UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: September 30, 2008

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

For the transition period from ____________ to _____________

Commission File Number: 000-25901

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

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

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

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

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

Yes Q                            No ¨

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

Large Accelerated Filer	¨	Accelerated Filer	Q
Non-Accelerated Filer (Do not check if a smaller reporting company)	¨	Smaller reporting company	¨

The number of shares outstanding of each of the issuer’s classes of common equity, as of October 27, 2008 is as follows:

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

Yes ¨                            No Q

1

---

TABLE OF CONTENTS

	PART I Financial Information	Page
Item 1.	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	49
	PART II Other Information
Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Defaults Upon Senior Securities	50
Item 4.	Submission of Matters to a Vote of Securities Holders	50
Item 5.	Other Information	50
Item 6.	Exhibits	50

 

---

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

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)

			September 30,		December 31,
			2008		2007
			(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	65,926	$	89,071
Accounts receivable, net			131,928		63,206
Related party receivables			215		549
Inventories, net			85,719		40,606
Prepayments and deposits			7,175		3,225
Advances to suppliers			22,989		2,877
Other receivables			13,739		13,171
Tax refundable			--		92
Deferred tax assets - current portion			72		137
Total current assets			327,763		212,934
Deposits for acquisition of subsidiaries, properties and intangible assets			24,909		46,443
Property, plant and equipment, net			55,586		24,066
Land use rights, net			7,728		1,379
Intangible assets, net			56,923		39,800
Goodwill			86,435		52,369
Deferred financing cost			1,188		150
Deferred tax assets - non-current portion			252		262
TOTAL ASSETS		$	560,784	$	377,403

See the accompanying notes to condensed consolidated financial statements

1

---

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)
(Continued)

			September 30,		December 31,
			2008		2007
			(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable - short term		$	8,213	$	12,814
Obligation under product financing arrangements – short term			2,413		--
Accounts payable			51,469		21,864
Accrued expenses			6,411		5,108
Advances from customers			23,992		8,352
Taxes payable			2,801		4,153
Payable for acquisition of businesses, properties and land use rights			24,312		--
Deferred income			1,062		915
Total current liabilities			120,673		53,206
LONG-TERM LIABILITIES
Notes payable - long term			4,327		698
Obligation under product financing arrangements – long term			4,867		--
Convertible notes payable			137,791		123,701
Total liabilities			267,658		177,605
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES			34		61
SHAREHOLDERS' EQUITY
Preferred stock, $0.0001 par value; 10,000,000 shares authorized, 0
share issued and outstanding
Common stock, $0.0001 par value; 290,000,000 shares authorized			5		4
45,843,285 (September 30, 2008) and 42,506,150 (December
31, 2007) shares issued and outstanding
Additional paid-in capital			162,396		110,254
Retained earnings			98,182		76,802
Statutory reserves			804		804
Accumulated other comprehensive income			31,705		11,873
Total shareholders' equity			293,092		199,737
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	560,784	$	377,403

See the accompanying notes to condensed consolidated financial statements

2

---

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)

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2008		2007		2008		2007
		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Revenues	$	119,289	$	65,438	$	283,806	$	156,014
Cost of goods sold
(including depreciation and amortization for the three and nine months ended September 30, 2008 and 2007 of $230, $516, $0 and $0, respectively)		87,280		45,700		199,085		111,265
Gross profit		32,009		19,738		84,721		44,749
Selling and marketing		3,376		1,455		8,509		2,913
General and administrative
(including non-cash employee compensation for the three and nine months ended September 30, 2008 and 2007 of $3,596, $9,662, 989 and $2,055, respectively)		11,023		3,836		29,269		9,395
Depreciation and amortization		2,283		1,436		6,230		3,326
Income from operations		15,327		13,011		40,713		29,115
Rental income received from related party		--		124		--		380
Interest income		65		89		171		314
Interest expense		(5,949)		(4,768)		(15,598)		(10,192)
Gain on disposal of land use right and property		--		5,517		--		5,517
Other income, net		480		329		1,167		1,047
Income before income taxes and minority interest		9,923		14,302		26,453		26,181
Minority interest in (income) loss of consolidated subsidiaries		--		(19)		31		(17)
Income taxes		(775)		(2,587)		(5,104)		(5,670)
Net income		9,148		11,696		21,380		20,494
Foreign currency translation gain		4,402		2,185		19,832		4,747
Comprehensive income	$	13,550	$	13,881	$	41,212	$	25,241
Net income per share
Basic	$	0.20	$	0.30	$	0.49	$	0.57
Diluted	$	0.20	$	0.29	$	0.48	$	0.54
Weighted average number of shares
Basic		45,655,617		38,547,263		44,003,994		35,807,815
Diluted		46,151,827		40,512,247		44,615,552		37,772,753

See the accompanying notes to condensed consolidated financial statements

3

---

CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
Expressed in thousands of U.S. dollars
(Except for share and per share amounts)

											Accumulated			Statutory
	Common Stock				Additional						Other			Surplus
		Par			Paid-in			Retained			Comprehensive			Reserve
	Shares	Value			Capital			Earnings			Income			Fund			Total
BALANCE AT JANUARY 1, 2008	42,506,150		$	4		$	110,254		$	76,802		$	11,873		$	804		$	199,737
Warrants exercised for cash per Securities Purchase Agreement	57,776			-			277			-			-			-			277
Common stock issued under Equity Incentive Plan	499,001			-			9,662			-			-			-			9,662
Forfeiture of restricted stock  under Equity Incentive Plan	(29,645)			-			-			-			-			-			-
Common stock issued for private placement	722,544			-			9,700			-			-			-			9,700
Common stock issued in  connection with Exclusive Cooperation Agreement with Beijing DM Security & Technology Co., Ltd.	136,378			-			2,041			-			-			-			2,041
Common stock issued for acquisition of Guangdong  Stonesonic Digital Technique Co., Ltd.	953,918			1			14,489			-			-			-			14,490
Common stock issued for acquisition of Shenzhen Longhorn Security Technology Co., Ltd.	790,502			-			12,030			-			-			-			12,030
Common stock issued for acquisition of Beijing Aurine Divine Land Technology Co., Ltd.	206,661			-			3,943			-			-			-			3,943
Foreign currency translation	-			-			-			-			19,832			-			19,832
Net income for the period	-			-			-			21,380			-			-			21,380
BALANCE AT SEPTEMBER 30, 2008	45,843,285		$	5		$	162,396		$	98,182		$	31,705		$	804		$	293,092

See the accompanying notes to condensed consolidated financial statements

4

---

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)
 

		Nine Months Ended
		September 30,
		2008			2007
		(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	21,380		$	20,494
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization		6,746			3,326
Provision for bad debt		345			--
Amortization of consultancy services		101			91
Amortization of deferred financing cost		102			18
Non cash employee compensation		9,662			2,055
Gain on disposal of land use right and property		--			(5,517)
Redemption accretion on convertible notes		14,090			9,338
Deferred taxes		104			7
Minority interest		(31)			17
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable		(60,155)			(16,669)
Related party receivables		373			23
Inventories		(31,933)			(10,299)
Prepayments and deposits		(2,233)			1,074
Advances to suppliers		(18,779)			183
Other receivables		(2,723)			(3,369)
Increase (decrease) in:
Accounts payable and accrued expenses		21,153			2,640
Advances from customers		12,543			6,664
Tax payable		(1,375)			1,236
Deferred income		82			61
Net cash (used in) provided by operating activities		(30,548)			11,373

See the accompanying notes to condensed consolidated financial statements

5

---

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)
(Continued)

	Nine Months Ended
	September 30,
			2008			2007
			(Unaudited)			(Unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment			(13,877)			(9,273)
Additions to intangible assets			(1,651)			(854)
Additions to land use rights			(5,101)			(587)
Deposits paid for acquisition of subsidiaries			(4,761)			(18,148)
Deposits refunded for acquisition of subsidiaries			11,898			--
Deposits paid for acquisition of properties and intangible assets			--			(22,040)
Net cash outflow for acquisition of subsidiaries (net of cash acquired from subsidiaries)			(6,013)			(36,378)
Proceeds from disposal of land use right and property			3,379			6,125
Net cash used in investing activities			(16,126)			(81,155)
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to a director			--			(73)
Issue of common stock by cash warrants			277			--
Issuance of common stock, net of issuing expenses			9,700			2,654
New borrowings, net of issuing cost			11,534			117,812
Repayment of borrowings			(13,987)			(3,481)
New borrowings from obligation under product financing arrangements			6,705			--
Repayment of obligation under product financing arrangements			(566)			--
Net cash provided by financing activities			13,663			116,912
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			9,866			1,677
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS			(23,145)			48,807
Cash and cash equivalents, beginning of period			89,071			30,980
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	65,926		$	79,787

See the accompanying notes to condensed consolidated financial statements

6

---

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)
(Continued)

SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid		$	1,347		$	640
Income taxes paid		$	9,054		$	4,449

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

136,378 shares of common stock were issued in satisfaction of the equity portion of the purchase price of approximately $2,041 in the establishment of the exclusive cooperation agreement with Beijing DM Security & Technology Co., Ltd. ("DM") on January 18, 2008. (Note 11)

953,918 shares of common stock were issued in satisfaction of the equity portion of the purchase price of approximately $14,490 for the acquisition of Guangdong Stonesonic Digital Technique Co., Ltd. ("Stonesonic") on June 4, 2008. (Note 3)

790,502 shares of common stock were issued in satisfaction of the equity portion of the purchase price of approximately $12,030 for the acquisition of Shenzhen Longhorn Security Technology Co., Ltd. ("Longhorn") on June 4, 2008. (Note 3)

206,661 shares of common stock were issued in satisfaction of the equity portion of the purchase price of approximately $3,943 for the acquisition of Beijing Aurine Divine Land Technology Co., Ltd. ("Guanling") on June 4, 2008. (Note 3)

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

2,800,711 shares of common stock were issued in satisfaction of the equity portion of the purchase price of approximately $16,204 for the acquisition of Shenzhen Hongtianzhi Electronics Co., Ltd. ("Hongtianzhi") in the second quarter of 2007.

811,804 shares of common stock were issued in satisfaction of the equity portion of the purchase price of approximately $5,198 for the acquisition of HiEasy Electronic Technology Development Co, Ltd. ("HiEasy") in the second quarter of 2007.

459,000 shares of common stock were issued in satisfaction of the equity portion of the purchase price of approximately $6,533 for the acquisition of Hangzhou Tsingvision Intelligence System Co., Ltd. ("Tsingvision") in the third quarter of 2007.

See the accompanying notes to condensed consolidated financial statements

7

---

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

1.

BASIS OF PRESENTATION

The accompanying financial statements, as of September 30, 2008 and for the three and nine months ended September 30, 2008 and 2007, 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, 2007, which are included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007, filed with the SEC on March 10, 2008. Amounts as of December 31, 2007 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 September 30, 2008, results of operations for the three and nine months ended September 30, 2008 and 2007, and cash flows for the nine months ended September 30, 2008 and 2007, have been made. The results of operations for the three and nine months ended September 30, 2008 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 any single customer exceeds 10% of total accounts receivable at September 30, 2008 and December 31, 2007.

(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 nine months ended September 30, 2008 and 2007.

As of September 30, 2008 and December 31, 2007, inventories held under the product financing arrangements were $6,705 and $0, respectively.

During the three and nine months ended September 30, 2008 and 2007, approximately 47%, 23%, 54% and 66%, of total inventory purchases were from our top five suppliers, respectively.

8

---

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

2.

SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(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 an estimated economic life of 5 years. The Company performs periodic reviews to ensure that unamortized program costs remain recoverable from future revenue.

As of September 30, 2008 and December 31, 2007, unamortized computer software costs were $2,281 and $2,383, respectively. During the three and nine months ended September 30, 2008 and 2007, $126, $501, $311 and $374 of 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. 99% of the installation contract amount is recognized as revenue when installation is completed. The remaining 1% of the contract amount is deferred and amortized to income over the one-year warranty period.

Revenue from sales of security and surveillance video cameras, surveillance equipment and related products is recognized in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” (“SAB No. 104”). Revenues are recognized when the following criteria are met:

(i)

Persuasive evidence of an arrangement exists – The Company requires evidence of an agreement with a customer specifying the terms and conditions of the products to be delivered typically in the form of a signed contract or purchase order;

(ii)

Delivery has occurred – For product sales, delivery generally takes place when titles to the products are shipped to or accepted by the customer;

(iii)

The fee is fixed or determinable – Fees are fixed or determinable based on the contract or purchase order terms; and

(iv)

Collection is probable – The Company performs a credit review of all customers with significant transactions to determine whether a customer is creditworthy and collection is probable.

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

The sales contracts generally provide a one to three-year product warranty to customers from the date of purchase. We estimate the costs of satisfying warranty claims based on an analysis of past experience and provide for the future claims in the period the revenue is recognized. As of September 30, 2008 and December 31, 2007, no material product warranty reserve was accrued. Warranty costs incurred by the Company have not been material.

9

---

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

2.         

SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(d)   

Revenue Recognition – continued

The Company derives a portion of its revenue from one-year software upgrades. These services are typical postcontract service (“PCS”) arrangements according to AICPA Statement of Position (“SOP”) 97-2. Under SOP 97-2, PCS revenue may be recognized together with the initial licensing fee on delivery of the software if all of the following conditions are met:

(i)   

The PCS fee is included with the initial licensing fee;

(ii)   

The PCS included with the initial license is for one year or less;

(iii)  

The estimated cost of providing PCS during the arrangement is insignificant; and

(iv)  

Unspecified upgrades/enhancements offered during PCS arrangements historically have been and are expected to continue to be minimal and infrequent.

Revenue from security and surveillance system one year software upgrades is recognized when delivery occurs and the risk of ownership passes to the customers, as the Company believes it meets the conditions of SOP 97-2.

(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 three and nine months ended September 30, 2008 and 2007 were $594, $940, $99 and $207, respectively.

(f)   

Advertising Costs

The Company expenses advertising costs as incurred or the first time advertising takes place. During the three and nine months ended September 30, 2008 and 2007, the Company incurred approximately $133, $410, $160 and $363, respectively.

(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 selling and marketing expenses and general and administrative expenses) for the three and nine months ended September 30, 2008 and 2007 were $372, $838, $128 and $255, respectively.

10

---

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

2.

SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(h)   

Share-based Payments

On February 7, 2007, the Company adopted the 2007 Equity Incentive Plan (“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. These restricted stocks are share-based payments subject to the provisions of revised SFAS No.123, “Share-Based Payment” (“SFAS 123 (R)”). The fair values of these restricted stock awards are equal to the market value of the Company's stock on the date of grant, after taking into account certain discounts. Such restricted stock is subject to the risk of forfeiture upon the occurrence of certain events. During the three and nine months ended September 30, 2008 and 2007, the Company has recognized $3,596, $9,662, $989 and $2,055 of compensation expense under the Plan, respectively. As of September 30, 2008 and December 31, 2007, there was $37,553 and $39,539 of unrecognized compensation expense related to the nonvested restricted stock, respectively. These expenses are expected to be recognized over a four-year period.

(i)    

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.

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 became effective on January 1, 2008.

(j)   

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.

11

---

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

2.

SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(k)   

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.

Earning 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.

As of September 30, 2008 and 2007, warrants were outstanding to acquire 174,515 and 450,016 shares of common stock, respectively. With respect to outstanding warrants, the dilutive impact on the weighted average number of shares was 20,251, 21,311, 344,121 and 326,965 for the three and nine months ended September 30, 2008 and 2007, respectively.

722,606 shares of common stock in connection with the acquisitions of Shenzhen Jin Lin Technology Co., Ltd (“Jin Lin”) and 100% of beneficial interest of Huge Long Limited (note 9) were not yet issued before September 30, 2008. The Company issued 1,951,081, shares of common stock in connection with the acquisitions of Stonesonic, Longhorn and Guanling during the nine months ended September 30, 2008 (note 3) and the exclusive cooperation agreement with DM (note 11). The impact of these shares has been included in the dilutive weighted average number of shares from the date of the closing of the acquisitions or the date the shares were issued.   

The Company issued 5,506,626 shares of common stock in connection with the acquisition of Hongtianzhi, HiEasy, Changzhou Minking Electronics Co., Ltd., Tsingvision and the exclusive cooperation agreement with Shenzhen Chuang Guan Intelligence Network Technology Co., Ltd. The impact of these shares has been included in the dilutive weighted average number of shares from the date of the closing of the acquisitions, through the earlier of September 30, 2007 or the date the shares were issued.

Approximately 5,452,000 shares of common stock underlying convertible notes were not included in the dilutive calculation for the three months and nine months ended September 30, 2008 and 2007, as the effect would be anti-dilutive.

(l)   

Recently Issued Accounting Pronouncements

In June 2008, the FASB issued EITF No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. EITF No.07-5 provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. The adoption of EITF No. 07-5 is not expected to have a material effect on the Company’s consolidated financial statements.

In May 2008, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 162, "The Hierarchy of Generally Accepted Accounting Principles" (SFAS No. 162). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS No. 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles". The Company does not expect that this standard will have a material impact on its results of operations, financial position or cash flows.

In April 2008, the FASB issued FASB Staff Position ("FSP") No. FAS 142-3, "Determination of Useful Life of Intangible Assets" ("FSP 142-3"). FSP 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). The intent of this FSP is to improve the consistency between the useful life of an intangible asset determined under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R. FSP 142-3 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting FSP 142-3 on the financial statements.

12

---

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

2.

SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(l)   

Recently Issued Accounting Pronouncements (continued)

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133" ("SFAS 161") effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. SFAS 161 requires an entity to provide enhanced disclosures about derivative instruments and hedging activities. The Company is currently evaluating the impact of adopting SFAS 161 on the financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141R"), effective for 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. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree and goodwill. SFAS 141R also expands disclosure requirements for business combinations. The Company is currently evaluating the impact of adopting SFAS 141 on the financial statements.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51" ("SFAS 160") effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The adoption of SFAS 160 is not expected to have a material effect on the Company's consolidated financial statements.

3.

BUSINESS ACQUISITIONS

In the second and third quarters of 2008, the Company acquired four companies that are engaged in the security and surveillance business in China: Stonesonic, Longhorn, Guanling and Jin Lin.

 

 

13

---

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

3.    

BUSINESS ACQUISITIONS (CONTINUED)

On April 2, 2008, the Company entered into an equity transfer agreement with the shareholder of Kit Grant Limited under which the Company agreed to pay a total consideration of RMB227,038 (approximately $32,299) in exchange for 100% ownership of Kit Grant Limited, consisting of RMB125,000 (approximately $17,809) in cash and 953,918 shares of the Company’s common stock valued at RMB102,038 (approximately $14,490). $11,205 of the cash portion of the purchase price was paid as a deposit in the first quarter of 2008. The balance of the cash portion of the purchase price is expected to be paid before December 2008.  The Company issued 953,918 shares of the Company’s common stock to the shareholder of Kit Grant Limited and her designees in June 2008. Kit Grant Limited is a holding company with no assets other than 100% of the equity interest of Stonesonic.  The acquisition was financed with proceeds from the Company's February Notes and April Notes (as defined in note 15).

The operational control of Stonesonic passed to the Company effective April 2, 2008. The results of Stonesonic’s operations from April 2, 2008 through September 30, 2008 are included in the Company's Consolidated Statements of Income and Comprehensive Income.

On April 2, 2008, the Company entered into an equity transfer agreement with the shareholder of Sincere On Limited under which the Company agreed to pay a total consideration of RMB120,558 (approximately $17,151) in exchange for 100% ownership of Sincere On Limited, consisting of RMB36,000 (approximately $5,121) in cash and 790,502 shares of the Company’s common stock valued at RMB84,558 (approximately $12,030). RMB36,000 (approximately $5,121) of the cash portion of the purchase price was paid before the execution of the equity transfer agreement.  The Company issued 790,502 shares of the Company’s common stock to the shareholder of Sincere On Limited and her designees in June 2008. Sincere On Limited is a holding company with no assets other than 100% of the equity interest of Longhorn.  The acquisition was financed with proceeds from the Company’s February Notes and April Notes (as defined in note 15).

The operational control of Longhorn passed to the Company effective April 2, 2008. The results of Longhorn's operations from April 2, 2008 through September 30, 2008 are included in the Company's Consolidated Statements of Income and Comprehensive Income.

On April 21, 2008, the Company entered into an equity transfer agreement with the shareholder of Sharp Eagle (HK) Limited under which the Company agreed to pay a total consideration of RMB39,110 (approximately $5,587) in exchange for 100% ownership of Sharp Eagle (HK) Limited, consisting of RMB12,500 (approximately $1,644) in cash and 206,661 shares of the Company’s common stock valued at RMB26,610 (approximately $3,943). RMB12,500 (approximately $1,644) of the purchase price was paid as a deposit in January 2008.  The Company issued 206,661 shares of its common stock to the shareholder of Sharp Eagle (HK) Limited and her designees in June 2008. Sharp Eagle (HK) Limited is a holding company with no assets other than 100% of the equity interest of Guanling.  The acquisition was financed with proceeds from the Company’s February Notes and April Notes (as defined in note 15).

The operational control of Guanling passed to the Company effective April 21, 2008. The results of Guanling’s operations from April 21, 2008 through September 30, 2008 are included in the Company’s Consolidated Statements of Income and Comprehensive Income.

On July 7, 2008, the Company entered into an equity transfer agreement with the shareholder of Long Top Limited under which the Company agreed to pay total consideration of RMB68,582 (approximately $10,000) in exchange for 100% ownership of Long Top Limited, consisting of RMB40,000 (approximately $5,832) in cash and shares of the Company’s common stock valued at RMB28,582 (approximately $4,168). RMB13,000 (approximately $1,896) of the purchase price was paid as a deposit in April 2008. The balance of the cash portion of the purchase price, RMB 27,000 (approximately $3,936), will be paid upon Long Top Limited and Jin Lin’s achievement of certain financial thresholds.  The Company will issue 268,870 shares of its common stock to the shareholders of Long Top Limited in the fourth quarter of 2008. Long Top Limited is a holding company with no assets other than 100% of the equity interest of Jin Lin. The acquisition was financed with proceeds from the Company’s February Notes and April Notes (as defined in Note 15).

The operational control of Jin Lin passed to the Company effective July 7, 2008. The results of Jin Lin’s operations from July 7, 2008 through September 30, 2008 are included in the Company’s Consolidated Statements of Income and Comprehensive Income.

14

---

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

3.    

BUSINESS ACQUISITIONS (CONTINUED)

The following represents the purchase price allocation at the dates of the acquisitions of Stonesonic, Longhorn, Guanling and Jin Lin based on the valuation reports which were prepared by a third party appraisal firm:

The following tables show supplemental information of the results of operations on a pro forma basis for the three and nine months ended September 30, 2008 and 2007 as if the acquisitions of Stonesonic, Longhorn, Guanling and Jin Lin had been completed at the beginning of the respective periods of 2008 and 2007:

For the three months ended September 30, 2008 (Unaudited)

15

---

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

3.     

BUSINESS ACQUISITIONS (CONTINUED)

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

For the nine months ended September 30, 2008 (Unaudited)

16

---

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

3.

BUSINESS ACQUISITIONS (CONTINUED)

For the nine months ended September 30, 2007 (Unaudited)

The pro forma adjustments represent the amortization of the intangible assets arising upon the acquisitions of Stonesonic, Longhorn, Guanling and Jin Lin.

4.    

ACCOUNTS RECEIVABLE

The Company provides an allowance for doubtful accounts related to its receivables. The receivables and allowance balances at September 30, 2008 and December 31, 2007 are as follows:

5.   

RELATED PARTY RECEIVABLES

The Company had receivables from several companies whose directors and shareholders are common with the Company. All receivables arise from the rental of real estate properties. The receivables are classified as related party receivables on the balance sheets. The balances as of September 30, 2008 and December 31, 2007 are as follows:

The Company has leased offices to three related parties since January 1, 2004. The leases expired on December 31, 2007. The rental income was $124 and $380 for the three and nine months ended September 30, 2007, respectively.

17

---

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

6.   

INVENTORIES

Inventories consist of the following as of September 30, 2008 and December 31, 2007:

7.   

PREPAYMENTS AND DEPOSITS

Prepayments and deposits consist of the following as of September 30, 2008 and December 31, 2007:

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

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 $22,989 and $2,877 as of September 30, 2008 and December 31, 2007, respectively.

18

---

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

9.    

PROPERTY, PLANT AND EQUIPMENT

As of September 30, 2008 and December 31, 2007, property, plant and equipment, at cost, consist of

On August 6, 2008, the Company entered into an equity transfer agreement with the shareholder of Huge Long Limited under which the Company will acquire all issued and outstanding shares of capital stock of Huge Long Limited through a series of transactions. The Company acquired 100% beneficial interest (but not record ownership) of all issued and outstanding capital stock of Huge Long Limited on August 6, 2008 (the “First Closing”) and will acquire the legal title and record ownership of all issued and outstanding shares of capital stock of Huge Long Limited on or before December 31, 2009 (the “Second Closing”).  Huge Long Limited has entered into an equity transfer agreement to acquire Shenzhen Wangdaiheng Industry Limited (“WDH”) which will close on or before December 31, 2009. The Second Closing is conditioned upon the acquisition by Huge Long Limited of the legal title of WDH. WDH owns a parcel of land (No. A524-0013) located at the south of Ban Gong Chang Road, Guangming Street, Bao’an District, Shenzhen (the “Industry Park”). The Company was granted an exclusive right to use the Industry Park at the First Closing.

The Company agreed to pay a total consideration of RMB145,812 (approximately $21,279) in exchange for the 100% beneficial interest of Huge Long Limited, consisting of RMB102,000 (approximately $14,885) in cash and 453,736 shares of the Company’s common stock valued at RMB43,812 (approximately $6,394). The Company’s total costs for acquiring the land use rights and properties were $4,382 and  $16,897 respectively. RMB80,000 (approximately $11,675) of the purchase price was paid as a deposit in 2007 and January 2008. The balance of the cash portion of the purchase price, RMB 22,000 (approximately $3,210), will be paid at the Second Closing.  The equity portion of the purchase price 453,736 shares will be issued in the fourth quarter of 2008. The acquisition was and will be financed with proceeds from the Company’s February Notes and April Notes (as defined in Note 15).  

Depreciation expense for the three and nine months ended September 30, 2008 and 2007 was $745, $2,265, $315 and $720, respectively.

19

---

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

10.  

LAND USE RIGHTS

Land use rights consist of the following as of September 30, 2008 and December 31, 2007:

Amortization expense for the three and nine months ended September 30, 2008 and 2007 was $22, $43, $12 and $32, respectively.

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

The Company disposed of certain land use rights and properties for a total consideration of RMB119,000 (approximately $16,119) in December 2007. The remaining proceeds of RMB24,000 (approximately $3,379) were received in January 2008.

20

---

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

11.  

INTANGIBLE ASSETS

As of September 30, 2008 and December 31, 2007, intangible assets, at cost, consist of

On January 18, 2008, the Company entered into an exclusive cooperation agreement with DM, which is engaged in the business of designing, developing and selling security and surveillance products, pursuant to which the parties have agreed, among other things, that the Company’s subsidiary, China Security & Surveillance Technology (PRC) Inc. (“CSST PRC”) will provide various items to DM, including training services, provision of technology licenses, equipment, consultations, workforces and other related services. DM will subcontract all its work to CSST PRC or its designees to the extent permitted by the local laws and regulations at no less than 80% of the face value of the contract. DM has agreed to add CSST PRC’s name to its marketing materials and its marketing and business development activities will be conducted either in the name of both DM and CSST PRC or through a joint venture established by the parties. The valuation of the agreement was determined by an independent appraisal firm. The Company did not acquire any of the assets or liabilities of DM, and the entire purchase price was allocated to an intangible asset, consisting of an exclusive cooperation relationship. The Company’s total cost for entry into the exclusive cooperation agreement amounted to $4,798, after taking into account certain discounts of the shares issued to DM due to the fact that the issued shares are restricted shares. 136,378 restricted shares were issued in January 2008.

The Company acquired Stonesonic, Longhorn, Guanling, and Jin Lin during the second and third quarter of 2008. The valuations and allocation of the intangible assets were determined by a third party appraisal firm.

The amortization expense for the three and nine months ended September 30, 2008 and 2007 was $1,746, $4,438, $1,109 and $2,574, respectively.

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

21

---

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

12.   

NOTES PAYABLE

The following is a summary of the Company’s short-term and long-term notes payable as of September 30, 2008 and December 31, 2007:

On August 28, 2008, the Company entered into a long term loan agreement with China Construction Bank. As of September 30, 2008, the liability relating to this loan was RMB49,500 (approximately $7,260), consisting of a 2-year loan payable to the bank. This loan matures on August 27, 2010 with an annual interest rate equal to 105% of the one to three years benchmark lending rate (7.37% as of September 30, 2008) of The People’s Bank of China. The interest rate is changed based on the change of one to three years benchmark lending rate quarterly, and the interest is payable at the 20^th of each month. The loan agreement requires the Company to use the loan proceeds only for the Company’s operations.

On November 15, 2007, the Company entered into a loan agreement with China Citic Bank. The Company borrowed RMB30,000 (approximately $4,400) with an annual interest rate of 7.29%. The loan is due in November 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 CEO of the Company and subsidiaries of the Company.

The long term note payable is from Shenzhen Ping An Bank. As of September 30, 2008 and December 31, 2007, the liability relating to this loan was RMB 6,000 (approximately $880) and RMB8,700 (approximately $1,290), respectively, consisting of a 3-year loan payable to the bank. This loan was entered into 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.

In January 2008, the Company entered into a loan agreement with Shanghai Pudong Development Bank. The Company borrowed RMB30,000 (approximately $4,374) with an annual interest rate of 6.57%. The loan was due in July 2008, and the interest was payable at the end of each month. The loan was repaid in the second quarter of 2008.

On October 15, 2007, the Company entered into a loan agreement with Shanghai Pudong Development Bank. The Company borrowed RMB20,000 (approximately $2,916) with an annual interest rate of 6.561%. The loan was due in October 2008, and the interest was payable at the end of each month. The loan was repaid in the second quarter of 2008.

On February 16, 2007, the Company entered into a loan agreement with Shanghai Pudong Development Bank. The Company borrowed RMB 10,000 (approximately $1,425) with an annual interest rate of 6.39%. The loan was due in March 2008 and was repaid when due.

On February 2, 2007, the Company entered into a loan agreement with Shanghai Pudong Development Bank. The Company borrowed RMB 30,000 (approximately $4,275) with an annual interest rate of 6.12%. The loan was due in February 2008 and was repaid when due.

22

---

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

13.  

OBLIGATIONS UNDER PRODUCT FINANCING ARRANGEMENTS

The following is a summary of the Company’s obligations under product financing arrangements as of September 30, 2008 and December 31, 2007:

Estimated repayments for the next five years and thereafter are as follows:

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

The Company paid $202 during the three and nine months ended September 30, 2008, which is included in interest expense.

Approximately RMB7,772 (approximately $1,140) of other costs directly associated with the finance lease agreements is recorded as deferred financing costs in the balance sheet at September 30, 2008. The Company is amortizing these financing costs over the life of the obligation. The amortization is recorded as interest expense, which was $75 for the three and nine months ended September 30, 2008.

14.   

DEFERRED INCOME

Deferred income balances as of September 30, 2008 and December 31, 2007 were $1,062 and $915, respectively, and represented amounts invoiced but deferred as revenues as an estimated warranty reserve.

15.  

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 annual interest of 1%. All the net proceeds from the sale of the February Notes are and will be used for the Company’s working capital and acquisition plan.

23

---

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

15.   

CONVERTIBLE NOTES PAYABLE (CONTINUED)

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% 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 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 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 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.

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% 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 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 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.

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 September 30, 2008 and December 31, 2007, the Company has complied with all the required covenants.

24

---

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

15.  

CONVERTIBLE NOTES PAYABLE (CONTINUED)

The Company has accreted $5,364, $14,090, $4,363 and $9,338 for the three and nine months ended September 2008 and 2007 of the additional redemption amount related to the February Notes and April Notes, which is included in interest expense.

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 September 30, 2008 and December 31, 2007. The Company has amortized these financing costs over the life of the February Notes and April Notes. The interest expense for the three and nine months ended September 30, 2008 and 2007 was $9, $27, $9 and $18, respectively.

16.  

ISSUANCE OF COMMON STOCK AND WARRANTS

On April 4, 2006, the Company entered into a securities purchase agreement with certain investors for the sale of 2,666,667 shares of the Company’s common stock at a price of $3.00 per share. Net proceeds to the Company from the sale of the common stock were approximately $7,400.

Pursuant to this securities purchase agreement, the Company also issued warrants to a private placement agent to purchase 416,667 shares of its common stock as commission for its services in connection with the private placement. A total of 150,000 of the warrants are exercisable at a price of $3.80 per share, which is the closing bid price for the Company’s common stock as of the date of closing under such agreement, and a total of 266,667 of the warrants are exercisable at a price of $3.00 per share. All of the warrants have a term of 5 years and include a cashless exercise feature. 90,000 and 90,000 warrants were exercised during the three and nine months ended September 30, 2007, respectively.

On July 6, 2006, the Company entered into another 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. 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 such securities purchase agreement if the Company had failed to obtain the necessary governmental approvals to consummate the acquisition of 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 this 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 such securities purchase agreement were approximately $14,900. 0, 57,776, 69,999 and 552,855 warrants were exercised at $4.80 per share during the three and nine months ended September 30, 2008 and 2007, respectively.

In conjunction with execution of this securities purchase agreement, the Company also executed a registration rights agreement under which it was 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 and they were declared effective on November 13, 2006 and November 15, 2006, respectively.

25

---

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

16.  

ISSUANCE OF COMMON STOCK AND WARRANTS (CONTINUED)

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. 0 and 324,421 of such warrants were exercised using the cashless exercise feature during the three and nine months ended September 30, 2007.

On July 23, 2008, the Company consummated a private placement transaction in which it issued 722,544 units to certain non-U.S. investors for an aggregate gross cash purchase price of $10,000 at a per unit price of $13.84. Net proceeds to the Company from this private placement were approximately $9,700. Each Unit consists of one share of the Company’s common stock and a warrant to purchase one-fifth of one share of common stock. The Company issued warrants to purchase 144,509 shares of its common stock with an exercise price of $19.23. The warrants have a term of 3 years and include a cashless exercise feature. No warrants were exercised using the cashless exercise feature during the three and nine months ended September 30, 2008.

A summary of the status of the Company’s warrants issued in 2008 and 2006 as described above, and the changes during the three months ended September 30, 2008 and 2007, is presented below:

A summary of the status of the Company’s warrants issued in 2008 and 2006 as described above, and the changes during the nine months ended September 30, 2008 and 2007, is presented below:

26

---

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

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. As of September 30, 2008 and December 31, 2007, the shares issued vest over a four-year period, and at issue resulted in total deferred compensation of $51,374 and $43,971, respectively. 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 three and nine months ended September 30, 2008 and 2007, the Company has recognized $3,596, $9,662, $989 and $2,055 of compensation expense under the plan, respectively. As of September 30, 2008 and December 31, 2007, there was $37,553 and $39,539 of unrecognized compensation expense related to the nonvested restricted stock, respectively. 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 three months ended September 30, 2008 and 2007:

The following table summarizes the status of the Company’s nonvested restricted stock awards during the nine months ended September 30, 2008 and 2007:

27

---

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

18.  

CONSOLIDATED SEGMENT DATA

Segment information is consistent with how management reviews the businesses, makes investment and resource allocation decisions and assesses operating performance. The Company has set up a new segment for distribution of security and safety products and realigned its management and segment reporting structure effective January 1, 2008. The segment data presented reflects this new segment structure. The Company reports financial and operating information in the following three segments:

(a)  

System installation: designs, sells, installs, services and monitors electronics security systems to residential, commercial, industrial and governmental customers (the “Installation segment”);

(b)

Manufacturing of security and safety products: designs, manufactures and sells security and safety products, including intrusion security, access control and video management systems (the “Manufacturing segment”); and

(c)

Distribution of security and safety products: sells security and safety products, including intrusion security, access control and video management systems (the “Distribution segment”).

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

Selected information in the new segment structure is presented in the following tables for the three and nine months ended September 30, 2008 and 2007:

Revenues by segment for the three months ended September 30, 2008 and 2007 are as follows:

Revenues by segment for the nine months ended September 30, 2008 and 2007 are as follows:

(1) Revenues by operating segments exclude intercompany transactions.

28

---

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

18.  

CONSOLIDATED SEGMENT DATA  (CONTINUED)

Income by segment for the three months ended September 30, 2008 and 2007 are as follows:

Income by segment for the nine months ended September 30, 2008 and 2007 are as follows:

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

29

---

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

18.  

CONSOLIDATED SEGMENT DATA  (CONTINUED)

Non cash employee compensation by segment for the three months ended September 30, 2008 and 2007 are as follows:

Non cash employee compensation by segment for the nine months ended September 30, 2008 and 2007 are as follows:

Total assets by segment at September 30, 2008 and December 31, 2007 are as follows: