kong company,
- ISS, are to Information Security Software (China) Co., Ltd., a PRC
  company,
- ISSI are to Information Security Software Investment Limited, a Hong Kong
  company,
- IST are to Information Security Technology (China) Co., Ltd., a PRC
  company,
- Kwong Tai, are to Kwong Tai International Technology Limited, a Hong Kong
  company, and
- Zhongtian, are to Shenzhen Zhongtian Technology Development Company Ltd.
  a PRC company.
- HPC are to HPC Electronics (China) Company Limited (formerly, Topwell
  Treasure Ltd.("Topwell")), a Hong Kong company, and
- Huipu are to Huipu Electronics (Shenzhen) Co., Ltd. a PRC company.

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

Overview of Our Business

We are a leading provider of integrated solutions for the
digital security sector, the Geographic Information Systems, or GIS sector, and
the digital hospital information sector. We provide a broad portfolio of fully
integrated solutions and services, including First Responder Coordination
Platform, Intelligent Recognition System, Residence Card Information Management
System, Police-use and Civil-use GIS products, and Digital Hospital Information
System, as well as high-end multimedia display systems and technology.

We are headquartered in Shenzhen, China and our common stock is
listed on the Nasdaq Global Select Market. As of December 31 2009, we had more
than 1,400 employees and 11 sales offices nationwide. We were founded in 1993.

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 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 other sectors, through active industry consolidation
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, or MSA, 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 2009, 2008 and
2007, 48.6%, 48% and 68% 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 transactions discussed below, we are now
a provider of integrated solutions for the public security sector in China,
specializing in providing public security information communication applications
and Geographic Information Systems or GIS software 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, however, on April
2, 2008, we entered into an Agreement and Plan of Merger with China Information
Security Technology, Inc., or CIST, a Nevada corporation and our wholly-owned
subsidiary. Pursuant to the merger agreement, we agreed to merge with and into
CIST, with CIST being the surviving entity. The merger became effective on April
7, 2008. As a result, our name is now China Information Security Technology,
Inc., a Nevada corporation.

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 in the aggregate. 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 in the aggregate, which, at January 31,
2007, constituted 80.8% of our issued and outstanding common stock. Mr. Lin has
since transferred 3,749,920 of these shares and now holds 19,150,080 of these
shares directly and 2,600,000 of these shares indirectly through Total Device
Management Limited, an entity controlled by Mr. Lin.

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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). The Turnkey
Agreement also provided for a revenue sharing arrangement between iASPEC and IST
where IST was entitled to between 90% and 100% of the revenues actually received
by iASPEC from servicing contracts involving any iASPEC business, but was
obligated to pay for its own costs in providing these services and to pay iASPEC
$180,000 per year throughout the term of the agreement.

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 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.

The Management Service Agreement contained a true-up provision
which required iASPEC and IST, on or before September 30, 2007, to calculate all
prior amounts owed to IST under the Turnkey Agreement, and required iASPEC to
pay such amounts. The parties were required to calculate the cumulative net
profit/net losses of iASPEC from October 9, 2006, when iASPEC commenced its
contractual relationship with IST, through the commencement date of the
Management Service Agreement, and iASPEC was required to pay the amount due to
IST, if there was a net received profit, while IST was obligated to reimburse
any amount to iASPEC if there was a net loss. Net Received Profit means the
net received profit of iASPEC, 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. Net Losses means the net losses of iASPEC,
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 negative number. The
calculated true-up amount of $7,005,183 was paid by iASPEC to IST as of December
31, 2007.

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.

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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 VIE 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. For
more details regarding the Management Service Agreement and Option Agreement,
see our Current Report on Form 8-K filed with the SEC on August 6, 2007.

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 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 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 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 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 either as an entrustment of funds to iASPEC, or as an advance
  to Mr. Lin, as iASPEC 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 MSA; 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 Securities and Exchange Commission.

For details regarding the terms of the MSA and the Equity
Transfer Agreement, see the Companys Current Reports on Form 8-K filed on
August 6, 2007, July 3, 2008, and December 17, 2009, respectively.

Acquisition of Fortune Fame

On November 7, 2007, we acquired 100% of the equity interests
of Fortune Fame, and its operating PRC subsidiary, ISS, for which we paid
approximately $7.1 million in cash and issued 883,333 shares of its common
stock. Of the 883,333 shares of common stock, 383,333 shares were issued to
Cheer Crown International Investment Limited, or Cheer Crown, and 500,000 shares
were issued to Mr. Gao, the Chairman of ISSs Board of Directors. Under the
terms of the acquisition agreement, Mr. Gao, agreed to continue on as the
Chairman of ISS. Mr. Gao also agreed that he will return 250,000 shares of our
common stock if Fortune Fame does not meet certain net income targets in 2008,
and 250,000 shares if Fortune Fame does not meet certain net income targets in
2009. The targets were met in both 2008 and 2009.

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Acquisition of Bocom Multimedia

On December 9, 2007, we entered into a Share Purchase Agreement
(the Bocom Purchase Agreement), with Bocom Venture Inc. (Bocom Venture), a
British Virgin Islands company, for the acquisition of 100% of the issued and
outstanding capital stock of Bocom Multimedia and its wholly-owned Chinese
subsidiary, Bocom, for a purchase price of approximately $18,000,000. We paid
approximately $9,000,000 of the purchase price in cash which is included in
deposit for business acquisition as of December 31, 2007. The remaining
$9,000,000 of the purchase price was paid in 1,125,000 shares of our common
stock. On February 1, 2008, we completed our acquisition of Bocom Multimedia,
and effective immediately, Bocom Multimedia and its subsidiary, Bocom, became
our indirect wholly-owned subsidiary.

Bocom Multimedia was formed in Hong Kong on August 10, 2007,
and is a leading provider of large screen digital light processing and
integrated solutions in China. Their products have been widely applied in the
fields of public security, communication and multimedia in China. Bocom
Multimedia has successfully completed over 100 digital light processing project
installations for police bureaus and municipal governments in more than ten
provinces in China, including Beijing, Shanghai, Chongqing, Sichuan, Hunan,
Guangdong and Fujian.

Acquisition of Wuhan Wuda Geoinformatics

On April 7, 2008, our variable interest entity, iASPEC,
acquired Wuhan Wuda Geoinformatics Co., Ltd., or Geo, pursuant to (1) a share
purchase and increased capital agreement, or the Geo Agreement, dated as of
February 16, 2008, by and among iASPEC, Wuhan Wuda Venture Capital Co., Ltd., or
Wuhan Venture, Song Ai Hong and Geo, for the purchase of 46% of Geo for a
purchase price of approximately $4,819,000, and to inject an additional
approximately $1,388,900 to increase the registered capital of Geo to
approximately $8,333,000 in the aggregate, and (2) a share purchase agreement,
or the Li 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.

Geo was founded in 1999 by Wuhan University, a leading
university in Asia for GIS-related studies. Geo develops and sells GIS software,
contracts surveying and mapping projects, produces space measurement data and
provides technical consulting and supervision services for GIS projects. In
addition to its research and development capabilities, Geo will provide us with
direct access to numerous permits and mapping data that will further enhance our
technological capabilities, lower project construction costs and enable us to
price its products and services more competitively. Our ownership of the data
will also provide licensing and recurring domestic and international revenue
opportunities for us.

Move to Nasdaq

On May 21, 2008, we received approval to list our securities on
The Nasdaq Global Select Market, or Nasdaq. The symbol for our common stock on
Nasdaq is CPBY. We began trading under our new symbol on May 23, 2008.

Equity Transfer Agreement with iASPEC

On July 1, 2008, our Chairman and Chief Executive Officer, Mr.
Jiang Huai Lin, entered into an equity transfer agreement, or Equity Transfer
Agreement, with Mr. Jin Zhu Cai, the owner of a 24% minority interest in iASPEC,
our variable interest entity, pursuant to which, Mr. Lin agreed to purchase Mr.
Cais minority interest for a total consideration of RMB60 million
(approximately $8.72 million). The purchase price was payable in 1,527,855
restricted shares of our common stock 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 was obligated to pay the purchase price on or before
July 15, 2008. As a condition to the closing of the Equity Transfer Agreement,
the parties obtained the consent of the Board of Directors of IST, our Chinese
operating subsidiary, in accordance with the terms and conditions of the MSA. As
a result of the Equity Transfer Agreement, Mr. Lin holds 100% of the equity
interests of iASPEC.

Acquisition of Zhongtian

On October 31, 2008, we completed the acquisition of Kwong Tai
International Technology Limited, a Hong Kong company, and its wholly-owned
Chinese subsidiary, Shenzhen Zhongtian Technology Development Company Ltd., or
Zhongtian, from Wide Peace International Investments Limited, a British Virgin
Islands company, or Wide Peace, for a purchase price of $16,500,000, $9,900,000
(approximately RMB67,617,000) of which was paid in cash, and the remaining
$6,600,000 of which was paid in 1,280,807 shares of our common stock, valued at
$5.153 per share (the average of the closing price of our common stock for the
20 trading days prior to September 23, 2008).

Under the terms of the stock purchase agreement dated September
23, 2008, 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. If the audited ATNI of Zhongtian for either 2009 and 2010, as
reflected in its audited accounts prepared in compliance with United States generally accepted accounting principles, meets
the respective thresholds for 2009 and 2010, then the pledged shares for each
such period will be released from the pledge whenever the applicable threshold
is attained. However, if the audited ATNI for 2009 or 2010 fails to reach the
applicable threshold, then Wide Peace is obligated to transfer title to and
deliver such pledged shares to us. The 2009 targets were met by Zhongtian. For more details regarding the Zhongtian
transaction, see our Current Reports on Form 8-K filed with the SEC on September
29, 2008 and November 3, 2008.

- 8 -

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Recent Developments

Acquisition of Huipu

On October 1, 2009, we completed the acquisition of Topwell
Treasure Ltd., or Topwell, a Hong Kong limited company, and its wholly-owned
Chinese subsidiary, Huipu Electronics (Shenzhen) Co., Ltd., or Huipu, for an
aggregate purchase price of $16,000,000, pursuant to a Share Purchase Agreement,
dated August 28, 2009, among the Company, its wholly-owned subsidiary, CPSH, and
Rita Kwai Fong Leung, the sole shareholder of Topwell. We paid $8,000,000
(approximately RMB54,640,000) of the purchase price in cash on September 30,
2009, and we are obligated to pay on or before December 31, 2009, the remaining
$4,000,000 of the purchase price in 1,101,930 shares of our common stock valued
at $3.63 per share (based on the average of the closing price of our common
stock on Nasdaq for the 20 trading days prior to August 28, 2009).

We are also obligated to issue and deliver to Ms. Leung an
additional 1,101,930 shares of our common stock in accordance with a make good
provision in the purchase agreement, if Topwell attains certain audited
consolidated after tax net income, or ATNI thresholds for fiscal years 2010
through 2012, as follows:

Year Ending December 31,
    ATNI Thresholds (in USD)
    CIST 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 -


As result of the transaction, Topwell and Huipu became indirect
wholly-owned subsidiaries of the Company.

- 9 -

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Huipu is a leading developer and manufacturer of customized LCD
& Plasma display systems in China and, the holder of numerous technology
patents, trademarks, certifications and licenses. Huipu is a well-recognized
brand within the industry and has a broad customer base covering 27
provinces/regions. Huipu's products are manufactured at its production
facilities in China and are sold through a network of distributors nationwide.
Its customers are represented in a wide variety of industries, including the
public security, government, trade, media, transportation and tourism
industries.

Currently, Huipu's customized LCD & Plasma displays are
integrated in systems deployed in all business segments that we serve, and we
have closely collaborated with Huipu in the past to deliver integrated systems
to common customers. Going forward, we plan to discontinue Huipus low-end
business lines and focus on Huipus high-end and innovative products while
integrating Huipu into our current business. Our goal is to leverage Huipus
wide distribution network and large client base to expand our market share in
the DIST, GIS and Digital Hospital markets. While the Company anticipates
moderate contribution from Huipu to its year 2009 financial results, management
believes that Huipu will make meaningful contributions to its projected earnings
in year 2010 and beyond.

Registered Direct Offering

On January 12, 2010, the Company closed a Securities Purchase
Agreement, dated as of January 7, 2010 with certain purchasers pursuant to
which: (i) the Company sold a total of 1,652,033 shares of its common stock, par
value $0.01 per share and (ii) Mr. Jiang Huai Lin, the Companys Chief Executive
Officer sold a total of 1,600,000 shares of Common Stock held by him, for an
aggregate purchase price of approximately $20 million, or $6.15 per share. The
Purchasers also received from the Company warrants to purchase an aggregate of
813,008 shares of Common Stock at an exercise price of $6.15. The Warrants were
exercisable for 45 days beginning on the date of the initial issuance of the
Warrants. The securities were sold pursuant to the Companys shelf registration
statement on Form S-3 declared effective by the SEC on November 23, 2009 (File
No. 333-159375). A prospectus supplement related to the offering was filed with
the SEC and delivered to the Purchasers. Prior to the expiration of the
Warrants, certain of the Purchasers exercised Warrants for the purchase of an
additional 41,250 shares of Common Stock for aggregate gross proceeds to the
Company of $253,687.50. The Company may use the net proceeds from the offering
for working capital purposes but may not use such proceeds for: (a) the
satisfaction of any portion of the Companys debt (other than payment of trade
payables in the ordinary course of the Companys business and prior practices),
(b) the redemption of any Common Stock or Common Stock Equivalents, (c) the
settlement of any outstanding litigation or (d) in violation of the FCPA or OFAC
regulations.
Rodman & Renshaw, LLC acted as the Companys exclusive placement agent in
connection with the offering and as consideration of its services to the
Company, received a commission equal to 5.0% of the gross proceeds of the
offering, including proceeds from the sale of Mr. Lins shares. Rodmans
commission was paid on a pro rata basis by the Company and Mr. Lin relative to
their respective amount of gross proceeds from the sale of the securities. The
Company was also obligated to pay a cash fee out of any proceeds from the
exercise of the Warrants, equal to 5% of the aggregate cash exercise price
received by the Company upon such exercise, if any; provided that such fee will
be reduced to the extent that Rodmans aggregate compensation for the offering,
as determined under FINRA Rule 5110, would otherwise exceed 8%. Rodman received
an additional $12,684 in fees in connection with the exercise of Warrants. For
details regarding the offering see the Companys current report on Form 8-K
filed on January 7, 2010. 
Mr. Lin received aggregate gross proceeds of $9.84 million from
the sale of his 1,600,000 shares of Common Stock in the offering. 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 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
Note). Corporate Structure

The following chart reflects our current corporate
organizational structure:

- 10 -

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Our corporate headquarters are located at 21st
Floor, Everbright Bank Building, Zhuzilin, Futian District, Shenzhen, Guangdong,
518040, Peoples Republic of China. Our telephone number is (+86) 755
-8370-8333. We maintain a website atwww.chinacpby.comthat contains
information about our subsidiaries CPSH and Public Security, but that
information is not a part of this report.

- 11 -

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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. 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 out DIST, GIS and DHIS 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.

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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.

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 public security information technology, GIS, and related software
service operations, as well as digital hospital systems in China. 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, 2009, approximately 58% of our total
  revenue was generated through our operations in the Guangdong Province. We
  also have established offices in Guangzhou and Beijing, and work through
  representatives in Changsha, Hunan Province, in Nanning, Guangxi Province, in
  Nanchang, Jiangxi Province, in Wuhan, Hubei Province, in Xian, Shanxi
  Province, as well as in Shanghai and Chongqing Municipalities. Our nationwide
  distribution network in China covers 32 provinces and provincial cities
  throughout China. Our long-term plan is to manage our national operations
  through offices in six geographic hubs located in Guangzhou, Beijing,
  Shanghai, Wuhan, Chongqing and Xi'an. 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
  of our: (1) First Responder Coordination Platform, (2) Intelligent Recognition
  System and (3) Residence Card Information Management System product lines.
- Pursue strategic acquisitions to complement strong internal growth
  We adhere to a focused and disciplined approach to identify, execute and
  integrate acquisitions. We intend to target acquisitions that enable
  geographic expansion, enhance our technological capabilities and competitive
  advantages, provide licensing and recurring revenue opportunities and propel
  our expansion into markets populated by high growth enterprises.
- Enhance our capabilities We strive to improve our existing
  capabilities and develop new ones. We plan to leverage our PGIS strength and
  the acquisition of Geo to target planned expansion into civil-use GIS,
  enterprise class information security markets and other government sectors.
  Geo was founded in 1999 by Wuhan University, a leading university in Asia for
  GIS- related studies. Geo develops and sells GIS software, contracts surveying
  and mapping projects, produces space measurement data and provides technical
  consulting and supervision services for GIS projects. We also plan to
  capitalize on the acquisition of Zhongtian and its patented Medical Case
  Statistics Software to serve the growing demand for digital hospital and
  electronic medical record, or EMR, systems in China. Zhongtian is focused on
  the development and sale of Hospital Information Management Software in order
  to help build modern, scientific and digitized hospitals. Its products are
  widely used to efficiently manage hospital fiscal information, clinical
  information, medical technologies, equipment and inventory, as well as other
  comprehensive hospital information. We also plan to continue providing our
  superior E-Government Platform and to maintain strong relationships with our
  current clients.

We expect to execute these key elements of our growth strategy
through a combination of investments in internal initiatives and through
acquisitions. Internal initiatives will focus on expanding capacity and
enhancing our technology and services capabilities. We also intend to focus on
acquisition targets in regions into which we plan to expand and that produce
complementary products and services.

Our Products and Services

Through the operations of our China-based subsidiaries and the
subcontracting services provided for in our MSA with iASPEC, we are a provider
of integrated solutions for the digital security sector, full-service GIS
solutions, as well as digital hospital solutions in China. Our products and
services can be separated into three categories: (1) Digital Information
Security Technology, which is comprised of our First Responder Coordination
Platform, our Intelligent Recognition System and our Residence Card Information
Management System; (2) Geographic Information Systems (GIS) applications and
services; and (3) Digital Hospital Information Systems.

Digital Information 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.

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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 318 million people
in 2006. Shenzhen has 11 out of 64 Exit and Entry Frontier Stations controlled
by the Ministry of Public Security in China, through which 167 million
passengers crossed in 2006. The total market opportunity for the Intelligent
Border Control System is currently estimated at $300 million. 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
288 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 150 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.

GIS Software Services and Operations

We provide system management and support services in connection
with our Police-Use GIS Platform, or PGIS Platform. The PGIS platform is a GIS
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. CISTs Core PGIS
Technology has been selected for use in the MPSs PGIS Project, which when
complete, is expected to standardize and interconnect all PGIS systems in China.
The MPS plans to standardize 100 provincial-level cities and municipalities over
the next three years and then subsequently roll out these systems nationwide. As
a result, despite the current global economic crisis, management estimates the
current market for PGIS in China to be worth approximately $346 million and that
this market will grow at a 23% cumulative rate in the next five years.

In the Civil-use GIS sector, CIST has 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 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 (EMR) 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. CISTs 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.

CISTs Electronic Medical Case Management System is able to
integrate Hospital Information System (HIS), Laboratory Information System
(LIS), Picture Archiving & Communication System (PACS), Radiology
Information System (RIS) and Corporate Identity System (CIS), to digitize all
clinic information. The System also provides access interfaces with related
agencies such as Social Insurance and Bank.

Impact of Huipu Acquisition on Product Offerings

As disclosed elsewhere in this report, we have recently
acquired Huipu Electronics, a leading developer and manufacturer of customized
LCD & Plasma display systems in China and, the holder of numerous technology
patents, trademarks, certifications and licenses. Huipu is a well-recognized
brand within the industry and has a broad customer base covering 27
provinces/regions. Huipu's products are manufactured at its production
facilities in China and are sold through a network of distributors nationwide.
Its customers are represented in a wide variety of industries, including the
public security, government, trade, media, transportation and tourism industries

Currently, Huipu's customized LCD & Plasma displays are
integrated in systems deployed in all business segments that we serve, and we
have closely collaborated with Huipu in the past to deliver integrated systems
to common customers. Going forward, we plan to discontinue Huipus low-end
business lines and focus on Huipus high-end and innovative products while
integrating Huipu into our overall business. Our goal is to leverage Huipus
wide distribution network and large client base to expand our market share in
the DIST, GIS and Digital Hospital markets. While the Company anticipates
moderate contribution from Huipu to its year 2009 financial results, management
believes that Huipu will make meaningful contributions to its projected earnings
in year 2010 and beyond.

Product Warranty

Our Company usually offers 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

We currently have the following registered and copyrighted
software products through our wholly-owned Chinese subsidiaries IST, ISS, Bocom
Multimedia, Zhongtian and Huipu, as well as numerous software licenses from
iASPEC and its controlling subsidiary Geo. under our Management Service
Agreement with iASPEC.

- 16 -

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|Registration Code  | Year Issued | Name                                                             | Version
|------------------ | ----------- | ---------------------------------------------------------------- | -------
|SHEN DGY-2007-0862 | 2007        | IST Workflow
      Software                                      | V1.0   
|SHEN DGY-2007-0861 | 2007        | IST Search Engine Software                                       | V1.0   
|SHEN DGY-2007-0361 | 2007        | IST Short-message
      Service Platform Software                | V1.0   
|2008SR14122        | 2008        | IST General Office Automated
      System                        | V1.0   
|2008SR14121        | 2008        | IST Content
      Management System                              | V3.0   
|2009SR020366       | 2007        | Bocom Multimedia Display Server
      Software                   | V 4.0  
|2009SR020367       | 2007        | Bocom Multimedia
      Screen Printing Software                  | V 4.0  
|2009SR020370       | 2007        | Bocom Multimedia Device Server
      Software                    | V 4.0  
|2009SR020368       | 2007        | Bocom Multimedia
      Customer End Software                     | V 4.0  
|SHEN DGY-2007-0761 | 2007        | ISS Supplier Management Software                                 | V 1.0  
|2007SR09783        | 2006        | ISS GPS Terminal
      Security Management Software (XAGPS)      | V 1.0  
|SHEN DGY-2007-0337 | 2007        | ISS GPS Terminal Security
      Management Software              | V 1.0  
|2008SR36215        | 2008        | ISS General
      Office Automation System                       | V 1.0  
|SHEN DGY-2007-0759 | 2007        | ISS Content Management Software                                  | V 1.0  
|2008SR36216        | 2007        | ISS Content
      Management Software                            | V3.0   
|2009SR0237357      | 2008        | ISS Electronic Medical Record
      Software                     | V1.0   
|2009SR048834       | 2009        | ISS e-Government
      Management System                         | V1.0   
|2009SR048816       | 2008        | ISS e-Shopping Mall Management
      System                      | V1.0   
|2009SR041627       | 2008        | ISS PACS System                                                  | V1.0   
|2009SR048836       | 2009        | ISS Airport VIP Service
      Management System                  | V1.0   
|2009SR041630       | 2009        | ISS Harbor
      Operations of Dangerous Goods Management System | V1.0   
|2009SR048814       | 2008        | ISS Workstation for Hospital
      Physicians                    | V1.0   
|2006SR03209        | 2006        | Zhongtian Doctor
      Work Station System                       | V1.0   
|2005SR03778        | 2005        | Zhongtian Hospital Information
      Management System           | V2.0   
|2008SR06203        | 2008        | Zhongtian Mobile
      Diagnosis System                          | V1.0   
|2008SR06202        | 2008        | Zhongtian Electronic Medical
      Record Software               | V1.0   
|2008SR06204        | 2008        | Zhongtian Picture
      Archiving & Communication System         | V1.0   
|2008SR10992        | 2008        | Zhongtian Hospitalization
      Management System (JAVA)         | V1.0   
|2008SR10993        | 2008        | Zhongtian
      Hospitalization Work Station System (JAVA)       | V1.0   
|2008SR10994        | 2008        | Zhongtian Outpatient Charging
      System                       | V1.0   
|2008SR10091        | 2008        | Zhongtian
      Outpatient Work Station System                   | V1.0   
|2008SR10995        | 2008        | Zhongtian Pharmacy Management
      System                       | V1.0   
|2008SR06205        | 2008        | Zhongtian Office
      Application System                        | V1.0   
|2009SR045070       | 2008        | Zhongtian Nurse Work Station
      System                        | V3.0   
|2009SR045071       | 2008        | Zhongtian
      Warehouse Management System                      | V2.0   
|2009SR057183       | 2009        | Zhongtian Clinic & Emergency
      Registration System           | V3.0   
|2009SR045069       | 2009        | Zhongtian
      Hospitalization Charging System                  | V3.0   
|2009SR031618       | 2009        | Huipu Hotel All-in-one Machine
      Software                    | V2.0   
|2009SR031620       | 2009        | Huipu LCD
      Software                                         | V2.0   
|2009SR031622       | 2009        | Huipu Plasma TV Software                                         | V2.0   
|2009SR031617       | 2009        | Huipu Hotel
      All-in-one Computer Software                   | V2.0   

- 17 -

---

|Registration Code | Year Issued | Name                                                                         | Version
|----------------- | ----------- | ---------------------------------------------------------------------------- | -------
|2004SR09334       | 2004        | iASPEC Case Tracking Management
      System                                 | V 2.0  
|2004SR09335       | 2004        | iASPEC Application Envelope System                                           | V 2.1  
|2004SR09336       | 2004        | iASPEC Quality System Document
      Management System                       | V 2.2  
|2004SR09337       | 2004        | iASPEC e-Logistics Support Management System                                 | V 2.0  
|2004SR09338       | 2004        | iASPEC Secured and Audited Message
      Switching System                    | V 2.5  
|2004SR09084       | 2004        | iASPEC Project e-Time Tracker Management System                              | V 2.0  
|2004SR09085       | 2004        | iASPEC Application e-Monitor System                                          | V 3.3  
|2004SR09086       | 2004        | iASPEC Remote Administered Distributed Application
      Architecture System | V 2.1.3
|2004SR09087       | 2004        | iASPEC Community and Establishment
      Management System                   | V 1.1  
|2004SR09088       | 2004        | iASPEC Document and Work Flow Management System                              | V 3.0  
|2004SR09089       | 2004        | iASPEC e-Community Management
      and Service System                       | V 1.0  
|2006SR11589       | 2006        | iASPEC Content Management System                                             | V 1.0  
|2006SR11590       | 2006        | iASPEC Three In One Police Computer
      Assistant Dispense System          | V 1.0  
|2006SR11591       | 2006        | iASPEC Police Force General Management System                                | V 1.0  
|2006SR11592       | 2006        | iASPEC General Office Automation
      System                                | V 1.0  
|2006SR11593       | 2006        | iASPEC Police Geographic Information System                                  | V 1.0  
|2008SR20992       | 2008        | iASPEC Integrated Achieves Management
      System                           | V 2.1  
|2009SR016630      | 2009        | iASPEC iPGISDecktop System                                                   | V 1.0  
|2009SR018644      | 2009        | iASPEC Ipgis Web System                                                      | V 1.0  
|2009SR026386      | 2009        | Geo GeoGlobeVision                                                           | V 2.1  
|2009SR015186      | 2009        | Geo GeoGlobe                                                                 | V 3.0  
|2008SR21737       | 2008        | Geo GeoOne                                                                   | V 1.0  
|2008SR17264       | 2008        | Geo GeoSurf                                                                  | V 5.2  
|2008SR17263       | 2008        | Geo GeoPOD                                                                   | V 1.0  
|2008SR17262       | 2008        | Geo GDC                                                                      | V 2.0  
|2008SR16551       | 2008        | Geo 3DIGIS                                                                   | V 1.0  
|2008SR08403       | 2008        | Geo GeoGlobe                                                                 | V 2.0  
|2008SR03710       | 2008        | Geo GeoCityGrid                                                              | V 1.0  
|2007SR13730       | 2008        | Geo GeoDodging                                                               | V 4.0  
|2008SR19555       | 2008        | Geo GeoLand Suite                                                            | V 2.0  
|2007SR17292       | 2007        | Geo GeoStar                                                                  | V 5.2  
|2005SR04396       | 2005        | Geo GeoStar                                                                  | V 4.0  
|2005SR04016       | 2005        | Geo GeoImageDB                                                               | V 4.0  
|2005SR04015       | 2005        | Geo GeoDEMDB                                                                 | V 4.0  
|2005SR03923       | 2005        | Geo CCGIS                                                                    | V 4.0  
|2005SR04014       | 2005        | Geo GeoSurf                                                                  | V 4.0  
|2003SR4257        | 2003        | Geo GeoUP                                                                    | V 1.0  
|2001SR5344        | 2001        | Geo GeoImageDB NT                                                            | V 3.1  
|2001SR5347        | 2001        | Geo GeoGrid NT                                                               | V 3.1  
|2001SR5349        | 2001        | Geo GeoTIN NT                                                                | V 3.1  
|2001SR5350        | 2001        | Geo GeoSurf NT                                                               | V 3.1  
|2001SR5348        | 2001        | Geo GeoImager NT                                                             | V 3.1  
|2001SR5346        | 2001        | Geo GeoMap NT                                                                | V 3.1  
|2001SR5345        | 2001        | Geo GeoStar NT                                                               | V 3.1  
|2001SR2419        | 2001        | Geo GeoMap NT                                                                | V 1.0  
|2001SR2417        | 2001        | Geo GeoImagDB NT                                                             | V 1.0  
|2001SR2420        | 2001        | Geo GeoTIN NT                                                                | V 3.0  
|2001SR2416        | 2001        | Geo GeoGrid NT                                                               | V 3.0  
|2001SR2421        | 2001        | Geo GeoSurf NT                                                               | V 3.0  
|2001SR2415        | 2001        | Geo GeoImager NT                                                             | V 3.0  
|2001SR2418        | 2001        | Geo GeoStar NT                                                               | V 3.0  
|2006SR01659       | 2001        | Geo Geo Trading System For Land and Natural Resources                        | V 3.0  

All copyrighted software applications are effective 5 years
from the date of registration, and can be renewed annually prior to their
expiration date respectively.

- 18 -

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In addition, our wholly-owned subsidiaries Bocom Multimedia,
Huipu and VIE iASPEC have the following patents in China:

Patent No.
    
    Effective Date
    
    Category
    
    Description
    
    DurationZL 2006 2 0014548.2
    
    11/14/2007
    
    Utility Model
    
    Bocom Fiber
      Signal Access Device of Large Screen Display
    
    10 yearsZL 2006 2 0014546.3
    
    09/12/2007
    
    Utility Model
    
    Bocom General Cable Signal Access
      Device of Large Screen Display
    
    10 yearsZL 2006 2 0014549.7
    
    09/12/2007
    
    Utility Model
    
    Bocom Bus Signal
      Access Device of Large Screen Display
    
    10 yearsZL 2007 2 0119649.4
    
    03/21/2008
    
    Utility Model
    
    Bocom Digital Light Display Back
      Projection Optical Reflector Structure
    
    10 yearsZL 2006 3 0018498.0
    
    01/09/2006
    
    Design
    
    Huipu LCD
      TV(LWT930)
    
    10 yearsZL 2006 3 0018500.4
    
    01/09/2006
    
    Design
    
    Huipu LCD TV(LWD460-SF)
    
    10 yearsZL 2006 3 0018501.9
    
    01/09/2006
    
    Design
    
    Huipu LCD
      TV(LWD400-SE)
    
    10 yearsZL 2006 3 0018499.5
    
    01/09/2006
    
    Design
    
    Huipu LCD TV(LAT980)
    
    10 yearsZL 2006 3 0018497.6
    
    01/09/2006
    
    Design
    
    Huipu LCD
      TV(LWT220-AA)
    
    10 yearsZL 2007 3 0172065.5
    
    10/08/2007
    
    Design
    
    Huipu LCD(LWM952)
    
    10 yearsZL 2007 3 0172066.X
    
    10/08/2007
    
    Design
    
    Huipu LCD(LWM750)
    
    10 yearsZL2008 30153791.7
    
    08/08/2008
    
    Design
    
    Huipu Computer Integrated Machine
      (LWP1900)
    
    10 yearsZL 2006 2 0015559.2
    
    05/20/2008
    
    Utility Model
    
    iASPEC Police
      Resource Management System
    
    10 yearsZL2008 2 0213407.2
    
    11/07/2008
    
    Utility Model
    
    iASPEC Anti-Tagging Detection
      System
    
    10 yearsZL 2008 2 0213406.8
    
    11/07/2008
    
    Utility Model
    
    iASPEC
      Intelligent Border Control System
    
    10 years


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 public
security information technology and GIS software services and operations, and
software sales and distribution. 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 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. Shenzhen General Station of Exit and
Entry Frontier Inspection of the P.R.C. and Shenzhen Municipal Public Security
Bureau accounted for 26% and 21%, respectively, of our total revenue in fiscal
2007.

For 2007, revenues were generated by us through our turnkey
arrangement with iASPEC for the period from January 1, 2007 to June 30, 2007 and
by us through our VIE, iASPEC, during the period from July 1, 2007 to December
31, 2007. We have combined the results of operations of CIST for the period from
January 1, 2007 through December 31, 2007 and the results of iASPECs operations
from January 1, 2007 through June 30, 2007 for purposes of the following 2007
analysis, which is not in accordance with US GAAP since iASPECs results were
not consolidated into CIST until July 1, 2007 when it became our VIE. The
following table provides revenue by our major customers for the years ended
December 31, 2009, 2008 and 2007.

- 19 -

---

|Year 2009                                                   |  
|----------------------------------------------------------- | -
|Name                                                        |  
|                                                            |  
|                                                            |  
|Haikou Boshuntong Software Development Company              | $
|Shenzhen Longtushenzhou Information Limited                 |  
|Shenzhen Municipal Public Security Bureau                   |  
|Huipu Electronics (Shenzhen) Co.,ltd (prior to acquisition) |  
|Shenzhen Tianshengji Technology Limited                     |  
|TOTAL                                                       | $

|Year 2008                                       |  
|----------------------------------------------- | -
|Name                                            |  
|                                                |  
|                                                |  
|Huipu Electronic (Shenzhen) Limited             |  
|Shenzhen Dingzhi Information Technology Limited |  
|Hainan Xin Kerui Software Engineering Limited   |  
|Shenzhen Ai Kemu Computer Technology Limited    |  
|Shenzhen longtushenzhou Information Limited     |  
|TOTAL                                           | $

|Year 2007                                                                      |  
|------------------------------------------------------------------------------ | -
|Name                                                                           |  
|                                                                               |  
|                                                                               |  
|Shenzhen General Station of Exit and Entry
      Frontier Inspection of P.R.C. | $
|Shenzhen City Police Department                                                |  
|Shantou City Police Department                                                 |  
|Shenzhen City Futian District Information Center                               |  
|Guangzhou Jieqing Computer Co., Ltd.                                           |  
|TOTAL                                                                          | $

Competition

The markets for digital security, GIS and digital hospital
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 these fields,
especially in the PGIS area, due to our strong capabilities in mission critical
project executions and industry standard setter position. Currently only a few
companies could effectively compete with us. Beijing Founder Digital Company
Limited and Beijing Easymap Information Technology Co., Ltd., are two PRC-based
software development companies in the digital security information technology
and GIS markets

However, we believe that we will be able to effectively compete
with these companies should they enter the market for our product and service
offerings in the future. We believe that our pioneering PGIS platform, our
ongoing customer relationships and our reputation for success in the industry
have enabled us to maintain this competitive advantage.

Our services are designed to provide our customers with
integrated and innovative public safety and security solutions. We believe the
following are our key competitive strengths.

- Broad and Growing Portfolio of Software and Services We offer our
  customers location-based public security solutions through our growing
  portfolio of software and services offerings. We are therefore able to provide
  multiple integrated
  solutions for our clients. Government agencies use our core products to incorporate
  location-based data into their decision- making processes to drive more effective
  results. Through our platforms, our customers can develop customized location-
  based applications, which can be extended across their agencies to support a
  variety of needs and generate more valuable intelligence. 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.

- 20 -

---

- 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 2009, we completed several large-scale system integration contracts
    relating to our First Responder Coordination System, our Intelligent Recognition
    System and our Residence Card Management System. We have successfully implemented
    our Consolidated Command System, which combines the functions of the police
    emergency system, the fire emergency system, and the traffic control emergency
    system, in Shenzhen, Shantou, Foshan, Yunfu and Zhuhai City, Guangdong Province,
    in Nanning City, Guangxi Province, in Nanchang City, Jiangxi Province, in
    Dongfang City, Hainan Province, in Yongzhou, Hunan Province, in Anxi, Fujian
    Province as well as Chongqing Municipality and Macao. We successfully implemented
    our Intelligent Recognition System at the Shenzhen Bay Port and the Futian
    Bay Port, the former of which received official recognition in July 2007 when
    China's President Hu Jintao inspected the system and became the first passenger
    to use the crossing. During the fourth quarter of 2009, we signed new contracts
    totaling $36.7 million from customers in 19 provinces and provincial cities
    in China. Some important contracts secured in the fourth quarter included:
    $10 million contract for Phase III of the Shenzhen Residence Card Information
    Management System; $2.3 million contract for the GIS Display System for Shanghai
    Zhiying Electronics Co., Ltd.; $1.8 million contract for the Police-use GIS
    for Hainan Province Public Security Department; $1.3 million contract for
    the Haikou City Medical Emergency Rescue Center Consolidated Command System;
    $0.5 million contract for the Geographic Information Public Service Platform
    for the Shanxi Province Geographic Information Center; $0.6 million contract
    for the Shenzhen Maternal and Child Health Hospital Data Sharing and Exchange
    Service Platform.
    Of the fourth quarter's contracts, excluding those of Huipu, 56% were for our
    Digital Information Security Technology ("DIST") products, 39% were for our
    Geographic Information Systems ("GIS") products and 5% related to our Digital
    Hospital Information Systems ("DHIS") products. Management expects that the
    majority of these contracts will be recognized as revenue in 2010.
- 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. Our VIE entity,
    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 iASPEC's 57% subsidiary, 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.
- Scalability of Platform We have digitized detailed proprietary
    information systems data related to Shenzhen City and Guangdong Province that
    can be leveraged for future civil-use applications in logistics, insurance,
    and location based services across industries. We believe that we are uniquely
    positioned to take advantage of future broad scale implementations in our
    core market sectors.

Regulation

We are subject to the PRCs foreign currency regulations. The
PRC government has control over RMB reserves through, among other things, direct
regulation of the conversion of RMB into other foreign currencies. Although
foreign currencies which are required for current account transactions can be
bought freely at authorized Chinese banks, the proper procedural requirements
prescribed by Chinese law must be met. At the same time, Chinese companies are
also required to sell their foreign exchange earnings to authorized Chinese
banks and the purchase of foreign currencies for capital account transactions
still requires prior approval of the Chinese government.

Our Chinese subsidiary IST, is a Shenzhen City Software
Enterprise, 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.

- 21 -

---

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

|Name                                                                                                                                                                                                                               |  | Duration                                                                                                                                                    
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|Computer System Integration Level One
      Qualification from PRC Ministry of Information                                                                                                                                         |  | June 11, 2007  June 10, 2010                                                                                                                               
|State Secret related Computer Information System
      Integration Certificate                                                                                                                                                     |  | March 29, 2009- March 29, 2012                                                                                                                              
|Guangdong Province Computer Information
      System Security Service Qualification                                                                                                                                                |  | July 22, 2004 (Grant Date,
      subject to annual renewal)                                                                                                 
|Shenzhen City High Technology Enterprise Certification                                                                                                                                                                             |  | December 31, 2001 (Grant Date, subject to
      annual renewal)                                                                                             
|Guangdong Province Security Technology
      Surveillance System Design, Implementation and Repair Qualification                                                                                                                   |  | October 31, 2007 (Grant Date,
      subject to annual renewal)                                                                                              
|Maturity Level 3 of Capability Maturity Model Integration                                                                                                                                                                          |  | September 2007 (Grant Date)                                                                                                                                 
|ISO 9001:2000 Certification                                                                                                                                                                                                        |  | May 30, 2008  May 29, 2011                                                                                                                                 
|Shenzhen Software Enterprise Certification Level II of
      Construction Certificate for Intelligent Project Design &
      Implementation National High-Tech Enterprise Honor the Contract
      and Keep the Promise Enterprise |  | June 29, 2005 (Grant Date, subject to annual
      renewal) December 1, 2008 December 1, 2011 June 27, 2009- June
      27, 2012 June 15, 2009 (Grant Date)

In addition, Bocom Multimedia, ISS, Zhongtian and Huipu hold
the following certifications and qualifications:

|Holder                                                                    | Name                                                                                                                                                                                                                                                                   | Duration                                                                                                                                                                                                                             
|------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Bocom Multimedia                                                          | ISO 9001:2008 Certification                                                                                                                                                                                                                                            | September 24, 2009  September
      24, 2011                                                                                                                                                                                        
|Bocom Multimedia Bocom Multimedia
      Bocom Multimedia Bocom Multimedia | Certificate for China Compulsory Product
      Certification Shenzhen Software Enterprise Certification Honor the
      Contract and Keep the Promise Enterprise National High-Tech Enterprise                                                                         | August 14, 2007 (Grant Date) October 30,
      2009 - October 30, 2010 June 15, 2009 (Grant Date) Approved
    certificate to be received                                                                                            
|ISS                                                                       | ISO 9001:2000 Certification                                                                                                                                                                                                                                            | June 05, 2008 - June 05, 2011                                                                                                                                                                                                        
|ISS                                                                       | Shenzhen Software Enterprise Certification                                                                                                                                                                                                                             | April 09, 2008 (Grant Date, subject to annual
      renewal)                                                                                                                                                                         
|ISS                                                                       | Maturity Level 3 of Capability
      Maturity Model Integration                                                                                                                                                                                                        | August 15, 2008 - August 
    14, 2011                                                                                                                                                                                               
|ISS ISS ISS                                                               | Computer System Integration Level Three
      Qualification from PRC Ministry of Information Honor the Contract and
      Keep the Promise Enterprise Guangdong Province Security Technology
      Surveillance System Design, Implementation and Repair Qualification | August 15, 2008 - August 14, 2011 June
      15, 2009 (Grant Date) July 18,2008 (Grant Date, subject to annual
      renewal)                                                                                                        
|Zhongtian                                                                 | Computer System Integration
      Level Four Qualification from PRC Ministry of Information                                                                                                                                                                            | November 17, 2008 - November 17,
    2011                                                                                                                                                                                            
|Zhongtian                                                                 | Shenzhen Software Enterprise
      Certification                                                                                                                                                                                                                       | April 29, 2008 (Grant Date,
      subject to annual renewal)                                                                                                                                                                         
|Zhongtian Zhongtian
      Huipu Huipu Huipu                               | Shenzhen High-tech Enterprise
      Certification Innovation Fund Certificate for Technology Based Firms
      ISO9001:2000 Certificate ISO14000 Shenzhen High-tech
      Enterprise Certification                                                                     | February 22, 2008 (Grant Date,
      subject to annual renewal) September 19, 2008- September 19, 2010
      June 29 2009-June 28 2012 January 8, 2009-January 8, 2012
      October 28, 2005 (Grant Date, subject to annual renewal)

Our Employees

As of December 31, 2009, we had approximately 1,439 full-time
employees. The following table illustrates the allocation of these employees
among the various job functions conducted at our company.

- 22 -

---

Department
    
    Number ofEmployeesSoftware Development
    
    557Sales & Marketing
    
    170Admin & Human Resources
    
    180Accounting
    
    48Corporate Finance
    
    9Management
    
    21Production
    
    454Total
    
    1,439


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.

- 23 -

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ITEM 1A. RISK FACTORS

You should carefully consider the risks described below,
which constitute the material risks facing us. If any of the following risks
actually occur, our business could be harmed. You should also refer to the other
information about us contained in this Form 10-K, including our financial
statements and related notes

RISKS RELATED TO OUR BUSINESS

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 acquisition
of Fortune Fame and its operating subsidiary Information Security Development
Technology (Shenzhen) Company Ltd., Bocom Multimedia Display Company Limited and
the acquisition of Wuhan Wuda Geoinformatics Co., Ltd. by our variable interest
entity, iASPEC Software Co., Ltd. Specifically, our revenue has grown 157%,
between the fiscal year 2007 and the fiscal year 2006 (including revenue earned
by our predecessor in fiscal year 2006) and 181%, between the fiscal year 2008
and the fiscal year 2007. Additionally, our net income has grown 135%, between
the fiscal year 2007 and the fiscal year 2006 (including revenue earned by our
predecessor in fiscal year 2006) and 78%, between the fiscal year 2008 and the
fiscal year 2007. 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 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.

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:

- difficulties in the integration of acquired operations and retention of
  personnel,

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- entry into unfamiliar markets,
- 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.

The global economic conditions and current credit crisis
could impair the overall availability and cost of external financing for our
operations and we may be forced to curtail or cease further business expansion
or our operations.

We currently generate sufficient operating cash flows to
support our working capital requirements, but our working capital requirements
and the cash flow provided by future operating activities, if any, will vary
greatly from quarter to quarter, depending on the volume of business during the
period and payment terms with our customers. Were rely on access to the
financial markets to provide us with significant discretionary funding capacity.
However, the continuation or intensification of the current global economic
crisis and turmoil in the global financial markets may adversely impact our
potential sources of capital financing, and may impact our ability to manage
normal relationships with our customers, suppliers and creditors. In addition,
the lack of availability of credit could lead to a further weakening of the
Chinese and global economies and make capital financing of our operations more
expensive for us or impossible altogether. It is unclear whether and to what
extent the economic stimulus measures and other actions taken or contemplated by
the Chinese government and other governments throughout the world will mitigate
the effects of the crisis on the industries that affect our business.
Furthermore, deteriorating economic conditions including business layoffs,
downsizing, industry slowdowns and other similar factors that affect our
suppliers and creditors could have further negative consequences for our
business operations. The economic situation also could harm our current or
future suppliers and creditors, causing them to fail to meet their obligations
to us. No assurances can be given that the effects of the current crisis will
not damage on our business, financial condition and results of operations.

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.

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.

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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,
2009, 2008 and 2007, 25%, 34% and 59% 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.

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 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.

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.

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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 THE INDUSTRY IN WHICH WE OPERATE

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.

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.

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 $2,705,669, $2,596,430 and $797,580 for the years ended December 31, 2009,
2008 and 2007, respectively.

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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 16copyrighted 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.

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.

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 38.93% of our common stock also beneficially owns 100%
of the equity interests in iASPEC, from whom we derived 43%, 48% and 68% of our
revenue in the fiscal year ended December 31, 2009, 2008 and 2007, 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, 2009, 2008
and 2007 we derived 43%, 48% and 68% 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.

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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.

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.

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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.

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 operational 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;

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- Balance of payments position;
- International trade restrictions; and
- International conflict.

The Chinese economy differs from the economies of most
countries belonging to the Organization for Economic Cooperation and
Development, or OECD, in many ways. 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 were similar to those of the OECD member countries.

Our business is largely subject to the uncertain legal
environment in China and your legal protection could be limited.

The Chinese legal system is a civil law system based on written
statutes. Unlike common law systems, it is a system in which precedents set in
earlier legal cases are not generally used. The overall effect of legislation
enacted over the past 20 years has been to enhance the protections afforded to
foreign invested enterprises in China. However, these laws, regulations and
legal requirements are relatively recent and are evolving rapidly, and their
interpretation and enforcement involve uncertainties. These uncertainties could
limit the legal protections available to foreign investors, such as the right of
foreign invested enterprises to hold licenses and permits such as requisite
business licenses. In addition, all of our executive officers and our directors
are residents of China and not of the U.S., and substantially all the assets of
these persons are located outside the U.S. As a result, it could be difficult
for investors to affect service of process in the U.S., or to enforce a judgment
obtained in the U.S. against us or any of these persons.

The Chinese government exerts substantial influence over
the manner in which we must conduct our business activities which could have an
adverse effect on our ability to operate in China.

China only recently has permitted provincial and local economic
autonomy and private economic activities. The Chinese 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 these jurisdictions
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.

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 high rates of inflation. During the past ten years, the rate
of inflation in China has been as high as 20.7% and as low as -2.2%. 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.

Any future outbreak of severe acute respiratory syndrome
or avian flu in China, or similar adverse public health developments, may
severely disrupt our business and operations.

From December 2002 to June 2003, China and certain other
countries experienced an outbreak of a new and highly contagious form of
atypical pneumonia now known as severe acute respiratory syndrome, or SARS. On
July 5, 2003, the World Health Organization declared that the SARS outbreak had
been contained. However, following this declaration, a number of isolated new
cases of SARS have been reported, mostly recently in central China in April
2004. During May and June of 2003, many businesses in China were closed by the
PRC government to prevent transmission of SARS. In addition, during 2005 and
2006 China reported cases of humans becoming infected with a strain of avian
influenza or bird flu known as H5N1, which is often fatal to humans. This
disease, which is spread through poultry populations, is capable in some
circumstances of being transmitted to humans and is often fatal. A new outbreak
of SARS or an outbreak of avian flu may reduce the level of economic activity in
affected areas and deter people from congregating in public places, which may
lead to a reduction in our advertising revenue as our clients may cancel
existing contracts or defer future advertising expenditures. In addition, health
or other government authorities may require temporary closure of our offices, or
the offices, where we provide our advertising services. All these will severely
disrupt our business operations and have a material adverse effect on our
financial condition and results of operations.

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

The majority of our revenues 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 foreign-invested enterprises 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.

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 Police-Use Geographical Information
Services, or PGIS, contracts with PRC Government customers is restricted to
entities possessing the necessary government licenses and approvals which our
subsidiary Information Security Technology (China) Co., Ltd. or IST, does not
have. We currently perform PGIS contracts through our VIE, 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.

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.

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, the PRC State Administration of Foreign
Exchange, or 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. Internal
implementing guidelines issued by SAFE, which became public in June 2007 (known
as Notice 106), expanded the reach of Circular 75 by (1) purporting to cover the
establishment or acquisition of control by PRC residents of offshore entities
which merely acquire "control" over domestic companies or assets, even in the
absence of legal ownership; (2) adding requirements relating to the source of
the PRC resident's funds used to establish or acquire the offshore entity; (3)
covering the use of existing offshore entities for offshore financings; (4)
purporting to cover situations in which an offshore SPV establishes a new
subsidiary in China or acquires an unrelated company or unrelated assets in
China; and (5) making the domestic affiliate of the SPV responsible for the
accuracy of certain documents which must be filed in connection with any such
registration, notably, the business plan which describes the overseas financing
and the use of proceeds. 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, and
Notice 106 makes the offshore SPV jointly responsible for these filings. 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 to have been completed before March 31, 2006;
this date was subsequently extended indefinitely by Notice 106, which also
required that the registrant establish that all foreign exchange transactions
undertaken by the SPV and its affiliates were in compliance with applicable laws
and regulations. Failure to comply with the requirements of Circular 75, as
applied by SAFE in accordance with Notice 106, 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.

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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 and Notice 106. 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 and Notice 106 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 and
Notice 106. 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 and Notice 106, 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.

The increase in the PRC enterprise income tax could
result in a decrease of our net income and materially and adversely affect our
financial condition and results of operations.

Our PRC subsidiaries are incorporated in the PRC and are
governed by applicable PRC income tax laws and regulations. Prior to January 1,
2008, entities established in the PRC were generally subject to a 30% state and
3% local enterprise income tax rate. There were various preferential tax
treatments promulgated by national tax authorities that were available to
foreign-invested enterprises or enterprises located in certain areas of China.
The PRC Enterprise Income Tax Law, or the EIT Law, was enacted on March 16, 2007
and became effective on January 1, 2008. The implementation regulations under
the EIT Law issued by the PRC State Council became effective January 1, 2008.
Under the EIT Law and the implementation regulations, the PRC has adopted a
uniform tax rate of 25% for all enterprises (including foreign-invested
enterprises) and revoked the previous tax exemption, reduction and preferential
treatments applicable to foreign-invested enterprises. However, there is a
transition period for enterprises, whether foreign-invested or domestic, that
received preferential tax treatments granted in accordance with the then
prevailing tax laws and regulations prior to January 1, 2008. Enterprises that
were subject to an enterprise income tax rate lower than 25% prior to January 1,
2008 may continue to enjoy the lower rate and gradually transition to the new
tax rate within five years after the effective date of the EIT Law. As a
wholly-owned FIE, our PRC subsidiary, IST, was approved by PRC tax authorities
on August 10, 2007, to enjoy a two-year tax exemption, followed by a 50%
exemption for three years, retroactive to as of January 1, 2007. 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 tax exemption in fiscal year 2008 and IST will continue to qualify for a
50% tax exemption for the two years thereafter. EIT exemptions claimed by IST
may become payable if IST were to dissolve within the next 10 years. The tax
rate for IST in 2009 is 10%. ISS is a foreign invested enterprise incorporated
in Shenzhen entitled a preferential enterprise income tax rate of 15% prior to
the new EIT law, which was transited to 18% in 2008 and 20% in 2009. We cannot
assure you that the preferential income tax rates that we enjoy will not be
phased out at a faster rate or will not be discontinued altogether, either of
which could result in a decrease of our net income and materially and adversely
affect our financial condition and results of operations.

Under the New Enterprise Income Tax, or EIT, 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.

China passed the New EIT Law and its implementing rules, both
of which became effective on January 1, 2008. Under the New 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 New 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. In addition, a recent
circular issued by the State Administration of Taxation on April 22, 2009
regarding the standards used to classify certain Chinese-invested enterprises
controlled by Chinese enterprises or Chinese group enterprises and established
outside of China as "resident enterprises" clarified that dividends and other
income paid by such "resident enterprises" will be considered to be PRC source
income, subject to PRC withholding tax, currently at a rate of 10%, when
recognized by non-PRC enterprise shareholders. This recent circular also
subjects such "resident enterprises" to various reporting requirements with the
PRC tax authorities.

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In addition, the recent circular mentioned above sets out
criteria for determining whether "de facto management bodies" are located in
China for overseas incorporated, domestically controlled enterprises. However,
as this circular only applies to enterprises established outside of China that
are controlled by PRC enterprises or groups of PRC enterprises, it remains
unclear how the tax authorities will determine the location of "de facto
management bodies" for overseas incorporated enterprises that are controlled by
individual PRC residents like us and some of our subsidiaries.

Therefore, although substantially all of our management is
currently located in the PRC, it remains unclear whether the PRC tax authorities
would require or permit our overseas registered entities to be treated as PRC
resident enterprises. We do not currently consider our company to be a PRC
resident enterprise. However, if the PRC tax authorities determine that China
Information Security Technology, Inc. is 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 offering proceeds and non-China source income would be subject to PRC
enterprise income tax at a rate of 25%. Second, although under the New 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.

In addition, under the EIT law, the Notice of the State
Administration of Taxation on Negotiated Reduction of Dividends and Interest
Rates, or Notice 112, 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, or the
Double Taxation Arrangement (Hong Kong), 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, or
Notice 601, which became effective on October 27, 2009, dividends from Shenzhen
Bocom, Information Security Software, Information Security Technology, Shenzhen
Zhongtian Technology Development Co., Ltd. and Huipu Electronics (Shenzhen) Co.,
Ltd. 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 as "beneficial owners" that are generally engaged
insubstantial business activities and entitled to treaty benefits under
the Double Taxation Arrangement (Hong Kong).Furthermore, the ultimate
tax rate will be determined by treaty between the PRC and the tax residence of
the holderof the PRC subsidiary. We are actively monitoring the proposed
withholding tax and are evaluating appropriateorganizational changes to
minimize the corresponding tax impact.

Dividends declared and paid from pre-January 1, 2008
distributable profits are grandfathered under the New EIT Law and are not
subject to withholding tax.

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.

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, the PRC State Administration of Foreign
Exchange, or 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. Internal
implementing guidelines issued by SAFE, which became public in June 2007 (known
as Notice 106), expanded the reach of Circular 75 by (1) purporting to cover the
establishment or acquisition of control by PRC residents of offshore entities
which merely acquire control over domestic companies or assets, even in the
absence of legal ownership; (2) adding requirements relating to the source of
the PRC residents funds used to establish or acquire the offshore entity; (3) covering the use
of existing offshore entities for offshore financings; (4) purporting to cover
situations in which an offshore SPV establishes a new subsidiary in China or
acquires an unrelated company or unrelated assets in China; and (5) making the
domestic affiliate of the SPV responsible for the accuracy of certain documents
which must be filed in connection with any such registration, notably, the
business plan which describes the overseas financing and the use of proceeds.
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, and Notice 106 makes
the offshore SPV jointly responsible for these filings. 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 to have been completed before March 31, 2006; this date was
subsequently extended indefinitely by Notice 106, which also required that the
registrant establish that all foreign exchange transactions undertaken by the
SPV and its affiliates were in compliance with applicable laws and regulations.
Failure to comply with the requirements of Circular 75, as applied by SAFE in
accordance with Notice 106, 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.

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We believe that our stockholders, who are PRC residents as
defined in Circular 75, have registered 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 their existing registrations have fully complied
with, and they have made all necessary amendments to their registration to fully
comply with, all applicable registrations or approvals 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
CSRC, promulgated the Regulation on Mergers and Acquisitions of Domestic
Companies by Foreign Investors, which became effective on September 8, 2006.
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 the Ministry of Commerce 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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The value of our securities will be affected by the
foreign exchange rate between U.S. dollars and RMB.

The value of our common stock will be affected by the foreign
exchange rate between U.S. dollars and RMB, and between those currencies and
other currencies in which our sales may be denominated. For example, to the
extent that we need to convert U.S. dollars into RMB for our operational needs
and should the RMB appreciate against the U.S. dollar at that time, our
financial position, the business of the company, and the price of our common
stock may be harmed. Conversely, if we decide to convert our RMB into U.S.
dollars for the purpose of declaring dividends on our common stock or for other
business purposes and the U.S. dollar appreciates against the RMB, the U.S.
dollar equivalent of our earnings from our subsidiaries in China would be
reduced.

We may be exposed to liabilities under the Foreign
Corrupt Practices Act, and any determination that we violated the Foreign
Corrupt Practices Act 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 we make sales in
China. 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 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 are subject to penny stock regulations and
restrictions which may affect our ability to sell our securities on the
secondary market.

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. Trading in our common stock is volatile and our stock
price fluctuates: between December 1, 2007 and December 31, 2008, our stock
price has fluctuated from a low of $3.00 to a high of $10.80. When our stock
price trades under $5.00 per share it may be designated a penny stock. As a
penny stock, our common stock may become 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.

For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction in a 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.

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.

Market volatility may affect our stock price, and the
value of our common stock may experience sudden decreases.

There has been, and will likely continue to be, significant
volatility in the market price of securities in general and of technology
companies in particular, including ours. These fluctuations can be unrelated to
the operating performance of these companies. Factors such as the following
could cause the market price of our common stock to fluctuate substantially:

- general economic conditions and trends;

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- stock market price and volume fluctuations of other publicly traded
  companies and, in particular, those that are in the technology industry;
- investor perceptions of the stock market in general and our industry or
  company in particular;
- shortfalls in our actual financial results compared to our guidance or
  results previously forecasted by stock market analysts
- quarterly fluctuations in our financial results or other software
  companies financial results;
- acquisitions or strategic alliances or announcements of new products by us
  or our competitors;
- any stock repurchase program;
- significant developments relating to our relationships with our customers
  or suppliers;
- litigation involving our Company or any of our officers and directors; and
- general conditions in the software industry and conditions in the financial
  markets.

A decline in the market price of our common stock may adversely
impact our ability to attract and retain employees. In addition, stockholders
may initiate securities class action lawsuits if the market price of our stock
drops significantly, which may cause us to incur substantial costs and could
divert the time and attention of our management.

Our controlling stockholder holds a significant
percentage of our outstanding voting securities, which could hinder our ability
to engage in significant corporate transactions without his approval.

Mr. Jiang Huai Lin, our Chairman, President and Chief Executive
Officer, beneficially owns 38.93% of our outstanding voting securities as at
December 31, 2009. As a result, he possesses significant influence, giving him
the ability, among other things, to elect a majority of our Board of Directors
and to authorize or prevent proposed significant corporate transactions. His
ownership and control may also have the effect of delaying or preventing a
future change in control, impeding a merger, consolidation, takeover or other
business combination or discourage a potential acquirer from making a tender
offer.

ITEM 1B. UNRESOLVED STAFF COMMENTS

We have no outstanding or unresolved comments from the
Securities and Exchange Commission staff.

ITEM 2. DESCRIPTION OF PROPERTY

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.

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 Dongguan in the PRC, pursuant
to lease agreements that will expire on various dates through June 2011. Rent
expense for the years ended December 31, 2009, 2008 and 2007, was
approximately$386,200, $337,000 and $46,300, respectively.

- 37 -

---

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 in the ordinary course of our business. We are currently
not aware of any legal proceedings the ultimate outcome of which, in our
judgment based on information currently available, would have a material adverse
effect on our business, financial condition or operating results.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS

There were no matters that were submitted during the fourth
quarter of 2009 to a vote of security holders that has not already been
disclosed in a Current Report on Form 8-K during the period.

PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the NASDAQ Global Select Market
under the symbol CPBY.

The following table sets forth, for the periods indicated, the
high and low reported sales 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.

|                                            |   | Sales Prices (1) | 
|------------------------------------------- | - | ---------------- | 
|                                            |   | High             | 
|Year ended December 31, 2010                |   |                  | 
|First Quarter
      (through March 2, 2010) | $ | 6.80             | 
|Year ended December 31, 2009                |   |                  | 
|Fourth Quarter                              | $ | 7.85             | 
|Third Quarter                               |   | 5.54             | 
|Second Quarter                              |   | 3.99             | 
|First Quarter                               |   | 3.93             | 
|Year ended December 31, 2008                |   |                  | 
|Fourth Quarter                              | $ | 4.75             | 
|Third Quarter                               |   | 5.66             | 
|Second Quarter                              |   | 7.45             | 
|First Quarter                               | $ | 8.30             | 

|(1) | The last reported sales price of our common stock on the
      NASDAQ Global Select Market on March 2, 2010 was $4.86. As of March 2,
      2010, there were approximately 128 stockholders of record of our common
      stock. Certain of our shares are held in nominee or street name;
      accordingly, we believe the number of beneficial owners is greater than
      the foregoing number.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Dividend Policy

We have never declared or paid cash dividends. Any future
decisions regarding dividends will be made by our Board of Directors. 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
foreseeable future.

Our Board of Directors has complete discretion on whether to
pay dividends, subject to the approval of our shareholders. Even if our Board of
Directors decides to pay dividends, the form, frequency and amount will depend
upon our future operations and earnings, capital requirements and surplus,
general financial condition, contractual restrictions and other factors that the
Board of Directors may deem relevant.

- 38 -

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Securities Authorized for Issuance under Equity
Compensation Plans

The following table includes the information as of the end of
2009 for each category of our equity compensation plan:

|Plan
      category                                              | Number of securities
      to be issued upon exercise of outstanding
      options, warrants and rights (a) | Weighted-average
      exercise price of outstanding options,
      warrants and rights (b) | Number of securities remaining
      available for future issuance under equity
      compensation plans (excluding securities
      reflected in column (a)) (c)
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans
      approved by security holders     | 8,000,000 (1)                                                                                               | $9.48                                                                                       | 7,470,000(2)                                                                                                                                                     
|Equity compensation plans not approved by
      security holders | -                                                                                                           |                                                                                             | -                                                                                                                                                                
|Total                                                            | 8,000,000                                                                                                   |                                                                                             | 7,470,000                                                                                                                                                        

(1) 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.

(2) On November 27, 2007, we issued 70,000 shares of common
stock to our senior management and an outside consultant as bonus awards and we
included stock-based compensation of $609,000 in our administrative expenses for
the year ended December 31, 2007. On November 30, 2007, our Board of Directors
authorized the grant of options to certain employees to purchase 490,000 shares
of our common stock, par value $0.01, subject to ratification of the Plan by our
stockholders. The options had an exercise price of $9.48 per share, were to vest
on December 5, 2008 and to expire on December 5, 2011. The respective
stock-based compensation, amounting to $68,891 was charged into administrative
expenses in the Consolidated Statements of Income and Comprehensive Income. On
March 3, 2008, our Board of Directors voided and canceled the grant of the stock
options to the employees, and on March 20, 2008 approved the grant of 400,000
shares stock awards to them at price of $4.30 per share. These newly granted
shares vested quarterly at 1/4 over a one-year period following the grant. Since
the cancellation and grant of the replacement award occurred concurrently, they
were treated as a modification of the terms of the cancelled award.

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 related expenses of $1,270,000 were accrued and are included in our
administrative expenses for the year ended December 31, 2009.

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated statement of income and
comprehensive income data for the years ended December 31, 2007, 2008 and 2009
and the selected balance sheet data as of December 31, 2008 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, 2006 and 2005 and the selected balance sheet data as of December 31, 2007
and 2006 are derived from our audited consolidated financial statements not
included in this report. We do not have balance sheet data for the fiscal year
ended December 31, 2005 which predates ISTs October 9, 2006 entry into its
contractual relationship with iASPEC.

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."

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

|                                                                  |   | 2009        |  |   | 2008        |  |   | 2007       |  |   | 2006       |  |   | 2005     
|----------------------------------------------------------------- | - | ----------- |  | - | ----------- |  | - | ---------- |  | - | ---------- |  | - | ---------
|                                                                  |   |             |  |   |             |  |   |            |  |   |            |  |   |          
|Revenues                                                          | $ | 100,996,094 |  | $ | 85,301,184  |  | $ | 30,342,709 |  | $ | 2,175,204  |  | $ | 5,023,065
|Income From Operations                                            | $ | 32,156,443  |  | $ | 23,882,882  |  | $ | 13,310,477 |  | $ | 1,881,233  |  | $ | 2,070,964
|Net Income                                                        | $ | 30,137,645  |  | $ | 24,028,173  |  | $ | 13,421,452 |  | $ | 1,594,649  |  | $ | 1,812,260
|Income from Operations Per Share                                  |   |             |  |   |             |  |   |            |  |   |            |  |   |          
|Basic                                                             | $ | 0.66        |  | $ | 0.51        |  | $ | 0.34       |  | $ | 0.06       |  |   | N/A      
|Diluted                                                           | $ | 0.66        |  | $ | 0.51        |  | $ | 0.33       |  | $ | 0.06       |  |   | N/A      
|Total Assets                                                      | $ | 250,828,938 |  | $ | 148,468,182 |  | $ | 88,853,795 |  | $ | 2,209,040  |  |   | N/A      
|Total Current Liabilities                                         | $ | 75,823,003  |  | $ | 25,463,055  |  | $ | 4,787,196  |  | $ | 564,391    |  |   | N/A      
|Total Long Term Liabilities                                       | $ | 7,107,101   |  | $ |             |  | $ |            |  | $ |            |  |   | N/A      
|Net Assets                                                        | $ | 167,898,834 |  | $ | 123,005,127 |  | $ | 84,066,599 |  | $ | 1,644,649  |  |   | N/A      
|Weighted Average Number of Shares
      Outstanding               |   |             |  |   |             |  |   |            |  |   |            |  |   |          
|Basic                                                             |   | 48,676,391  |  |   | 46,398,600  |  |   | 39,718,967 |  |   | 26,958,104 |  |   | N/A      
|Diluted                                                           |   | 48,676,391  |  |   | 46,852,827  |  |   | 40,152,855 |  |   | 26,958,104 |  |   | N/A      
|Total Equity                                                      | $ | 167,898,834 |  | $ | 123,005,127 |  | $ | 84,066,599 |  | $ | 1,644,649  |  |   | N/A      
|Capital Stock (excluding long term debt and
      treasury stock) | $ | 233,548     |  | $ | 209,121     |  | $ | 190,891    |  | $ | 50,000     |  |   | N/A      
|Number of Shares Issued and Outstanding                           |   | 49,905,141  |  | $ | 47,462,404  |  | $ | 45,639,396 |  |   | 31,550,298 |  |   | N/A      
|Basic                                                             | $ | -           |  | $ | -           |  | $ | -          |  | $ | -          |  | $ | -        
|Diluted                                                           | $ | -           |  | $ | -           |  | $ | -          |  | $ | -          |  | $ | -        
|Net Income Per Share                                              |   |             |  |   |             |  |   |            |  |   |            |  |   |          
|Basic                                                             | $ | 0.62        |  | $ | 0.51        |  | $ | 0.34       |  | $ | 0.06       |  |   | N/A      
|Diluted                                                           | $ | 0.62        |  | $ | 0.51        |  | $ | 0.33       |  | $ | 0.06       |  |   | N/A      

- 39 -

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Overview

We are a leading provider of integrated solutions for the
digital security sector, the Geographic Information Systems, or GIS sector, and
the digital hospital information sector. We provide a broad portfolio of fully
integrated solutions and services, including First Responder Coordination
Platform, Intelligent Recognition System, Residence Card Information Management
System, Police- and Civil-use GIS products, and Digital Hospital Information
System, as well as high-end multimedia display systems and technology.

We are headquartered in Shenzhen, China and our common stock is
listed on the Nasdaq Global Select Market. As of December 31, 2009, we had more
than 1,400 employees and 11 sales offices nationwide. We were founded in 1993.

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 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 other sectors, through active industry consolidation
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, or MSA, 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, operations, and accrued
but uncollected accounts receivable. In fiscal years 2009, 2008 and 2007 48.60%, 48%
and 68% of our revenues, respectively, were generated under this exclusive commercial
arrangement with iASPEC.

- 40 -

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Recent Developments

The acquisition of Huipu Electronics (Huipu) was successfully
closed on October 14, 2009. Consequently, the financial results of Huipu were
consolidated in our financial statements from the closing date. Upon closing of
the acquisition, we have been restructuring Huipu to focus on high end hardware.
These cutting-edge hardware products can be integrated with our proprietary
software and be used by our existing and new customers. We believe that such
high-end hardware capabilities will help unleash the power of our software, when
bundled with our software, can effectively broaden our sales reach
geographically and significantly enhance our core competency relative to
software-only competitors.

Fiscal Year 2009 Financial Performance Highlights

We continued to experience strong demand for our products and
services during the fiscal year ended December 31, 2009, which resulted in
revenue and net income growth. The following are some financial highlights for
the period:

- Revenue: Revenue increased $15.70 million, or 18.40%, to $101
  million for the fiscal year ended December 31, 2009, from $85.3 million for
  2008.
- Gross Profit: Gross profit increased $11.57 million, or 29.61%, to
  $50.65 million for the fiscal year ended December 31, 2009, from $39.08
  million for 2008. Gross margin widened by 434 basis points to 50.15% in 2009
  from 45.81% in 2008.
- Income from continuing operations: Income from continuing operations
  increased $6.83 million, or 29.3%, to $30.14 million for the fiscal year ended
  December 31, 2009, from $23.31 million for 2008. Operating margin (defined as
  income from continuing operations as a percentage of revenue) widened by
  251 basis points to 29.84% in
  2009 from 27.33%in 2008.
- Net income attributable to the Company: Net income attributable to
  the Company was $30.09 million for the fiscal year ended December 31, 2009.
  Backing out net income from discontinued operations, net income attributable
  to the Company for the same period in 2008 was $23.79 million. The
  year-over-year growth was 26.48%. As a result, net margin expanded by 190
  basis points to 29.79% in 2009 from 27.89% in 2008.
- Fully diluted net income per share from continuing operations: Fully
  diluted net income per share from continuing operations was $0.62 for the
  fiscal year ended December 31, 2009, as compared to $0.49 for the same period
  in 2008, representing a growth of 26.53%.

The total value of our backlog of contracts as of 
December 31, 2009 is estimated to be approximately $41.24 million.

We are pleased that against the backdrop of global financial
crisis, our 2009 financial results exceeded our goals and we continue to set new
record highs in contract wins. We executed our strategic plan successfully and
believe that the foundation we are building will take CIST to a new level as a
total solution provider with core competency in software and high-end hardware,
leading the information technology development in China for public security, GIS
and health care management.

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 DIST,
GIS and DHIS offerings.

- 41 -

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Taxation

Geo, iASPEC 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 2009

ISS, Zhongtian and Huipu are subject to the PRC EIT at 20% in
2009.

As a wholly-owned FIE, our PRC subsidiary, IST, was approved by
PRC tax authorities on August 10, 2007, to enjoy a two-year tax exemption,
followed by a 50% exemption for three years, retroactive to as of January 1,
2007. Year 2009 is the third year that IST is entitled to the tax holiday and is
subject to a favorable tax rate of 10%. 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 2009 and will continue to qualify for a 50% tax exemption for the
two years 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.

Before January 1, 2008, foreign invested enterprises, or FIEs,
established in the PRC were generally subject to an enterprise income tax, or
EIT, rate of 33.0%, which included a 30% state income tax and a 3.0% local
income tax. FIEs established in Shenzhen Special Economic Zone were subject to
reduced tax rate. On March 6, 2007, the China Unified Corporate Income Tax Law,
or the EIT Law, was released and on November 28, 2007, the State Council of
China passed the Implementing Rules for the EIT Law, or Implementing Rules, both
of which became effective on January 1, 2008, and resulted in an increase in the
PRC federal statutory tax rate to 25%. The EIT Law gives foreign investment
enterprises, or the 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. The discontinuation of any such special or
preferential tax treatment or other incentives would have an adverse effect on
any organization's business, fiscal condition and current operations in China.

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 25.0% on its global income. The Implementing
Rules define the term de facto management bodies as an establishment that
exercises, in substance, overall management and control over the production,
business, personnel, accounting, etc., of a Chinese enterprise. If the PRC tax
authorities subsequently determine that the Company should be classified as a
resident enterprise, then the organization's global income will be subject to
PRC income tax of 25%

Results of Operations

The following tables set forth key components of our results of
operations for the periods indicated, both in dollars and as a percentage of
sales revenue and key components of our revenue for the periods indicated in
dollars.

|                                  |   | 2009        |   |  |            |  |   | 2008        |   |  |            |  |   | 2007       |   |  |            | 
|--------------------------------- | - | ----------- | - |  | ---------- |  | - | ----------- | - |  | ---------- |  | - | ---------- | - |  | ---------- | 
|                                  |   |             |   |  | Percentage |  |   |             |   |  | Percentage |  |   |            |   |  | Percentage | 
|                                  |   | Amount      |   |  | of Revenue |  |   | Amount      |   |  | of Revenue |  |   | Amount     |   |  | of Revenue | 
|                                  |   |             |   |  |            |  |   |             |   |  |            |  |   |            |   |  |            | 
|Revenue                           | $ | 100,996,094 |   |  | 100.00%    |  | $ | 85,301,184  |   |  | 100.00%    |  | $ | 30,342,709 |   |  | 100%       | 
|Costs of revenue                  |   | 50,344,427  |   |  | 49.85%     |  |   | 46,222,320  |   |  | 54.19%     |  |   | 12,373,370 |   |  | 40.78%     | 
|Gross Profit                      |   | 50,651,667  |   |  | 50.15%     |  |   | 39,078,864  |   |  | 45.81%     |  |   | 17,969,339 |   |  | 59.22%     | 
|                                  |   |             |   |  |            |  |   |             |   |  |            |  |   |            |   |  |            | 
|Administrative expenses           |   | (12,653,175 | ) |  | 12.53%     |  |   | (10,158,863 | ) |  | 11.91%     |  |   | (3,288,657 | ) |  | 10.84%     | 
|Research and development expenses |   | (2,705,669  | ) |  | 2.68%      |  |   | (2,596,430  | ) |  | 3.04%      |  |   | (797,580   | ) |  | 2.63%      | 
|Management fee                    |   | -           |   |  | -          |  |   | -           |   |  | -          |  |   | (92,160    | ) |  | 0.30%      | 
|Selling expenses                  |   | (3,136,380  | ) |  | 3.11%      |  |   | (2,440,689  | ) |  | 2.86%      |  |   | (480,465   | ) |  | 1.58%      | 
|Income from operations            |   | 32,156,443  |   |  | 31.84%     |  |   | 23,882,882  |   |  | 28.00%     |  |   | 13,310,477 |   |  | 43.87%     | 

- 42 -

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|                                                                      |   |            |   |  |        |  |   |            |   |  |        |  |   |            |   |  |        | 
|--------------------------------------------------------------------- | - | ---------- | - |  | ------ |  | - | ---------- | - |  | ------ |  | - | ---------- | - |  | ------ | 
|Subsidy income                                                        |   | 833,429    |   |  | 0.83%  |  |   | 738,482    |   |  | 0.87%  |  |   | 53,289     |   |  | 0.18%  | 
|Other income, net(expenses)                                           |   | 1,153,288  |   |  | 1.14%  |  |   | 200,439    |   |  | 0.23%  |  |   | 26,146     |   |  | 0.09%  | 
|Interest income                                                       |   | 270,666    |   |  | 0.27%  |  |   | 214,850    |   |  | 0.25%  |  |   | 138,840    |   |  | 0.46%  | 
|Interest expenses                                                     |   | (388,686   | ) |  | 0.38%  |  |   | (179,130   | ) |  | 0.21%  |  |   | -          |   |  | 0.00%  | 
|                                                                      |   |            |   |  |        |  |   |            |   |  |        |  |   |            |   |  |        | 
|Income from continuing operations
      before income taxes           |   | 34,025,140 |   |  | 33.70% |  |   | 24,857,523 |   |  | 29.14% |  |   | 13,528,752 |   |  | 44.59% | 
|                                                                      |   |            |   |  |        |  |   |            |   |  |        |  |   |            |   |  |        | 
|Income tax expense                                                    |   | (3,887,495 | ) |  | 3.85%  |  |   | (1,547,509 | ) |  | 1.81%  |  |   | (107,300   | ) |  | 0.35%  | 
|                                                                      |   |            |   |  |        |  |   |            |   |  |        |  |   |            |   |  |        | 
|Income from continuing operations                                     |   | 30,137,645 |   |  | 29.84% |  |   | 23,310,014 |   |  | 27.33% |  |   | 13,421,452 |   |  | 44.23% | 
|                                                                      |   |            |   |  |        |  |   |            |   |  |        |  |   |            |   |  |        | 
|Income from discontinued
      operations (net of income taxes of $0) |   | -          |   |  | -      |  |   | 718,159    |   |  | 0.84%  |  |   | -          |   |  | -      | 
|                                                                      |   |            |   |  |        |  |   |            |   |  |        |  |   |            |   |  |        | 
|Net income                                                            |   | 30,137,645 |   |  | 29.84% |  |   | 24,028,173 |   |  | 28.17% |  |   | 13,421,452 |   |  | 44.23% | 
|                                                                      |   |            |   |  |        |  |   |            |   |  |        |  |   |            |   |  |        | 
|Less: Net Income Attributable to
      the Non controlling Interest   |   | (43,076    | ) |  |        |  |   | (241,197   | ) |  | 0.28%  |  |   | (90,000    | ) |  | -      | 
|                                                                      |   |            |   |  |        |  |   |            |   |  |        |  |   |            |   |  |        | 
|Net Income Attributable to the
      Company                          | $ | 30,094,569 |   |  | 29.80% |  | $ | 23,786,976 |   |  | 27.89% |  | $ | 13,331,452 |   |  | 43.94% | 

Comparison for the Years ended December 31, 2009 and 2008

Revenue

Our revenue is generated from our integrated 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

For the year ended December 31, 2009, approximately $54.20
million of our revenues were generated by our DIST segment, $36.83 million of
our revenues were generated by our GIS segment, and $9.97million was generated
by the DHIS segment. This compares with $50.97 million by our DIST segment,
$34.28 million by our GIS segment and $50,801 by our DHIS segment for the year
ended December 31, 2008. The increase in DIST and GIS segments are 6.33% and
7.42% year-over-year as the GIS market has gained growth momentum exceeding that
of DIST. 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

|                   |   |             |  |  |        |  |   | 2009       |  |   |            |  |  |        |  |   |            |  |  |        |  |   | 2008       |  |   |            |  |  |        | 
|------------------ | - | ----------- |  |  | ------ |  | - | ---------- |  | - | ---------- |  |  | ------ |  | - | ---------- |  |  | ------ |  | - | ---------- |  | - | ---------- |  |  | ------ | 
|                   |   | Revenue     |  |  | %      |  |   | Cost       |  |   | GP         |  |  | GP%    |  |   | Revenue    |  |  | %      |  |   | Cost       |  |   | GP         |  |  | GP%    | 
|Products           | $ | 16,784,910  |  |  | 16.62% |  | $ | 13,560,279 |  | $ | 3,224,631  |  |  | 19.21% |  | $ | 26,822,325 |  |  | 31.44% |  | $ | 25,049,072 |  | $ | 1,773,253  |  |  | 6.61%  | 
|Software           |   | 63,827,233  |  |  | 63.20% |  |   | 22,229,542 |  |   | 41,597,691 |  |  | 65.17% |  |   | 34,958,401 |  |  | 40.98% |  |   | 5,628,436  |  |   | 29,329,965 |  |  | 83.89% | 
|System integration |   | 19,017,962  |  |  | 18.83% |  |   | 14,251,391 |  |   | 4,766,571  |  |  | 25.06% |  |   | 19,328,312 |  |  | 22.66% |  |   | 12,196,185 |  |   | 7,132,127  |  |  | 36.89% | 
|Others             |   | 1,365,989   |  |  | 1.35%  |  |   | 303,215    |  |   | 1,062,774  |  |  | 77.80% |  |   | 4,192,146  |  |  | 4.91%  |  |   | 3,348,627  |  |   | 843,519    |  |  | 20.13% | 
|Subtotal           |   | 100,996,094 |  |  | 100%   |  | $ | 50,344,427 |  |   | 50,651,667 |  |  | 50.11% |  | $ | 85,301,184 |  |  | 100%   |  | $ | 46,222,320 |  |   | 39,078,864 |  |  | 45.81% | 

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This 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 revenueto 63.20% in 2009 from 41.0% in 2008. The gross margin of software is 65.17%, significantly higher than those of hardware 19.2%
and system integration 25.1%. In the mean time, 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 DIST segment, $15.41
million was attributable to our GIS segment and $3.27 million was attributable
to our DHIS segment, compared to $31.51million to DIST, $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 as a result of tax unification effort in
China.

Our subsidiaries, ISS, Zhongtian and HPC are governed by the
income tax laws of the PRC and are subject to the PRCs enterprises income tax,
or 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%, an 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.

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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 2007 and 2008, IST
enjoyed tax exemption. From 2009 through 2011, IST is subject to a favorable tax
rate of 10%, 11% and 12% respectively.

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 MSA, and
$136,926 of Geos losses retained by the entity with the 43%non-controlling interest in Geo.

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 acquisition on Oct. 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.

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Comparison for the Years ended December 31, 2008 and 2007

Revenue

Our revenue is generated from our integrated hardware and
software products and through the related after-sales services. In 2008 we
experienced solid growth in revenues. Revenue for the year ended December 31,
2008 increased $54.96 million, or 181.13%, to $85.3 million, as compared to
$30.34 million for 2007. The increase in our revenue was mainly due to the
addition of new product lines, our procurement of several large-scale system
integration projects in 2008 and our expansion into new territory.

In 2008, we completed the acquisition of our operating
subsidiaries, Bocom, Geo and Zhongtian. Our consolidation of the revenues of
these three companies in our 2008 financial statements, resulted in a $12.2
million increase of our revenues for the period. The consolidation of Bocom
accounted for $7.3 million, Geo accounted for $4.4 million and Zhongtian
accounted for 0.5 million of this increase. The acquisitions also enriched our
product and service offerings to our customers.

Our increase in revenues during the 2008 period was also
attributable to the Companys win of 235 new system integration or software
development contracts that contributed approximately $69 million to the
Companys 2008 revenues. Of these contracts, 118 integration/software
development contracts contributed $35 million in sales, 75 software development
contracts contributed $10 million in sales, and 42 new software development
contracts contributed approximately $24 million in sales. The completion of
existing contracts also contributed about $5.4 million in sales to the Company.

Some of our new contract wins also signaled our expansion
into new territories. Of these 235 new contracts, 15 contracts were won from
provinces outside of our usual market in Guangdong Province, including Beijing,
Hainan, Tianjin, Liaoning, Guangxi, Xinjiang and Xi'an. These contracts, in the
aggregate, contributed approximately $16.5 million to our revenues.

Cost of Revenue

Our cost of revenues increased $33.85 million, or 273.56%, to
$46.22 million, for the fiscal year ended December 31, 2008, from $12.37 million
in 2007. The increase was mainly due to the consolidation of ISS, Bocom, Geo and
Zhongtian who collectively contributed approximately $15.8 million in 2008,
compared to $1.7 million in 2007 which only included ISS. As a percentage of
revenues, our cost of revenue increased to 54.19% during the year ended December
31, 2008, from 40.78% in 2007. During the 2008 period, we were engaged in
several large-scale system integration projects which involved higher costs for
procured hardware and other subcontracting costs. The cost for accomplishing
those projects is generally much higher than pure software development services
and, therefore, led to an increase in our cost of revenues.

Gross Profit

Gross profit as a percentage of revenue was 45.81% for the
year ended December 31, 2008, a decrease of 13.41%, from 59.22% in 2007. The
decrease in our gross profit ratio is the combined effect of an increase in the
gross profit ratio of our software sales by 1%, and a decrease in the gross
profit ratio of our system integration sales by 7%, net of a decrease in the
gross profit ratio of our product sales by 10%, as shown in the following table:

|                   |            | 2008       |        |  |            | 2007       |       
|------------------ | ---------- | ---------- | ------ |  | ---------- | ---------- | ------
|                   | Revenue    | Cost       | GP%    |  | Revenue    | Cost       | GP%   
|Products           | 26,822,325 | 25,049,072 | 6.61%  |  | 2,007,800  | 1,669,410  | 16.85%
|Software           | 34,958,401 | 5,628,436  | 83.89% |  | 13,131,578 | 2,233,493  | 82.99%
|System integration | 19,328,312 | 12,196,185 | 36.89% |  | 15,194,314 | 8,470,467  | 44.25%
|Others             | 4,192,146  | 3,348,627  | 20.13% |  | 9,017      | -          | 100%  
|Subtotal           | 85,301,184 | 46,222,320 | 45.81% |  | 30,342,709 | 12,373,370 | 59.22%

The increase in gross profit, or GP, ratio of software sales
results from managements cost control procedures and processes to enhance
efficiency. Management has taken a series of measures to reduce software
development costs, such as reducing purchases of out-sourced services and
enhancing reliance on the work of the Companys own technicians. The decrease in
the GP ratio of system integration and product sales is mainly due to the
increase in the purchase price of manufacturing materials.

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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. We expect the dollar amount of our general and
administrative expenses will increase as our business grows and we continue to
incur increased costs for being a public reporting company.

Our administrative expenses increased $6.87 million, or 209%,
to $10.16 million for the year ended December 31, 2008, from $3.28 million in
2007. The increase in administrative expenses was mainly attributable to an
increase in our administrative staff and increased administrative costs in
connection with the expansion of our operations. The number of our employees
increased from 460 in 2007 to 732 in 2008. In addition, we issued 70,000 bonus
shares to our senior management and a consulting service company on November 27,
2007. On November 30, 2007, we also granted options to purchase 490,000 shares
of our common stock to certain employees which resulted in $0.68 million of
stock-based compensation cost charged into administrative expenses in 2007. On
March 3, 2008, the Company canceled the grant of the stock options, and on March
20, 2008 approved the grant of 400,000 shares of restricted common stock to the
employees under our 2007 Equity Incentive Plan. In 2008, $1.6 million of
stock-based compensation was charged to administrative expenses in connection
with the Plan. As a percentage of revenue, administrative expenses increased to
11.9% for the year ended December 31, 2008 from 10.8% in 2007. We believe the
increase was generally in line with the increase in our revenue.

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, 2008, research and
development expenses increased to $2.6 million, from $0.8 million for the same
period of 2007, a $1.8 million, or 225.54% increase, from year to year.
Increases related to iASPEC and IST reflect our efforts to address the
increasingly sophisticated needs of our customers for the support of existing
and emerging hardware, software, database and networking platforms, and for the
development and introduction of enhancements to our existing products and new
products on a timely basis in order to keep pace with technological
developments. We capitalize costs that are incurred to produce finished products
after technological feasibility is established.

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. Our selling expenses
increased $1.96 million, or 407.98%, to $2.44 million for the year ended
December 31, 2008, from $0.48 million in 2007. The increase was mainly due to
the consolidation of ISS, Bocom, Geo and Zhongtian collectively contributed $1.3
million in 2008, compared to $0.04 million, the result of consolidation in the
same period of 2007 which only included ISS. As a percentage of revenue, our
selling expenses increased to 2.9% for the year ended December 31, 2008, from
1.6% in 2007. We believe such increase was generally in line with the increase
in our revenue.

Subsidy Income

For the year ended December 31, 2008, in connection with
research and development activities in a designated locale, we received
approximately $738,482 as a subsidy from the local governmental agency in China.
We have no continuing obligation under the subsidy provision.

Income Taxes Expense

Our subsidiaries, ISS, Bocom, Zhongtian, and our VIE, iASPEC
(exclusive of Geo), are all governed by the Income Tax Laws of the PRC and are
subject to the PRCs enterprises income tax, or EIT, at a rate of 18% of
assessable profits in 2008. Geo is subject to EIT at a rate of 15% of assessable
profits as a High-Tech Enterprise. However, after offsetting accumulated losses
from prior years, Geo had no assessable profit subject to EIT for the year of
2008. In addition, 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. On
August 10, 2007, IST was granted the EIT exemption by PRC tax authorities,
retroactive to as of January 1, 2007. Income tax expenses for the years 2008 and
2007, was $1.55 million, and $0.11 million, respectively.

Discontinued Operations

In December 2008, we terminated our involvement in two joint
venture projects, the leasing of LED screens and the manufacture and sale of LCD
screens. Our termination resulted in income from discontinued operations of $
0.72 million.

Non-controlling Interests

Compared with $0.09 million for the same period in 2007,
minority interest increased $0.15 million, or 168%, to $0.24 million for the
year 2008. Consolidation of iASPEC for the twelve months in 2008, compared to
six months in 2007, resulted in an increase of $0.09 million in minority
interest, and the consolidation of Geo from April 1, 2008 contributed $0.06
million.

Net Income Attributed To The Company

Net income increased $10.46 million, or 78.43%, to $23.79
million during the year ended December 31, 2008, from $13.33 million in 2007.
The increase in net income was primarily attributable to the increase in revenue
and other factors described above.

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Liquidity and Capital Resources

Cash Flow and Working Capital

As of December 31, 2009, we had cash and cash equivalents of
$13.48 million. The following table summarizes the key cash flow metrics from
our consolidated statements of cash flow for the fiscal year ended December 31.

(All amounts in U.S. dollars)

CASH FLOW2009
      
      2008
      
      2007Net Cash Provided by Operating Activities
      $
      11,477,783
      $
      4,547,977
      $
      1,607,191Net Cash Used in Investing Activities
      
      (14,664,274)
      
      (21,045,087)
      
      (31,964,909)Net Cash Provided by Financing Activities
      
      7,113,658
      
      5,228,098
      
      49,535,182Effect of Exchange Rate Change on Cash
      
      (13,786)
      
      1,079,082
      
      405,402Net increase (decrease) in Cash and Cash
      Equivalents
      
      3,913,381
      
      (10,189,930)
      
      19,582,866Cash and Cash Equivalents  Beginning of
      Period
      
      9,565,252
      
      19,755,182
      
      172,316Cash and Cash Equivalents  End of Period
      $
      13,478,633
      $
      9,565,252
      $
      19,755,182


Operating Activities
Net cash provided by our operating activities increased by $6.93 million or 152.4%
for fiscal 2009, as compared to fiscal 2008. Such an increase in net cash
provided by operating activities, while revenues expanded by 18.4%, reflects
much improved operating cash flow management in 2009. The increase was mainly
due to increased net income of $6.11 million, a $2.47 increase of non-cash
adjustments and a $1.65 decrease of cash used in changes of operating assets and
liabilities. 
Net cash provided by operating activities was $4.5 million for the year ended
December 31, 2008, which is an increase of $2.9 million from the $1.6 million
net cash provided by operating activities in 2007. The increase in cash provided
by operations during the year ended December 31, 2008 was mainly due to the
increase in accounts receivable and accounts payable as a result of the steady
growth of our business operations. Investing Activities
Net cash used by our investing activities decreased by $6.38 million, or 30.3% for
fiscal 2009, as compared to fiscal 2008. The decrease was mainly due to a
decrease in cash used for acquisitions of $8.02, with Huipu being the only
acquisition this year, as compared with 3 acquisitions completed in 2008, a
decrease in proceeds from investments of $3.45 and a decrease of capital
expenditure of $1.8 million  Backing out the impact from acquisition, free cashflow was $2.3 million compared with a negative free cashflow of $3.0
million in 2008. The 152.4% increase in our cashflow from operating
activities, combined with a 30% decrease in cash flow from investing activities,
along with the health free cashflow trend indicates that our business
is reaching cashflow self-sustainability. 
On June 25, 2008, we invested RMB40 million (approximately $5.71 million) in
currencylinked capital protected investment products, or CPI Products. These
products hac a term of one year and matured on June 25, 2009. The return rate on
these investments was 4.1975% or 5.2722% per annum, based upon the quoted
exchange rate between Hong Kong Dollars (HK$) and Chinese RMB on June 23, 2008.
At maturity, the Company received $5.8 million. 
For the fiscal year ended December 31, 2008, net cash used in investing
activities was $21.05 million, which included $0.71 million, $2.44 million and
$0.23 million of cash acquired from Bocom, Geo and Zhongtian, respectively,
compared to cash used of $31.96 million for 2007. Cash provided by and used in
investing activities during the fiscal year ended December 31, 2008 consisted of
the $15.0 million in cash collected from the sale of our investment in
marketable securities and from the honor of a guarantee by our Chief Executive
Officer and controlling shareholder, Mr. Jiang Huai Lin in connection with this
investment, offset by the price paid of $7.0 million and $9.9 million,
respectively, in connection with the acquisition for Geo and Zhongtian, a $5.66
million short-term investment made in June 2008 and $8.57 million cash paid for
the investment in the two joint ventures during the year. The company also spent
$8.9 million on the purchase of property and equipment, and received $1.14
million in cash proceeds from sales of property and equipment.

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Financing Activities
Net cash provided by our financing activities increased by $1.89 million for
fiscal 2009, 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. 
For the fiscal year ended December 31, 2008 and 2007, net cash provided by
financing activities was $5.1 million and $49.5 million, respectively. For the
fiscal year ended December 31, 2008, financing activities included the repayment
of a $1.09 million bank loan and securing a $6.3 million bank loan. During 2007,
net cash provided by financing activities was mainly attributable to the net
proceeds of $49.8 million raised in our private placement during January and
February 2007.

On January 12, 2010, the Company closed a Securities Purchase
Agreement, dated as of January 7, 2010 with certain purchasers pursuant to
which: (i) the Company sold a total of 1,652,033 shares of its common stock, par
value $0.01 per share and (ii) Mr. Jiang Huai Lin, the Company's Chief Executive
Officer sold a total of 1,600,000 shares of Common Stock held by him, for an
aggregate purchase price of approximately $20 million, or $6.15 per share. The
Purchasers also received from the Company warrants to purchase an aggregate of
813,008 shares of Common Stock at an exercise price of $6.15. The Warrants were
exercisable for 45 days beginning on the date of the initial issuance of the
Warrants. The securities were sold pursuant to the Company's shelf registration
statement on Form S-3 declared effective by the SEC on November 23, 2009 (File
No. 333-159375). A prospectus supplement related to the offering was filed with
the SEC and delivered to the Purchasers. The total proceeds to the Company were
approximately $9,395,000. Prior to the expiration of the Warrants, certain of
the Purchasers exercised Warrants for the purchase of an additional 41,250
shares of Common Stock for aggregate gross proceeds to the Company of
approximately $254,000.

Rodman & Renshaw, LLC acted as the Company's exclusive
placement agent in connection with the offering and as consideration of its
services to the Company, received a commission equal to 5.0% of the gross
proceeds of the offering, including proceeds from the sale of Mr. Lin's shares.
Rodman's commission was paid on a pro rata basis by the Company and Mr. Lin
relative to their respective amount of gross proceeds from the sale of the
securities. The Company was also obligated to pay a cash fee out of any proceeds
from the exercise of the Warrants, equal to 5% of the aggregate cash exercise
price received by the Company upon such exercise, if any; provided that such fee
will be reduced to the extent that Rodman's aggregate compensation for the
offering, as determined under FINRA Rule 5110, would otherwise exceed 8%. Rodman
received an additional $12,684 in fees in connection with the exercise of
Warrants. For details regarding the offering see the Company's current report on
Form 8-K filed on January 7, 2010.

Mr. Lin received aggregate gross proceeds of $9.84 million
from the sale of his 1,600,000 shares of Common Stock in the offering. 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 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 Note).

Loan Commitments and Facilities 
As of December 31, 2009, the amount, maturity date and duration of each of our
loan commitments and facilities were as follows:

|Lender                                                       | Terms                                                                                                                                                                                                                                                                                                                                                          | Duration/Maturity Date                    | Interest Rate                                                        |   | Balance as at December 31, 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 isdue 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% p/a over HIBOR                                                 |   | 5,160,000                      
|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
    Commerce Bank                                   | Huipu term
    loan in the principal amount of RMB 55,000,000 ($8,069,000) to finance the
    construction of its plant and buildings. Interest on the loan is payable
    monthly, and principal of RMB 1,200,000 ($176,000) is payable monthly
    through the maturity date, with any remaining principal also payable on the
    maturity date.            | October 18,
    2006to October 17, 2011   | 7.128%                                                               |   | 4,020,000                      
|--                                                           | --                                                                                                                                                                                                                                                                                                                                                             | --                                        | --                                                                   | $ | 17,835,300                     

The Company has total available notes payable facilities of
$16.5 million and $3.5 million with various banks, of which $3.8 million and $0
were unutilized as of December 31, 2009 and 2008 respectively. The funds
borrowed under these facilities are generally repayable within 6 months. The
notes payable are non-interest bearing and do not have any restrictions or
covenants attached. 
We believe that our currently available working capital should be adequate to
sustain our operations at current levels through at least the next twelve
months. However, global economic conditions could substantially affect our sales
and profitability and our cash position and collection of accounts receivable.
See Part I, Item 1A - Risk Factors in this report.

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Obligations under Material Contracts
The following table sets forth our material contractual obligations as of
December 31, 2009:

|                                                               |  | Payments Due by Period
|-------------------------------------------------------------- |  | ----------------------
|Contractual obligations                                        |  | Total                 
|Operating Lease
    Obligations                                |  | $510,297              
|Software
    Purchase Commitments                              |  | $665,550              
|Other Long-Term
    Liabilities Reflected on our Balance Sheet |  | $271,117              
|Total                                                          |  | $1,446,964            

During the first half of 2007, our wholly-owned subsidiary, IST, was a party to
the Turnkey Agreement with iASPEC, pursuant to which IST was exclusively engaged
as a subcontractor providing iASPECs customers with certain outsourcing
services (to the extent that those services did not violate any special
governmental permits held by iASPEC and did not involve the transfer of any
sensitive confidential governmental or other data), and IST was obligated under
the terms of the Turnkey Agreement to pay for its own costs in providing these
services and to pay iASPEC $180,000 per year throughout the term of the
agreement.

IST, iASPEC and iASPECs shareholders, Mr. Lin and Mr. Jin Zhu
Cai, terminated the Turnkey Agreement, effective as of July 1, 2007, and
replaced it on the same day with the Management Services Agreement, or MSA.
Pursuant to the terms of the MSA, 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 also 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 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.

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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 net received profits. The MSA also provides that IST may advance to
iASPEC, at ISTs 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, when iASPEC commenced its contractual relationship with
IST, through the date of the MSA, and iASPEC will pay such true-up amount to IST
if there is a net received profit, while IST is obligated to reimburse such
true-up amount to iASPEC if it is there is a net loss.

In connection with the MSA, IST also entered into an Option
Agreement with iASPEC and its shareholders, effective as of July 1, 2007,
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. 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 the Company upon 30days notice and will
terminate on the date that the Company purchases all remaining shares or assets
of the Company 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 $712,000) to
the non-breaching party or parties, and compensate the non-breaching party or
parties for any losses caused by the breach. For more details regarding the MSA
and Option Agreement, see our Report on Form 8-K filed with the SEC on August 6,
2007.

On December 13, 2009, IST, iASPEC and Mr. Lin, as the sole
iASPEC Shareholder, amended and restated the 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 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 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 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 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 either as an entrustment of funds to iASPEC, or as an advance
  to Mr. Lin, as iASPEC 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 MSA; 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 Securities and Exchange Commission.

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For details regarding the terms of the MSA and the Equity
Transfer Agreement, see the Companys Current Reports on Form 8-K filed on
August 6, 2007, July 3, 2008, and December 17, 2009, respectively.

Seasonality of our Sales

Our operating results and operating cash flows historically
have not been subject to seasonal variations. This pattern may change, however,
as a result of new market opportunities or new product introductions.

Inflation

Inflation has not materially affected our business or the
results of our operations to date.

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Goodwill represents the excess of the purchase price over
  the net of the fair value of the identifiable tangible and intangible assets
  acquired and the fair value of liabilities assumed upon the acquisition of
  Information Security Software Investment Limited, or ISSI (formerly Fortune
  Fame International Limited) in 2007, Information Security International
  Investment and Development Limited, or ISIID (formerly Bocom Multimedia
  Display Technology Co., Ltd.), Wuda Geo Informatics Co., Ltd, or Geo, Kwong
  Tai International Technology Limited, or Kwong Tai, and Huipu Electronics
  (China) Company Limited, or Huipu. Management evaluates the carrying value of
  goodwill annually or when a possible impairment is indicated. We perform our
  impairment annually during the fourth quarter of the fiscal year and
  determined that there was no impairment of goodwill as of December 31, 2009.
- 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.
- 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
- Foreign Currency TranslationThe functional currency of our wholly-
  owned PRC subsidiaries, IST, ISS, Bocom, Zhongtian, Huipu and our VIE, iASPEC
  and its subsidiary, Geo is the Chinese Renminbi Yuan, (RMB). RMB is not
  freely convertible into foreign currencies. Our PRC subsidiaries 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.

The exchange rates adopted are as follows:

|                             |         | December 31, |       
|---------------------------- | ------- | ------------ | ------
|                             | 2009    | 2008         | 2007  
|                             |         |              |       
|Year end exchange rate       | 6.81663 | 6.8542       | 7.3141
|Average yearly exchange rate | 6.82082 | 6.9623       | 7.6172

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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.

- Income Taxes- Income tax expense is based on reported income before
  income taxes. Deferred income taxes reflect the effect of temporary
  differences between assets and liabilities that are recognized for financial
  reporting purposes and the amounts that are recognized for income tax
  purposes. Deferred taxes are measured by applying currently enacted tax laws.
- Earnings per Share- Basic earnings per share is 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 the year ended December 31, 2009, there is no dilutive effect.

Recent Accounting Pronouncements

In April 2009, the FASB issued new guidance relating to
Interim Disclosures about Fair Value of Financial Instruments that requires the
fair value disclosures required for all financial instruments be included in
interim financial statements. This guidance also requires entities to disclose
the method and significant assumptions used to estimate the fair value of
financial instruments on an interim and annual basis and to highlight any
changes from prior periods. This guidance was effective for interim periods
ending after September 15, 2009. The adoption of this guidance did not have a
material impact on the Company's Consolidated Financial Statements.

In June 2009, the FASB issued new guidance on the Accounting
for Transfers of Financial Assets that addresses information a reporting entity
provides in its financial statements about the transfer of financial assets; the
effects of a transfer on its financial position, financial performance, and cash
flows; and a transferor continuing involvement in transferred financial assets.
The guidance also removes the concept of a qualifying special purpose entity,
limits the circumstances in which a transferor derecognizes a portion or
component of a financial asset, defines participating interest and enhances the
information provided to financial statement users to provide greater
transparency. This guidance is effective for the first annual reporting period
beginning after November 15, 2009 and will be effective for the Company as of
January 1, 2010. The Company is currently evaluating the impact on our
consolidated financial statements upon adoption.

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

Interest Rate Risk The Company deposits surplus funds with Chinese banks earning daily
interest. The Company does not invest in any instruments for trading purposes.
Most of the Companys outstanding debt instruments carry fixed rates of
interest. The Companys operations generally are not directly sensitive to
fluctuations in interest rates. The amount of long-term debt outstanding as of
December 31, 2009 and 2008 was $ 2 million and $0, 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, 2009, would decrease
net income before provision for income taxes by approximately $20,000 or less
than 1% for the fiscal year ended December 31, 2009. 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. dollar, 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. dollar, the value of
our RMB revenues, earnings and assets as expressed in our U.S. dollar financial
statements will decline. Assets and liabilities are translated at exchange rates
at the balance sheet dates and revenue and expenses are translated at the
average exchange rates and 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.
dollar of 5% would increase(decrease) our comprehensive income by $ 5 million
based on our outstanding revenues, costs and expenses, assets and liabilities
denominated in RMB as of December 31, 2009. As of December 31, 2009, our
accumulated other comprehensive income was $5 million. We have not entered into
any hedging transactions in an effort to reduce our exposure to foreign exchange
risk. 
The value of the Renminbi against the U.S. dollar and other currencies is
affected by, among other things, changes in Chinas political and economic
conditions. Since July 2005, the Renminbi has not been pegged to the U.S.
dollar. Although the Peoples Bank of China regularly intervenes in the foreign
exchange market to prevent significant short-term fluctuations in the exchange
rate, the Renminbi may appreciate or depreciate significantly in value against
the U.S. dollar in the medium to long term. Moreover, it is possible that in the
future, PRC authorities may lift restrictions on fluctuations in the Renminbi
exchange rate and lessen intervention in the foreign exchange market. Inflation
Inflationary factors such as increases in the cost of our product and overhead
costs may adversely affect our operating results. Although we do not believe
that inflation has had a material impact on our financial position or results of
operations to date, a high rate of inflation in the future may have an adverse
effect on our ability to maintain current levels of gross margin and selling,
general and administrative expenses as a percentage of net revenues if the
selling prices of our products do not increase with these increased costs.



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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Financial Statements

The financial statements required by this item begin on page
F-1 hereof.

Quarterly Financial Results

The following table sets forth certain unaudited financial
information for each of the eight quarters ended December 31, 2009 and 2008. 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)

|2009                       |   | First Quarter |  |   | Second Quarter |  |   | Third Quarter |  |   | Fourth 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           | 



|2008         |   |            |  |   |            |  |   |            |  |   |            | 
|------------ | - | ---------- |  | - | ---------- |  | - | ---------- |  | - | ---------- | 
|Revenue      | $ | 14,404,426 |  | $ | 21,704,641 |  | $ | 21,621,140 |  | $ | 27,570,977 | 
|Gross profit |   | 6,631,010  |  |   | 10,408,229 |  |   | 11,151,828 |  |   | 10,887,797 | 

|Income before income taxes |   | 3,830,725 |  |   | 7,136,380 |  |   | 7,922,575 |  |   | 5,967,843 | 
|-------------------------- | - | --------- |  | - | --------- |  | - | --------- |  | - | --------- | 
|Net income                 |   | 3,623,980 |  |   | 7,114,875 |  |   | 8,101,812 |  |   | 4,946,309 | 
|Basic income per share     | $ | 0.08      |  | $ | 0.16      |  | $ | 0.17      |  | $ | 0.10      | 
|Diluted income per share   | $ | 0.08      |  | $ | 0.15      |  | $ | 0.17      |  | $ | 0.11      | 



|2007                       |   |           |  |   |           |  |   |            |  |   |            | 
|-------------------------- | - | --------- |  | - | --------- |  | - | ---------- |  | - | ---------- | 
|Revenue                    | $ | 3,032,141 |  | $ | 5,407,595 |  | $ | 10,158,285 |  | $ | 11,744,688 | 
|Gross profit               |   | 2,821,429 |  |   | 4,809,764 |  |   | 5,072,826  |  |   | 5,265,320  | 
|Income before income taxes |   | 2,516,295 |  |   | 4,181,710 |  |   | 3,797,665  |  |   | 3,033,082  | 
|Net income                 |   | 2,138,851 |  |   | 4,559,154 |  |   | 3,722,377  |  |   | 2,911,070  | 
|Basic income per share     | $ | 0.06      |  | $ | 0.12      |  | $ | 0.09       |  | $ | 0.07       | 
|Diluted income per share   | $ | 0.07      |  | $ | 0.11      |  | $ | 0.09       |  | $ | 0.06       | 

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.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

(a) 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, 2009. Based upon, and as
of the date of this evaluation, Mr. Lin and Ms. Kazmerzak, determined that, as
of December 31, 2009, and as of the date of this Report, our disclosure controls
and procedures were effective.

(b) Management's Report on Internal Control over
Financial Reporting

Our management is responsible for establishing and maintaining
adequate internal controls over our financial reporting as defined in Rule
13a-15(f) under the Exchange Act. The Exchange Act defines internal control over
financial reporting as a process designed by, or under the supervision of, the a
companys principal executive and principal financial officers and effected by a
companys Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America and
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 accounting principles generally accepted in the
United States of America, or US GAAP, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and
directors of the Company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the Companys assets that could have a material effect on the financial
statements.

There are inherent limitations in the effectiveness of any
system of internal controls, including the possibility of human error and the
circumvention or overriding of controls, such that 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 and procedures may deteriorate. A
material weakness is a deficiency, or a combination of deficiencies, in internal
controls over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Companys annual or interim financial
statements will not be prevented or detected on a timely basis. A significant
deficiency is a deficiency, or a combination of deficiencies, in internal
control over financial reporting that is less severe than a material weakness,
yet important enough to merit attention by those responsible for oversight of
our financial reporting.

Management, 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, assessed the effectiveness of our internal control
over financial reporting as of December 31, 2009. Management excluded from this
assessment, the business that we acquired in 2009, because it was not possible
to conduct an assessment of the business's internal control over financial
reporting in the period between the consummation date and the date of
managements assessment. With respect to excluding this company, we are required
to (1) formally note that management is excluding this acquired business from
managements report on internal control over financial reporting; (2) clearly
identify the acquired business excluded and have indicated the significance of
the acquired business in our companys consolidated financial statements; and
(3) disclose material changes, if any, to our internal control over financial
reporting due to the acquisition of this business. We have excluded Huipu, our
PRC indirect subsidiary, from our assessment of internal control over financial
reporting as of December 31, 2009 because this company was acquired on October
14, 2009 and qualified under current SEC regulations for exclusion from our
assessment of internal control over financial reporting. Huipus financial
statements constitute 18.26% of our total assets, 4.33% of total revenues, and less than 1% of net income
of our consolidated financial statements amounts, as of and for the year ended
December 31, 2009. In assessing the effectiveness of our internal controls over
financial reporting as of December 31, 2009, we used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control  Integrated Framework. Based on our assessment, we determined
that as of December 31, 2009, our internal controls over financial reporting
were effective based on those criteria.

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(c) Changes in Internal Controls over Financial Reporting

We regularly review our system of internal control over
financial reporting and make changes to our processes and systems to improve
controls and increase efficiency, while ensuring that we maintain an effective
internal control environment. Changes may include such activities as
implementing new, more efficient systems, consolidating activities, and
migrating processes.

Except as described above, there were no changes in our
internal controls over financial reporting during the fourth quarter of fiscal
2009 that have materially affected, or are reasonably likely to materially
affect our internal control over financial reporting.  As a result of the
remediation taken by management during fiscal year 2009 and disclosed in our
periodic reports for the periods in which such remediation ocurred, the material
weaknesses identified as of December 31, 2008 have been fully remediated as at
December 31, 2009. ITEM 9B. OTHER INFORMATION

There is no information required to be disclosed in a report on
Form 8-K during the fourth quarter of the year covered by this Form 10-K but not
reported.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTThe information required by Item 10 of Part III is included in our Proxy
Statement relating to the 2009 Annual Meeting of Stockholders and is
incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATIONThe information required by Item 11 of Part III is included in our Proxy
Statement relating to the 2009 Annual Meeting of Stockholders and is
incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDERSThe information required by Item 12 of Part III is included in our Proxy
Statement relating to the 2009 Annual Meeting of Stockholders and is
incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCEInformation required by Item 13 of Part III is included in our Proxy
Statement relating to the 2009 Annual Meeting of Stockholders and is
incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESInformation required by Item 14 of Part III is included in our Proxy
Statement relating to the 2009 Annual Meeting of Stockholders and is
incorporated herein by reference.

- 56 -

---

|(a) | The following documents are filed as part of this
      report:
|--- | ---------------------------------------------------------------
|    |                                                                
|    | (1)                                                            
|    |                                                                
|    |                                                                
|    |                                                                
|    | (2)                                                            
|    |                                                                
|    |                                                                
|    |                                                                
|    | (3)                                                            
|    |                                                                
|    |                                                                

|Exhibit | **Description**                                                                                                                                                                                                                                                         
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.     |                                                                                                                                                                                                                                                                         
|        |                                                                                                                                                                                                                                                                         
|2.1     | Agreement and Plan of Merger, dated April 2, 2008,
      between China Public Security Technology, Inc. and China (incorporated by
      reference to Exhibit 2.1 of the current report on Form 8-K filed by the
      Company on April 7, 2008).                       
|        |                                                                                                                                                                                                                                                                         
|3.1     | Amended and Restated Articles of Incorporation of the
      Company, as filed with the Secretary of State of Nevada on February 13,
      2008 (incorporated by reference to Exhibit 3.1 of the current report on
      Form 8-K filed by the Company on April 7, 2008).
|        |                                                                                                                                                                                                                                                                         
|3.2     | Bylaws of China Information Security Technology, Inc.,
      adopted on February 13, 2008 (incorporated by reference to Exhibit 3.2 of
      the registration statement on Form 8-K filed by the Company on April 7,
      2008).                                       
|        |                                                                                                                                                                                                                                                                         
|4.1     | Form of Registration Rights Agreement, dated October 25,
      2007 (incorporated by reference to Exhibit 4.1 to the current report on
      Form 8-K filed by the Company on October 25, 2007).                                                                        
|        |                                                                                                                                                                                                                                                                         
|4.2     | Common Stock Purchase Warrant issued to Roth Capital
      Partners, LLC, dated October 29, 2007 (incorporated by reference to
      Exhibit 4.2 to the current report on Form 8-K filed by the Company on
      October 30, 2007).                                     
|        |                                                                                                                                                                                                                                                                         
|4.3     | Common Stock Purchase Warrant issued to Brean Murray,
      Carret & Co., LLC, dated October 29, 2007 (incorporated by reference
      to Exhibit 4.3 to the current report on Form 8-K filed by the Company on
      October 30, 2007).                                
|        |                                                                                                                                                                                                                                                                         
|4.4     | Registration Rights Agreement, dated January 31, 2007,
      among the Company and the investors signatory thereto (incorporated by
      reference to Exhibit 4.1 to the current report on Form 8-K filed by the
      Company on February 1, 2007).                   
|        |                                                                                                                                                                                                                                                                         
|4.5     | Amendment No. 1 to Registration Rights Agreement, dated
      March 9, 2007, among the Company and the investors signatory thereto
      (incorporated by reference to Exhibit 4.1 to the current report on Form
      8-K filed by the Company on March 20, 2007).     

- 57 -

---

|4.6   | 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).                                                                                                                                                                                                                                                                                        
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.7   | Registration Rights Agreement, dated March 26, 2008,
      among the Company and the investors signatory thereto (incorporated by
      reference to Exhibit 4.1 to the current report on Form 8-K filed by the
      Company on March 28, 2008).                                                                                                                                                                                                                                              
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.8   | Form of Warrant, dated January 7, 2010, among the Company
      and the investors signatory thereto (incorporated by reference to Exhibit
      4.1 to the current report on Form 8-K filed by the Company on January 7,
      2010).                                                                                                                                                                                                                                                          
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.1  | Form of Securities Purchase Agreement, dated October 25,
      2007 (incorporated by reference to Exhibit 10.1 of the current report on
      Form 8-K filed by the Company on October 25, 2007).                                                                                                                                                                                                                                                                                              
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.2  | Form of Closing Escrow Agreement, dated as of October 25,
      2007 (incorporated by reference to Exhibit 10.2 of the current report on
      Form 8-K filed by the Company on October 25, 2007).                                                                                                                                                                                                                                                                                             
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.3  | Securities Purchase Agreement, dated January 16, 2007,
      among the Company and the investors signatory thereto (incorporated by
      reference to Exhibit 10.1 of the current report on Form 8-K filed by the
      Company on January 17, 2007).                                                                                                                                                                                                                                         
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.4  | 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 of the current report
      on Form 8-K filed by the Company on February 1, 2007).                                                                                                                                                                                                                  
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.5  | Make Good Escrow Agreement, dated January 31, 2007, among
      the Company, Mr. Jiang Huai Lin, the investors signatory thereto, Roth
      Capital Partners, LLC and Securities Transfer Corporation, as escrow agent
      (incorporated by reference to Exhibit 10.3 of the current report on Form
      8-K filed by the Company on February 1, 2007).                                                                                                                                    
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.6  | Lockup Agreement, dated January 31, 2007, among the
      Company and the stockholders signatory thereto (incorporated by reference
      to Exhibit 10.4 of the current report on Form 8-K filed by the Company on
      February 1, 2007).                                                                                                                                                                                                                                                   
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.7  | Rescission; Termination and Share Exchange Agreement,
      dated January 31, 2007, among Shenzhen iASPEC Software Engineering Company
      Limited, the shareholders of iASPEC who are signatories thereto, including
      Jiang Huai Lin, Public Security Technology (PRC) Co., Ltd., China
      Information Security Holdings Limited and the Company (incorporated by
      reference to Exhibit 10.5 of the current report on Form 8-K filed by the
      Company on February 1, 2007).
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.8  | Amended and Restated Business Turnkey Agreement, dated as
      of January 31, 2007, by and between Public Security Technology (PRC) Co.,
      Ltd. and Shenzhen iASPEC Software Engineering Company Limited and the
      shareholders of iASPEC party thereto (incorporated by reference to Exhibit
      10.6 of the current report on Form 8-K filed by the Company on February 1,
      2007).                                                                                           
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.9  | Management Service Agreement, dated as of August 1, 2007,
      among Public Security Technology (PRC) Co., Ltd., Shenzhen iASPEC Software
      Engineering Company Limited, Jiang Huai Lin and Jin Zhu Cai (incorporated
      by reference to Exhibit 10.1 of the current report on Form 8-K filed by
      the Company on August 6, 2007).                                                                                                                                                 
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.10 | Guaranty, dated August 1, 2007, by Jiang Huai Lin and Jin
      Zhu Cai (incorporated by reference to Exhibit 10.2 of 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
      Public Security Technology (PRC) Co., Ltd., Shenzhen iASPEC Software
      Engineering Company Limited, Jiang Huai Lin and Jin Zhu Cai (incorporated
      by reference to Exhibit 10.3 of 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 Public
      Security Technology (PRC) Co., Ltd., Shenzhen iASPEC Software Engineering
      Company Limited, Jiang Huai Lin and Jin Zhu Cai (incorporated by reference
      to Exhibit 10.4 of 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 Public Security Technology (PRC) Co., Ltd.,
      Shenzhen iASPEC Software Engineering Company Limited, Jiang Huai Lin and
      Jin Zhu Cai (incorporated by reference to Exhibit 10.16 of the
      registration statement on Form SB-2/A filed by the Company on September
      14, 2007).                                                                                                                                   

- 58 -

---

|10.14 | English Translation of Form of China Public Security
      Technology, Inc. Employment Agreement (incorporated by reference to
      Exhibit 10.7 of the annual report on Form 10-KSB filed by the Company on
      April 16, 2007).                                                                                                                                         
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                                                                              
|10.15 | English Translation of Form of China Public Security
      Technology, Inc. Non-Disclosure Agreement (incorporated by reference to
      Exhibit 10.8 of the annual report on Form 10-KSB filed by the Company on
      April 16, 2007).                                                                                                                                     
|      |                                                                                                                                                                                                                                                                                                                                                                              
|10.16 | Letter Agreement, dated March 29, 2007, among the Company
      and the investors and stockholder signatory thereto (incorporated by
      reference to Exhibit 10.9 of the annual report on Form 10-KSB filed by the
      Company on April 16, 2007).                                                                                                                      
|      |                                                                                                                                                                                                                                                                                                                                                                              
|10.17 | Form of China Public Security Technology, Inc.
      Independent Director Agreement (incorporated by reference to Exhibit 10.1
      of the current report on Form 8- K filed by the Company on August 16,
      2007).                                                                                                                                                      
|      |                                                                                                                                                                                                                                                                                                                                                                              
|10.18 | Form of China Public Security Technology, Inc.
      Indemnification Agreement (incorporated by reference to Exhibit 10.2 of
      the current report on Form 8-K filed by the Company on August 16,
      2007).                                                                                                                                                            
|      |                                                                                                                                                                                                                                                                                                                                                                              
|10.19 | 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 of the current report on Form
      8-K filed by the Company on November 9, 2007).                                      
|      |                                                                                                                                                                                                                                                                                                                                                                              
|10.20 | 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 of the current
      report on Form 8-K filed by the Company on December 13, 2007).                                                                                 
|      |                                                                                                                                                                                                                                                                                                                                                                              
|10.21 | Share Purchase and Increase Capital Agreement, dated as
      of February 16, 2008, by and among iASPEC Software Engineering Co., Ltd.,
      Wuhan Wuda Venture Capital Co., Ltd., Wuhan Wuda Geoinformatics Co., Ltd.
      and Song Ai Hong (incorporated by reference to Exhibit 10.1 of the current
      report on Form 8-K filed by the Company on February 19, 2008).
|      |                                                                                                                                                                                                                                                                                                                                                                              
|10.22 | Share Purchase and Increase Capital Agreement, dated as
      of February 16, 2008, by and among iASPEC Software Engineering Co., Ltd.
      and Li Wei (incorporated by reference to Exhibit 10.1 of the current
      report on Form 8-K filed by the Company on February 19, 2008).                                                                                       
|      |                                                                                                                                                                                                                                                                                                                                                                              
|10.23 | Purchase Agreement, dated as of March 26, 2008, by and
      among Jiang Huai Lin, the Company and the investors signatory thereto
      (incorporated by reference to Exhibit 10.1 of the current report on Form
      8-K filed by the Company on March 28, 2008).                                                                                                         
|      |                                                                                                                                                                                                                                                                                                                                                                              
|10.24 | Equity Transfer Agreement, dated August 1, 2008, by and
      between Jiang Huai Lin and Jin Zhu Cai (incorporated by reference to
      Exhibit 10.2 of the current report on Form 8-K filed by the Company on
      August 3, 2008).                                                                                                                                       
|      |                                                                                                                                                                                                                                                                                                                                                                              
|10.25 | Purchase Contract between iASPEC Software Co., Ltd. and
      Huipu Electronic (Shenzhen) Co., Ltd., dated September 15, 2008
      (incorporated by reference to Exhibit 10.25 of the annual report on Form
      10-K/A filed by the Company on November 18, 2009).                                                                                                        
|      |                                                                                                                                                                                                                                                                                                                                                                              
|10.26 | Purchase Contract between Dell (China) Company Limited
      and Information Security Software Company Ltd., dated January 1, 2008
      (incorporated by reference to Exhibit 10.26 of the annual report on Form
      10-K/A filed by the Company on August 12, 2009).                                                                                                     
|      |                                                                                                                                                                                                                                                                                                                                                                              
|10.27 | 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 of the annual report on Form
      10-K/A filed by the Company on November 18, 2009).                                                                                                  
|      |                                                                                                                                                                                                                                                                                                                                                                              
|10.28 | 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 of the
      annual report on Form 10-K/A filed by the Company on November 18,
      2009).                                                                      
|      |                                                                                                                                                                                                                                                                                                                                                                              
|10.29 | Employment Agreement, dated January 25, 2007, between the
      Company and Jiang Huai Lin (incorporated by reference to Exhibit 10.29 of
      the annual report on Form 10-K/A filed by the Company on August 12,
      2009).                                                                                                                                             
|      |                                                                                                                                                                                                                                                                                                                                                                              
|10.30 | Employment Agreement, dated November 17, 2008, between
      the Company and Wendy Wang (incorporated by reference to Exhibit 10.30 of
      the annual report on Form 10-K/A filed by the Company on August 12,
      2009).                                                                                                                                                

- 59 -

---

|10.31 | Employment Agreement,
        dated August 12, 2008, between the Company and Yi Fu Liu (incorporated
        by reference to Exhibit 10.31 of the annual report on Form 10-K/A filed
        by the Company on August 12, 2009).                                                                                                                         
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                                                          
|10.32 | Employment Agreement,
        dated August 12, 2008, between the Company and Zhi Xiong Huang (incorporated
        by reference to Exhibit 10.32 of the annual report on Form 10-K/A filed
        by the Company on August 12, 2009).                                                                                                                   
|      |                                                                                                                                                                                                                                                                                                                                                          
|10.33 | Employment Agreement,
        dated August 12, 2008, between the Company and Zhi Qiang Zhao (incorporated
        by reference to Exhibit 10.33 of the annual report on Form 10-K/A filed
        by the Company on August 12, 2009).                                                                                                                    
|      |                                                                                                                                                                                                                                                                                                                                                          
|10.34 | 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 of the current report
        on Form 8-K filed by the Company on July 3, 2008).                         
|      |                                                                                                                                                                                                                                                                                                                                                          
|10.35 | Amended and
        Restated Management Services Agreement, dated as of December 13, 2009,
        among Information Security Technology (China) Company, Ltd., iASPEC Software
        Company, Ltd. and Jiang Huai Lin (incorporated by reference to Exhibit
    10.5 of the current report on Form 8-K filed by the Company on December 17,
    2009).
|      |                                                                                                                                                                                                                                                                                                                                                          
|10.36 | 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).                                                                                       
|      |                                                                                                                                                                                                                                                                                                                                                          
|10.37 | 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).                                                                                                          
|      |                                                                                                                                                                                                                                                                                                                                                          
|14    | Amended and
        Restated Code of Ethics, adopted on December 25, 2007 (incorporated by
        reference to Exhibit 14 of the annual report on Form 10-K filed by the
        Company on March 31, 2008).                                                                                                                                            
|      |                                                                                                                                                                                                                                                                                                                                                          
|21    | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                     
|      |                                                                                                                                                                                                                                                                                                                                                          
|31.1* | Certification
        of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley
        Act of 2002                                                                                                                                                                                                                             
|      |                                                                                                                                                                                                                                                                                                                                                          
|31.2* | Certification
        of Principal Financial and Accounting Officer filed pursuant to Section
        302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                              
|      |                                                                                                                                                                                                                                                                                                                                                          
|32.1* | Certification
        of Principal Executive Officer furnished pursuant to 18 U.S.C. Section
        1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
        2002                                                                                                                                                                  
|      |                                                                                                                                                                                                                                                                                                                                                          
|32.2* | Certification
        of Principal Financial and Accounting Officer furnished pursuant to 18
        U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
        Act of 2002                                                                                                                                                   

* Filed herewith

-60 -

---

SIGNATURES

In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

|                     | CHINA INFORMATION SECURITY TECHNOLOGY, INC. 
|-------------------- | --------------------------------------------
|                     |                                             
|                     |                                             
|Dated: March 5, 2010 | /s/
      Jiang Huai Lin                    
|                     | Jiang Huai Lin                              
|                     | Chairman and Chief Executive Officer        
|                     | (Principal Executive Officer)               
|                     |                                             
|Dated: March5, 2010  | /s/
      Jackie You Kazmerzak              
|                     | Jackie You Kazmerzak                        
|                     | Chief Financial Officer                     
|                     | (Principal Financial and Accounting Officer)

Pursuant
to the requirements of 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 indicated on November 18, 2009.

|SIGNATURE                      | CAPACITY                                        | DATE        
|------------------------------ | ----------------------------------------------- | ------------
|                               |                                                 |             
|/s/ Jiang Huai Lin             | President, Chief Executive
      Officer and    | March5, 2010
|Jiang Huai Lin                 | Chairman of the Board
      (Principal          |             
|                               | Executive Officer)                              |             
|                               |                                                 |             
|/s/ Jackie You
      Kazmerzak | Chief Financial Officer
      (Principal        | March5, 2010
|Jackie You Kazmerzak           | Financial Officer and Principal                 |             
|                               | Accounting Officer)                             |             
|                               |                                                 |             
|s/ Zhiqiang Zhao               | Director and Chief
      Administrative Officer | March5, 2010
|Zhiqiang Zhao                  |                                                 |             
|                               |                                                 |             
|s/ Qiang Lin                   | Director                                        | March5, 2010
|Qiang Lin                      |                                                 |             
|                               |                                                 |             
|s/ Remington Hu                | Director                                        | March5, 2010
|Remington Hu                   |                                                 |             
|                               |                                                 |             
|s/ Yun Sen Huang               | Director                                        | March5, 2010
|Yun Sen Huang                  |                                                 |             

- 61 -

---

CHINA INFORMATION SECURITY TECHNOLOGY, INC. INDEX
TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2009 AND 2008

|Contents                                                                                                         | Page(s)
|---------------------------------------------------------------------------------------------------------------- | -------
|                                                                                                                 |        
|Report
      of Independent Registered Public Accounting Firm                                                    | F-2    
|                                                                                                                 |        
|Consolidated
      Balance Sheets as of December 31, 2009 and 2008                                               | F-4    
|                                                                                                                 |        
|Consolidated
      Statements of Income for the years ended December 31, 2009, 2008 and 2007                     | F-6    
|                                                                                                                 |        
|Consolidated
      Statements of Comprehensive Income for the years ended December 31, 2009,
      2008 and 2007 | F-8    
|                                                                                                                 |        
|Consolidated
      Statements of Changes in Equity for the years ended December 31, 2009,
      2008 and 2007    | F-8    
|                                                                                                                 |        
|Consolidated
      Statements of Cash Flows for the years ended December 31, 2009, 2008 and
      2007           | F-9    
|                                                                                                                 |        
|Notes
      to the Consolidated Financial Statements                                                             | F-11   

- F-1 -

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM

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

We have audited the accompanying consolidated balance sheets of
China Information Security Technology, Inc. and subsidiaries as of December 31,
2009 and 2008, and the related consolidated statements of income, comprehensive
income, changes in equity, and cash flows for each of the years in the
three-year period ended December 31, 2009. We also have audited China
Information Security Technology, Inc.s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal
Control -Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). China Information Security
Technology, Inc.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 Managements Report 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 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 audits 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 audits 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, and 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
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.

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
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
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.

As indicated in the accompanying Managements Report on
Internal Control Over Financial Reporting appearing under Item 9A(b) of the
Companys December 31, 2009 annual report on Form 10-K, managements assessment
of and conclusion on the effectiveness of internal control over financial
reporting did not include a business acquisition during 2009 because it was not
possible to conduct an assessment of the acquired businesss internal control
over financial reporting in the period between the consummation date and the
date of managements assessment. The business comprises 13.3%, 4.6% and less
than 1% of total assets, total revenue and net income, respectively, included in
the consolidated financial statements of the Company as of December 31, 2009.
Our audit of internal control over financial reporting of the Company also did
not include an evaluation of the internal control over financial reporting of
the acquired business.

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 2008, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2009 in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, China Information Security Technology, Inc. maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).

- F-2 -

---

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 SECURITY TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETSDECEMBER 31, 2009 AND 2008

|                                                                                                                                             |  | NOTES |  |   | 2009        |   |   | 2008        | 
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- |  | - | ----------- | - | - | ----------- | 
|ASSETS                                                                                                                                       |  |       |  |   |             |   |   |             | 
|                                                                                                                                             |  |       |  |   |             |   |   |             | 
|CURRENT ASSETS                                                                                                                               |  |       |  |   |             |   |   |             | 
|Cash and cash equivalents                                                                                                                    |  |       |  | $ | 13,478,633  |   | $ | 9,565,252   | 
|Restricted cash                                                                                                                              |  |       |  |   | 5,859,910   |   |   | -           | 
|Short-term investments                                                                                                                       |  | 6     |  |   | -           |   |   | 5,835,838   | 
|Accounts receivable:                                                                                                                         |  |       |  |   |             |   |   |             | 
|Billed, net of allowance for doubtful accounts of
      $3,123,000 and $399,800, respectively                                                |  |       |  |   | 23,907,035  |   |   | 17,141,594  | 
|Unbilled                                                                                                                                     |  |       |  |   | 47,851,638  |   |   | 25,715,514  | 
|Bills receivable                                                                                                                             |  |       |  |   | -           |   |   | 4,481,340   | 
|Advances to suppliers                                                                                                                        |  |       |  |   | 6,924,035   |   |   | 8,469,976   | 
|Amount due from related parties, net of allowance for
      doubtful accounts of $0 and $73,000, respectively                                |  | 7     |  |   | 129,937     |   |   | 131,594     | 
|Inventories, net of provision of $184,000
      and $49,000,respectively                                                                     |  | 8     |  |   | 10,936,004  |   |   | 7,107,537   | 
|Other receivables and prepaid expenses                                                                                                       |  |       |  |   | 15,405,089  |   |   | 6,251,484   | 
|Deferred tax assets                                                                                                                          |  | 14    |  |   | 1,719,327   |   |   | -           | 
|TOTAL CURRENT ASSETS                                                                                                                         |  |       |  |   | 126,211,608 |   |   | 84,700,129  | 
|                                                                                                                                             |  |       |  |   |             |   |   |             | 
|Deposit for software purchase                                                                                                                |  |       |  |   | 1,426,452   |   |   | -           | 
|Long-term investments                                                                                                                        |  | 9     |  |   | 2,862,016   |   |   | 3,078,405   | 
|Property, plant and equipment, net                                                                                                           |  | 10    |  |   | 53,586,514  |   |   | 23,555,603  | 
|Land use rights, net                                                                                                                         |  | 11(a) |  |   | 1,907,611   |   |   | -           | 
|Intangible assets, net                                                                                                                       |  | 11(b) |  |   | 13,556,141  |   |   | 13,115,151  | 
|Goodwill                                                                                                                                     |  | 5     |  |   | 50,609,866  |   |   | 24,018,894  | 
|Deferred tax assets                                                                                                                          |  | 14    |  |   | 668,730     |   |   |             | 
|TOTAL ASSETS                                                                                                                                 |  |       |  | $ | 250,828,938 |   | $ | 148,468,182 | 
|                                                                                                                                             |  |       |  |   |             |   |   |             | 
|LIABILITIES AND EQUITY                                                                                                                       |  |       |  |   |             |   |   |             | 
|                                                                                                                                             |  |       |  |   |             |   |   |             | 
|CURRENT LIABILITIES                                                                                                                          |  |       |  |   |             |   |   |             | 
|Short-term bank loans                                                                                                                        |  | 12    |  | $ | 15,927,780  |   | $ | 6,327,992   | 
|Accounts payable                                                                                                                             |  |       |  |   | 20,159,317  |   |   | 7,206,154   | 
|Bills payable                                                                                                                                |  | 13    |  |   | 12,658,029  |   |   | 3,501,574   | 
|Advances from customers                                                                                                                      |  |       |  |   | 3,950,744   |   |   | 2,476,335   | 
|Amount due to related parties                                                                                                                |  | 7     |  |   | 583,736     |   |   | 486,136     | 
|Accrued payroll and benefits                                                                                                                 |  |       |  |   | 3,142,240   |   |   | 1,319,386   | 
|Other payables and accrued expenses                                                                                                          |  |       |  |   | 14,252,918  |   |   | 2,553,019   | 
|Contingent consideration, current portion                                                                                                    |  | 5     |  |   | 1,857,994   |   |   | -           | 
|Income tax payable                                                                                                                           |  | 14    |  |   | 3,290,245   |   |   | 1,592,459   | 
|TOTAL CURRENT LIABILITIES                                                                                                                    |  |       |  |   | 75,823,003  |   |   | 25,463,055  | 
|                                                                                                                                             |  |       |  |   |             |   |   |             | 
|Long-term bank loans                                                                                                                         |  | 12    |  |   | 1,907,100   |   |   | -           | 
|Contingent consideration, net of current portion                                                                                             |  | 5     |  |   | 2,635,397   |   |   | -           | 
|Deferred tax liabilities                                                                                                                     |  | 14    |  |   | 2,564,604   |   |   | -           | 
|TOTAL LIABILITIES                                                                                                                            |  |       |  |   | 82,930,104  |   |   | 25,463,055  | 
|                                                                                                                                             |  |       |  |   | -           |   |   |             | 
|EQUITY                                                                                                                                       |  |       |  |   |             |   |   |             | 
|Common stock, par $0.01; authorized capital
      200,000,000 shares; shares issued and outstanding 2009: 49,905,141 2008: 47,462,404 shares |  | 16    |  |   | 233,548     |   |   | 209,121     | 
|Treasury stock, 6,000 shares, at cost                                                                                                        |  | 16    |  |   | (11,468     | ) |   | -           | 
|Additional paid-in capital                                                                                                                   |  |       |  |   | 78,495,062  |   |   | 64,127,339  | 
|Reserve                                                                                                                                      |  | 15    |  |   | 8,345,371   |   |   | 4,964,597   | 

- F-4 -

---



|Retained earnings                      |   | 60,462,275  |  |   | 33,748,480  | 
|-------------------------------------- | - | ----------- |  | - | ----------- | 
|Accumulated other comprehensive income |   | 5,016,575   |  |   | 4,644,693   | 
|Total equity of the Company            |   | 152,541,363 |  |   | 107,694,230 | 
|Non-controlling interest               |   | 15,357,471  |  |   | 15,310,897  | 
|Total equity                           |   | 167,898,834 |  |   | 123,005,127 | 
|                                       |   |             |  |   |             | 
|TOTAL LIABILITIES AND EQUITY           | $ | 250,828,938 |  | $ | 148,468,182 | 

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

- F-5 -

---

CHINA INFORMATION SECURITY TECHNOLOGY, INC.CONSOLIDATED STATEMENTS OF INCOMEYEARS ENDED DECEMBER 31,
2009, 2008 AND 2007

|                                                                                                                                 |  | NOTES |  |   | 2009        |   |   | 2008       |   |   | 2007       |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ----- |  | - | ----------- | - | - | ---------- | - | - | ---------- | -
|                                                                                                                                 |  |       |  |   |             |   |   |            |   |   |            |  
|Revenue - Products                                                                                                               |  |       |  | $ | 16,784,910  |   | $ | 26,822,325 |   | $ | 2,007,800  |  
|Revenue - Software                                                                                                               |  |       |  |   | 63,827,233  |   |   | 34,958,401 |   |   | 13,131,578 |  
|Revenue - System integration                                                                                                     |  |       |  |   | 19,017,962  |   |   | 19,328,312 |   |   | 15,194,314 |  
|Revenue - Others                                                                                                                 |  |       |  |   | 1,365,989   |   |   | 4,192,146  |   |   | 9,017      |  
|TOTAL REVENUE                                                                                                                    |  |       |  |   | 100,996,094 |   |   | 85,301,184 |   |   | 30,342,709 |  
|                                                                                                                                 |  |       |  |   |             |   |   |            |   |   |            |  
|Cost - Products sold                                                                                                             |  |       |  |   | 13,560,279  |   |   | 25,049,072 |   |   | 1,669,410  |  
|Cost - Software sold                                                                                                             |  |       |  |   | 22,229,542  |   |   | 5,628,436  |   |   | 2,233,493  |  
|Cost - System integration                                                                                                        |  |       |  |   | 14,251,391  |   |   | 12,196,185 |   |   | 8,470,467  |  
|Cost - Others                                                                                                                    |  |       |  |   | 303,215     |   |   | 3,348,627  |   |   | -          |  
|TOTAL COST                                                                                                                       |  |       |  |   | 50,344,427  |   |   | 46,222,320 |   |   | 12,373,370 |  
|                                                                                                                                 |  |       |  |   |             |   |   |            |   |   |            |  
|GROSS PROFIT                                                                                                                     |  |       |  |   | 50,651,667  |   |   | 39,078,864 |   |   | 17,969,339 |  
|                                                                                                                                 |  |       |  |   |             |   |   |            |   |   |            |  
|Administrative expenses                                                                                                          |  |       |  |   | 12,653,175  |   |   | 10,158,863 |   |   | 3,288,657  |  
|Research and development expenses                                                                                                |  |       |  |   | 2,705,669   |   |   | 2,596,430  |   |   | 797,580    |  
|Management fee                                                                                                                   |  |       |  |   | -           |   |   | -          |   |   | 92,160     |  
|Selling expenses                                                                                                                 |  |       |  |   | 3,136,380   |   |   | 2,440,689  |   |   | 480,465    |  
|INCOME FROM OPERATIONS                                                                                                           |  |       |  |   | 32,156,443  |   |   | 23,882,882 |   |   | 13,310,477 |  
|                                                                                                                                 |  |       |  |   | -           |   |   |            |   |   |            |  
|Subsidy income                                                                                                                   |  |       |  |   | 833,429     |   |   | 738,482    |   |   | 53,289     |  
|Other income, net                                                                                                                |  |       |  |   | 1,153,288   |   |   | 200,439    |   |   | 26,146     |  
|Interest income                                                                                                                  |  |       |  |   | 270,666     |   |   | 214,850    |   |   | 138,840    |  
|Interest expense                                                                                                                 |  |       |  |   | (388,686    | ) |   | (179,130   | ) |   | -          |  
|INCOME FROM CONTINUING
      OPERATIONS BEFORE                                                                                   |  |       |  |   |             |   |   |            |   |   |            |  
|INCOME TAXES                                                                                                                     |  |       |  |   | 34,025,140  |   |   | 24,857,523 |   |   | 13,528,752 |  
|                                                                                                                                 |  |       |  |   | -           |   |   |            |   |   |            |  
|Income tax expense                                                                                                               |  | 14    |  |   | (3,887,495  | ) |   | (1,547,509 | ) |   | (107,300   | )
|                                                                                                                                 |  |       |  |   |             |   |   |            |   |   |            |  
|INCOME FROM CONTINUING OPERATIONS                                                                                                |  |       |  |   | 30,137,645  |   |   | 23,310,014 |   |   | 13,421,452 |  
|                                                                                                                                 |  |       |  |   |             |   |   |            |   |   |            |  
|INCOME FROM DISCONTINUED OPERATIONS NET OF
      AMOUNT ATTRIBUTABLE TO NON-CONTROLLING INTEREST (NET OF INCOME TAXES OF
    $0) |  |       |  |   | -           |   |   | 718,159    |   |   | -          |  
|                                                                                                                                 |  |       |  |   |             |   |   |            |   |   |            |  
|NET INCOME                                                                                                                       |  |       |  |   | 30,137,645  |   |   | 24,028,173 |   |   | 13,421,452 |  
|                                                                                                                                 |  |       |  |   |             |   |   |            |   |   |            |  
|Less: Net income attributable to the
      non-controlling interest                                                              |  | 3     |  |   | (43,076     | ) |   | (241,197   | ) |   | (90,000    | )
|                                                                                                                                 |  |       |  |   |             |   |   |            |   |   |            |  
|NET INCOME ATTRIBUTABLE TO THE COMPANY                                                                                           |  |       |  | $ | 30,094,569  |   | $ | 23,786,976 |   | $ | 13,331,452 |  
|                                                                                                                                 |  |       |  |   |             |   |   |            |   |   |            |  
|WEIGHTED AVERAGE NUMBER OF SHARES
      OUTSTANDING                                                                              |  |       |  |   |             |   |   |            |   |   |            |  
|Basic                                                                                                                            |  | 4     |  |   | 48,676,391  |   |   | 46,398,600 |   |   | 39,718,967 |  
|Diluted                                                                                                                          |  | 4     |  |   | 48,676,391  |   |   | 46,852,827 |   |   | 40,152,855 |  
|                                                                                                                                 |  |       |  |   |             |   |   |            |   |   |            |  
|EARNINGS PER SHARE                                                                                                               |  |       |  |   |             |   |   |            |   |   |            |  
|Basic - From continuing
      operations                                                                                         |  |       |  | $ | 0.62        |   | $ | 0.50       |   | $ | 0.34       |  
|Basic - From discontinued operations                                                                                             |  |       |  |   | -           |   |   | 0.01       |   |   | -          |  
|                                                                                                                                 |  |       |  | $ | 0.62        |   | $ | 0.51       |   | $ | 0.34       |  
|                                                                                                                                 |  |       |  |   |             |   |   |            |   |   |            |  
|Diluted - From continuing
      operations                                                                                       |  |       |  | $ | 0.62        |   | $ | 0.49       |   | $ | 0.33       |  
|Diluted - From discontinued operations                                                                                           |  |       |  |   | -           |   |   | 0.02       |   |   | -          |  
|                                                                                                                                 |  |       |  | $ | 0.62        |   | $ | 0.51       |   | $ | 0.33       |  

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

- F-6 -

---

CHINA INFORMATION SECURITY TECHNOLOGY, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEYEARS ENDED
DECEMBER 31, 2009, 2008 AND 2007

|                                                                              |   | 2009       |   |   | 2008       |   |   | 2007       |  
|----------------------------------------------------------------------------- | - | ---------- | - | - | ---------- | - | - | ---------- | -
|                                                                              |   |            |   |   |            |   |   |            |  
|Net income                                                                    | $ | 30,137,645 |   | $ | 24,028,173 |   | $ | 13,421,452 |  
|                                                                              |   |            |   |   |            |   |   |            |  
|Foreign currency translation gain                                             |   | 375,380    |   |   | 4,580,443  |   |   | 1,467,800  |  
|                                                                              |   |            |   |   |            |   |   |            |  
|Comprehensive income                                                          |   | 30,513,025 |   |   | 28,608,616 |   |   | 14,889,252 |  
|                                                                              |   |            |   |   |            |   |   |            |  
|Less: comprehensive income attributable to
      the non-controlling interest |   | (46,574    | ) |   | (1,644,747 | ) |   | (90,000    | )
|                                                                              |   |            |   |   |            |   |   |            |  
|Comprehensive income attributable to the
      Company                        | $ | 30,466,451 |   | $ | 26,963,869 |   | $ | 14,799,252 |  

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

- F-7 -

---

CHINA INFORMATION SECURITY TECHNOLOGY, INC.CONSOLIDATED STATEMENTS OF CHANGES IN EQUITYYEARS ENDED DECEMBER 31, 2009,
2008 AND 2007

AccumulatedCommon stock
      
      
      Treasury stock
      
      
      Additional
      
      
      
      
      
      
      
      
      other
      
      
      NonPar 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, 2007
      
      31,550,298
      
      $
      50,000
      
      
      -
      
      $
      -
      
      $
      -
      
      $
      159,465
      
      $
      1,435,184
      
      $
      -
      
      $
      -
      
      $
      1,644,649Issuance of common stock in private placements
      
      12,868,422
      
      
      128,684
      
      
      -
      
      
      -
      
      
      49,688,802
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      49,817,486Common stock issued upon the cashless exercise of warrants
      
      267,343
      
      
      2,674
      
      
      -
      
      
      -
      
      
      (2,674
      )
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -Common stock issued for business acquisition
        (Note 5 )
      
      883,333
      
      
      8,833
      
      
      -
      
      
      -
      
      
      7,057,831
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      7,066,664Non-controlling interests upon acquisition of VIE
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      9,970,657
      
      
      9,970,657Stock-based compensation (Note 16 )
      
      70,000
      
      
      700
      
      
      -
      
      
      -
      
      
      677,191
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      677,891Net income for the year
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      13,331,452
      
      
      -
      
      
      90,000
      
      
      13,421,452Foreign currency translation gain
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      1,467,800
      
      
      -
      
      
      1,467,800Transfer to reserve (Note 15)
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      1,596,087
      
      
      (1,596,087
      )
      
      -
      
      
      -
      
      
      -BALANCE AS AT DECEMBER 31, 2007
      
      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 16)
      
      298,008
      
      
      2,980
      
      
      -
      
      
      -
      
      
      (2,980
      )
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -Common stock issued and to be issued for business acquisitions
        (Note 5)
      
      1,125,000
      
      
      11,250
      
      
      -
      
      
      -
      
      
      5,108,428
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      5,119,678Stock-based compensation (Note 16)
      
      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 15)
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      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 16)
      
      -
      
      
      -
      
      
      (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 16)
      
      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 15)
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      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
      
      $
      167,898,834


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

- F-8 -

---

CHINA INFORMATION SECURITY TECHNOLOGY, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSYEARS ENDED DECEMBER
31, 2009, 2008 AND 2007

|                                                                                        |   | 2009        |   |   | 2008        |   |   | 2007        |  
|--------------------------------------------------------------------------------------- | - | ----------- | - | - | ----------- | - | - | ----------- | -
|OPERATING ACTIVITIES                                                                    |   |             |   |   |             |   |   |             |  
|Net income                                                                              | $ | 30,137,645  |   | $ | 24,028,173  |   | $ | 13,421,452  |  
|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                                             |   | 2,765,837   |   |   | 472,750     |   |   |             |  
|Depreciation                                                                            |   | 4,069,363   |   |   | 2,991,266   |   |   | 1,274,768   |  
|Amortization of intangible assets                                                       |   | 1,786,201   |   |   | 1,354,567   |   |   | 168,747     |  
|Stock-based compensation                                                                |   | 1,453,110   |   |   | 1,604,741   |   |   | 677,891     |  
|Loss on disposal of property and equipment,
      net                                   |   | 62,803      |   |   | 2,533       |   |   | -           |  
|Provision for obsolete inventories                                                      |   | 183,714     |   |   | -           |   |   | -           |  
|Change in fair value of contingent
      consideration                                  |   | (1,108,759  | ) |   | -           |   |   | -           |  
|Deferred income tax benefits                                                            |   | (1,268,670  | ) |   | -           |   |   | -           |  
|Impairment of long-term investment                                                      |   | 233,211     |   |   | -           |   |   | -           |  
|Changes in operating assets and liabilities, net of
      effects of                    |   |             |   |   |             |   |   |             |  
|business acquisitions                                                                   |   |             |   |   | -           |   |   | -           |  
|Increase in restricted cash                                                             |   | (5,856,949  | ) |   | -           |   |   | -           |  
|Increase in accounts receivable                                                         |   | (24,850,334 | ) |   | (30,169,244 | ) |   | (4,115,867  | )
|Decrease in receivables from and advances to iASPEC prior
      to VIE consolidation    |   | -           |   |   | -           |   |   | (10,660,988 | )
|Decrease in advances to suppliers                                                       |   | 3,001,469   |   |   | -           |   |   | -           |  
|Increase (decrease) in other receivables and prepaid
      expenses                     |   | (13,366,450 | ) |   | (553,400    | ) |   | 592,182     |  
|Increase in amount due from related parties                                             |   | 132,774     |   |   | 372,391     |   |   | -           |  
|Increase in inventories                                                                 |   | (1,219,083  | ) |   | (472,829    | ) |   | (1,399,838  | )
|Increase in accounts payable                                                            |   | 11,068,019  |   |   | 4,633,198   |   |   | 903,475     |  
|Increase (decrease) in advances from customers                                          |   | 1,416,715   |   |   | (801,288    | ) |   | 54,830      |  
|Increase in other payables and accrued
      expenses and other liabilities             |   | 1,149,194   |   |   | 896,447     |   |   | 643,953     |  
|Increase in income tax payable                                                          |   | 1,687,973   |   |   | 906,825     |   |   | 46,586      |  
|Net cash provided by operating
      activities                                         |   | 11,477,783  |   |   | 4,547,977   |   |   | 1,607,191   |  
|                                                                                        |   |             |   |   |             |   |   |             |  
|INVESTING ACTIVITIES                                                                    |   |             |   |   |             |   |   |             |  
|Deposit for business acquisition of Bocom                                               |   | -           |   |   | -           |   |   | (9,000,000  | )
|Cash acquired in VIE consolidation                                                      |   | -           |   |   | -           |   |   | 4,731,140   |  
|Cash acquired in ISS acquisition                                                        |   | -           |   |   | -           |   |   | 326,831     |  
|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 ISS                                               |   | -           |   |   | -           |   |   | (7,051,469  | )
|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 Equity Linked Notes                                                         |   | -           |   |   | -           |   |   | (22,654,230 | )
|Proceeds from sale of short-term investments                                            |   | 5,864,400   |   |   | -           |   |   | -           |  
|Purchase of short-term investments                                                      |   | -           |   |   | (5,655,605  | ) |   | -           |  
|Proceeds from sale of marketable securities                                             |   | -           |   |   | 14,966,752  |   |   | 7,687,478   |  
|Refund of investment in former Joint
      Venture                                      |   | 4,398,300   |   |   | -           |   |   | -           |  
|Investing cash flows from discontinued operations                                       |   | -           |   |   | (8,576,575  | ) |   | -           |  
|Proceeds from sales of property and
      equipment                                     |   | 78,238      |   |   | 1,146,671   |   |   | -           |  
|Advances to third parties                                                               |   | -           |   |   | -           |   |   | 332,479     |  
|Advances from related parties                                                           |   | -           |   |   | -           |   |   | 115,312     |  
|Purchases of property and equipment                                                     |   | (16,872,380 | ) |   | (8,928,057  | ) |   | (6,452,450  | )
|Capitalized and purchased software
      development costs                              |   | (1,215,649  | ) |   | (487,541    | ) |   | -           |  
|Deposit for software purchase                                                           |   | (1,425,577  | ) |   | -           |   |   | -           |  
|Net cash used in investing
      activities                                             |   | (14,664,274 | ) |   | (21,045,087 | ) |   | (31,964,909 | )

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

- F-9 -

---

CHINA INFORMATION SECURITY TECHNOLOGY, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSYEARS ENDED DECEMBER
31, 2009, 2008 AND 2007(CONTINUED)

|FINANCING ACTIVITIES                                                          |   |             |   |   |             |   |   |            |  
|----------------------------------------------------------------------------- | - | ----------- | - | - | ----------- | - | - | ---------- | -
|Borrowings under short-term loans                                             |   | 19,952,949  |   |   | 6,314,410   |   |   | -          |  
|Repayment of long-term loans                                                  |   | (351,984    | ) |   | (1,086,312  | ) |   | -          |  
|Purchase of treasury stock                                                    |   | (11,468     | ) |   | -           |   |   | -          |  
|Repayment of short-term loans                                                 |   | (12,475,839 | ) |   | -           |   |   | -          |  
|Advances repaid to a third party company                                      |   | -           |   |   | -           |   |   | (200,000   | )
|Amount repaid to a stockholder                                                |   | -           |   |   | -           |   |   | (82,304    | )
|Cash received from private placement of common stock                          |   | -           |   |   | -           |   |   | 49,817,486 |  
|Net cash provided by financing
      activities                               |   | 7,113,658   |   |   | 5,228,098   |   |   | 49,535,182 |  
|                                                                              |   |             |   |   |             |   |   |            |  
|                                                                              |   |             |   |   |             |   |   |            |  
|Effect of exchange rate changes on cash and cash
      equivalents            |   | (13,786     | ) |   | 1,079,082   |   |   | 405,402    |  
|                                                                              |   |             |   |   |             |   |   |            |  
|NET INCREASE (DECREASE) IN CASH AND CASH
      EQUIVALENTS                    |   | 3,913,381   |   |   | (10,189,930 | ) |   | 19,582,866 |  
|CASH AND CASH EQUIVALENTS, BEGINNING                                          |   | 9,565,252   |   |   | 19,755,182  |   |   | 172,316    |  
|CASH AND CASH EQUIVALENTS, ENDING                                             | $ | 13,478,633  |   | $ | 9,565,252   |   | $ | 19,755,182 |  
|                                                                              |   |             |   |   |             |   |   |            |  
|                                                                              |   |             |   |   |             |   |   |            |  
|Supplemental disclosure of cash flow
      information:                       |   |             |   |   |             |   |   |            |  
|Cash paid during the period                                                   |   |             |   |   |             |   |   |            |  
|Income taxes                                                                  | $ | 3,464,474   |   | $ | 650,648     |   | $ | 24,574     |  
|Interest                                                                      | $ | 379,101     |   | $ | 158,650     |   | $ | -          |  
|                                                                              |   |             |   |   |             |   |   |            |  
|Supplemental disclosure of non-cash investing and
      financing activities: |   |             |   |   |             |   |   |            |  
|                                                                              |   |             |   |   |             |   |   |            |  
|Property and equipment transfers from inventory                               | $ | -           |   | $ | 78,784      |   | $ | -          |  

Acquired businesses

|• | In 2007, 833,333 shares of common stock were issued in
      satisfaction of the equity position of the purchase price of approximately
      $7,067,000 of ISS                                                                                                           
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                           
|• | In 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.                                                 
|  |                                                                                                                                                                                                                                                                           
|• | In 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.

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

- F-10 -

---

CHINA INFORMATION SECURITY TECHNOLOGY, INC.NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER
31, 2009, 2008 and 2007

1. ORGANIZATION AND PRINCIPAL ACTIVITIES

China Information Security Technology Inc (the "Company" or
CIST), and its subsidiaries, is a provider of integrated solutions for the
information security sector, and full-service Geographic Information Systems
(GIS) solutions to the public security and civil-use markets in the People's
Republic of China ("PRC"), specializing in providing information security
technology, Geographic Information Systems (GIS), and digital hospital
information systems, as well as the sale of computer hardware and software, and
the provision of Certificate Authority, or CA, an application platform and
e-Government solution technology. 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 CIST, a Nevada corporation and wholly-owned subsidiary of CPST. Pursuant to
the Merger Agreement, CPST agreed to merge with and into CIST, with CIST 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 CIST on a one-for-one basis. As a
result of the Reincorporation Merger, CPST became domiciled in Nevada its name
was changed to China Information Security Technology, Inc. All assets,
liabilities, contracts and obligations of CPST became the assets, liabilities,
contracts and obligations of CIST. References to the Company are to CIST 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.

- F-11 -

---

1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)

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.

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 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

- F-12 -

---

1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)

- 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.

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 VIE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 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).

- F-13 -

---

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.

(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, 2009 and 2008, approximately $19.34 million and $9.56 million,
respectively was held in bank accounts in the PRC.

(e) Restricted Cash

Restricted cash as of December 31, 2009 consists of security
deposits that serve as collateral for the Company's revolving working capital
facility (Note 12).

- F-14 -

---

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

(f) Short-term Investments

The Companys short-term investments are accounted for as
either available-for-sale or trading securities. Investments accounted for as
available for sale are stated at fair market value, with unrealized gains and
losses (net of deferred income tax assets (liabilities)) reported as a component
of equity. Investments accounted for as trading securities are stated at fair
market value with unrealized holding gains and losses reported in income. The
cost of securities sold is determined based on the specific identification
method for purposes of recording realized gains and losses.

(g) 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 $47.85 million and $25.72 million
of unbilled accounts receivable at December 31, 2009 and 2008, 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 31% of accounts
receivable as of December 31, 2009, of which no single customer accounted for
greater than 10% or more of accounts receivable. The Companys top five
customers accounted for 43.5 % of accounts receivable as of December 31, 2008,
of which two customers accounted for 10.8% and 10.0% of accounts receivable. No
other customers accounted for greater than 10% of accounts receivable.

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. For the year ended December 31, 2007,
two customers accounted for 21% and 26% of revenue, respectively, and no other
customer contributed greater than 10% of revenue. The allowance for doubtful
accounts at December 31, 2009 and 2008, totaled $3,123,000 and $399,800
respectively, representing managements best estimate.
(h) Advances to Suppliers

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

(i) Advances from Customers

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

- F-15 -

---

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

(j) 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.

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.

(k) Inventories

Inventories are valued at the lower of cost or net realizable
value. Net realizable value is the estimated selling price in the ordinary
course of business less the estimated cost of completion and the estimated costs
necessary to make the sale.

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, 2009, 2008, approximately 33%
and 46%, respectively of total inventory purchases were from five unrelated
suppliers. 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. In 2008, two suppliers accounted for 19.2% and 11.6% of
total inventory purchases and no other suppliers accounted for greater than 10%
of total inventory purchases.

(l) 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.

- F-16 -

---

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

(m) Property, plant and equipment

Property, plant and equipment are stated at cost less
accumulated depreciation. 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.

(n) 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 46 years.

(o) 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    

(p) Goodwill

Goodwill represents the excess of the purchase price over the
net of the fair value of the identifiable tangible and intangible assets
acquired and the fair value of liabilities assumed in business acquisitions.
Management of the Company evaluates the carrying value of goodwill annually or
when a possible impairment is indicated. The Company performs its impairment
assessment annually during the fourth quarter of the fiscal year and determined
that there was no impairment of goodwill as of December 31, 2009. Goodwill
impairment is assessed using the expected present value of associated future cash
flows (Level 3 inputs)

(q) 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.

- F-17 -

---

**2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)**

(r) 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.

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.

- F-18 -

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

(s) 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. As of December 31, 2009, the Company has repurchased 6,000
shares of common stock.

(t) 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, 2009, 2008 and 2007 were $537,915, $428,800 and $117,753, respectively.

(u) Stock-based compensation

The Company measures the cost of employee services received in
exchange for stock-based compensation at the grant date fair value of the award
by using the Black-Scholes option pricing model. The Company recognizes the
compensation costs, net of a forfeiture rate, on a straight-line basis over the
requisite service period of the award, which is the vesting term. During the
years ended December 31, 2009, 2008 and 2007, the Company recognized
approximately $1,453,110, $1,605,000 and $678,000, respectively of compensation
expenses under the Plan. As of December 31, 2009, there was no unrecognized
compensation expenses.

(v) Foreign Currency Translation

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

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.

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,
|---------------------------- | ------------ | ------------
|                             | 2009         | 2008        
|Year end exchange rate       | 6.8372       | 6.8542      
|Average yearly exchange rate | 6.8409       | 6.9623      

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.

- F-19 -

---

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

(w) 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, 2009 and 2008, $1,079,148 and $483,849,
respectively was capitalized. At December 31, 2009 and 2008, unamortized
capitalized software costs were $1,240,439, and $845,828, respectively.

(x) Income Taxes

Income tax expense is based on reported income before income
taxes. Deferred income taxes reflect the effect of temporary differences between
assets and liabilities that are recognized for financial reporting purposes and
the amounts that are recognized for income tax purposes. In accordance with
FASBASC 740 Income Taxes, these deferred taxes are measured by
applying currently enacted tax laws.

(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.

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 three segments:

(1)        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
      sale;             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                 
|(3) | Digital Hospital Information System Segment ("DHIS"):
      includes revenues from digital information system provided to hospitals or
      medical institutes.

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.

- F-20 -

---

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

(z) Sales, use and other value added tax

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

(aa) Derivatives

On January 1, 2009, the Company adopted ASC 815,
Derivatives and Hedging, which requires the application of a two-step
approach in evaluating whether an equity-linked financial instrument (or
embedded feature) is indexed to our own stock, including evaluation of the
instruments contingent exercise and settlement provisions. The adoption of ASC
815 did not have an impact on the Companys financial statements.

(ab) Recently Issued Accounting Guidance

In June 2009, the Financial Accounting Standards Board ("FASB")
approved its Accounting Standards Codification or Codification as the single
source of authoritative United States accounting and reporting standards
applicable for all nongovernmental entities, with the exception of the SEC and
its staff. The Codification, which changes the referencing of financial
standards, is effective for interim or annual financial periods ending after
September 15, 2009. Therefore, beginning in the third quarter of fiscal year 2009, all
references made to US GAAP use the new Codification numbering system
prescribed by the FASB. As the Codification is not intended to change or alter
existing US GAAP, it is not expected to have any impact on the Company's
condensed consolidated financial statements.

In June 2009, the FASB amended its guidance on accounting for
variable interest entities ("VIE"). The new accounting guidance will result in a
change in the Company's accounting policy effective January 1, 2010. Among other things,
the new guidance requires a qualitative rather than a quantitative analysis to
determine the primary beneficiary of a VIE; requires continuous assessments of
whether an enterprise is the primary beneficiary of a VIE; enhances disclosures
about an enterprise's involvement with a VIE; and amends certain guidance for
determining whether an entity is a VIE. Under the new guidance, a VIE must be
consolidated if the enterprise has both (a) the power to direct the activities
of the VIE that most significantly impact the entity's economic performance, and
(b) the obligation to absorb losses or the right to receive benefits from the
VIE that could potentially be significant to the VIE. The Company is evaluating
the impact that this change in accounting policy will have on its consolidated
financial statements. Based on an initial assessment, the Company anticipates that
certain entities that are consolidated under our current accounting policy may
not be consolidated subsequent to the effective date of the new guidance. The
Company does not expect this change in accounting policy to have a material
impact on its consolidated financial statements.

In May 2009, the FASB amended its guidance on accounting for
Subsequent Events which establishes general standards of accounting for and
disclosures of events that occur after the balance sheet date but before the
financial statements are issued or are available to be issued. It requires the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for that date. This guidance is effective for interim and annual
reporting periods ending after June 15, 2009 and shall be applied prospectively.

On January 1, 2009, the Company adopted newly effective
authoritative guidance that clarifies the accounting for certain transactions
and impairment considerations involving equity method investments. The Company
does not currently have any investments that are accounted for under the equity
method. The adoption of this new authoritative guidance did not have an impact
on the Company's consolidated financial statements.

- F-21 -

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

(ab) Recently Issued Accounting Guidance (continued)

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 noncontrolling
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 $15.6 million and $15.3 million at December 31, 2009 and December
31, 2008, respectively) are classified as equity, a change from its previous
classification between liabilities and stockholders' equity. Earnings
attributable to non-controlling interest (approximately ($43,000, $241,000 and
$90,000 for 2009, 2008 and 2007, 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.

In December 2007, the FASB issued new accounting guidance that
defines collaborative arrangements and establishes reporting requirements for
transactions between participants in a collaborative arrangement and between
participants in the arrangement and third parties. It also establishes the
appropriate income statement presentation and classification for joint operating
activities and payments between participants, as well as the sufficiency of the
disclosures related to those arrangements. This new accounting guidance was
effective for the Company on January 1, 2009, and its adoption did not have a
significant impact on its consolidated financial statements.

In April 2009, the FASB issued new guidance relating to Interim
Disclosures about Fair Value of Financial Instruments that requires the fair
value disclosures required for all financial instruments be included in interim
financial statements. This guidance also requires entities to disclose the
method and significant assumptions used to estimate the fair value of financial
instruments on an interim and annual basis and to highlight any changes from
prior periods. This guidance was effective for interim periods ending after
September 15, 2009. The adoption of this guidance did not have a material impact
on the Company's Consolidated Financial Statements.
In June 2009, the FASB issued new guidance on the Accounting for Transfers of
Financial Assets that addresses information a reporting entity provides in its
financial statements about the transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and a
transferor continuing involvement in transferred financial assets. The guidance
also removes the concept of a qualifying special purpose entity, limits the
circumstances in which a transferor derecognizes a portion or component of a
financial asset, defines participating interest and enhances the information
provided to financial statement users to provide greater transparency. This
guidance is effective for the first annual reporting period beginning after
November 15, 2009 and will be effective for the Company as of January 1, 2010.
The Company is currently evaluating the impact on our consolidated financial
statements upon adoption. 
In October 2009, the FASB issued a new accounting standard which provides
guidance for arrangements with multiple deliverables. Specifically, the new
standard requires an entity to allocate consideration at the inception of an
arrangement to all of its deliverables based on their relative selling prices.
In the absence of the vendor-specific objective evidence or third-party evidence
of the selling prices, consideration must be allocated to the deliverables based
on managements best estimate of the selling prices. In addition, the new
standard eliminates the use of the residual method of allocation. In October
2009, the FASB also issued a new accounting standard which changes revenue
recognition for tangible products containing software and hardware elements.
Specifically, tangible products containing software and hardware that function
together to deliver the tangible products essential functionality are scoped
out of the existing software revenue recognition guidance and will be accounted
for under the multiple-element arrangements revenue recognition guidance
discussed above. Both standards will be effective for the Company in the first
quarter of 2011. Early adoption is permitted. The Company is currently
evaluating the impact that the adoption of this standard may have on its
consolidated financial statements.3. 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 as described in Note 5,
Business Acquisitions, 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, 2009, 2008 and 2007, $43,076
($180,000 from iASPEC and ($136,924) from Geo), $241,197 ($180,000 from iASPEC
and $61,197 from Geo) and $90,000 (all from iASPEC), respectively have been
attributed to non-controlling interest in the consolidated statements of income
of the Company.

At December 31, 2009, the consolidation of iASPEC and Geo,
resulted in an increase in assets of approximately $51.7 million, an increase in
liabilities (consisting primarily of accounts payable and short-term bank loans)
of approximately $28.2 million, and an increase in non-controlling interest of
approximately $15.4 million. For the years ended December 31, 2009, 2008 and
2007, the consolidation resulted in an increase in net income attributable to
the Company of approximately $9.3 million, $10.6 million and $5.5 million,
respectively.

- F-22 -

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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, 2009, 2008 and 2007:

|                                                                                              |   | 2009       |  |   | 2008       |  |   | 2007       | 
|--------------------------------------------------------------------------------------------- | - | ---------- |  | - | ---------- |  | - | ---------- | 
|                                                                                              |   |            |  |   |            |  |   |            | 
|Income from continuing operations (net of
      income taxes and non- controlling interest)   | $ | 30,094,569 |  | $ | 23,068,817 |  | $ | 13,331,452 | 
|Income from discontinued operations (net of income taxes
      and non- controlling interest) | $ | -          |  | $ | 718,159    |  | $ | -          | 
|                                                                                              |   |            |  |   |            |  |   |            | 
|Weighted average outstanding shares of common stock                                           |   | 48,676,391 |  |   | 46,398,600 |  |   | 39,718,967 | 
|Effect of dilutive securities                                                                 |   |            |  |   |            |  |   |            | 
|Warrants                                                                                      |   | -          |  |   | 131,905    |  |   | 433,888    | 
|Contingently issuable shares                                                                  |   | -          |  |   | 322,322    |  |   | -          | 
|Common stock and common stock equivalents                                                     |   | -          |  |   | -          |  |   | -          | 
|                                                                                              |   |            |  |   |            |  |   |            | 
|Earnings per share:                                                                           |   |            |  |   |            |  |   |            | 
|Basic - From continuing operations                                                            | $ | 0.62       |  | $ | $0.50      |  | $ | 0.34       | 
|Basic - From discontinued operations                                                          | $ | -          |  |   | 0.01       |  | $ | -          | 
|                                                                                              |   |            |  |   |            |  |   |            | 
|Diluted - From continuing operations                                                          | $ | 0.62       |  |   | 0.49       |  | $ | 0.33       | 
|Diluted - From discontinued operations                                                        | $ | -          |  | $ | 0.02       |  | $ | -          | 

Warrants for the purchase of 400,000 shares were not included
in 2009, 2008 or 2007 as their effect would have been anti-dilutive.

- F-23 -

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5. BUSINESS ACQUISITIONS

2007 Acquisition

On November 7, 2007, the Company acquired 100% of the equity
interests of Information Security Software Investment Limited, or ISSI (formerly
Fortune Fame International Limited), and its operating PRC subsidiary, ISS
(formerly Information Security Development Technology (Shenzhen) Company Ltd.),
for which approximately $7.1 million of the purchase price was paid in cash. The
balance of the purchase price was paid through the issuance of 883,333 shares of
the Companys common stock.

Under the terms of the agreement, 250,000 shares of the
Companys common stock were to be returned if ISS did not meet certain net
income targets in 2008, and an additional 250,000 shares were to be returned if ISS
did not meet certain net income targets in 2009.

ISS met its net income targets in 2009 and 2008, resulting in an
increase to goodwill of $1,540,000 and $ 900,000 during the fourth quarters of 2009 and
2008, respectively. The
following table represents the purchase price allocation of ISS including the
additional goodwill.

|Cash and cash equivalents | $ | 326,831    |  
|------------------------- | - | ---------- | -
|Accounts receivable       |   | 1,369,257  |  
|Advances to suppliers     |   | 530,286    |  
|Inventory                 |   | 151,516    |  
|Other current assets      |   | 257,526    |  
|Property and equipment    |   | 223,845    |  
|Goodwill                  |   | 5,594,395  |  
|Intangible assets         |   | 4,334,381  |  
|Current liabilities       |   | (229,904   | )
|                          |   |            |  
|Total purchase price      | $ | 12,558,133 |  

The operating results of ISS have been included in the
Companys consolidated financial statements since November 07, 2007, the
acquisition date. Intangible assets include technology 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.

2008 Acquisitions

(a) Bocom

On February 1, 2008, the Company, through CPSH, acquired 100%
of the equity interests of Information Security International Investment and
Development Limited (ISIID), a Hong Kong company (formerly Bocom Multimedia
Display Co., Ltd.), and its wholly-owned Chinese subsidiary, Shenzhen Bocom
Multimedia Display Technology Co., Ltd. (Bocom). Approximately $9,000,000 of
the purchase price was paid in cash and at December 31, 2007 was included in
deposit for business acquisition. The balance of the purchase price was paid on
April 1, 2008 through the issuance of 1,125,000 shares of the Companys common
stock.

Under the terms of the acquisition agreement, 300,000 shares of
the Companys common stock were to be returned if Bocom did not meet certain net
income targets in 2008, and an additional 300,000 shares were to be returned if Bocom
did not meet certain net income targets in 2009.

Bocom met its net income targets in 2009 and 2008, resulting in an
increase to goodwill of $1,848,000 and $1,080,000 during the fourth quarter of 2009
and 2008, respectively. The
following table represents the purchase price allocation of ISIID and Bocom
(collectively Bocom), including the additional goodwill.

- F-24 -

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5. BUSINESS ACQUISITIONS (CONTINUED)

2008 Acquisition (continued)

|Cash and cash equivalents | $ | 713,876    |  
|------------------------- | - | ---------- | -
|Accounts receivable       |   | 2,851,881  |  
|Advances to suppliers     |   | 475,120    |  
|Inventory                 |   | 1,332,661  |  
|Other current assets      |   | 559,977    |  
|Property and equipment    |   | 43,287     |  
|Goodwill                  |   | 9,553,183  |  
|Intangible assets         |   | 4,207,282  |  
|Current liabilities       |   | (3,564,840 | )
|                          |   |            |  
|Total purchase price      | $ | 16,172,427 |  

The operating results of Bocom have been included in the
Companys consolidated financial statements since February 1, 2008, the
acquisition date. Intangible assets include technology and a trademark with
estimated useful lives of 10 and 20 years, respectively. Goodwill, which has
been allocated to the Companys DIST Segment, is not expected to be deductible
for tax purposes.

(b) Geo

On April 1, 2008, iASPEC acquired approximately 57% of Wuda
Geoinformatics Co., Ltd. (Geo), a leading provider of GIS software products
and integrated solutions in China, for RMB49,500,000 (approximately $7,049,000).

|The following table represents the purchase price
      allocation of Geo. |   |            |  
|-------------------------------------------------------------------------- | - | ---------- | -
|                                                                           |   |            |  
|Cash and cash equivalents                                                  | $ | 2,443,677  |  
|Accounts receivable                                                        |   | 1,146,794  |  
|Advances to suppliers                                                      |   | 187,969    |  
|Inventory                                                                  |   | 91,075     |  
|Other current assets                                                       |   | 708,283    |  
|Property and equipment                                                     |   | 3,753,779  |  
|long-term investment                                                       |   | 3,004,756  |  
|Goodwill                                                                   |   | 2,269,698  |  
|Intangible assets                                                          |   | 2,040,671  |  
|Current liabilities                                                        |   | (4,992,136 | )
|Minority interest                                                          |   | (3,605,493 | )
|                                                                           |   |            |  
|Total purchase price                                                       | $ | 7,049,073  |  

- F-25 -

---

5. BUSINESS ACQUISITIONS (CONTINUED)

2008 Acquisitions (continued)

(b) Geo (continued)

The operating results of Geo have been included in the
consolidated financial statements from the April 1, 2008, acquisition date.
Intangible assets include software, trademarks and customer bases with estimated
useful lives of 2, 20 and 2 years respectively. Goodwill, which has been
allocated to the Companys GIS segment, is not expected to be deductible for tax
purposes.

(c) Zhongtian

On October 31, 2008, the Company acquired 100% of the equity
interest of Kwong Tai International Technology Limited, a Hong Kong company
(Kwong Tai) 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.

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 certain net income targets in 2009,  resulting
in an increase to goodwill of $2,187,810 during the fourth quarter of 2009. The
following table represents the purchase price allocation of Kwong Tai
International Technology Company Ltd. and Zhongtian (collectively Zhongtian)
including the additional goodwill of $2,187,810 recorded in 2009.

| | Cash and cash equivalents | $ | 233,243    |  
| | ------------------------- | - | ---------- | -
| | Accounts receivable       |   | 225,660    |  
| | Advances to suppliers     |   | -          |  
| | Inventory                 |   | -          |  
| | Other current assets      |   | 63,499     |  
| | Property and equipment    |   | 174,566    |  
| | Goodwill                  |   | 12,177,428 |  
| | Intangible assets         |   | 2,262,113  |  
| | Current liabilities       |   | (156,566   | )
| |                           |   |            |  
| | Total purchase price      | $ | 14,979,943 |  

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.

- F-26 -

---

5. BUSINESS ACQUISITIONS (CONTINUED)

2008 Acquisitions (continued)

At December 31, 2009, approximately 355,164 shares of common
stock underlying the make good provisions in Zhongtian acquisitions are
contingently returnable. When the contingencies are resolved, any portion of
these shares that are not returned to the Company will be recorded as additional
goodwill.

2009 Acquisition

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
prospectively 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 of the Companys common
shares 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. Included in other
income in 2009 is a gain of $1.1 million, due to the change in estimate of the
fair value of acquisition-related contingent consideration.

The following table summarizes the consideration paid for Huipu
and the amounts of the assets acquired and liabilities assumed recognized at the
acquisition date.

- F-27 -

---

5. BUSINESS ACQUISITIONS (CONTINUED)

2009 Acquisitions (continued)

|Consideration                                                               |   |             |  
|--------------------------------------------------------------------------- | - | ----------- | -
|Cash                                                                        | $ | 8,000,000   |  
|Equity instruments (1,101,930 common shares
      of the Company)           |   | 8,462,822   |  
|Contingent consideration arrangement                                        |   | 5,602,149   |  
|Fair value of total consideration
      transferred                         | $ | 22,064,972  |  
|                                                                            |   |             |  
|Acquisition-related cost(including
      in selling, general,               |   |             |  
|and administrative expenses in the Company's income
      statement for the | $ | 70,000      |  
|year ending December 31, 2009)                                              |   |             |  
|                                                                            |   |             |  
|Recognized amounts of identifiable
      assets acquired                    |   |             |  
|Financial assets                                                            | $ | 6,179,401   |  
|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                                               |   | 3,587,735   |  
|                                                                            |   |             |  
|Goodwill                                                                    | $ | 18,477,237  |  
|Total Purchase Price                                                        |   | 22,064,972  |  

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 DIST and GIS segments.

A liability of $145,093 has been recognized for expected
warranty claims on products sold by Huipu during the last year. The Company
expects that the majority of this expenditure will be incurred in 2010. As of
December 31, 2009, there has been no change since October 14, 2009, in the
amount recognized for the liability or any change in the range of outcomes or
assumptions used to develop the estimates.

The amounts of Topwell and Huipus revenue and earnings
included in the Companys consolidated income statement for the year ended
December 31, 2009, and the revenue and earnings of the combined entities had the
acquisition date been January 1, 2009, or January 1, 2008, are:

|                                                                    |   | Revenue     |  |  | Earnings/(losses) |  
|------------------------------------------------------------------- | - | ----------- |  |  | ----------------- | -
|Actual from October 14, 2009 - December 31,
    2009                | $ | 4,588,426   |  |  | (210,799          | )
|Supplemental pro forma from January 1, 2009 - December 31,
    2009 | $ | 115,924,835 |  |  | 30,894,559        |  
|Supplemental pro forma for January 1, 2008 -
    December 31, 2008  | $ | 106,005,757 |  |  | 25,089,414        |  

- F-28 -

---

6. SHORT-TERM INVESTMENTS

As of December 31, 2008, short-term investments consisted of
investments in Currency-linked Capital Protected Investment products in the
amount of RMB40 million (approximately $5.8 million). These investments had a
term of one year and their return rate ranged from 4.1975% to 5.2722% per annum,
based upon the quoted exchange rate between Hong Kong Dollars (HK$) and U.S.
Dollars on June 23, 2008. Upon maturity, the Company received approximately
$5,864,400 from these investments

Until their maturity, these investments had been pledged as
collateral for a bank term loan for HK$40 million (approximately $5.1 million)
that the Company drew on July 8, 2008. (Note 12)

7. RELATED PARTY BALANCES AND TRANSACTIONS

(a) Related party balances

As of December 31, 2009 and 2008, amounts due from (to) related
parties consist of:

|                                                                    |   | 2009    |  |   | 2008    | 
|------------------------------------------------------------------- | - | ------- |  | - | ------- | 
|Due from related companies                                          |   |         |  |   |         | 
|- Xiamen
      Yili Geo Information Technology Co., Ltd.            | $ | -       |  | $ | 36,474  | 
|- Shenzhen Kewen Information Technology Co., Ltd.                   |   | 129,937 |  |   | 95,120  | 
|                                                                    | $ | 129,937 |  | $ | 131,594 | 
|                                                                    |   |         |  |   |         | 
|Due to related companies                                            |   |         |  |   |         | 
|- Xiamen Yili Geo Information Technology Co., Ltd.                  | $ | 7,335   |  | $ | -       | 
|- Wuhan Geo
      Navigation and Communication Technology Co., Ltd. |   | 576,401 |  |   | 486,136 | 
|                                                                    | $ | 583,736 |  | $ | 486,136 | 

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.

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.

(b) Revenue - related party

Amounts earned from Yili and Kewen during the years ended
December 31, 2009 and 2008 were as follows:

| |               |   | 2009     |   |   | 2008    |  
| | ------------- | - | -------- | - | - | ------- | -
| | Revenue       | $ | 470,422  |   | $ | 65,297  |  
| | Cost of sales |   | (107,221 | ) |   | (19,084 | )
| | Gross profit  | $ | 363,201  |   | $ | 46,213  |  

- F-29 -

---

7. RELATED PARTY BALANCES AND TRANSACTIONS (CONTINUED)

(c) Guarantees of bank loans

Mr. Lin has provided a personal guarantee for certain of the
Companys loans (Note 12) as follows:

| | Borrower |  | Lender                                                  |  |   | 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 | 

8. INVENTORIES

As of December 31, 2009 and 2008, inventories consist of:

| |                          |   | 2009       |  |   | 2008      | 
| | ------------------------ | - | ---------- |  | - | --------- | 
| | Raw materials            | $ | 3,385,758  |  | $ | 2,537,223 | 
| | Work in Processes        |   | 344,875    |  |   | -         | 
| | Finished goods           |   | 2,034,345  |  |   | 201,834   | 
| | Installations in process |   | 5,171,026  |  |   | 4,368,480 | 
| | Total                    | $ | 10,936,004 |  | $ | 7,107,537 | 

9. LONG-TERM INVESTMENTS

As of December 31, 2009 and 2008, long-term investments consist
of:

| |                                                                           |   | 2009      |  |   | 2008      | 
| | ------------------------------------------------------------------------- | - | --------- |  | - | --------- | 
| |                                                                           |   |           |  |   |           | 
| | Tianhe Navigation and Communication
      Technology Co., Ltd. ("Tianhe") | $ | 2,788,666 |  | $ | 3,005,457 | 
| | Xiamen Yili Geo Information Technology Co., Ltd. ("Yili")                 |   | 73,350    |  |   | 72,948    | 
| |                                                                           | $ | 2,862,016 |  | $ | 3,078,405 | 

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.

Long-term investments also include Geos investments in Yili.
During year ended December 31, 2009 and 2008, the Company received dividends of
RMB 750,000 (approximately $110,000) and RMB 249,900 (approximately $36,000),
respectively, in connection with its investment in Yili. During the year ended
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.

- F-30 -

---

10. PROPERTY, PLANT AND EQUIPMENT

As of December 31, 2009 and 2008, property, plant and equipment
consists of:

| |                                                    |   | 2009        |   |   | 2008       |  
| | -------------------------------------------------- | - | ----------- | - | - | ---------- | -
| | Office building                                    | $ | 6,536,605   |   | $ | 6,794,855  |  
| | Plant and Machinery                                |   | 17,844,918  |   |   | -          |  
| | Electronic equipment, furniture and
      fixtures |   | 11,405,355  |   |   | 10,791,186 |  
| | Motor vehicles                                     |   | 1,098,729   |   |   | 1,203,015  |  
| | Purchased software                                 |   | 27,036,904  |   |   | 11,132,611 |  
| | Total                                              |   | 63,922,511  |   |   | 29,921,667 |  
| |                                                    |   |             |   |   |            |  
| | Less: accumulated depreciation                     |   | (10,335,997 | ) |   | (6,366,064 | )
| | Net Book Value                                     | $ | 53,586,514  |   | $ | 23,555,603 |  

Depreciation expense for the years ended December 31, 2009,
2008, and 2007 was approximately $4,069,000, $2,991,000, and $1,274,800,
respectively.

11. LAND USE RIGHTS AND INTANGIBLE ASSETS

(a) Land use rights

As of December 31, 2009 and 2008, land use rights consist of:

| |                                |   | 2009      |   |   | 2008 | 
| | ------------------------------ | - | --------- | - | - | ---- | 
| | Land use rights                | $ | 1,914,611 |   | $ | -    | 
| | Less: accumulated amortization |   | (7,000    | ) |   | -    | 
| |                                |   |           |   |   |      | 
| | Land use rights, net           | $ | 1,907,611 |   | $ | -    | 

Amortization expense for the years ended December 31, 2009,
2008, and 2007 was $7,000, $0, and $0, respectively.

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

| | 2010       | $ | 41,621    | 
| | ---------- | - | --------- | 
| | 2011       |   | 41,621    | 
| | 2012       |   | 41,621    | 
| | 2013       |   | 41,621    | 
| | 2014       |   | 41,621    | 
| | Thereafter |   | 1,699,506 | 
| | Total      | $ | 1,907,611 | 

(b) Intangible assets

As of December 31, 2009 and 2008, intangible assets consist of:

| |                                         |   | 2009       |  |   | 2008       | 
| | --------------------------------------- | - | ---------- |  | - | ---------- | 
| | Software and software development costs | $ | 5,637,740  |  | $ | 4,272,145  | 
| | Technology                              |   | 7,191,087  |  |   | 7,151,673  | 
| | Trademarks                              |   | 4,150,143  |  |   | 3,324,969  | 
| | Customer base                           |   | 294,867    |  |   | 293,251    | 
| | Sub-Total                               |   | 17,273,837 |  |   | 15,042,038 | 

- F-31 -

---



| | Less: accumulated amortization |   | (3,717,696 | ) |   | (1,926,887 | )
| | ------------------------------ | - | ---------- | - | - | ---------- | -
| |                                |   |            |   |   |            |  
| | Intangible assets, net         | $ | 13,556,141 |   | $ | 13,115,151 |  

Amortization expense for the years ended December 31, 2009,
2008, and 2007 was approximately $1,780,000, $1,355,000, and $168,700,
respectively.

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

| | 2010       | $ | 1,835,089  | 
| | ---------- | - | ---------- | 
| | 2011       |   | 1,636,141  | 
| | 2012       |   | 1,549,694  | 
| | 2013       |   | 1,288,894  | 
| | 2014       |   | 1,281,489  | 
| | Thereafter |   | 5,964,834  | 
| | Total      | $ | 13,556,141 | 

12. BANK LOANS

(a) Short-term bank loans

On June 27, 2008, Geo drew a short-term bank loan of
RMB5,000,000 ($727,611). The loan has a fixed interest rate at 7.47% per annum
and matures on June 27, 2009. Interest on the loan is payable monthly and the
principal is due at maturity. On November 20, 2008, Geo drew a short-term bank
loan of RMB3,000,000 ($438,860). The loan has a fixed interest rate of 6.99% per
annum and matures on November 19, 2009. Interest on the loan is payable monthly
and the principal is due at maturity. These loans are collateralized by Geos
land and office buildings.

On August 8, 2008, ISIID drew a term loan for HKD40,000,000
($5,147,939) from a bank. The loan is payable in 12 monthly installments of
principal and interest, and has a weighted average interest rate of 4.61% per
annum. The loan is guaranteed by Mr. Lin, iASPEC, Bocom, CPSH and the Company,
and is collateralized by the Companys short-term investments. The maturity date
of the loan is August 8, 2009.

- F-32 -

---

12. BANK LOANS (CONTINUED)

(a) Short-term bank loans (continued)

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

|                                                               |                                                                                                                                                                                                                                                                                                                                                                 | Loan                                        | Interest rate                                                          |  |   |            | 
|-------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | ---------------------------------------------------------------------- |  | - | ---------- | 
|Lender                                                         | Terms                                                                                                                                                                                                                                                                                                                                                           | Period                                      | 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% p/a over HIBOR                                                   |  |   | 5,160,000  | 
|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                                                                                                                                                                                                                                                                                                                        | December 31,
      2009 to                  | 7.128%                                                                 |  |   | 2,112,480  | 
|                                                               | ($2,112,480 ). See Note 12(b)                                                                                                                                                                                                                                                                                                                                   | December 30, 2010                           |                                                                        |  |   |            | 
|                                                               |                                                                                                                                                                                                                                                                                                                                                                 |                                             |                                                                        |  | $ | 15,927,780 | 

- F-33 -

---

12. BANK LOANS (CONTINUED)

(b) Long-term bank loans

On October 18, 2006, Huipu entered into a RMB 55,000,000
($8,069,000) term loan with Shenzhen Commerce Bank to finance the construction
of its plant and buildings. The loan has a fixed interest rate at 7.128% per
annum and matures on October 17, 2011. Interest on the loan is payable monthly,
and principal of RMB 1,200,000 ($176,000) is payable monthly through the
maturity date, with any remaining principal also payable on the maturity
date.

The total outstanding balance of this loan as of December 31,
2009 is RMB 27,400,000 ($4,020,000), of which RMB 14,400,000 ($2,112,000) is due
in one year and classified as current liability (Note 12(a)).

13. BILLS PAYABLE

| |               |   | 2009       |  |   | 2008      | 
| | ------------- | - | ---------- |  | - | --------- | 
| | Bills payable | $ | 12,658,029 |  | $ | 3,501,574 | 

The Company has total available notes payable facilities of
$16.5 million and $3.5 million with various banks, of which $3.8 million and $0
were unutilized as of December 31, 2009 and 2008 respectively. The funds
borrowed under these facilities are generally repayable within 6 months. The
notes payable are non-interest bearing and do not have any restrictions or
covenants attached.

14. INCOME TAXES

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

| |                                  |   | 2009       |   |   | 2008       |   |   | 2007       |  
| | -------------------------------- | - | ---------- | - | - | ---------- | - | - | ---------- | -
| | PRC                              | $ | 34,764,245 |   | $ | 28,954,455 |   | $ | 15,288,112 |  
| | Others                           |   | (739,105   | ) |   | (4,096,931 | ) |   | (1,759,360 | )
| | Total income before income taxes | $ | 34,025,140 |   | $ | 24,857,524 |   | $ | 13,528,752 |  

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.

- F-34 -

---

14. INCOME TAXES (CONTINUED)

PRC

The income tax provision consists of the following:

| |                            |   | 2009       |   |   | 2008      |  |   | 2007    | 
| | -------------------------- | - | ---------- | - | - | --------- |  | - | ------- | 
| |                            |   |            |   |   |           |  |   |         | 
| |                            |   |            |   |   |           |  |   |         | 
| | Current taxes              | $ | 5,156,165  |   | $ | 1,547,509 |  | $ | 107,300 | 
| | Deferred taxes             |   | (1,268,670 | ) |   | -         |  |   | -       | 
| | Provision for income taxes | $ | 3,887,495  |   | $ | 1,547,509 |  | $ | 107,300 | 

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

| |                                                          |   | 2009       |   |   | 2008       |   |   | 2007       |  
| | -------------------------------------------------------- | - | ---------- | - | - | ---------- | - | - | ---------- | -
| |                                                          |   |            |   |   |            |   |   |            |  
| | PRC federal statutory tax rate                           |   | 20%        |   |   | 18%        |   |   | 15%        |  
| |                                                          |   |            |   |   |            |   |   |            |  
| | Computed expected income tax expense                     | $ | 6,805,028  |   | $ | 4,474,354  |   | $ | 2,029,313  |  
| | Tax exemption                                            |   | (2,733,522 | ) |   | (4,503,473 | ) |   | (2,191,770 | )
| | Permanent differences                                    |   | 691,797    |   |   | 239,293    |   |   | 5,854      |  
| | Effect of non-PRC operating losses and other differences |   | (875,808   | ) |   | 1,337,335  |   |   | 263,903    |  
| |                                                          |   |            |   |   |            |   |   |            |  
| | Income taxes                                             | $ | 3,887,495  |   | $ | 1,547,509  |   | $ | 107,300    |  

The significant components of deferred tax assets and deferred
tax liabilities were as follows for the year ended 31 December 2009:

| |                                                 |   | Deferred Tax Assets |   |   | Deferred Tax Liabilities |  
| | ----------------------------------------------- | - | ------------------- | - | - | ------------------------ | -
| | Fixed assets                                    | $ | 202,458             |   | $ | (212,102                 | )
| | Intangible assets                               |   | 91,865              |   |   | (2,352,503               | )
| | Inventory valuation                             |   | 953,754             |   |   | -                        |  
| | Accounts receivable allowance                   |   | 765,573             |   |   | -                        |  
| | Equity investments                              |   | 35,003              |   |   | -                        |  
| | Loss carryforwards                              |   | 2,075,541           |   |   | -                        |  
| | Gross deferred tax assets and
      liabilities |   | 4,124,194           |   |   | (2,564,605               | )
| |                                                 |   |                     |   |   |                          |  
| | Valuation allowance                             |   | (1,736,137          | ) |   | -                        |  
| |                                                 |   |                     |   |   |                          |  
| | Total deferred tax assets and
      liabilities | $ | 2,388,057           |   | $ | (2,564,605               | )

- F-35 -

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14. INCOME TAXES (CONTINUED)

The breakdown between current and long-term deferred tax
liabilities was as follows for the year ended 31 December 2009:

| |                                       |   | 2009       |  
| | ------------------------------------- | - | ---------- | -
| |                                       |   |            |  
| |                                       |   |            |  
| | Current deferred tax assets           | $ | 1,719,327  |  
| | Current deferred tax liabilities      |   | -          |  
| | Long-term deferred tax assets         |   | 668,730    |  
| | Long-term deferred tax liabilities    |   | (2,564,604 | )
| |                                       |   |            |  
| | Total deferred tax liabilities net of | $ | (176,547   | )

Deferred tax assets related to loss carry forwards mainly
represented Geo and HPCs accumulated losses for prior years of $2,315,000 and
$6,945,000, respectively. These accumulated losses can be carried forward though
approximately 2010. 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. During the year ended December 31,
2009, an adjustment of $1,736,000 to the valuation allowance was made because
management expects that there may not be sufficient taxable income in the future
to realize this portion of the deferred tax assets.

- F-36 -

---

14. INCOME TAXES (CONTINUED)

Geo, iASPEC 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 2009.

ISS, Zhongtian and Huipu are subject to the PRC EIT at 20% in 2009.

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 2009 and IST 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,
2009, 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, 2009, 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.

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 2009, 2008 and 2007.

15. RESERVE AND DISTRIBUTION OF PROFIT

In accordance with relevant PRC regulations and the Articles of Association of IST, ISS, iASPEC, Bocom and Zhongtian, 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, 2009, 2008
and 2007 $3,384,304, $3,209,045 and $1,596,087 respectively, were appropriated.

- F-37 -

---

16. EQUITY

(a) Issuance of new shares

On January 16, 2007, the Company entered into a Securities
Purchase Agreement (SPA I) with 2 investors, pursuant to which the Company
issued an aggregate of 7,868,422 shares of common stock and received net
proceeds of $13,311,211. The Company also paid fees in connection with SPA I
consisting of cash of approximately $670,000 and warrants to purchase 786,841
shares of common stock for $2.28 per share. The warrants have a term of five
years, are exercisable immediately on issuance and have an exercise price of
$2.28 per share.

In October and November 2007, the Company issued 267,343 shares
of common stock in connection with the cashless exercise of 346,209 warrants
issued in connection with SPA I.

On October 30, 2007, the Company completed a second securities
purchase agreement ("SPA II") with certain accredited investors (collectively,
the "Investors"). Under SPA II, the Company issued 5,000,000 shares of the
Companys common stock, and received net proceeds of $36,506,275.

Pursuant to the SPA II, the Company also entered into (i) a
registration rights agreement (the "Registration Rights Agreement") with the
Investors, pursuant to which, among other things, the Company agreed to register
the shares of its common stock issued to the Investors within a pre-defined
period and (ii) a closing escrow agreement (the "Escrow Agreement") with the
Investors and the Companys U.S. legal counsel, as escrow agent, pursuant to
which the Investors agreed to deposit the Purchase Price into escrow to be
released upon the occurrence of the events set forth in the Escrow Agreement.
The funds were released from in escrow on October 30, 2007, the closing date,
and the registration statement covering these shares was declared effective on
February 6, 2008. The Company also agreed to use its reasonable best efforts to
have its common stock listed and traded on any one of the New York Stock
Exchange, the American Stock Exchange, the NASDAQ Global Select Market or the
NASDAQ Capital Market by June 30, 2008.

In connection with SPA II, the Company issued warrants to
purchase 400,000 shares of the Companys common stock. The warrants have a term
of 5 years, are exercisable, have an exercise price of $9.60 per share, and
include registration rights to register the shares underlying the warrants.

On November 7, 2007, the Company issued 883,333 shares of
common stock in connection with the acquisition of ISSI (formerly Fortune Fame).

On Feb 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 cashless exercise of 440,632 warrants issued in
connection with SPA I.

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 Equity Incentive Plan. (Note 16(c)).

On February 2, 2009, the Company issued 60,000 shares of common
stock to in connection with the Equity Incentive Plan. (Note 16(c)).

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

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

- F-38 -

---

16. EQUITY (CONTINUED)

(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.

As of December 31, 2009, there was no unrecognized compensation
expenses related to the non-vested options.

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 $1.2 million, based on the
quoted market price, was accrued as of December 31, 2009 as the compensation was
for services provided in 2009.

- F-39 -

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17. CONSOLIDATED SEGMENT DATA

Selected information by segment is presented in the following
tables for 2009, 2008 and 2007.

| | Revenues(1)  |   | 2009        |  |   | 2008       |  |   | 2007       | 
| | ------------ | - | ----------- |  | - | ---------- |  | - | ---------- | 
| | DIST Segment | $ | 54,197,481  |  | $ | 50,968,985 |  | $ | 21,529,388 | 
| | GIS Segment  |   | 36,826,430  |  |   | 34,281,398 |  |   | 8,813,321  | 
| | DHIS Segment |   | 9,972,183   |  |   | 50,801     |  |   | -          | 
| |              | $ | 100,996,094 |  | $ | 85,301,184 |  | $ | 30,342,709 | 

(1) Revenues by operating segments exclude intercompany
transactions.

| |                                                               |   | 2009       |   |   | 2008       |   |   | 2007       |  
| | ------------------------------------------------------------- | - | ---------- | - | - | ---------- | - | - | ---------- | -
| | Income from operations:                                       |   |            |   |   |            |   |   |            |  
| | DIST Segment                                                  | $ | 13,983,421 |   | $ | 13,180,933 |   | $ | 11,058,347 |  
| | GIS Segment                                                   |   | 15,382,648 |   |   | 14,876,341 |   |   | 4,077,474  |  
| | DHIS Segment                                                  |   | 5,306,292  |   |   | (199,534   | ) |   | -          |  
| | Corporate and others(2)                                       |   | (2,515,918 | ) |   | (3,974,858 | ) |   | (1,825,344 | )
| | Income from operations                                        |   | 32,156,443 |   |   | 23,882,882 |   |   | 13,310,477 |  
| |                                                               |   |            |   |   |            |   |   |            |  
| | Corporate other income
      (expenses), net                  |   | 1,986,717  |   |   | 938,921    |   |   | 79,435     |  
| | Corporate interest income                                     |   | 270,666    |   |   | 214,850    |   |   | 138,840    |  
| | Corporate interest
      expense                              |   | (388,686   | ) |   | (179,130   | ) |   | -          |  
| | Income from continuing operations before income
      taxes   |   | 34,025,140 |   |   | 24,857,523 |   |   | 13,528,752 |  
| |                                                               |   |            |   |   |            |   |   |            |  
| | Income tax expense                                            |   | (3,887,495 | ) |   | (1,547,509 | ) |   | (107,300   | )
| | Income from continuing operations                             |   | 30,137,645 |   |   | 23,310,014 |   |   | 13,421,452 |  
| |                                                               |   |            |   |   |            |   |   |            |  
| | Income from discontinued operations, net of
      taxes of $0 |   | -          |   |   | 718,159    |   |   | -          |  
| | Net income                                                    |   | 30,137,645 |   |   | 24,028,173 |   |   | 13,421,452 |  
| |                                                               |   |            |   |   |            |   |   |            |  
| | Net income attributable to the non-controlling interest       |   | (43,076    | ) |   | (241,196   | ) |   | (90,000    | )
| | Net income attributable to the
      Company                  | $ | 30,094,569 |   | $ | 23,786,977 |   | $ | 13,331,452 |  

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

- F-40 -

---

17. CONSOLIDATED SEGMENT DATA (CONTINUED)

Non cash employee compensation by segment for the years ended
December 31, 2009, 2008, and 2007 are as follows:

| |                                 |   | 2009      |  |   | 2008      |  |   | 2007    | 
| | ------------------------------- | - | --------- |  | - | --------- |  | - | ------- | 
| | Non cash employee compensation: |   |           |  |   |           |  |   |         | 
| | DIST Segment                    | $ | 469,200   |  | $ | 1,323,911 |  | $ | 53,907  | 
| | GIS Segment                     |   | 212,181   |  |   | 152,451   |  |   | 9,473   | 
| | DHIS Segment                    |   | 97,339    |  |   | -         |  |   | -       | 
| | Corporate and others            |   | 674,390   |  |   | 128,379   |  |   | 614,511 | 
| |                                 | $ | 1,453,110 |  | $ | 1,604,741 |  | $ | 677,891 | 

Total assets by segment as at December 31, 2009, 2008 and 2007
are as follows:

| |                      |   | 2009        |  |   | 2008        | 
| | -------------------- | - | ----------- |  | - | ----------- | 
| | Total assets         |   |             |  |   |             | 
| | DIST Segment         | $ | 115,003,084 |  | $ | 88,619,621  | 
| | GIS Segment          |   | 98,140,496  |  |   | 46,292,034  | 
| | DHIS Segment         |   | 30,886,236  |  |   | 12,712,303  | 
| | Corporate and others |   | 6,799,122   |  |   | 844,224     | 
| |                      | $ | 250,828,938 |  | $ | 148,468,182 | 

Depreciation and amortization by segment for the years ended
December 31, 2009, 2008 and 2007 are as follows:

| |                      |   | 2009      |  |   | 2008      |  |   | 2007      | 
| | -------------------- | - | --------- |  | - | --------- |  | - | --------- | 
| |                      |   |           |  |   |           |  |   |           | 
| | DIST Segment         | $ | 2,808,663 |  | $ | 2,789,128 |  | $ | 1,088,284 | 
| | GIS Segment          |   | 2,132,304 |  |   | 1,466,384 |  |   | 355,231   | 
| | DHIS Segment         |   | 871,597   |  |   | 47,515    |  |   | -         | 
| | Corporate and others |   | 43,000    |  |   | 42,806    |  |   | -         | 
| |                      | $ | 5,855,564 |  | $ | 4,345,833 |  | $ | 1,443,515 | 

18. 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, 2009 and 2008 was
approximately $386,200 and $337,000, respectively.

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

Years Ending December 31,

2010
    $
    269,3012011
    
    184,6882012
    
    56,308Total
    $
    510,297


- F-41 -

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19. SUBSEQUENT EVENTS

We evaluated events that occurred subsequent to December 31,
2009, 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 consolidated financial statements. 
On January 12, 2010, the Company closed a Securities Purchase Agreement, dated
as of January 7, 2010 with certain purchasers pursuant to which: (i) the Company
sold a total of 1,652,033 shares of its common stock, par value $0.01 per share
and (ii) Mr. Jiang Huai Lin, the Company抯 Chief Executive Officer sold a total
of 1,600,000 shares of Common Stock held by him, for an aggregate purchase price
of approximately $20 million, or $6.15 per share. The Purchasers also received
from the Company warrants to purchase an aggregate of 813,008 shares of Common
Stock at an exercise price of $6.15. The Warrants were exercisable for 45 days
beginning on the date of the initial issuance of the Warrants. The securities
were sold pursuant to the Company抯 shelf registration statement on Form S-3
declared effective by the SEC on November 23, 2009 (File No. 333-159375). A
prospectus supplement related to the offering was filed with the SEC and
delivered to the Purchasers. The total proceeds to the Company were
approximately $9,395,000. Prior to the expiration of the Warrants, certain of
the Purchasers exercised Warrants for the purchase of an additional 41,250
shares of Common Stock for aggregate gross proceeds to the Company of
approximately $254,000. 
Rodman & Renshaw, LLC acted as the Company's exclusive placement agent in
connection with the offering and as consideration of its services to the
Company, received a commission equal to 5.0% of the gross proceeds of the
offering, including proceeds from the sale of Mr. Lin's shares. Rodman's
commission was paid on a pro rata basis by the Company and Mr. Lin relative to
their respective amount of gross proceeds from the sale of the securities. The
Company was also obligated to pay a cash fee out of any proceeds from the
exercise of the Warrants, equal to 5% of the aggregate cash exercise price
received by the Company upon such exercise, if any; provided that such fee will
be reduced to the extent that Rodman's aggregate compensation for the offering,
as determined under FINRA Rule 5110, would otherwise exceed 8%. Rodman received
an additional $12,684 in fees in connection with the exercise of Warrants. For
details regarding the offering see the Company's current report on Form 8-K
filed on January 7, 2010.

Mr. Lin received aggregate gross proceeds of $9.84 million
from the sale of his 1,600,000 shares of Common Stock in the offering. 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 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 Note).

- F-42 -

---

EXHIBIT INDEX

|Exhibit |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.     | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|2.1     | Agreement and Plan of Merger, dated April 2, 2008,
      between China Public Security Technology, Inc. and China (incorporated by
      reference to Exhibit 2.1 of the current report on Form 8-K filed by the
      Company on April 7, 2008).                                                                                                                                                                                                                                        
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|3.1     | Amended and Restated Articles of Incorporation of the
      Company, as filed with the Secretary of State of Nevada on February 13,
      2008 (incorporated by reference to Exhibit 3.1 of the current report on
      Form 8-K filed by the Company on April 7, 2008).                                                                                                                                                                                                                 
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|3.2     | Bylaws of China Information Security Technology, Inc.,
      adopted on February 13, 2008 (incorporated by reference to Exhibit 3.2 of
      the registration statement on Form 8-K filed by the Company on April 7,
      2008).                                                                                                                                                                                                                                                        
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.1     | Form of Registration Rights Agreement, dated October 25,
      2007 (incorporated by reference to Exhibit 4.1 to the current report on
      Form 8-K filed by the Company on October 25, 2007).                                                                                                                                                                                                                                                                                         
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.2     | Common Stock Purchase Warrant issued to Roth Capital
      Partners, LLC, dated October 29, 2007 (incorporated by reference to
      Exhibit 4.2 to the current report on Form 8-K filed by the Company on
      October 30, 2007).                                                                                                                                                                                                                                                      
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.3     | Common Stock Purchase Warrant issued to Brean Murray,
      Carret & Co., LLC, dated October 29, 2007 (incorporated by reference
      to Exhibit 4.3 to the current report on Form 8-K filed by the Company on
      October 30, 2007).                                                                                                                                                                                                                                                 
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.4     | Registration Rights Agreement, dated January 31, 2007,
      among the Company and the investors signatory thereto (incorporated by
      reference to Exhibit 4.1 to the current report on Form 8-K filed by the
      Company on February 1, 2007).                                                                                                                                                                                                                                    
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.5     | Amendment No. 1 to Registration Rights Agreement, dated
      March 9, 2007, among the Company and the investors signatory thereto
      (incorporated by reference to Exhibit 4.1 to the current report on Form
      8-K filed by the Company on March 20, 2007).                                                                                                                                                                                                                      
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.6     | 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).                                                                                                                                                                                                                                                                                  
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.7     | Registration Rights Agreement, dated March 26, 2008,
      among the Company and the investors signatory thereto (incorporated by
      reference to Exhibit 4.1 to the current report on Form 8-K filed by the
      Company on March 28, 2008).                                                                                                                                                                                                                                        
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.8     | Form of Warrant, dated January 7, 2010, among the Company
      and the investors signatory thereto (incorporated by reference to Exhibit
      4.1 to the current report on Form 8-K filed by the Company on January 7,
      2010).                                                                                                                                                                                                                                                    
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.1    | Form of Securities Purchase Agreement, dated October 25,
      2007 (incorporated by reference to Exhibit 10.1 of the current report on
      Form 8-K filed by the Company on October 25, 2007).                                                                                                                                                                                                                                                                                        
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.2    | Form of Closing Escrow Agreement, dated as of October 25,
      2007 (incorporated by reference to Exhibit 10.2 of the current report on
      Form 8-K filed by the Company on October 25, 2007).                                                                                                                                                                                                                                                                                       
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.3    | Securities Purchase Agreement, dated January 16, 2007,
      among the Company and the investors signatory thereto (incorporated by
      reference to Exhibit 10.1 of the current report on Form 8-K filed by the
      Company on January 17, 2007).                                                                                                                                                                                                                                   
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.4    | 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 of the current report
      on Form 8-K filed by the Company on February 1, 2007).                                                                                                                                                                                                            
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.5    | Make Good Escrow Agreement, dated January 31, 2007, among
      the Company, Mr. Jiang Huai Lin, the investors signatory thereto, Roth
      Capital Partners, LLC and Securities Transfer Corporation, as escrow agent
      (incorporated by reference to Exhibit 10.3 of the current report on Form
      8-K filed by the Company on February 1, 2007).                                                                                                                              
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.6    | Lockup Agreement, dated January 31, 2007, among the
      Company and the stockholders signatory thereto (incorporated by reference
      to Exhibit 10.4 of the current report on Form 8-K filed by the Company on
      February 1, 2007).                                                                                                                                                                                                                                             
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.7    | Rescission; Termination and Share Exchange Agreement,
      dated January 31, 2007, among Shenzhen iASPEC Software Engineering Company Limited, the shareholders of iASPEC
      who are signatories thereto, including Jiang Huai Lin, Public Security
      Technology (PRC) Co., Ltd., China Information Security Holdings Limited
      and the Company (incorporated by reference to Exhibit 10.5 of the current
      report on Form 8-K filed by the Company on February 1, 2007).



---



|10.8  | Amended and Restated Business Turnkey Agreement, dated as
      of January 31, 2007, by and between Public Security Technology (PRC) Co.,
      Ltd. and Shenzhen iASPEC Software Engineering Company Limited and the
      shareholders of iASPEC party thereto (incorporated by reference to Exhibit
      10.6 of the current report on Form 8-K filed by the Company on February 1,
      2007).
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.9  | Management Service Agreement, dated as of August 1, 2007,
      among Public Security Technology (PRC) Co., Ltd., Shenzhen iASPEC Software
      Engineering Company Limited, Jiang Huai Lin and Jin Zhu Cai (incorporated
      by reference to Exhibit 10.1 of the current report on Form 8-K filed by
      the Company on August 6, 2007).                                                      
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.10 | Guaranty, dated August 1, 2007, by Jiang Huai Lin and Jin
      Zhu Cai (incorporated by reference to Exhibit 10.2 of 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
      Public Security Technology (PRC) Co., Ltd., Shenzhen iASPEC Software
      Engineering Company Limited, Jiang Huai Lin and Jin Zhu Cai (incorporated
      by reference to Exhibit 10.3 of 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 Public
      Security Technology (PRC) Co., Ltd., Shenzhen iASPEC Software Engineering
      Company Limited, Jiang Huai Lin and Jin Zhu Cai (incorporated by reference
      to Exhibit 10.4 of 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 Public Security Technology (PRC) Co., Ltd.,
      Shenzhen iASPEC Software Engineering Company Limited, Jiang Huai Lin and
      Jin Zhu Cai (incorporated by reference to Exhibit 10.16 of the
      registration statement on Form SB-2/A filed by the Company on September
      14, 2007).                                        
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.14 | English Translation of Form of China Public Security
      Technology, Inc. Employment Agreement (incorporated by reference to
      Exhibit 10.7 of the annual report on Form 10-KSB filed by the Company on
      April 16, 2007).                                                                                                                                                                
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.15 | English Translation of Form of China Public Security
      Technology, Inc. Non-Disclosure Agreement (incorporated by reference to
      Exhibit 10.8 of the annual report on Form 10-KSB filed by the Company on
      April 16, 2007).                                                                                                                                                            
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.16 | Letter Agreement, dated March 29, 2007, among the Company
      and the investors and stockholder signatory thereto (incorporated by
      reference to Exhibit 10.9 of the annual report on Form 10-KSB filed by the
      Company on April 16, 2007).                                                                                                                                             
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.17 | Form of China Public Security Technology, Inc.
      Independent Director Agreement (incorporated by reference to Exhibit 10.1
      of the current report on Form 8- K filed by the Company on August 16,
      2007).                                                                                                                                                                             
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.18 | Form of China Public Security Technology, Inc.
      Indemnification Agreement (incorporated by reference to Exhibit 10.2 of
      the current report on Form 8-K filed by the Company on August 16,
      2007).                                                                                                                                                                                   
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.19 | 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 of the current report on Form
      8-K filed by the Company on November 9, 2007).                                                             
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.20 | 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 of the current
      report on Form 8-K filed by the Company on December 13, 2007).                                                                                                        
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.21 | Share Purchase and Increase Capital Agreement, dated as
      of February 16, 2008, by and among iASPEC Software Engineering Co., Ltd.,
      Wuhan Wuda Venture Capital Co., Ltd., Wuhan Wuda Geoinformatics Co., Ltd.
      and Song Ai Hong (incorporated by reference to Exhibit 10.1 of the current
      report on Form 8-K filed by the Company on February 19, 2008).                       
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.22 | Share Purchase and Increase Capital Agreement, dated as
      of February 16, 2008, by and among iASPEC Software Engineering Co., Ltd.
      and Li Wei (incorporated by reference to Exhibit 10.1 of the current
      report on Form 8-K filed by the Company on February 19,
  2008).                                                                                                            



---



|10.23 | Purchase Agreement,
        dated as of March 26, 2008, by and among Jiang Huai Lin, the Company and
        the investors signatory thereto (incorporated by reference to Exhibit
        10.1 of the current report on Form 8-K filed by the Company on March 28,
        2008).                                                                       
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                                                          
|10.24 | Equity Transfer
        Agreement, dated August 1, 2008, by and between Jiang Huai Lin and Jin
        Zhu Cai (incorporated by reference to Exhibit 10.2 of the current report
        on Form 8-K filed by the Company on August 3, 2008).                                                                                                             
|      |                                                                                                                                                                                                                                                                                                                                                          
|10.25 | Purchase Contract
        between iASPEC Software Co., Ltd. and Huipu Electronic (Shenzhen) Co.,
        Ltd., dated September 15, 2008 (incorporated by reference to Exhibit 10.25
        of the annual report on Form 10-K/A filed by the Company on November 18,
        2009).                                                                      
|      |                                                                                                                                                                                                                                                                                                                                                          
|10.26 | Purchase Contract
        between Dell (China) Company Limited and Information Security Software
        Company Ltd., dated January 1, 2008 (incorporated by reference to Exhibit
        10.26 of the annual report on Form 10-K/A filed by the Company on August
        12, 2009).                                                                   
|      |                                                                                                                                                                                                                                                                                                                                                          
|10.27 | 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 of the annual report on Form 10-K/A filed by the Company on November
        18, 2009).                                                                
|      |                                                                                                                                                                                                                                                                                                                                                          
|10.28 | 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 of the annual report on Form 10-K/A filed
        by the Company on November 18, 2009).                                          
|      |                                                                                                                                                                                                                                                                                                                                                          
|10.29 | Employment Agreement,
        dated January 25, 2007, between the Company and Jiang Huai Lin (incorporated
        by reference to Exhibit 10.29 of the annual report on Form 10-K/A filed
        by the Company on August 12, 2009).                                                                                                                   
|      |                                                                                                                                                                                                                                                                                                                                                          
|10.30 | Employment Agreement,
        dated November 17, 2008, between the Company and Wendy Wang (incorporated
        by reference to Exhibit 10.30 of 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 Yi Fu Liu (incorporated
        by reference to Exhibit 10.31 of the annual report on Form 10-K/A filed
        by the Company on August 12, 2009).                                                                                                                         
|      |                                                                                                                                                                                                                                                                                                                                                          
|10.32 | Employment Agreement,
        dated August 12, 2008, between the Company and Zhi Xiong Huang (incorporated
        by reference to Exhibit 10.32 of the annual report on Form 10-K/A filed
        by the Company on August 12, 2009).                                                                                                                   
|      |                                                                                                                                                                                                                                                                                                                                                          
|10.33 | Employment Agreement,
        dated August 12, 2008, between the Company and Zhi Qiang Zhao (incorporated
        by reference to Exhibit 10.33 of the annual report on Form 10-K/A filed
        by the Company on August 12, 2009).                                                                                                                    
|      |                                                                                                                                                                                                                                                                                                                                                          
|10.34 | 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 of the current report
        on Form 8-K filed by the Company on July 3, 2008).                         
|      |                                                                                                                                                                                                                                                                                                                                                          
|10.35 | Amended and
        Restated Management Services Agreement, dated as of December 13, 2009,
        among Information Security Technology (China) Company, Ltd., iASPEC Software
        Company, Ltd. and Jiang Huai Lin (incorporated by reference to Exhibit
    10.5 of the current report on Form 8-K filed by the Company on December 17,
    2009).
|      |                                                                                                                                                                                                                                                                                                                                                          
|10.36 | 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).                                                                                       
|      |                                                                                                                                                                                                                                                                                                                                                          
|10.37 | 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).                                                                                                          
|      |                                                                                                                                                                                                                                                                                                                                                          
|14    | Amended and
        Restated Code of Ethics, adopted on December 25, 2007 (incorporated by
        reference to Exhibit 14 of the annual report on Form 10-K filed by the
        Company on March 31, 2008).                                                                                                                                            
|      |                                                                                                                                                                                                                                                                                                                                                          
|21    | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                     
|      |                                                                                                                                                                                                                                                                                                                                                          
|31.1* | Certification
        of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley
        Act of 2002                                                                                                                                                                                                                             



---



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

______________* Filed herewith

---