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CORRECTION: China Information Security Technology, Inc. Announces Second Quarter 2010 Results
Aug 06, 2010 (09:08 AM EDT)


The correction is related to the classification of a shareholder loan to the Company on the Condensed Consolidated Statements of Cash Flows. The shareholder loan was misclassified under Cash Flow from Operations instead of Cash Flow from Financing. The reclassification has no effect on the income statement or balance sheet.

SHENZHEN, China, Aug. 6 /PRNewswire-Asia-FirstCall/ -- China Information Security Technology, Inc. (Nasdaq: CPBY) ("China Information Security," or the "Company"), a leading total solutions provider of Geographic Information Systems (GIS), digital public security and hospital information systems in China, is issuing this press release to correct a press release issued on August 5, 2010, under the same headline, to reflect the correction on the statement of cash flows. A shareholder loan was misclassified under Operating Activities and should have been classified under Financing Activities in the statement of cash flows. The reclassification has no effect on the income statement or balance sheet. The Company is also filing an amendment to its quarterly report on Form 10-Q to reflect the proper classification. The corrected release follows:

    Second Quarter 2010 Financial Highlights
    -- Revenues increased 30% YoY to $33.52 million
    -- Gross Margin expanded 250 basis points
    -- Operating Margin expanded 290 basis points
    -- Attributable Net Income increased 19.9% YoY to $9.35 million
    -- Non-GAAP Fully Diluted EPS was $0.19 vs. $0.17 a year ago
    -- Cash flow from operations reached $9.80 million
    -- New Record High Backlog of $52.27 million representing 50.7% YoY growth
    -- Reaffirms FY2010 Revenue and Adjusted Net Income Guidance

"We continued to effectively execute on our business strategy which resulted in another promising quarter," commented Mr. Jiang Huai Lin, Chairman and CEO. "New contracts signed in the second quarter reached $39.3 million, up 49% from a year ago and our backlog once again hit a new record high of $52.3 million, up 50.7% from a year ago."

"We believe that contract wins this quarter continue to demonstrate our ability to penetrate new markets nationally and expand in key cities outside Guangdong province. In Shanghai, we are helping the Public Security Bureau manage public security at the 41st World Expo which we believe positions us well to further expand into Eastern China. We are also winning new business by integrating different technologies in our portfolio to create innovative and sophisticated solutions. One specific example is our win of the intelligent traffic management system for the 16th Asian Games in Guangzhou, which delivers highly efficient solutions to improve the quality of our day-to-day lives. Meanwhile, we continue to collaborate with the State Grid Corporation of China on the smart grid project, which is currently in the planning stage."

"We believe that the future of our industry remains bright as the Chinese government continues to demonstrate a long-term commitment to investing in public security, public healthcare and the management of natural resources and disaster-relief."

Revenues

For the three months ended June 30, 2010, revenue was $33.52 million, compared to $25.79 million for the three months ended June 30, 2009, representing an increase of $7.73 million, or 30%. During the current quarter, Huipu, which was acquired in October 2009, contributed $4.26 million to total revenues. Excluding the impact from Huipu's revenues, organic revenue growth was 13.5% as the Company continued to focus on profitability and the reduction of lower-margin businesses primarily in product and system integration categories.

Software sales increased by 40.7% to $22.41 million for the three months ended June 30, 2010, from $15.92 million for the three months ended June 30, 2009. Software sales constituted 66.9% of the total revenue, which increased from 61.7% during the same period in the prior year, reflecting the Company's continued commitment to the core competency in software. Excluding the impact of Huipu's sales, software sales were 76.6% of organic revenues.

Product sales increased by $3.68 million, or 97.2% for the three months ended June 30, 2010, as compared to $3.79 million in the same period of 2009. Product sales constituted 22.3% of total revenue during the current period as compared with 14.7% during the same period in the prior year. Product sales excluding Huipu's product sales declined by 22.01% from the same period in the prior year to 10.1% of organic revenues. This reflects the Company's focus on higher value-added product sales with the Huipu acquisition.

Sales of system integration services decreased by 37.4% for the three months ended June 30, 2010, as compared to the same period of 2009. As a percentage of revenue, it declined from 21.6% during the three months ended June 30, 2009 to 10.4% during the current quarter. Excluding the impact of Huipu, system integration was 11.9% of organic revenues. The steady decline in weight of system integration business, which carries lower margin, reflects the Company's strategy of growing businesses with higher profitability.

Other revenue decreased by 69.6%, from $0.51 million in the three months ended June 30, 2009 to $0.15 million in the same period of 2010. Other revenue mainly derived from maintenance services in the three months ended June 30, 2009, while in the same period of 2010, in addition to maintenance services, the Company also generated $0.11 million royalty income from Huipu's licensing of its HPC trademark to other manufacturers. The Company believes this was an effective way to monetize Huipu's valuable intellectual property.

Regarding segment breakdown, for the three months ended June 30, 2010, approximately $15.68 million of revenues were generated by the GIS segment, $13.96 million by the DIST segment and $3.88 million by the DHIS segment. This compared with $7.97 million generated by the GIS segment, $15.22 million by the DIST segment and $2.59 million by the DHIS segment for the same period in 2009. The DIST segment decreased by 8.3% compared with the same period of 2009, while the year-over-year growth ratios for the GIS and DHIS segments were 96.6% and 49.7%, respectively.

GIS accounted for 46.8% of the total revenue while DIST and DHIS represented 41.6% and 11.6% respectively. Excluding the impact of Huipu, each of the GIS, DIST and DHIS segment represented 46.3%, 40.4% and 13.3% of total revenue, respectively, as compared to 30.9%, 59.0% and 10.1% of the total revenue, respectively, for the three months ended June 30, 2009. For the first time, the GIS segment exceeded that of the DIST segment and became the Company's largest business segment in the second quarter of 2010. As the Company's technologies continue to evolve, it will be able to integrate more and more DIST functions with those of GIS to create brand new capabilities for customers. Such new offerings contributed to the GIS segment, instead of to DIST, which explains the negative growth rate in the DIST segment. The shifts in segment weights also ultimately reflect the growth momentum in the GIS and DHIS segments outpacing that of the DIST as a result of the Company's focus in the last few years on targeting areas with the highest barriers-to-entry and developing sustainable competitive advantages in the GIS and DHIS segments, in anticipation of accelerating market growth in the coming years. The Company believes it will be well positioned to capture the growth opportunities as this expectation materializes.

Gross Profit and Gross Margin

Gross profit was $16.80 million in 2Q10, an increase of 36.9%, or $4.53 million, from 2Q09. Gross margin was 50.1% in 2Q10, an increase of 2.5%, from 47.6% in the same period of 2009. Huipu yielded a gross margin of 18.5%. Excluding the impact of Huipu's gross margin, the gross margin of the Company's organic business was 54.7%.

The improvement in gross margin resulted from several factors. During the quarter, the Company cut down on lower-margin product sales while benefiting from Huipu's higher-margin product contribution. As a result, the gross margin of products improved by 157 basis points. During the quarter, the Company continued to reduce the weight of the system integration business which typically carries a lower margin. The gross margin for this segment during the quarter was as high as 83.63% primarily due to the progress of certain projects. Meanwhile, the Company continued to increase the weight of its software business, which carries a higher gross margin. However, the gross margin of its software business declined to 54.22% from 62.36% a year ago primarily due to the Company's outsourcing of portions of its software projects commending in the first quarter of 2010. The Company believes that by outsourcing some of the non-essential and labor-intensive portions of software projects, it will be able to focus resources on the higher value-added components of the software business. This practice should enable more effective revenue growth and save operating expenses, which, overtime, will be accretive to long-term shareholder value.

Income from Operations

Income from operations increased $3.53 million, or 41.1%, to $12.13 million for the three months ended June 30, 2010, from $8.60 million in the corresponding period in 2009. Income from operations as a percentage of revenue increased to 36.2% during the three months ended June 30, 2010, from 33.3% in 2009.

Income Tax Expense

Income tax expense for the three months ended June 30, 2010 was $2.16 million, up from $1.09 million for the same period in 2009.

The Company's subsidiaries, ISS, Zhongtian and Huipu 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 22% of assessable profits in 2010, compared to 20% for the same period in 2009, an increase of 2%.

Bocom, and the Company's VIE, iASPEC (inclusive of Geo), as High-Tech Enterprises, are subject to EIT at a rate of 15% of assessable profits. After offsetting accumulated losses from prior years, Geo had no assessable profit subject to EIT for the three months ended June 30, 2010. 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. Year 2010 is the fourth year that IST is entitled to the tax holiday and will be subject to a favorable tax rate of 11%.

Net Income Attributable to the Company

As a result of the factors described above, net income increased $1.55 million, or 19.9%, to $9.35 million during the three months ended June 30, 2010, from $7.79 million for the same period in 2009.

Cash and Cash Equivalents

As of June 30, 2010, the Company had $23.54 million in cash and restricted cash, as compared to $19.34 million in the same period one year ago.

During the three months ended June 30, 2010, net cash provided by operating activities improved significantly to $9.80 million, as compared with $5.48 million in the same period a year ago. During the current quarter, accounts receivable balance increased by $0.50 million, as compared with an increase of $11.39 million during the second quarter of 2009.

    Recent Developments
    -- May 18, 2010 - China Information Security Technology PGIS System Plays
       Critical Role in Public Security Management at the Shanghai World Expo
    -- June 14, 2010 - China Information Security Technology Wins Intelligent
       Traffic Management Contract for the 16th Asian Games in Guangzhou,
       China

2010 Outlook

For fiscal year 2010, the Company reaffirms its guidance with projected revenue to $141-146 million and adjusted net income to $35.5-39.5 million, excluding any non-cash expenses as a result of employee stock awards, amortization of intangible assets associated with acquisitions, and changes in fair value of contingent considerations.

About Non-GAAP Financial Measures

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

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



             Q2 2010 Reconciliation of Operating, Net Income and EPS
         to Exclude SBC, Amortization of Intangible Assets and Contingent
                                  Consideration

                                 3 Mos.      3 Mos.      6 Mos.      6 Mos.
                                 Ended       Ended       Ended       Ended
                               30-Jun-10   30-Jun-09   30-Jun-10   30-Jun-09

    Operating income           12,126,944   8,597,615  18,690,373  12,766,965
    Stock based compensation
     (SBC)                             --          --          --     183,600
    Amortization                  427,391     437,704     927,048     865,710

    Operating income (without
     SBC and amortization)     12,554,335   9,035,319  19,617,421  13,816,275

    Net income Attributable to
     the Company                9,352,069   7,797,830  15,633,177  11,554,823
    Stock based compensation
     (SBC)                             --          --          --     183,600
    Amortization                  427,391     437,704     927,048     865,710
    Change in fair value of
     contingent consideration*     94,829          --    (700,268)         --

    Net income (without SBC,
     amortization and
     contingent consideration)  9,874,289   8,235,534  15,859,957  12,604,133

    Weighted Average Number of
     Shares Outstanding
    Basic                      51,450,623  47,536,883  51,332,698  47,528,503
    Diluted                    51,450,623  47,536,883  51,332,698  47,528,503

    Earnings per hare (without
     SBC, amortization and
     contingent consideration)      $0.19       $0.17       $0.31       $0.27
    Basic                           $0.19       $0.17       $0.31       $0.27

    * Represents a gain from the change of fair value of the contingent
      consideration for the acquisition of Huipu as at 06/30/2010, according
      to FASB ASC 805 - Business Combinations


About China Information Security Technology, Inc.

China Information Security Technology, Inc., together with its subsidiaries, specializes in Geographic Information Systems (GIS), digital public security and hospital information systems, with the goal of being the largest GIS software provider in the People's Republic of China. Headquartered in Shenzhen, China, the Company's total solutions include specialized software, hardware, systems integration, and related services organized into three business segments - Geographic Information Systems, Digital Information Security Technology (DIST), and Digital Hospital Information Systems (DHIS). To learn more about the Company, please visit its corporate website at http://www.chinacpby.com .

Safe Harbor Statement

This press release may contain certain "forward-looking statements" relating to the business of China Information Security Technology, Inc., and its subsidiary companies. All statements, other than statements of historical fact included herein are "forward-looking statements" including statements regarding: the significance of the Company's new contract wins during the quarter; the ability of the Company to continue to strengthen its position in the industry by winning and successfully performing under national contracts; the ability of the Company to secure future opportunities in the market by leveraging its R&D capabilities and reputation; the continued support of the Chinese government for domestic GIS products; the general ability of the Company to achieve its commercial objectives, including the Company's plan to sustain the growth while creating shareholder value; the business strategy, plans and objectives of the Company and its subsidiaries; and any other statements of non-historical information. These forward-looking statements are often identified by the use of forward-looking terminology such as "believes," "expects" or similar expressions, involve known and unknown risks and uncertainties. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. Investors should not place undue reliance on these forward-looking statements, which speak only as of the date of this press release. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those discussed in the Company's periodic reports that are filed with the Securities and Exchange Commission and available on its website (http://www.sec.gov). All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these factors. Other than as required under the securities laws, the Company does not assume a duty to update these forward-looking statements.

    For further information, please contact:

    China Information Security Technology, Inc.
     Iris Yan
     Tel:   +86-755-8370-4767
     Email: ir@chinacpby.com
     Web:   http://www.chinacpby.com

    Christensen
     Kathy Li
     Tel:   +1-480-614-3036
     Email: kli@christensenir.com

     Roger Hu
     Tel:   +86-158-1049-5326
     Email: rhu@christensenir.com



                 CHINA INFORMATION SECURITY TECHNOLOGY, INC.
                    CONDENSED CONSOLIDATED BALANCE SHEETS
                  AS OF JUNE 30, 2010 AND DECEMBER 31, 2009
                          Expressed in U.S. dollars
                   (Except for share and per share amounts)

                                                 June 30         December 31
                                                   2010              2009
    ASSETS                                      (Unaudited)

    CURRENT ASSETS
    Cash and cash equivalents                   $17,745,272      $ 13,478,633
    Restricted cash                               5,795,203         5,859,910
    Accounts receivable:
    Billed, net of allowance for doubtful
     accounts of $2,944,000 and
     $3,123,000, respectively                    24,114,664        23,907,035
    Unbilled                                     58,149,465        47,851,638
    Bills receivable                                218,622                --
    Advances to suppliers                         4,084,692         6,924,035
    Amount due from related parties, net
     of allowance for doubtful accounts
     of $0 and $73,000, respectively                158,467           129,937
    Inventories, net of provision of
     $183,000 and $184,000, respectively         20,985,556        10,936,004
    Other receivables and prepaid
     expenses                                    14,751,936        15,405,089
    Deferred tax assets                           1,622,613         1,719,327
    TOTAL CURRENT ASSETS                        147,626,490       126,211,608

    Deposit for software purchase                 4,797,561         1,426,452
    Deposit for purchase of land use
     rights                                         925,912                --
    Long-term investments                         2,873,722         2,862,016
    Property, plant and equipment, net           62,612,136        53,586,514
    Land use rights, net                          2,123,702         1,907,611
    Intangible assets, net                       13,138,669        13,556,141
    Goodwill                                     50,067,871        50,609,866
    Deferred tax assets                             428,336           668,730
    TOTAL ASSETS                               $284,594,399     $ 250,828,938

    LIABILITIES AND EQUITY

    CURRENT LIABILITIES
    Short-term bank loans                       $22,121,740      $ 15,927,780
    Accounts payable                             17,115,384        20,159,317
    Bills payable                                10,605,305        12,658,029
    Advances from customers                       3,266,171         3,950,744
    Amount due to related parties,
     current portion                                667,138           583,736
    Accrued payroll and benefits                  1,609,966         3,142,240
    Other payables and accrued expenses          14,969,739        14,252,918
    Contingent consideration, current
     portion                                      1,568,437         1,857,994
    Income tax payable                            3,875,563         3,290,245
    TOTAL CURRENT LIABILITIES                    75,799,443        75,823,003

    Long-term bank loans                          4,036,020         1,907,100
    Amount due to related parties, long-
     term portion                                 5,015,528                --
    Contingent consideration, net of
     current portion                              2,224,685         2,635,397
    Deferred tax liabilities                      1,896,337         2,564,604
    TOTAL LIABILITIES                            88,972,013        82,930,104

    COMMITMENTS AND CONTINGENCIES                        --                --



                 CHINA INFORMATION SECURITY TECHNOLOGY, INC.
                    CONDENSED CONSOLIDATED BALANCE SHEETS
            AS OF JUNE 30, 2010 AND DECEMBER 31, 2009 (CONTINUED)
                          Expressed in U.S. dollars
                   (Except for share and per share amounts)

    EQUITY
    Common stock, par $0.01; authorized
     capital 200,000,000 shares; shares
     issued and outstanding 2010:
     51,811,787: 2009: 49,905,141 shares    $      252,615          $233,548
    Treasury stock, 6,000 shares, at cost          (11,468)          (11,468)
    Additional paid-in capital                  89,128,945        78,495,062
    Reserve                                      8,345,371         8,345,371
    Retained earnings                           76,095,452        60,462,275
    Accumulated other comprehensive income       6,020,572         5,016,575
    Total equity of the Company                179,831,487       152,541,363
    Non-controlling interest                    15,790,899        15,357,471
    Total equity                               195,622,386       167,898,834

    TOTAL LIABILITIES AND EQUITY               284,594,399       250,828,938



                 CHINA INFORMATION SECURITY TECHNOLOGY, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
    FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009  (Unaudited)
                          Expressed in U.S. dollars
                   (Except for share and per share amounts)

                               Three Months Ended        Six Months Ended
                              June 30,    June 30,    June 30,     June 30,
                                2010        2009        2010         2009

    Revenue - Products       $7,471,511 $ 3,789,288  $13,819,481   $6,610,416
    Revenue - Software       22,406,236  15,921,487   37,584,868   24,932,952
    Revenue - System
     integration              3,485,523   5,571,619    6,269,406    8,527,076
    Revenue - Others            153,618     505,525    1,148,240      697,659
    TOTAL REVENUE            33,516,888  25,787,919   58,821,995   40,768,103

    Cost - Products sold      5,813,701   3,007,849   11,054,123    5,620,640
    Cost - Software sold     10,257,690   5,993,637   16,659,101    8,694,577
    Cost - System
     integration                570,721   4,395,011    3,046,531    6,540,763
    Cost - Others                76,470     124,671      146,481      162,108
    TOTAL COST               16,718,582  13,521,168   30,906,236   21,018,088

    GROSS PROFIT             16,798,306  12,266,751   27,915,759   19,750,015

    Administrative expenses  (2,621,501) (2,304,376)  (5,391,532)  (4,520,723)
    Research and development
     expenses                  (560,649)   (720,411)  (1,130,080)  (1,224,263)
    Selling expenses         (1,489,212)   (644,349)  (2,703,774)  (1,238,064)
    INCOME FROM OPERATIONS   12,126,944   8,597,615   18,690,373   12,766,965

    Subsidy income              268,898     318,071      431,680      515,860
    Other (loss)/income, net   (324,700)    (16,845)     642,099      164,521
    Interest income              10,403     120,627       29,294      197,544
    Interest expense           (263,756)    (56,443)    (412,647)    (116,653)
    INCOME BEFORE INCOME
     TAXES                   11,817,789   8,963,025   19,380,799   13,528,237

    Income tax expense       (2,163,609) (1,091,800)  (3,334,692)  (1,680,196)
    NET INCOME                9,654,180   7,871,225   16,046,107   11,848,041

    Less: Net income
     attributable to the
     non-controlling
     interest                  (302,111)    (73,395)    (412,930)    (293,218)


    NET INCOME ATTRIBUTABLE
     TO THE COMPANY
                             $9,352,069  $7,797,830  $15,633,177  $11,554,823

    Weighted average number
     of shares
    Basic                    51,450,623  47,536,883   51,332,698   47,528,503
    Diluted                  51,450,623  47,536,883   51,332,698   47,528,503

    Earnings per share -
     Basic and Diluted
    Basic - Net income
     attributable to the
     Company's common
     stockholders                 $0.18       $0.16        $0.30        $0.24

    Diluted - Net income
     attributable to the
     Company's common
     stockholders                 $0.18       $0.16        $0.30        $0.24



                 CHINA INFORMATION SECURITY TECHNOLOGY, INC.
          CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
    FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009  (Unaudited)
                          Expressed in U.S. dollars
                   (Except for share and per share amounts)

                                Three Months Ended        Six Months Ended
                               June 30,    June 30,     June 30,     June 30,
                                 2010        2009         2010        2009

    Net income                 $9,654,180  $7,871,225  16,046,107  $11,848,041
    Other comprehensive
     income:
    Foreign currency
     translation gain             787,465     (16,365)  1,024,495      435,377

    Comprehensive income       10,441,645   7,854,860  17,070,602   12,283,418
    Comprehensive income
     attributable to the non-
     controlling interest
                                 (322,572)    (73,310)   (433,428)    (293,133)
    Comprehensive income
     attributable to the
     Company                  $10,119,073  $7,781,550  16,637,174  $11,990,285



                 CHINA INFORMATION SECURITY TECHNOLOGY, INC.
               CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
         FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009  (Unaudited)
                          Expressed in U.S. dollars
                   (Except for share and per share amounts)

                                                      Six Months Ended
                                              June 30, 2010     June 30, 2009
    OPERATING ACTIVITIES
    Net income                                 $16,046,107       $11,848,041
    Adjustments to reconcile net income
     to net cash provided by operating
     activities:
    Depreciation                                 3,441,071         1,852,357
    Amortization of intangible assets              927,048           865,710
    Stock-based compensation                            --           183,600
    Loss on disposal of property and
     equipment                                     320,957            31,764
    Change in allowance for accounts
     receivable                                    267,716           573,881
    Reversal of write-down of inventories           (1,362)               --
    Change in deferred income tax                  215,192           (29,517)
    Change in fair value of contingent
     consideration                                (700,268)               --
    Changes in operating assets and
     liabilities, net of effects of
     business acquisitions:
    Decrease in restricted cash                    457,202                --
    Increase in accounts receivable            (10,656,507)      (14,665,591)
    Decrease / (increase) in advances to
     suppliers                                   2,091,453        (3,028,042)
    Decrease / (increase) in other
     receivables and prepaid expenses              313,302        (1,540,531)
    Increase in inventories                    (10,164,333)       (1,657,773)
    (Decrease) / increase in accounts
     payable                                    (5,209,216)        4,643,442
    (Decrease) / increase in advances
     from customers                               (695,808)        4,469,480
    Increase in amount due to related
     parties                                       311,077           177,621
    Increase / (decrease) in other
     payables and accrued expenses                 921,098          (432,401)
    Increase in income tax payable                 569,611           695,912
    Net cash (used in) / provided by
     operating activities                       (1,545,660)         3,987,953


    INVESTING ACTIVITIES
    Increase in restricted cash related
     to bank borrowings                           (368,895)              --
    Proceeds from sales of property and
     equipment                                      44,007           100,225
    Proceeds from sale of short-term
     investments                                        --         5,862,800
    Refund of investment in former Joint
     Venture                                            --         4,397,100
    Purchase of land-use-rights                   (230,970)               --
    Purchases of property and equipment        (11,038,575)         (630,478)
    Capitalized and purchased software
     development costs                            (432,547)         (308,484)
    Deposit for software purchase               (4,777,693)       (4,781,846)
    Deposit for purchase of land-use-
     rights                                       (165,093)               --
    Net cash (used in) / provided by
     investing activities                      (16,969,766)        4,639,317


    FINANCING ACTIVITIES
    Borrowing of short-term loans               21,003,299         1,898,082
    Borrowing of shareholder's loan             6,026,830                --
    Borrowing of long-term loans                 4,019,306                --
    Repayment of short-term loans              (14,887,816)         (732,850)
    Repayment of shareholder's loan            (1,026,830)               --
    Repayment of long-term loans                (1,906,970)               --
    Issued common stock                          9,383,440                --
    Repurchase of common stock                          --           (11,468)
    Net cash provided by financing
     activities                                 22,611,259         1,153,764



                 CHINA INFORMATION SECURITY TECHNOLOGY, INC.
               CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
   FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (CONTINUED) (Unaudited)
                          Expressed in U.S. dollars
                   (Except for share and per share amounts)

                                                       Six Months Ended
                                                  June 30,            June 30,
                                                    2010                2009
    Effect of exchange rate changes on
     cash and cash equivalents                     170,806              30,757

    NET INCREASE IN CASH AND CASH EQUIVALENTS    4,266,639           9,811,791
    CASH AND CASH EQUIVALENTS, BEGINNING        13,478,633           9,565,252
    CASH AND CASH EQUIVALENTS, ENDING          $17,745,272         $19,377,043

    Supplemental disclosure of cash
     flow information:
                                                       Six Months Ended
                                                  June 30,           June 30,
                                                   2010                2009
    Cash paid during the period
         Income taxes                           $2,547,020          $1,013,801
         Interest paid                            $449,494            $117,327

    Supplemental disclosure
     of significant non-cash
     transactions:

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 China Information Security Technology, Inc. 2007 Equity Incentive Plan ("The Plan"). The fair value of these shares of approximately $1.3 million, based on the quoted market price, was accrued as of December 31, 2009 as the compensation was for services provided in 2009.

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. The fair value of these shares of $183,600 based on quoted market price was recognized as stock-based compensation for the six months ended June 30, 2009.

Selected information by segment is presented in the following tables for the three and six months ended June 2010 and 2009.

                               Three months ended        Six months ended
                                    June 30                  June 30
                                2010        2009         2010        2009
                             (Unaudited) (Unaudited)  (Unaudited)  (Unaudited)


    Revenues(1)
         GIS Segment         $15,677,977  $7,974,312  $26,315,057  $13,833,978
         DIST Segment         13,957,662  15,221,482   26,055,086   22,741,939
         DHIS Segment          3,881,249   2,592,125    6,451,852    4,192,186
                             $33,516,888 $25,787,919  $58,821,995  $40,768,103

    (1) Revenues by operating segments exclude intercompany transactions.

    Percentage to Revenue
         GIS Segment               46.8%       30.9%        44.7%        33.9%
         DIST Segment              41.6%       59.0%        44.3%        55.8%
         DHIS Segment              11.6%       10.1%        11.0%        10.3%

SOURCE China Information Security Technology, Inc.