CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

Expressed in thousands of U.S. dollars

(Except for share and per share amounts)

		June 30,			December 31,
		2007			2006
		(Unaudited)
		USD			USD
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	91,784		$	30,980
Accounts receivable, net			37,466			26,754
Related party receivables			559			440
Inventories, net			38,982			19,721
Prepayments & deposits			6,136			3,533
Advances to suppliers			4,950			2,889
Other receivables			3,595			1,697
Deferred tax assets - current portion			38			41
Total current assets			183,510			86,055
Deposits for acquisition of subsidiaries and properties			20,023			-
Property, plant and equipment, net			15,821			8,339
Land use rights, net			2,507			1,152
Intangible assets			28,996			9,997
Investment, at cost			13			12
Goodwill			43,512			8,426
Deferred financing cost			167			-
Deferred tax assets - non-current portion			473			462
TOTAL ASSETS		$	295,022		$	114,443

 

3

---

CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

Expressed in thousands of U.S. dollars

(Except for share and per share amounts)

		June 30,			December 31,
		2007			2006
		(Unaudited)
		USD			USD
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable - short term		$	10,189		$	2,272
Accounts payable			12,727			4,000
Accrued expenses			3,459			749
Advances from customers			2,223			5,432
Taxes payable			2,838			1,660
Payable for acquisition of business			18,468			7,500
Deferred income			826			831
Due to a director			-			76
Total current liabilities			50,730			22,520
LONG-TERM LIABILITIES
Notes payable - long term			906			2,010
Convertible notes payable			114,975			-
Total liabilities			166,611			24,530
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES			144			94
SHAREHOLDERS' EQUITY
Common stock, $0.0001 par value; 100,000,000 shares authorized 37,771,488 (June 30, 2007) and 31,824,938 (December 31, 2006) shares issued and outstanding			4			3
Additional paid-in capital			72,407			45,320
Retained earnings			50,281			41,483
Statutory reserves			804			804
Accumulated other comprehensive income			4,771			2,209
Total shareholders' equity			128,267			89,819
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	295,022		$	114,443

 

See the accompanying notes to condensed consolidated financial statements

4

---

 

CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

Expressed in thousands of U.S. dollars

(Except for share and per share amounts)

 

		Six Months Ended June 30,						Three Months Ended June 30,
		2007			2006			2007			2006
		(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
		USD			USD			USD			USD
Revenues		$	90,576		$	22,609		$	52,125		$	8,015
Cost of goods sold			65,565			15,175			37,232			4,978
Gross profit			25,011			7,434			14,893			3,037
Selling and marketing			1,458			293			855			171
General and administrative			5,559			673			3,308			378
(including non-cash employee compensation for the six months ended and three months ended June 30, 2007 and 2006 of $1,066, $801, $0 and $0, respectively)
Depreciation and amortization			1,890			189			1,084			87
Income from operations			16,104			6,279			9,646			2,401
Rental income received from related party			256			246			129			123
Interest income			225			-			143			-
Interest expense			(5,424	)		-			(4,105	)		-
Other income, net			718			454			226			334
Income before income taxes and minority interest			11,879			6,979			6,039			2,858
Minority interest in income of consolidated subsidiaries			2			-			(7	)		-
Income taxes			(3,083	)		(943	)		(1,767	)		(322	)
Net income			8,798			6,036			4,265			2,536
Foreign currency translation gain			2,562			217			1,767			597
Comprehensive income		$	11,360		$	6,253		$	6,032		$	3,133
Net income per share
Basic		$	0.26		$	0.26		$	0.12		$	0.10
Diluted		$	0.24		$	0.26		$	0.11		$	0.10
Weighted average number of shares outstanding
Basic			34,429,780			23,046,766			35,770,742			24,436,755
Diluted			36,492,123			23,139,542			38,831,023			24,621,287

 

6

---

 

CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Expressed in thousands of U.S. dollars

(Except for share and per share amounts)

		Six Months Ended June 30,
		2007			2006
		(Unaudited)			(Unaudited)
		USD			USD
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	8,798		$	6,036
Adjustments to reconcile net income to net cash (used in) operating activities:
Depreciation and amortization			1,890			189
Amortization of consultancy services			60			48
Amortization of deferred financing cost			9			-
Non-cash employee compensation			1,066			-
Redemption accretion on convertible notes			4,975			-
Deferred taxes			8			(643	)
Minority interest			(2	)		-
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable			(4,217	)		(3,556	)
Related party receivables			(109	)		2,891
Inventories			(7,602	)		(3,526	)
Prepayments & deposits			(2,549	)		-
Advances to suppliers			(1,176	)		(3,663	)
Other receivables			(658	)		(1,736	)
Deferred expenses			-			(12,150	)
(Decrease) increase in:
Accounts payable and accrued expenses			(838	)		(720	)
Advances from customers			(4,310	)		-
Tax payable			856			(210	)
Deferred income			16			16,959
Net cash (used in) operating activities			(3,783	)		(81	)

Continued

7

---

 

CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Expressed in thousands of U.S. dollars

(Except for share and per share amounts)

 

		Six Months Ended June 30,
		2007			2006
		(Unaudited)			(Unaudited)
		USD			USD
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment			(1,528	)		(1	)
Additions to intangible assets			(15	)		-
Additions to land use rights			(565	)		-
Deposits paid for acquisition of subsidiaries			(14,657	)		-
Deposits paid for acquisition of properties			(5,366	)		-
Net cash outflow for acquisition of subsidiaries (net of cash acquired from subsidiaries)			(30,275	)		-
Net cash used in investing activities			(52,406	)		(1	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to a director			(74	)		1
Issuance of common stock, net of issuing expenses			2,318			7,359
New borrowings, net of issuing cost			116,291			-
Repayment of borrowings			(2,055	)		-
Net cash provided by financing activities			116,480			7,360
EFFECT OF EXCHANGE RATE CHANGES ON CASH			513			63
NET INCREASE IN CASH AND CASH EQUIVALENTS			60,804			7,341
Cash and cash equivalents, beginning of period			30,980			2,277
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	91,784		$	9,618

Continued

8

---

 

CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Expressed in thousands of U.S. dollars

(Except for share and per share amounts)  

 

SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid		$	210		$	-
Income taxes paid		$	2,696		$	940

 

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

1,361,748 shares of common stock issuable in satisfaction of the equity portion of the purchase price of approximately $7,500 in the acquisition of Shanghai Cheng Feng Digital Technology Co., Ltd., (“Cheng Feng”), were issued in the first quarter of 2007.

 

2,800,711 shares of common stock issuable in satisfaction of the equity portion of the purchase price of approximately $16,162 in the acquisition of Shenzhen Hongtianzhi Electronics Co., Ltd., (“Hongtianzhi”), were issued in the second quarter of 2007. (Note 3)

 

See the accompanying notes to condensed consolidated financial statements

9

---

 

CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Expressed in thousands of U.S. dollars

(Except for share and per share amounts)

1.	BASIS OF PRESENTATION   The accompanying financial statements, as of June 30, 2007 and for the six months and three months ended June 30, 2007 and 2006, have been prepared by CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. (the “Company”) without audit. Pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s audited annual financial statements for the year ended December 31, 2006, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, filed with the SEC on March 21, 2007, as amended on March 23, 2007. Amounts as of December 31, 2006 are derived from these audited consolidated financial statements.   The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates.   In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company’s financial position as of June 30, 2007, results of operations for the six months and three months ended June 30, 2007 and 2006, and cash flows for the six months ended June 30, 2007 and 2006, have been made. The results of operations for the six months and three months ended June 30, 2007 are not necessarily indicative of the operating results for the full year.
2.	SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES

 

(a)    Accounts Receivable

Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An estimate for doubtful accounts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred.

No trade receivables due from one individual customer exceeds 10% of total accounts receivable at June 30, 2007 and December 31, 2006.

 

(b)    Inventories

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

When inventories are sold, their carrying amount is charged to expense in the year in which the revenue is recognized. Write-downs for declines in net realizable value or for losses of inventories are recognized as an expense in the year the impairment or loss occurs. There were no declines in net realizable value of inventory for the three and six months ended June 30, 2007 and 2006.

During the six months and three months ended June 30, 2007 and 2006, approximately 81%, 72%, 99% and 98%, of total inventory purchases were from five suppliers, respectively.

10

---

 

CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Expressed in thousands of U.S. dollars

(Except for share and per share amounts)

 

2.	SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(c)    Accounting for Computer Software To Be Sold, Leased or Otherwise Marketed

The Company accounts for software development costs in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “ Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed .” Costs related to establishing the technological feasibility of a software product are expensed as incurred as a part of research and development in general and administrative expenses. Costs that are incurred to produce the finished product after technological feasibility is established are capitalized and amortized over the estimated economic life of 5 years. The Company performs periodic reviews to ensure that unamortized program costs remain recoverable from future revenue.

As of June 30, 2007 and December 31, 2006, unamortized computer software costs were $665 and $267, respectively. During the six months and three months ended June 30, 2007 and 2006, $63, $32, $0 and $0 amortization expense was charged to income, respectively.

(d)    Revenue Recognition

The Company derives the bulk of its revenue from the supply and installation of security and surveillance equipment and the two deliverables do not meet the separation criteria under Emerging Issues Task Force (“EITF”) issue 00-21. The installation is not considered to be essential to the functionality of the equipment having regard to the following criteria as set out in Staff Accounting Bulletin (“SAB”) 104:

(i)    The security and surveillance equipment is a standard product with minor modifications according to customers’ specifications;

 

(ii)    Installation does not significantly alter the security and surveillance equipment’s capabilities; and

 

(iii)    Other companies which possess the relevant licenses are available to perform the installation services.

In early 2006, the Company began performing much larger security installation contracts than it had been performing previously. As a marketing approach, the Company prepared standard contracts with its new larger customers, whereby 90% of the contract amount was due when installation was complete and payment of the remaining 10% was deferred for one year. Because of the newness of the larger contracts and the inability to immediately determine the amount of warranty work that would be required, the Company initially deferred recognizing the 10% of the contract amount as revenue and amortized this amount to income over the one year period. During the second and third quarters of 2006, the Company carefully monitored the warranty work requested by its customers, and determined that very little warranty work had been required to be performed.

The Company reduced its estimate of future warranty requirements to approximately 1% of contract installation revenue since the fourth quarter of 2006.

Revenue from the outright sale of security and surveillance equipment is recognized when delivery occurs and risk of ownership passes to the customers.

 

(e)    Research and Development Costs

Research and development costs are expensed as incurred. Research and development costs included in general and administrative expenses for the six and three months ended June 30, 2007 and 2006 were $108, $87, $0 and $0, respectively.

11

---

CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Expressed in thousands of U.S. dollars

(Except for share and per share amounts)

2.	SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(f)    Advertising Costs

(g)    Retirement Benefits

Retirement benefits in the form of contributions under defined contribution retirement plans to the relevant authorities are charged to the consolidated statements of income as incurred. The retirement benefit expenses (included in general and administrative expenses) for the six and three months ended June 30, 2007 and 2006 were $127, $73, $10 and $1, respectively.

(h)    Income taxes

The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109,” (“FIN 48”), on January 1, 2007. The Company did not have any material unrecognized tax benefits and there was no effect on its financial condition or results of operations as a result of implementing FIN 48.

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

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the three and six month periods ended June 30, 2007. The Company’s effective tax rate differs from the federal statutory rate primarily due to non-deductible expenses, temporary differences, and preferential tax treatment.

On March 16, 2007, the National People’s Congress of the People’s Republic of China (“PRC”) adopted a new corporate income tax law in its fifth plenary session. The new corporate income tax law unifies the application scope, tax rate, tax deduction and preferential policy for both domestic and foreign-invested enterprises.  The new corporate income tax law will be effective on January 1, 2008.  According to the new corporate income tax law, the applicable income tax rate for our operating subsidiaries may be subject to change.  As the implementation detail has not yet been announced, we cannot be sure of the potential impact of such new corporate income tax law on financial position and operating results.

(i)    Use of Estimates

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

12

---

 

CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Expressed in thousands of U.S. dollars

(Except for share and per share amounts)

2.	SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(j)    Earnings Per Share

SFAS No. 128, “Earnings Per Share,” requires dual presentation of basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation.  Basic EPS excludes dilution.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. 

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

The calculation of diluted earnings per share for the three and six months ended June 30, 2007 has been calculated using the treasury stock method based on the weighted average number of dilutive securities outstanding during 2007. As of June 30, 2007, warrants were outstanding to acquire 610,015 shares of common stock.

The Company is to issue 1,780,415 shares of common stock in connection with business acquisitions (note 3). The impact of these shares has been included in dilutive weighted average number of shares from the date of the closing of the acquisitions.

3.	BUSINESS ACQUISITIONS

On April 2, 2007, the Company entered into an Equity Transfer Agreement relating to the acquisition of 100% of the equity of Chain Star Investments Limited, the holding company of Hongtianzhi. The acquisition was financed with proceeds from the Company’s February Notes (as defined in note 13). The results of operations of Hongtianzhi are included in our consolidated financial statements beginning on April 2, 2007.

 

The Company agreed to pay total consideration equaling RMB250,000 (approximately $32,324) in exchange for the 100% ownership of Chain Star Investment Limited, consisting of RMB125,000 (approximately $16,162) in cash and shares of the Company’s common stock valued at RMB125,000. RMB 12,500 (approximately $1,579) of the purchase price was paid as a deposit in October 2006. The balance of the cash portion of the purchase price, RMB 112,500 (approximately $14,583), was paid in April 2007. The number of shares issuable in satisfaction of the equity portion of the purchase price was 2,800,711 shares, which were issued in May and June 2007. Chain Star Investment Limited is a holding company with no assets other than 100% of the equity interests of Hongtianzhi.

The operational control of Hongtianzhi passed to the Company effective April 2, 2007. Government approval to consummate the acquisition was subsequently received. The results of Hongtianzhi's operations from April 2, 2007 through June 30, 2007 are included in the Company’s Consolidated Statements of Income and Comprehensive Income.

On May 11, 2007, the Company entered into an Equity Transfer Agreement relating to the acquisition of 100% of the equity of Link Billion Limited which is the holding company of HiEasy Electronic Technology Development Co., Ltd. (“HiEasy”). The acquisition was financed with proceeds from the Company’s February Notes and April Notes (as defined in note 13). The results of operations of HiEasy are included in our consolidated financial statements beginning on May 11, 2007.

 

The Company agreed to pay total consideration equaling RMB80,000 (approximately $10,382) in exchange for the 100% ownership of Link Billion Limited, consisting of RMB40,000 (approximately $5,191) in cash and shares of the Company’s common stock valued at RMB40,000. RMB32,290 (approximately $4,200) of the purchase price was paid before the execution of the Equity Transfer Agreement. The balance of the cash portion of the purchase price, RMB7,710 (approximately $991), was paid in June 2007. The number of shares issuable in satisfaction of the equity portion of the purchase price was 811,804 shares, which will be issued in the third quarter of 2007. Link Billion Limited is a holding company with no assets other than 100% of the equity interests of HiEasy.

 

13

---

CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Expressed in thousands of U.S. dollars

(Except for share and per share amounts)

3.	BUSINESS ACQUISITIONS (CONTINUED)

 

The operational control of HiEasy passed to the Company effective May 11, 2007. Government approval to consummate the acquisition was subsequently received. The results of HiEasy’s operations from May 11, 2007 through June 30, 2007 are included in the Company’s Consolidated Statements of Income and Comprehensive Income.

On June 4, 2007, the Company entered into an Equity Transfer Agreement relating to the acquisition of 100% of the equity of Allied Rich Limited which is the holding company of Changzhou Minking Electronics Co., Ltd. (“Minking”). The acquisition was financed with proceeds from the Company’s February Notes and April Notes. (as defined in note 13) The results of operations of Minking are included in our consolidated financial statements beginning on June 4, 2007.

 

The Company agreed to pay RMB200,000 (approximately $26,136) in exchange for 100% ownership of Allied Rich Limited, consisting of RMB100,000 (approximately $13,068) in cash and shares of the Company’s common stock valued at RMB100,000. RMB30,833 (approximately $3,953) of the purchase price was paid as a deposit in March 2007. The balance of the cash portion of the purchase price, RMB69,167 (approximately $9,115), was paid in June 2007. The number of shares issuable in satisfaction of the equity portion of the purchase price was 968,611 shares, which will be issued in the third quarter of 2007. Allied Rich Limited is a holding company with no assets other than 100% of the equity interests of Minking.

The operational control of Minking passed to the Company effective June 4, 2007. Government approval to consummate the acquisition was subsequently received. The results of Minking’s operations from June 4, 2007 through June 30, 2007 are included in the Company’s Consolidated Statements of Income and Comprehensive Income.

The following represents the purchase price allocation at the dates of the acquisition of Hongtianzhi, HiEasy and Minking based on a preliminary valuation report that is subject to finalization which was prepared by a third party appraisal firm:

		Hongtianzhi			HiEasy			Minking			Total
Cash and cash equivalents		$	924		$	291		$	2,680		$	3,895
Other current assets			8,998			2,631			7,414			19,043
Property, plant and equipment			3,869			200			2,084			6,153
Other assets			420			-			364			784
Goodwill			20,092			3,153			11,839			35,084
Intangible assets			6,051			5,587			8,560			20,198
Current liabilities			(5,931	)		(1,480	)		(6,805	)		(14,216	)
Long-term liabilities			(2,043	)		-			-			(2,043	)
Minority interest in consolidated subsidiaries			(56	)		-			-			(56	)
Total purchase price		$	32,324		$	10,382		$	26,136		$	68,842

 

14

---

 

CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Expressed in thousands of U.S. dollars

(Except for share and per share amounts)

3.	BUSINESS ACQUISITIONS (CONTINUED)

 

The following table shows supplemental information of the results of operations on a pro forma basis for the six months ended and three months ended June 30, 2007 and 2006 as if the acquisition of Hongtianzhi, HiEasy and Minking had been completed at the beginning of 2007 and 2006:

 

For the six months ended June 30, 2007 (Unaudited)

 

		Historical
		CSST			Hongtianzhi, HiEasy and Minking			Pro Forma Adjustments			Pro Forma
Revenues		$	90,576		$	9,899					$	100,475
Income From Operations		$	16,104		$	1,240		$	(694	)	$	16,650
Net Income		$	8,798		$	794		$	(694	)	$	8,898
Net Income Per Share
Basic		$	0.26								$	0.23
Diluted		$	0.24								$	0.22

For the six months ended June 30, 2006 (Unaudited)

		Historical
		CSST			Hongtianzhi, HiEasy and Minking			Pro Forma Adjustments			Pro Forma
Revenues		$	22,609		$	10,253					$	32,862
Income From Operations		$	6,279		$	1,347		$	(1,000	)	$	6,626
Net Income		$	6,036		$	1,058		$	(1,000	)	$	6,094
Net Income Per Share
Basic		$	0.26								$	0.22
Diluted		$	0.26								$	0.22

15

---

CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Expressed in thousands of U.S. dollars

(Except for share and per share amounts)

3.	BUSINESS ACQUISITIONS (CONTINUED)

 

For the three months ended June 30, 2007 (Unaudited)

 

		Historical
		CSST			Hongtianzhi, HiEasy and Minking			Pro Forma Adjustments			Pro Forma
Revenues		$	52,125		$	3,194					$	55,319
Income From Operations		$	9,646		$	334		$	(195	)	$	9,785
Net Income		$	4,265		$	176		$	(195	)	$	4,246
Net Income Per Share
Basic		$	0.12								$	0.11
Diluted		$	0.11								$	0.10

For the three months ended June 30, 2006 (Unaudited)

 

		Historical
		CSST			Hongtianzhi, HiEasy and Minking			Pro Forma Adjustments			Pro Forma
Revenues		$	8,015		$	5,911					$	13,926
Income From Operations		$	2,401		$	915		$	(499	)	$	2,817
Net Income		$	2,536		$	704		$	(499	)	$	2,741
Net Income Per Share
Basic		$	0.10								$	0.09
Diluted		$	0.10								$	0.09

 

The pro forma adjustments represent the amortization of the intangible assets arising upon the acquisitions of Hongtianzhi, HiEasy and Minking.

16

---

CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Expressed in thousands of U.S. dollars

(Except for share and per share amounts)

 

4.	ACCOUNTS RECEIVABLE

 

The Company provides an allowance for doubtful accounts related to its receivables. The receivables and allowance balances at June 30, 2007 and December 31, 2006 are as follows:

 

		June 30, 2007			December 31, 2006
Accounts receivable		$	37,721		$	26,877
Less: allowance for doubtful accounts			(255	)		(123	)
Accounts receivable, net		$	37,466		$	26,754

  

5.	RELATED PARTY RECEIVABLES

 

The Company had receivables from several companies whose directors and shareholders are common with the Company. All receivables arise from advances made prior to the date of the reverse merger on September 22, 2005 and from the rental of real estate properties. The receivables are classified as related party receivables on the balance sheets. The balances as of June 30, 2007 and December 31, 2006 are as follows:

 

		June 30, 2007			December 31, 2006
Related party receivables		$	559		$	440
Less: allowance for doubtful accounts			-			-
Related party receivables, net		$	559		$	440

The Company has leased offices to three related parties since January 1, 2004. The leases expire on December 31, 2007. The rental income was $256, $127, $246 and $123 for the six and three months ended June 30, 2007 and 2006, respectively.

 

6.	INVENTORIES

 

Inventories consist of the following as of June 30, 2007 and December 31, 2006:

 

		June 30, 2007			December 31, 2006
Raw materials		$	10,088		$	2,261
Work in progress			1,670			-
Finished goods			9,397			642
Installations in process			18,344			17,091
Total			39,499			19,994
Less: allowance for obsolete inventories			(517	)		(273	)
Inventories, net		$	38,982		$	19,721

17

---

CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Expressed in thousands of U.S. dollars

(Except for share and per share amounts)

7.	PREPAYMENTS & DEPOSITS

 

Prepayments and deposits consist of the following as of June 30, 2007 and December 31, 2006:

 

		June 30, 2007			December 31, 2006
Current portion		$	6,136		$	3,533
Non current portion - Deposits paid for acquisition of properties			5,366			-
- Deposits paid for acquisition of subsidiaries			14,657			-
		$	20,023		$	-

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

 

8.	ADVANCE PAYMENTS

 

The Company has made payments to unrelated suppliers in advance of receiving merchandise. The advance payments are meant to ensure preferential pricing and delivery. The amounts advanced under such arrangements totaled $4,950 and $2,889 as of June 30, 2007 and December 31, 2006, respectively.

 

9.	PROPERTY, PLANT AND EQUIPMENT

 

At June 30, 2007 and December 31, 2006, property, plant and equipment, at cost, consist of

 

		June 30, 2007			December 31, 2006
Buildings		$	12,577		$	7,450
Leasehold improvements			1,004			888
Plant and equipment			2,002			267
Electronic equipment			1,616			669
Motor vehicles			1,947			938
			19,146			10,212
Less: accumulated depreciation			(3,325	)		(1,873	)
Property, plant and equipment, net		$	15,821		$	8,339

18

---

 

CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Expressed in thousands of U.S. dollars

(Except for share and per share amounts)

 

10.	LAND USE RIGHTS

 

Land use rights consist of the following as of June 30, 2007 and December 31, 2006:

		June 30, 2007			December 31, 2006
Cost of land use rights		$	2,861		$	1,445
Less: Accumulated amortization			(354	)		(293	)
Land use rights, net		$	2,507		$	1,152

 

Amortization expense for the six and three months ended June 30, 2007 and 2006 was $20, $12, $14 and $7, respectively.

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

2007 (for the remaining 6 months)		$	29
2008			57
2009			57
2010			57
2011			57
2012			57
Thereafter			2,193
Total		$	2,507

 

19

---

 

CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Expressed in thousands of U.S. dollars

(Except for share and per share amounts)  

 

11.	INTANGIBLE ASSETS

 

		June 30, 2007			December 31, 2006
Acquired trademarks from Hongtianzhi, HiEasy and Minking (life of 11 to 25 years)		$	11,638		$	-
Acquired customer base from the Four-Related Companies, Hongtianzhi, HiEasy and Minking (life of 5 to 10 years)			6,993			5,840
Acquired patents from Minking (life of 10 years)			4,555			-
Acquired technical know-how from HiEasy (life of 9 years)			2,372			-
Acquired non-compete agreements from the Four-Related Companies, and HiEasy (life of 5 to 9 years)			1,334			953
Acquired surveillance software from HiEasy (life of 5 years)			260			-
Acquired contracts in progress from the Four-Related Companies and Hongtianzhi (life of 2 to 9 months)			414			177
Acquired surveillance software and patents from Cheng Feng (life of 5 years)			3,593			3,159
Acquired surveillance recording system from Yuan Da (life of 5 years)			519			511
Less: accumulated amortization			(2,682	)		(643	)
Intangible assets, net		$	28,996		$	9,997

The Company acquired Hongtianzhi, HiEasy and Minking during the second quarter of 2007. The valuations and allocation of the intangible assets were determined by a third party appraisal firm.

The Company acquired Cheng Feng and the security and surveillance businesses of Jian Golden An Ke Technology Co., Ltd., Shenzhen Golden Guangdian Technology Co., Ltd., Shenyang Golden Digital Technology Co., Ltd., and Jiangxi Golden Digital Technology Co., Ltd. (collectively referred to herein as the “the Four-Related Companies”) in 2006. The valuations and allocation of the intangible assets were determined by a third party appraisal firm.

The Company's intangible assets from Shenzhen Yuan Da Wei Shi Technology Limited (“Yuan Da”) represent the value determined by an independent accounting firm for the intellectual property pertaining to a surveillance recording system developed by Yuan Da which was acquired by the Company on December 31, 2005.

The amortization expense for the six and three months ended June 30, 2007 and 2006 was $1,465, $844, $51 and $26, respectively.

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

2007 (for the remaining 6 months)		$	2,080
2008			4,215
2009			4,765
2010			3,465
2011			2,426
2012			1,857
Thereafter			10,188
Total		$	28,996

20

---

 

CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Expressed in thousands of U.S. dollars

(Except for share and per share amounts)

 

12.	NOTES PAYABLE

 

The following is a summary of the Company’s short-term and long-term notes payable as of June 30, 2007 and December 31, 2006:

 

		June 30, 2007			December 31, 2006
Bank loans		$	11,095		$	4,282
Less: current portion			(10,189	)		(2,272	)
Long-term portion		$	906		$	2,010

 

At June 30, 2007, notes payable are due as follows:		Long-term notes			Short-term notes			Total
2007 (for the remaining six months)		$	236		$	1,838		$	2,074
2008			472			7,878			8,350
2009			671			-			671
Total		$	1,379		$	9,716		$	11,095

 

On May 28, 2007, the Company entered into a loan agreement with a Chinese bank. The Company borrowed RMB20,000 (approximately $2,626) with an annual interest rate of 5.913%. The loan is due in May 2008, and the interest is payable at the end of each month. The loan agreement requires the Company to use the loan proceeds only for the Company’s operations. The loan is guaranteed by the directors and the CEO of the Company and by a subsidiary of the Company.

On February 16, 2007, the Company entered into a loan agreement with a Chinese bank. The Company borrowed RMB 10,000 (approximately $1,313) with an annual interest rate of 6.39%. The loan is due in February 2008, and the interest is payable at the end of each month. The loan agreement requires the Company to use the loan proceeds only for the Company’s operations. The bank has the right to increase the interest rate and demand repayment of the entire loan principal and unpaid interest if the Company uses the loan for any purpose other than operations. The loan is guaranteed by the directors and the CEO of the Company and by Shenzhen Chuang Guan Intelligent Network Technology Co., Ltd.

On February 2, 2007, the Company entered into a loan agreement with a Chinese bank. The Company borrowed RMB 30,000 (approximately $3,939) with an annual interest rate of 6.12%. The loan is due in February 2008, and the interest is payable at the end of each month. The loan agreement requires the Company to use the loan proceeds only for the Company’s operations. The bank has the right to increase the interest rate and demand repayment of the entire loan principal and unpaid interest if the Company uses the loan for any purpose other than operations. The loan is guaranteed by the directors and the CEO of the Company and by Shenzhen Chuang Guan Intelligent Network Technology Co., Ltd.

On November 27, 2006, the Company entered into a loan agreement with a Chinese bank. The Company borrowed RMB 8,000 (approximately $1,050) with an annual interest rate of 6.732%. The loan is due in November 2007, and the interest is payable at the end of each month. The loan agreement requires the Company to use the loan proceeds only for the construction of the Company’s factory. The bank has the right to increase the interest rate and demand repayment of the entire loan principal and unpaid interest if the Company uses the loan for other purposes. The land use rights are pledged as collateral for the bank loan.

The long term note payable is from another Chinese bank. As of June 30, 2007, total long term liabilities were RMB10,500 (approximately $1,379), consisting of a 3-year loan payable to a Chinese Bank. This loan was borrowed on January 17, 2006 and matures on March 3, 2009, with an annual interest rate of 6.435 %. The loan agreement requires the Company to use the loan proceeds only for the construction of the Company’s factory. The loan is collateralized by the personal assets of the CEO of one of the Company’s subsidiaries.

 

21

---

 CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Expressed in thousands of U.S. dollars

(Except for share and per share amounts)

 

12.	NOTES PAYABLE  (CONTINUED)

 

On August 16, 2006, the Company entered into a loan agreement with a Chinese bank, guaranteed by the CEO of the Company. The Company borrowed RMB 10,000 (approximately $1,313) with an annual interest rate of 5.94% payable at the end of each month. The loan was repaid in February 2007.

On November 1, 2005, a subsidiary of the Company entered into a loan agreement with a Chinese bank in the amount of RMB 6,000 (approximately $788) with an annual interest rate of 5.76%. The loan is due on November 7, 2007, and the interest is payable at the end of each quarter. The loan agreement requires the Company to use the loan proceeds only for the Company’s operations. The bank has the right to increase the interest rate and demand repayment of the entire loan principal and unpaid interest if the Company uses the loan for any purpose other than operations.

The loan is guaranteed by two third-party companies. According to the guaranty and security agreement, the loan is also collateralized by the office building owned by such subsidiary and the personal assets of the subsidiary’s CEO. The Company is required to pay the guarantors an annual guaranty fee equal to 2.5% of the loan principal amount and an annual management and security fee equal to 3% of the loan principal amount. The Company prepaid these fees in November 2005 and amortizes the fees throughout the loan term. The Company is also required to pay the guarantors a loan default fee equal to 20% of the loan principal amount plus interest at 10.7% if the loan is in default.

 

13.	CONVERTIBLE NOTES PAYABLE

 

On February 20, 2007, pursuant to a Notes Purchase Agreement and indenture with Citadel Equity Fund Ltd. (“Citadel”), the Company issued to Citadel $60,000 aggregate principal amount of guaranteed senior unsecured convertible notes due 2012 (the “February Notes”). The terms of the February Notes indenture was subsequently amended on each of March 29, 2007 and April 24, 2007. The February Notes financing replaced the existing bridge financing that was closed on February 8, 2007 in which the Company had issued to Citadel $60,000 aggregate principal amount of senior notes. The February Notes bear an annual interest of 1%. All the net proceeds from the sales of the February Notes are and will be used for the Company’s working capital and acquisition plan.

Under the February Notes indenture, the February Notes are convertible, by the holders thereof, at any time on or prior to maturity, into common stock of the Company initially at the conversion price of $18 per share (subject to adjustment in certain circumstances, including semi-annual reset of the conversion price and upon occurrence of certain dilutive events, in each case subject to certain conditions). If the February Notes are not converted before maturity, the February Notes will be redeemed by the Company on the maturity date at a redemption price equal to 100% of the principal amount of the February Notes then outstanding plus an additional amount of 15.0% per annum, calculated on a quarterly compounded basis, plus any accrued and unpaid interest. In addition, if the 45-day variable weighted average price (“VWAP”) during the one year period from February 16, 2009 to February 15, 2010 equals or is greater than $30.0 per share of common stock, the Company shall, within one trading day, force holders of the February Notes to convert 50% of the then-outstanding principal amount of the February Notes at the then applicable conversion rate on a pro rata basis (the “February Notes 2010 Mandatory Conversion”). If the 45-day VWAP during the one year period from February 16, 2010 to February 15, 2011 equals or is greater than $35.0 per share of common stock (the “February Notes 2011 Mandatory Conversion Trigger”) and the February Notes 2010 Mandatory Conversion had occurred, the Company shall, within one trading day, force holders of the February Notes to convert all of the then-outstanding principal amount of the February Notes at the then applicable conversion price. If the February Notes 2011 Mandatory Conversion Trigger occurs and the February Notes 2010 Mandatory Conversion had not occurred, the Company shall, within one trading day, force holders of the February Notes to convert 50% of the then-outstanding principal amount of the February Notes at the then applicable conversion rate on a pro rata basis.

On April 24, 2007, pursuant to another Notes Purchase Agreement with Citadel, the Company issued to Citadel $50,000 aggregate principal amount of guaranteed senior unsecured convertible notes due 2012 (the “April Notes”). The April Notes bear an annual interest of 1%. All the net proceeds from the sales of the April Notes are and will be used for the Company’s working capital and acquisition plan.

22

---

 

 CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Expressed in thousands of U.S. dollars

(Except for share and per share amounts)

13.	CONVERTIBLE NOTES PAYABLE - CONTINUED

 

Under the April Notes indenture, the April Notes are convertible, by the holders thereof, at any time on or prior to maturity, into common stock of the Company initially at the conversion price of $23.60 per share (subject to adjustment in certain circumstances, including semi-annual reset of the conversion price and upon occurrence of certain dilutive events, in each case subject to certain conditions). If the April Notes are not converted before maturity, the April Notes will be redeemed by the Company on the maturity date at a redemption price equal to 100% of the principal amount of the April Notes then outstanding plus an additional amount of 15.0% per annum, calculated on a quarterly compounded basis, plus any accrued and unpaid interest. In addition, if the 45-day VWAP during the one year period from February 16, 2009 to February 15, 2010 equals or is greater than $40.0 per share of common stock, the Company shall, within one trading day, force holders of the April Notes to convert 50% of the then-outstanding principal amount of the April Notes at the then applicable conversion rate on a pro rata basis (the “April Notes 2010 Mandatory Conversion”). If the 45-day VWAP during the one year period from February 16, 2010 to February 15, 2011 equals or is greater than $45.00 per share of common stock (the “April Notes 2011 Mandatory Conversion Trigger”) and the April Notes 2010 Mandatory Conversion had occurred, the Company shall, within one trading day, force holders of the April Notes to convert all of the then-outstanding principal amount of the April Notes at the then applicable conversion price. If the April Notes 2011 Mandatory Conversion Trigger occurs and the April Notes 2010 Mandatory Conversion had not occurred, the Company shall, within one trading day, force holders of the April Notes to convert 50% of the then-outstanding principal amount of the April Notes at the then applicable conversion rate on a pro rata basis.

As of June 30, 2007, the Company has accreted $4,975 of the additional redemption amount related to the February Notes and April Notes, which amount is included in interest expense.

The February Notes and April Notes indentures, the notes purchase agreements and certain investor rights agreements between the Company and Citadel entered into in connection with the February Notes and April Notes financings contain various covenants that may limit the Company’s discretion in operating its business. In particular, the Company is limited in its ability to merge, consolidate or transfer substantially all of its assets, issue stock of subsidiaries, incur additional debt and create liens on assets to secure debt. In addition, if there is a default, or if the Company does not maintain certain financial covenants or does not maintain borrowing availability in excess of certain pre-determined levels, the February Notes and the April Notes may be accelerated with the balance becoming due and payable immediately and the Company may be unable to incur additional indebtedness, make restricted payments (including paying cash dividends on capital stock) or redeem or repurchase capital stock.  As of June 30, 2007, the Company has complied with all the required covenants.

Approximately $176 of legal fees and other costs directly associated with the issuance of the February Notes and April Notes is recorded as deferred financing costs in the balance sheet at June 30, 2007. The Company has amortized these financing costs over the life of the February Notes and April Notes. As of June 30, 2007, approximately $9 was amortized to interest expenses.

14.	DEFERRED INCOME

 

Deferred income balances as of June 30, 2007 and December 31, 2006 were $826 and $831, respectively, and represented amounts invoiced but deferred as revenues as an estimated warranty reserve.

 

15.	DUE TO A DIRECTOR

 

The Company had received advances from a director that were repaid during the six months ended June 30, 2007. The advances were non-interest bearing and were repayable upon demand. The balances due to the director were $0 and $76, at June 30, 2007 and December 31, 2006, respectively. 

 

23

---

 

 CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Expressed in thousands of U.S. dollars

(Except for share and per share amounts)

16.	ISSUANCE OF COMMON STOCK AND WARRANTS

 

On July 6, 2006, the Company entered into a definitive Securities Purchase Agreement with certain accredited investors relating to the private placement of units, consisting of one share of the Company’s common stock and a warrant to purchase one-fifth of one share of common stock.

 

Such Securities Purchase Agreement was amended on each of July 30, 2006 and July 31, 2006 (as amended, the “Securities Purchase Agreement”). Closing thereunder occurred July 31, 2006. The purchase price of each unit was $3.50 and the exercise price for each whole warrant was set at $4.80. The warrants have a term of five years and include a cashless exercise feature which does not apply when there is an effective registration statement covering the shares underlying the warrants. In addition, the Company had granted a put right to all of the investors which would have allowed the investors to require the Company to repurchase all, but not less than all, of the securities issued pursuant to the Securities Purchase Agreement if the Company had failed to obtain the necessary governmental approvals to consummate the acquisition of Shanghai Cheng Feng Digital Technology Co., Ltd. (“Cheng Feng”) on or before December 31, 2006. As such governmental approvals were obtained before December 31, 2006, the put right has terminated.

Pursuant to the Securities Purchase Agreement, the Company sold 4,634,592 units to certain accredited investors at $3.50 per unit for gross proceeds of $16,200.

Net proceeds to the Company from the sale of all of the units pursuant to the Securities Purchase Agreement were approximately $14,900. 482,856 and 128,571 warrants were exercised at $4.80 per share during the six months and three months ended June 30, 2007, respectively.

 

In conjunction with execution of the Securities Purchase Agreement, the Company also executed a Registration Rights Agreement under which it is obligated to file registration statements on Form S-4 and Form S-1, or other available form, to register the shares and the shares underlying the warrants for resale, within 45 days and 55 days after the closing date, respectively. The Company was obligated to use its best efforts to cause the registration statement to be declared effective within 150 days of the closing date, and was liable for payment of penalties to the purchasers in the event the registration statement has not declared effective within the 150-day period. The Company filed the registration statements on Form S-4 and Form S-1 on October 3, 2006 and October 23, 2006 which were declared effective on November 13, 2006 and November 15, 2006, respectively.

The Company also issued warrants to purchase 324,421 shares of its common stock with an exercise price of $4.20 to two private placement agents as commission for their services in connection with the private placement. 324,421 and 97,326 of such warrants were exercised using the cashless exercise feature during the six months ended and three months ended June 30, 2007.

A summary of the status of the Company’s warrants issued in 2006 as described above, and the changes during the six months ended June 30, 2007 and 2006, is presented below:

		2007						2006
					Weighted Average Exercise						Weighted Average Exercise
		Shares			Prices			Shares			Prices
Outstanding at January 1			1,417,292		$	4.40			100,000		$	1.85
Granted			-			-			416,667			3.22
Exercised			(807,277	)		(4.50	)		-			-
Outstanding at June 30			610,015			4.23			516,667			2.95
Warrants exercisable at June 30			610,015		$	4.23			516,667		$	2.95

 

24

---

 CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Expressed in thousands of U.S. dollars

(Except for share and per share amounts)

16.	ISSUANCE OF COMMON STOCK AND WARRANTS - (CONTINUED)

A summary of the status of the Company’s warrants issued in 2006 as described above, and the changes during the three months ended June 30, 2007 and 2006, is presented below:

		2007						2006
					Weighted Average Exercise						Weighted Average Exercise
		Shares			Prices			Shares			Prices
Outstanding at April 1			835,912		$	4.28			100,000		$	1.85
Granted			-			-			416,667			3.22
Exercised			(225,897	)		(4.34	)		-			-
Outstanding at June 30			610,015			4.23			516,667			2.95
Warrants exercisable at June 30			610,015		$	4.23			516,667		$	2.95

 

17.	EQUITY INCENTIVE PLAN

 

On February 7, 2007, the Company adopted the 2007 Equity Incentive Plan, which has a five-year term and provides for grants of stock options, stock appreciation rights, performance units, restricted stock units and performance shares. The total number of shares which may be issued under the plan is 8,000,000 shares of common stock. On February 27, 2007, the Company granted an aggregate of 1,052,100 shares of restricted stock. On April 16, 2007, the Company granted an aggregate of 10,600 shares of restricted stock. On May 8, 2007, the Company granted an aggregate of 12,800 shares of restricted stock and retired 28,900 shares of restricted stock. On May 9, 2007, the Company granted an aggregate of 16,900 shares of restricted stock. The shares issued vest over a four-year period, and at issue resulted in total deferred compensation of $12,874. The fair values of these restricted stock awards are equal to the fair value of the Company’s stock on the date of grant. Such restricted stock is subject to the risk of forfeiture upon the occurrence of certain events. During the six and three months ended June 30, 2007, the Company has recognized $1,066 and $801 of compensation expense under the plan, respectively. As of June 30, 2007, there was $11,808 of unrecognized compensation expense related to the nonvested restricted stock. This cost is expected to be recognized over a four-year period.

The following table summarizes the status of the Company's nonvested restricted stock awards during the six months ended June 30, 2007:  

 

		Nonvested Restricted Stock and Stock Unit Awards
		Number of Shares			Weighted Average Grant Date Fair Values
Outstanding at January 1, 2007			-		$	-
Granted			1,092,400			14.24
Vested			(87,621	)		14.22
Retired			(28,900	)		(14.20	)
Outstanding at June 30, 2007			975,879		$	14.24

25

---