China Information Technology, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - China Information Technology, Inc.	exhibit31-1.htm
EX-32.2 - EXHIBIT 32.2 - China Information Technology, Inc.	exhibit32-2.htm
EX-31.2 - EXHIBIT 31.2 - China Information Technology, Inc.	exhibit31-2.htm
EX-32.1 - EXHIBIT 32.1 - China Information Technology, Inc.	exhibit32-1.htm

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

FORM 10-Q
(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: June 30, 2011

[ ] 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: 001-34076

CHINA INFORMATION TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Its Charter)

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

21^st Floor, Everbright Bank Building
Zhuzilin, Futian District
Shenzhen, Guangdong, 518040
People’s Republic of China
(Address of principal executive offices, Zip Code)

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

_____________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

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

Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [ ] No [ ]

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

Large accelerated filer [ ]	Accelerated filer [X]
Non-accelerated filer [ ]	Smaller reporting company [ ]
(Do not check if a smaller reporting company)

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

Yes [ ] No [X]

The number of shares outstanding of each of the issuer’s classes of common stock, as of August 9, 2011 is as follows:

Class of Securities		Shares Outstanding
Common Stock, $0.01 par value		52,636,365

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS.	1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	23
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	32
ITEM 4.	CONTROLS AND PROCEDURES.	33

PART II
OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS.	34
ITEM 1A.	RISK FACTORS.	34
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	34
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.	34
ITEM 4.	(REMOVED AND RESERVED).	34
ITEM 5.	OTHER INFORMATION.	34
ITEM 6.	EXHIBITS.	35

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CHINA INFORMATION TECHNOLOGY, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010

	Page(s)
Financial Statements
Condensed Consolidated Balance Sheets	2 - 3
Condensed Consolidated Statements of Income	4
Condensed Consolidated Statements of Comprehensive Income	5
Condensed Consolidated Statement of Changes in Equity	6
Condensed Consolidated Statements of Cash Flows	7 - 8
Notes to Condensed Consolidated Financial Statements	9 - 22

- 1 -

CHINA INFORMATION TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2011 AND DECEMBER 31, 2010
Expressed in U.S. dollars (Except for share amounts)

			June 30		December 31
	NOTES		2011		2010
			(Unaudited)
ASSETS

CURRENT ASSETS
Cash and cash equivalents		$	9,631,618	$	18,166,857
Restricted cash			11,801,481		8,344,147
Accounts receivable:
Billed, net of allowance for doubtful accounts of $ 5,548,000 and $6,073,000, respectively			35,714,301		31,172,599
Unbilled			71,988,882		67,622,656
Bills receivable			35,581		201,003
Advances to suppliers			11,129,156		9,246,437
Amounts due from related parties	6		62,588		330,876
Inventories, net of provision of $955,000 and $578,000, respectively	7		24,869,787		19,931,866
Other receivables and prepaid expenses			4,226,119		2,463,562
Deferred tax assets	12		1,229,363		1,565,006
TOTAL CURRENT ASSETS			170,688,876		159,045,009

Deposit for software purchase			2,552,550		3,034,000
Deposit for purchase of land use rights	10(a)		27,091,750		26,566,377
Long-term investments	8		2,461,695		3,296,252
Property, plant and equipment, net	9		85,114,427		79,348,883
Land use rights, net	10(b)		1,945,199		1,929,194
Intangible assets, net	10(c)		13,931,788		13,725,274
Goodwill			53,005,334		51,918,275
Deferred tax assets	12		757,900		538,460
TOTAL ASSETS		$	357,549,519	$	339,401,724

LIABILITIES AND EQUITY

CURRENT LIABILITIES
Short-term bank loans	11	$	43,215,288	$	35,326,566
Accounts payable			15,070,939		17,249,334
Bills payable			21,546,474		20,536,475
Advances from customers			5,593,614		7,480,686
Amounts due to related parties	6		609,746		1,293,866
Accrued payroll and benefits			2,700,731		4,304,988
Other payables and accrued expenses			10,924,076		6,953,561
Contingent consideration, current portion			616,724		3,267,087
Income tax payable	12		2,867,350		3,809,708
TOTAL CURRENT LIABILITIES			103,144,942		100,222,271

Long-term bank loans	11		707,212		5,863,205
Amounts due to related parties, long-term portion	6		5,012,408		5,014,949
Contingent consideration, net of current portion			359,776		901,171
Deferred tax liabilities	12		1,452,592		1,824,434
TOTAL LIABILITIES			110,676,930		113,826,030

- 2 -

COMMITMENTS AND CONTINGENCIES			-			-

EQUITY

Common stock, par $0.01; authorized capital 200,000,000 shares; shares issued and outstanding 2011: 52,642,365, 2010: 52,061,787 shares	13		260,921			255,115
Treasury stock, 6,000 shares, at cost			(11,468	)		(11,468	)
Additional paid-in capital			95,280,855			92,294,350
Reserve			12,968,985			12,968,985
Retained earnings			104,064,685			90,240,665
Accumulated other comprehensive income			16,059,316			11,325,040
Total equity of the Company			228,623,294			207,072,687
Non-controlling interest			18,249,295			18,503,007
Total equity			246,872,589			225,575,694

TOTAL LIABILITIES AND EQUITY		$	357,549,519		$	339,401,724

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

- 3 -

CHINA INFORMATION TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
Expressed in U.S. dollars (Except for share amounts)
(Unaudited)

	NOTES		Three Months Ended						Six Months Ended

			June 30,			June 30,			June 30,			June 30,
			2011			2010			2011			2010

Revenue - Products		$	11,113,382		$	7,471,511		$	19,120,375		$	13,819,481
Revenue - Software			9,255,633			22,406,236			23,147,158			37,584,868
Revenue - System integration			7,135,217			3,485,523			12,055,717			6,269,406
Revenue - Others			383,547			153,618			513,277			1,148,240
TOTAL REVENUE			27,887,779			33,516,888			54,836,527			58,821,995

Cost - Products sold			8,785,131			5,813,701			14,595,154			11,054,123
Cost - Software sold			2,137,286			10,257,690			6,386,892			16,659,101
Cost - System integration			4,971,036			570,721			8,114,193			3,046,531
Cost - Others			71,770			76,470			162,892			146,481
TOTAL COST			15,965,223			16,718,582			29,259,131			30,906,236

GROSS PROFIT			11,922,556			16,798,306			25,577,396			27,915,759

Administrative expenses			(3,375,472	)		(2,621,501	)		(5,879,779	)		(5,391,532	)
Research and development expenses			(1,150,407	)		(560,649	)		(1,883,737	)		(1,130,080	)
Selling expenses			(1,936,744	)		(1,489,212	)		(3,438,894	)		(2,703,774	)
INCOME FROM OPERATIONS			5,459,933			12,126,944			14,374,986			18,690,373

Subsidy income			87,064			268,898			117,504			431,680
Other income(loss), net	4		757,471			(324,700	)		1,591,251			642,099
Interest income			39,940			10,403			134,946			29,294
Interest expense			(776,947	)		(263,756	)		(1,476,653	)		(412,647	)
INCOME BEFORE INCOME TAXES			5,567,461			11,817,789			14,742,034			19,380,799

Income tax expense	12		(239,440	)		(2,163,609	)		(1,319,958	)		(3,334,692	)
NET INCOME			5,328,021			9,654,180			13,422,076			16,046,107

Less: Net loss (income ) attributable to the non-controlling interest			273,666			(302,111	)		401,944			(412,930	)

NET INCOME ATTRIBUTABLE TO THE COMPANY	3	$	5,601,687		$	9,352,069		$	13,824,020		$	15,633,177

Weighted average number of shares
Basic	3		52,636,365			51,450,623			52,583,879			51,332,698
Diluted	3		52,636,365			51,450,623			52,583,879			51,332,698

Earnings per share - Basic and Diluted
Basic - Net income attributable to the Company's common stockholders		$	0.11		$	0.18		$	0.26		$	0.30
Diluted - Net income attributable to the Company's common stockholders		$	0.11		$	0.18		$	0.26		$	0.30

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

- 4 -

CHINA INFORMATION TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
Expressed in U.S. dollars (Except for share amounts)
(Unaudited)

		Three Months Ended					Six Months Ended

		June 30,		June 30,			June 30,		June 30,
		2011		2010			2011		2010

Net income	$	5,328,021	$	9,654,180		$	13,422,076	$	16,046,107
Other comprehensive income:
Foreign currency translation gain		3,309,989		787,465			4,882,508		1,024,495
Comprehensive income		8,638,010		10,441,645			18,304,584		17,070,602
Comprehensive loss (income) attributable to the non-controlling interest		175,894		(322,572	)		253,712		(433,428	)
Comprehensive income attributable to the Company	$	8,813,904	$	10,119,073		$	18,558,296	$	16,637,174

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

- 5 -

CHINA INFORMATION TECHNOLOGY, INC
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
SIX MONTHS ENDED JUNE 30, 2011
Expressed in U.S. dollars (Except for share amounts)
(Unaudited)

																Accumulated
	Common stock			Treasury stock						Additional						other		Non
	Par value $0.01			Par value $0.01						Paid-in				Retained		comprehensive		controlling
	Shares		Amount	Shares			Amount			Capital		Reserve		earnings		income		interest			Total

BALANCE AS AT DECEMBER 31, 2010	52,061,787	$	255,115	(6,000	)	$	(11,468	)	$	92,294,350	$	12,968,985	$	90,240,665	$	11,325,040	$	18,503,007		$	225,575,694
Stock-based compensation (Note 13)	250,000		2,500	-			-			1,142,499		-		-		-		-			1,144,999
Common stock issued upon achieved earn-out target (Note 13)	330,578		3,306	-			-			1,719,006		-		-		-		-			1,722,312
Net income for the period	-		-	-			-			-		-		13,824,020		-		(401,944	)		13,422,076
Imputed interests in relation to shareholder’s loan (Note 6)	-		-	-			-			125,000		-		-		-		-			125,000
Foreign currency translation gain	-		-	-			-			-		-		-		4,734,276		148,232			4,882,508
BALANCE AS AT JUNE 30, 2011	52,642,365	$	260,921	(6,000	)	$	(11,468	)	$	95,280,855	$	12,968,985	$	104,064,685	$	16,059,316	$	18,249,295		$	246,872,589

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

- 6 -

CHINA INFORMATION TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2011 AND 2010
Expressed in U.S. dollars
(Unaudited)

		Six Months			Six Months
		Ended			Ended
		June 30, 2011			June 30, 2010
OPERATING ACTIVITIES
Net income	$	13,422,076		$	16,046,107
Adjustments to reconcile net income to net cash provided by operating activities:
(Reverse) provide provision for losses on accounts receivable and other receivables		(578,489	)		267,716
Depreciation		5,161,401			3,441,071
Amortization of intangible assets and land use rights		882,055			927,048
Loss on disposal of property, plant and equipment, net		143,149			320,957
Provide (reverse) provision for obsolete inventories		361,384			(1,362	)
Change in fair value of contingent consideration		(1,469,446	)		(700,268	)
Change in deferred income tax		(311,254	)		215,192
Impairment of long-term investments		890,438			-
Imputed interests in relation to shareholder's loan		125,000			-
Changes in operating assets and liabilities
(Increase) decrease in restricted cash		(249,697	)		457,202
Increase in accounts receivable		(6,125,482	)		(10,656,507	)
(Increase) decrease in advances to suppliers		(1,777,253	)		2,091,453
(Increase) decrease in other receivables and prepaid expenses		(1,815,261	)		313,302
Increase in inventories		(4,826,735	)		(10,164,333	)
Decrease in accounts payable		(1,888,310	)		(5,209,216	)
Decrease in advances from customers		(2,008,268	)		(695,808	)
(Decrease) increase in amounts due to related parties		(363,537	)		5,311,077
Increase in accrued expenses and other liabilities		3,271,516			921,098
(Decrease) increase in income tax payable		(941,434	)		569,611
Net cash provided by operating activities		1,901,853			3,454,340

INVESTING ACTIVITIES
Purchase of land use rights		-			(230,970	)
Purchases of property, plant and equipment		(3,331,779	)		(11,038,575	)
Capitalized and purchased software development costs		(795,894	)		(432,547	)
Proceeds from sales of property and equipment		-			44,007
Deposit for purchase of land use rights		-			(165,093	)
Deposit for software purchase		(5,358,500	)		(4,777,693	)
Net cash (used in) investing activities		(9,486,173	)		(16,600,871	)

FINANCING ACTIVITIES
Borrowings under short-term loans		50,286,201			21,003,299
Borrowings under long-term loans		-			4,019,306
Repayment of short-term loans		(47,281,885	)		(14,887,816	)
Repayment of long-term loans		(1,157,117	)		(1,906,970	)
Issued common stock		-			9,383,440
Increase in restricted cash in relation to bank borrowings		(3,008,573	)		(368,895	)
Net cash (used in)/ provided by financing activities		(1,161,374	)		17,242,364

Effect of exchange rate changes on cash and cash equivalents		210,455			170,806

NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS		(8,535,239	)		4,266,639
CASH AND CASH EQUIVALENTS, BEGINNING		18,166,857			13,478,633
CASH AND CASH EQUIVALENTS, ENDING	$	9,631,618		$	17,745,272

Supplemental disclosure of cash flow information:
Cash paid during the year
Income taxes	$	2,640,260		$	2,547,020
Interest paid	$	1,332,230		$	449,494

- 7 -

Supplemental disclosure of significant non-cash transactions:

On February 8, 2011, the Company granted eligible employees a total of 250,000 shares of the Company's common stock as compensation under the China Information Technology, Inc. 2007 Equity Incentive Plan. The fair value of these shares of approximately $1.1 million, based on the quoted market price, was accrued as of December 31, 2010 as the compensation was for services provided in 2010.

On May 3, 2011, upon achievement of earn out targets by Huipu, the Company issued 330,578 shares of the Company’s common stock in connection with the acquisition of Huipu.

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

- 8 -

CHINA INFORMATION TECHNOLOGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. ORGANIZATION AND PRINCIPAL ACTIVITIES

China Information Technology Inc (the “Company” or “CNIT”), together with its subsidiaries, is a total solutions provider of information and display technology products and services in the People's Republic of China (“PRC”). The Company’s total solutions include specialized software, hardware, systems integration, and related services. These total solutions are provided through the Company’s wholly-owned PRC subsidiaries, Information Security Technology (China) Co., Ltd (“IST”), Information Security Software (China) Co., Ltd (formerly, Information Security Development Technology Co., Ltd), or “ISS,” Shenzhen Bocom Multimedia Display Technology Co., Ltd (“Bocom”), Shenzhen Zhongtian Technology Development Company Ltd (“Zhongtian”), and Huipu Electronics (Shenzhen) Co., Ltd. ("Huipu"), and through the Company’s variable interest entity (“VIE”), iASPEC Software Co., Ltd (“iASPEC”), and iASPEC’s 52.54% majority-owned subsidiary, Wuda Geoinformatics Co., Ltd (“Geo”).

The operating results of Bocom, Geo, Zhongtian and Huipu have been included in the Company’s consolidated financial statements since February 1, 2008, April 1, 2008, November 1, 2008, and November 1, 2009, their respective acquisition dates.

The interim condensed consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. The condensed consolidated statements of income for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2011. It is suggested that these interim consolidated financial statements be read in conjunction with the financial statements of the Company and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 and notes thereto. The Company follows the same accounting policies in the preparation of interim reports.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Consolidation

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

(b) Foreign Currency Translation

The functional currency of the US and British Virgin Islands (“BVI”) companies is the United States dollars. The functional currency of the Company’s Hong Kong subsidiaries is the Hong Kong dollars.

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

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

- 9 -

CHINA INFORMATION TECHNOLOGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company generates its revenues primarily from three sources, (1) hardware sales, (2) software sales and (3) system integration services. The Company's revenue recognition policies are in accordance with SEC Staff Accounting Bulletin No. 104, "Revenue Recognition" and Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No.605-35 ("FASB ASC 605-35") .

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

Software revenues are generated from fixed-price contracts which include the development of software products, and services to customize such software to meet customers' needs. Generally, when the services are determined to be essential to the functionality of the delivered software, revenue is recognized using the percentage of completion method of accounting in accordance with FASB ASC 605-35. The percentage of completion for each contract is estimated based on the ratio of direct labor hours incurred to total estimated direct labor hours. The Company provides post contract support (PCS), which includes telephone technical support, that is not essential to the functionality of the software. Although vendor-specific objective evidence does not exist for PCS, because (1) the PCS fees are included in the total contract amount, (2) the PCS service period is for less than one year, (3) the estimated cost of providing PCS is not significant, and (4) unspecified upgrades enhancements offered are minimal and infrequent; the Company recognizes PCS revenue together with the initial fee after delivery and customer acceptance of the software products.

System integration revenues are generated from fixed-price contracts which provide for software development and hardware integration, which involves more than minor modifications to the functionality of the software and hardware products. Accordingly, system integration revenues are accounted for in accordance with FASB ASC 605-35, using the percentage of completion method of accounting. The percentage of completion for each contract is estimated based on the ratio of costs incurred to total estimated costs. Contract periods are usually less than six months, and typical contract periods for PCS are 12 months.

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

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

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

(d) Treasury Stock

The Company repurchases its common stock from time to time in the open market and holds such shares as treasury stock. The Company applies the “cost method” and presents the cost to repurchase such shares as a reduction in shareholders’ equity. During the period, the Company did not repurchase shares of common stock.

- 10 -

CHINA INFORMATION TECHNOLOGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(e) Recent Accounting Pronouncements Multiple Deliverable Revenue Arrangements (Accounting Standards Updates 2009-13 and 2009-14)

In October 2009, the FASB issued a new accounting standard which provides guidance for arrangements with multiple deliverables. Specifically, the new standard requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In the absence of the vendor-specific objective evidence or third-party evidence of the selling prices, consideration must be allocated to the deliverables based on management’s best estimate of the selling prices. In addition, the new standard eliminates the use of the residual method of allocation. In October 2009, the FASB also issued a new accounting standard which changes revenue recognition for tangible products containing software and hardware elements. Specifically, tangible products containing software and hardware that function together to deliver the tangible products’ essential functionality are scoped out of the existing software revenue recognition guidance and will be accounted for under the multiple-element arrangements revenue recognition guidance discussed above. Both standards were effective for us beginning on January 1, 2011. The adoption of this standard did not have a material impact on our consolidated financial statements.

- 11 -

CHINA INFORMATION TECHNOLOGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3. EARNINGS PER SHARE

Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, or resulted in the issuance of common stock that shared in the earnings of the entity. For purposes of the computation of net income per share, shares issued in connection with acquisitions that are returnable are considered contingently returnable shares under FASB ASC 260, although classified as issued and outstanding, are not included in the basic weighted average number of shares until all necessary conditions are met that no longer cause the shares to be contingently returnable. These contingently returnable shares are included in the diluted weighted average number of shares as of the beginning of the period in which the conditions were satisfied (or as of the date of the agreement, if later).

Components of basic and diluted earnings per share were as follows:

		Three Months Ended June 30,				Six Months Ended June 30,
		2011		2010		2011		2010
		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)

Net income attributable to the common stockholders	$	5,601,687	$	9,352,069	$	13,824,020	$	15,633,177
Weighted average outstanding shares of common stock		52,636,365		51,450,623		52,583,879		51,332,698
Dilutive effect of options ,warrants, and contingently issuable shares		-		-		-		-
Common stock and common stock equivalents		52,636,365		51,450,623		52,583,879		51,332,698
Earnings per share:
Basic	$	0.11	$	0.18	$	0.26	$	0.30
Diluted	$	0.11	$	0.18	$	0.26	$	0.30

4. FAIR VALUE OF FINANCIAL INSTRUMENTS AND FAIR VALUE ACCOUNTING

Financial Instruments

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

Fair Value Accounting

FASB ASC 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). As required by FASB ASC 820-10, assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The three levels of the fair value hierarchy under FASB ASC 820-10 are described below:

Level	1	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level	2	Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level	3	Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

As at June 30, 2011 and December 31, 2010, the contingent consideration of the Company’s acquisition of Huipu was measured at fair values using level 3 inputs.

- 12 -

CHINA INFORMATION TECHNOLOGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5. VARIABLE INTEREST ENTITY

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

In order to facilitate iASPEC’s expansion and also to provide financing for iASPEC to complete the acquisition of Geo, the Company advanced RMB 38 million (approximately $5.4 million) to iASPEC in two installments on November 20, 2007 and May 8, 2008, respectively, to increase iASPEC’s registered capital. In order to comply with PRC laws and regulations, the advance was made to Mr. Lin, iASPEC’s then majority shareholder, who, upon the authority and direction of the Board of Directors, forwarded the funds to iASPEC. The Company has recorded the advance of these funds as an interest-free loan to iASPEC, which was eliminated against additional capital of iASPEC in consolidation. The increase in iASPEC’s registered capital does not affect IST’s exclusive option to purchase iASPEC’s assets and shares under the MSA.

For the three months ended June 30, 2011 and 2010, net loss of 273,666 (income $136,020 from iASPEC and loss of $409,686 from Geo), income $302,111 ($284,421 from iASPEC and $17,690 from Geo), respectively, was attributable to non-controlling interest in the consolidated statements of income of the Company.

For the six months ended June 30, 2011 and 2010, net loss of $401,944 (income $319,614 from iASPEC and loss of $721,558 from Geo), income $412,930 (income $419,218 from iASPEC and loss of 6,288 from Geo), respectively, was attributable to non-controlling interest in the consolidated statements of income of the Company.

At June 30, 2011, the consolidation of iASPEC and Geo, resulted in an increase in assets of approximately $78.1 million, an increase in liabilities (consisting primarily of accounts payable and short-term bank loans) of approximately $27.5 million, and an increase in non-controlling interest of approximately $18.2 million, and for the six months ended June 30, 2011 and 2010 the consolidation resulted in an increase in net income attributable to parent company of approximately $6.1 million and $8 million, respectively.

6. RELATED PARTY BALANCES AND TRANSACTIONS

(a) Related party balances

As of June 30, 2011 and December 31, 2010, amount due from (to) related parties consists of:

		June 30,		December 31,
		2011		2010
		(Unaudited)
Due from related companies
- Xiamen Yili Geo Information Technology Co., Ltd.	$	22,432	$	137,289
- Shenzhen Kewen Information Technology Co., Ltd.		40,156		193,587
	$	62,588	$	330,876
Due to related companies
- Wuhan Geo Navigation and Communication Technology Co., Ltd.	$	609,746	$	596,046
- Shenzhen Information Security Investment and Development Co., Ltd.		-		697,820
	$	609,746	$	1,293,866
Due to related parties, long-term portion
- Shareholders	$	5,012,408	$	5,014,949

Due from related companies, current portion

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

Shenzhen Kewen Information Technology Co., Ltd. (“Kewen”) is a private company owned by a member of the senior management of Zhongtian. The balance due from Kewen primarily consists of accounts receivable from sales.

- 13 -

CHINA INFORMATION TECHNOLOGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6. RELATED PARTY BALANCES AND TRANSACTIONS (CONTINUED)

Due to related companies

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

Due to related parties, long-term portion

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

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

On March 25, 2010, Mr. Lin surrendered the Original Note to the Company and asked the Company to void and rescind the Original Note and issue a replacement note (the “New Note”), in the principal amount of $6,000,000, to reflect the principal amount of the Original Note as well as an additional loan of $1,000,000 made to the Company on March 25, 2010. The New Note omits the conversion feature that was contained in the Original Note and it is non-interest bearing. The maturity date of the New Note is March 5, 2012 and the Company may prepay all or any part of the amounts outstanding under this Note at any time before the maturity date without the express written consent of Mr. Lin. On April 7, 2010, the Company repaid the additional loan of $1,000,000 included in the New Note.

In accounting for the New Note, the Company accrues an interest expense at an interest rate of 5% per annum, which is the market interest rate for USD denominated 2-year loans in China. The imputed interests for the three and six months ended June 30, 2011 is $62,500 and $125,000 respectively and is recognized as capital contribution by the shareholder.

(b) Revenue - related party

Amounts earned from Yili and Kewen during the three months ended June 30, 2011 and 2010 were as follows:

		Three Months		Three Months			Six Months		Six Months
		Ended June 30,		Ended June 30,			Ended June 30,		Ended June 30,

		2011		2010			2011		2010
		(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)

Revenue	$	-	$	194,772		$	14,162	$	219,664
Cost of sales		-		(94,787	)		-		(108,252	)
Gross profit	$	-	$	99,985		$	14,162	$	111,412

Rental expenses of renting buildings and offices from related party for operation during the three months ended June 30, 2011 and 2010 were approximately $57,660 and zero, respectively. For the six months ended June 30, 2011 and 2010, the rental expenses were $114,660 and zero, respectively.

- 14 -

CHINA INFORMATION TECHNOLOGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7. INVENTORIES

As of June 30, 2011 and December 31, 2010, inventories consist of:

		June 30,		December 31,
		2011		2010
		(Unaudited)
Raw materials	$	6,130,441	$	5,274,081
Work in Processes		2,920,928		227,455
Finished goods		3,871,738		4,700,253
Installations in process		11,946,680		9,730,077
Total	$	24,869,787	$	19,931,866

8. LONG-TERM INVESTMENTS

As of June 30, 2011 and December 31, 2010, long-term investments consist of:

		June 30,		December 31,
		2011		2010
		(Unaudited)
Tianhe Navigation and Communication Technology Co., Ltd. ("Tianhe")	$	1,146,745	$	2,006,802
Tianditu Co., Ltd		1,237,600		1,213,600
Xiamen Yili Geo Information Technology Co., Ltd. ("Yili")		77,350		75,850
	$	2,461,695	$	3,296,252

Geo holds a 20% ownership interest in Tianhe. Although Geo owns 20% of Tianhe, Geo’s management does not have the ability to exercise significant influence over operating and financial policies of Tianhe due to the following factors:

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

The management regularly evaluates the impairment of the cost method investments based on performance and financial position of the investee as well as other evidence of market value. Such evaluation includes, but is not limited to, reviewing the investee’s cash position, recent financing, projected and historical financial performance, cash flow forecasts and financing needs. As at December 31, 2010, management determined that there was an other-than-temporary impairment in the value of its investment in Tianhe and recorded an impairment loss of approximately $855,000. As at June 30, 2011, the management reassessed the possible impairment on the investment in Tianhe and determined that there was an other-than-temporary impairment in the value of its investment in Tianhe and recorded an impairment loss of approximately $890,000.

- 15 -

CHINA INFORMATION TECHNOLOGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

9. PROPERTY, PLANT AND EQUIPMENT

As of June 30, 2011 and December 31, 2010, property, plant and equipment consist of:

		June 30,			December 31
		2011			2010
		(Unaudited)
Office building	$	7,738,467		$	7,559,941
Plant and Machinery		29,394,997			27,900,717
Electronic equipment, furniture and fixtures		12,383,661			12,045,103
Motor vehicles		1,168,475			1,102,159
Purchased software		57,267,528			48,814,198
Total		107,953,128			97,422,118

Less: accumulated depreciation		(22,838,701	)		(18,073,235	)
	$	85,114,427		$	79,348,883

Depreciation expense for the three months ended June 30, 2011 and 2010 was approximately $2,689,000 and $1,917,000, respectively. Depreciation expense for the six months ended June 30, 2011 and 2010 was approximately $5,161,000 and $3,441,000, respectively.

10. LAND USE RIGHTS AND INTANGIBLE ASSETS

(a) Deposits for purchase of land use rights

As of June 30, 2011, deposits for purchase of land use rights represent deposit for purchase of land use rights in Dongguan City of approximately $18.6 million (RMB 119.96 million) by IST, and additional land premium paid for increase of plot ratios under existing land use rights in Fuyong County of Shenzhen of approximately $8.5million (RMB 55.16 million) by Huipu.

(b) Land use rights

As of June 30, 2011 and December 31, 2010, land use rights consist of:

		June 30,			December 31
		2011			2010
		(Unaudited)
Land use rights	$	2,019,021		$	1,979,867
Less: accumulated amortization		(73,822	)		(50,673	)
Land use rights, net	$	1,945,199		$	1,929,194

Amortization expense for the three months ended June 30, 2011 and 2010 was $11,000 and $12,000, respectively. Amortization expense for the six months ended June 30, 2011 and 2010 was $22,000 and $24,000, respectively.

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

Remainder of 2011	$ 22,146
2012	44,293
2013	44,293
2014	44,293
2015	44,293
Thereafter	1,745,881
Total	$ 1,945,199

- 16 -

CHINA INFORMATION TECHNOLOGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10. LAND USE RIGHTS AND INTANGIBLE ASSETS (CONTINUED)

As of June 30, 2011 and December 31, 2010, intangible assets consist of:

		June 30,			December 31
		2011			2010
		(Unaudited)
Software and software development costs	$	8,282,962		$	7,333,720
Technology		7,583,239			7,436,182
Trademarks		4,376,463			4,291,593
Customer base		310,947			304,917
Sub-Total		20,553,611			19,366,412
Less: accumulated amortization		(6,621,823	)		(5,641,138	)
Intangible assets, net	$	13,931,788		$	13,725,274

Amortization expense for the three months ended June 30, 2011 and 2010, was approximately $415,000 and $427,000, respectively.
Amortization expense for the six months ended June 30, 2011 and 2010 was approximately $860,000 and $927,000, respectively.

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

Remainder of 2011	$	827,028
2012		2,008,149
2013		1,495,448
2014		1,220,426
2015		1,022,046
Thereafter		7,358,691
Total	$	13,931,788

11. BANK LOANS

(a) Short-term bank loans

		June 30, 2011		December 31, 2010
		(Unaudited)
Secured short-term loans⁽¹⁾	$	36,620,542	$	33,051,066
Add: Amounts due within one year under long-term loan contracts		6,594,746		2,275,500
Total short-term bank loans	$	43,215,288	$	35,326,566

⁽¹⁾ Detailed information of secured short-term loan balances as at June 30, 2011 and December 31, 2010 were as follows:

		June 30,		December 31,
		2011		2010
		(Unaudited)
Collateralized by land and office buildings	$	13,551,720	$	12,682,120
Secured by iASPEC's trade receivable		1,547,000		979,982
Secured by Huipu's trade receivable and guaranteed by the Company and Huipu’s ex- shareholder		2,965,189		5,741,894
Secured by HPC's trade receivable and guaranteed by Huipu’s ex-shareholder		3,440,887		1,760,000
Secured by Bocom's trade receivable and guaranteed by the Company		812,520		320,432
Secured by Huipu's trade receivable and guaranteed by the Company and Huipu		4,784,793		4,740,138
Guaranteed by IST		4,641,000		4,551,000
Guaranteed by Huipu		2,320,500		2,275,500
Secured by Huipu's bank deposit		2,556,933		-
	$	36,620,542	$	33,051,066

- 17 -

CHINA INFORMATION TECHNOLOGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

11. BANK LOANS (CONTINUED)

(b) Long-term bank loans

		June 30,			December 31,
		2011			2010
		(Unaudited)
Secured long-term loans	$	7,301,958		$	8,138,705
Less: Amounts due within one year under long-term loan contracts		(6,594,746	)		(2,275,500	)
Total long-term bank loans	$	707,212		$	5,863,205

12. INCOME TAXES

Pre-tax income for the three months ended June 30, 2011 and 2010 was taxable in the following jurisdictions:

		Three Months		Three Months			Six Months		Six Months
		Ended June 30,		Ended June 30,			Ended June 30,		Ended June 30,

		2011		2010			2011		2010
		(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)

PRC	$	5,152,576	$	12,302,773		$	13,133,021	$	19,490,776
Others		414,885		(484,984	)		1,609,013		(109,977	)
Total income before
income taxes	$	5,567,461	$	11,817,789		$	14,742,034	$	19,380,799

United States

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

BVI

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

PRC

The income tax provision consists of the following:

		Three months ended June 30					Six months ended June 30

		2011			2010		2011			2010
		(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)

Current taxes	$	437,007		$	2,027,487	$	1,631,212		$	3,115,112
Deferred taxes		(197,567	)		136,122		(311,254	)		219,580
Provision for income taxes	$	239,440		$	2,163,609	$	1,319,958		$	3,334,692

- 18 -

CHINA INFORMATION TECHNOLOGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

12. INCOME TAXES (CONTINUED)

		Three months ended June 30						Six months ended June 30
		2011			2010			2011			2010
		(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)


PRC federal statutory tax rate	$	25%		$	25%		$	25%		$	25%
Computed expected income tax expense		1,391,866			2,954,448			3,685,509			4,845,200
Tax concession		(1,125,843	)		(1,219,294	)		(2,025,888	)		(1,935,319	)
Non-deductible tax loss		47,112			12,999			105,111			117,984
Permanent differences		(8,735	)		126,913			(176,529	)		28,269
Other differences		(64,960	)		288,543			(268,245	)		278,558
Income taxes	$	239,440		$	2,163,609		$	1,319,958		$	3,334,692

The significant components of deferred tax assets and deferred tax liabilities were as follows as at June 30, 2011 and December 31, 2010:

		June 30, 2011						December 31, 2010
		Deferred			Deferred			Deferred			Deferred
		Tax			Tax			Tax			Tax
		Assets			Liabilities			Assets			Liabilities
		(Unaudited)			(Unaudited)
Fixed assets	$	343,907			(203,790	)	$	275,209		$	(205,199	)
Intangible assets		94,355			(1,248,802	)		95,517			(1,619,235	)
Inventory valuation		143,261			-			258,339			-
Accounts receivable allowance		1,046,162			-			1,191,001			-
Salary payable		39,940			-			47,174			-
Subsidy income		-			-			68,493			-
Equity investments		319,638			-			167,733			-
Loss carry-forwards		346,765			-			593,595			-
Gross deferred tax assets and liabilities		2,334,028			(1,452,592	)		2,697,061			(1,824,434	)

Valuation allowance	$	(346,765	)		-		$	(593,595	)		-

Total deferred tax assets and liabilities	$	1,987,263		$	(1,452,592	)	$	2,103,466		$	(1,824,434	)

The breakdown between current and long-term deferred tax assets and liabilities was as follows as at June 30, 2011 and December 31, 2010:

		June 30,			December 31,
		2011			2010
		(Unaudited)
Current deferred tax assets	$	1,229,363		$	1,565,006
Current deferred tax liabilities		-			-
Long-term deferred tax assets		757,900			538,460
Long-term deferred tax liabilities		(1,452,592	)		(1,824,434	)

Total net deferred tax assets	$	534,671		$	279,032

- 19 -

CHINA INFORMATION TECHNOLOGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

13. EQUITY

(a) Issuance of new shares

On February 8, 2011, the Company issued 250,000 shares of common stock to in connection with the Equity Incentive Plan. On May 3, 2011, upon achievement of earn out targets by Huipu, the Company issued 330,578 shares of common stock in connection with the acquisition of Huipu.

(b) Stock-based compensation

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

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

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

On February 8, 2011, the Company granted eligible employees a total of 250,000 shares of the Company's common stock as compensation under the Plan. The fair value of these shares of approximately $1.1 million, based on the quoted market price, was accrued as of December 31, 2010 as the compensation was for services provided on 2010.

As of June 30, 2011, there was no unrecognized compensation expenses related to the non-vested options.

14. CONSOLIDATED SEGMENT DATA

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

In connection with the changes in the Company's business portfolio and realignment of management, management conducted a review of its operating business segments during the first quarter of 2011. The review resulted in changing the segment reporting to Information Technology (“IT”), and Display Technology (“DT”).

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

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

(a)	IT includes revenues from products and services surrounding the Company’s variety of software core competencies currently primarily in Geographic Information Systems, Digital Public Security Technologies and Hospital Information Systems. IT segment revenues are generated from the sales of software and system integration services, as well as hardware other than display products.

(b)	DT includes revenues from products and services surrounding the Company’s display technology core competencies currently primarily in Geographic Information Systems, Digital Public Security Technologies, Education and Media Solutions and consumer products. DT segment revenues are generated from sales of hardware and total solutions of hardware integrated with proprietary software and content, as well as services.

- 20 -

CHINA INFORMATION TECHNOLOGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

14. CONSOLIDATED SEGMENT DATA (CONTINUED)

Selected information by segment is presented in the following tables for the three and six months ended June 30, 2011 and 2010.

		Three months ended June 30						Six months ended June 30
		2011			2010			2011			2010
		(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

Revenues(1)
IT Segment	$	16,795,401		$	27,604,567		$	35,774,150		$	46,811,208
DT Segment		11,092,378			5,912,321			19,062,377			12,010,787
	$	27,887,779		$	33,516,888		$	54,836,527		$	58,821,995
(1)Revenues by operating segments exclude intercompany transactions.
Income from operations:
IT Segment	$	4,114,335		$	12,456,591		$	11,545,112		$	18,846,096
DT Segment		1,458,313			128,335			3,135,133			632,329
Corporate and others (2)		(112,715	)		(457,982	)		(305,259	)		(788,052	)
Income from operations		5,459,933			12,126,944			14,374,986			18,690,373

Corporate other income (expenses), net		844,535			(55,802	)		1,708,755			1,073,779
Corporate interest income		39,940			10,403			134,946			29,294
Corporate interest expense		(776,947	)		(263,756	)		(1,476,653	)		(412,647	)
Income before income tax		5,567,461			11,817,789			14,742,034			19,380,799

Income tax expense		(239,440	)		(2,163,609	)		(1,319,958	)		(3,334,692	)
Net income		5,328,021			9,654,180			13,422,076			16,046,107

Net loss (income) attributable to the non-controlling interest		273,666			(302,111	)		401,944			(412,930	)
Net income attributable to the Company	$	5,601,687		$	9,352,069		$	13,824,020		$	15,633,177

(1)	Revenues by operating segments exclude intercompany transactions.

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

Total assets by segment as at June 30, 2011 and December 31, 2010 are as follows:

		June 30,		December 31,
		2011		2010
		(Unaudited)
Total assets:
IT Segment	$	231,459,003	$	209,739,372
DT Segment		125,747,639		129,533,782
Corporate and others		342,877		128,570
	$	357,549,519	$	339,401,724

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CHINA INFORMATION TECHNOLOGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

15. COMMITMENTS AND CONTINGENCIES

iASPEC, Bocom, Zhongtian, and HPC lease offices, employee dormitories and factory space in Shenzhen, Guangzhou, Beijing and Dongguan in the PRC, under lease agreements that will expire on various dates through March 2013. For the three months ended June 30, 2011 and 2010, the rent expenses were approximately $110, 500 and $84,700, respectively. For the six months ended June 30, 2011 and 2010, the rent expenses were approximately $229,300 and $168,500, respectively.

Future minimum lease payments under these lease agreements are as follows:
Remainder of 2011	$	128,916
2012		27,888
2013		1,033
Total	$	157,837

On July 9, 2010, the Company entered into an agreement with the municipal government of Dongguan City, to purchase a land use right for a land of 101,764 square meters at a consideration of approximately $23.8 million (RMB 153.6 million) to be paid in cash in installments. As of June 30, 2011, the Company paid deposits of approximately $18.6 million (RMB 119.96 million). The Company will pay the remaining contracted amount within year 2011.

16. CONCENTRATIONS

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company extends credit to its customers in the normal course of business and generally does not require collateral. As a result, management performs ongoing credit evaluations, and the Company maintains an allowance for potential credit losses based upon its loss history and its aging analysis. The allowance for doubtful accounts $5,548,000 at June 30, 2011 and $6,073,000 at December 31, 2010 is the Company's best estimate of the amount of probable credit losses in existing accounts receivable.

Management reviews the allowance for doubtful accounts each reporting period based on a detailed analysis of accounts receivable. In the analysis, management primarily considers the age of the customer's receivable and also considers the creditworthiness of the customer, the economic conditions of the customer's industry, and general economic conditions and trends, among other factors. If any of these factors change, the Company may also change its original estimates, which could impact the level of the Company's future allowance for doubtful accounts. If judgments regarding the collectability of accounts receivables were incorrect, adjustments to the allowance may be required, which would reduce profitability.

For the three and six months ended June 30, 2011 and 2010, the Company had no customer accounted for greater than 10% of third-party revenue.

At June 30, 2011, accounts receivables were due from 316 customers. Of these, no customer accounted for over 10% of the total accounts receivable. At June 30, 2010, accounts receivables were due from 230 customers and no customer accounted for over 10% of the total accounts receivable.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Special Note Regarding Forward Looking Statements

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those identified in Item 1A, “Risk Factors” described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

Use of Terms

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

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

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Overview of our Business

We are a leading provider of information and display technologies in the PRC. We provide a broad portfolio of software, hardware and fully integrated solutions to customers in a variety of technology sectors including Geographic Information Systems (GIS), Digital Public Security Technologies (DPST), Hospital Information Systems (HIS), Education and Media.

We were founded in 1993 and are headquartered in Shenzhen, China. As of June 30, 2011, we had more than 1,370 employees and 22 sales offices nationwide.

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

We generate revenues through the sale of our software and hardware products, through our fully integrated total solutions, and through the provision of related support services. A significant portion of our operations are conducted through iASPEC, our variable interest entity. iASPEC is a PRC domestic company owned by Jiang Huai Lin, our Chairman and Chief Executive Officer, who is a PRC citizen and resident. iASPEC is able to obtain governmental licenses that are restricted to PRC entities that have no foreign ownership. These licenses allow iASPEC to perform Police-use Geographic Information Systems, or PGIS, services for PRC governmental customers. Under our Amended and Restated Management Services Agreement among our subsidiary, IST, iASPEC and Mr. Lin, or the MSA, IST is entitled to receive 95% of the net received profit of iASPEC during the term of the Agreement, less costs and expenses related to sales and operations, and accrued but uncollected accounts receivable. During the six months ended June 30, 2011, $25.6 million, or 46.68% of our revenue, was generated under this exclusive commercial arrangement with iASPEC.

Second Quarter Financial Performance Highlights

We experienced moderate weakness in demand for our products and services during the three months ended June 30, 2011. The following are some financial highlights for the second quarter:

Revenue: Revenue decreased $5.63 million, or 16.79%, to $27.89 million for the three months ended June 30, 2011, from $33.52 million for the same period in 2010.
Gross Profit: Gross profit decreased $4.88 million, or 29.03%, to $11.92 million for the three months ended June 30, 2011, from $16.8 million for the same period in 2010.
Income from operations: Income from operations decreased $6.67 million, or 54.98%, to $5.46 million for the three months ended June 30, 2011, from $12.13 million for the same period in 2010.
Net income attributable to the Company: Net income attributable to the Company was $5.6 million for the three months ended June 30, 2011, a decrease of $3.75 million, or 40.1 %, from $9.35 million for the same period in 2010.
Fully diluted net income per share: Fully diluted net income per share was $0.11 for the three months ended June 30, 2011, as compared to $0.18 for the same period in 2010.

As at June 30, 2011, the total of our contract backlog was approximately $40.44 million.

Business Segment Information

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

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

Information Technology, or IT, Segment
Display Technology, or DT, Segment

For more information regarding our operating segments, see Note 14 (Consolidated Segment Data) to our unaudited condensed consolidated financial statements included elsewhere in this report.

Results of Operations

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

Comparison of Three Months Ended June 30, 2011 and June 30, 2010

(All amounts, other than percentages, in U.S. dollars)

										Period-over-period
		2011				2010				Increase (Decrease)
				% of				% of
		Amount		Revenue		Amount		Revenue		Amount		%
Revenue	$	27,887,779		100.00%	$	33,516,888		100.00%	$	(5,629,109	)	-16.79%
Costs of revenue		15,965,223		57.25%		16,718,582		49.88%		(753,359	)	-4.51%
Gross Profit		11,922,556		42.75%		16,798,306		50.12%		(4,875,750	)	-29.03%
Administrative expenses		(3,375,472	)	-12.10%		(2,621,501	)	-7.82%		(753,971	)	28.76%
Research and development expenses		(1,150,407	)	-4.13%		(560,649	)	-1.67%		(589,758	)	105.19%
Selling expenses		(1,936,744	)	-6.94%		(1,489,212	)	-4.44%		(447,532	)	30.05%
Income from operations		5,459,933		19.58%		12,126,944		36.18%		(6,667,011	)	-54.98%
Subsidy income		87,064		0.31%		268,898		0.80%		(181,834	)	-67.62%
Other income/(loss), net		757,471		2.72%		(324,700	)	-0.97%		1,082,171		-333.28%
Interest income		39,940		0.14%		10,403		0.03%		29,537		283.93%
Interest expense		(776,947	)	-2.79%		(263,756	)	-0.79%		(513,191	)	194.57%
Income before Income Taxes		5,567,461		19.96%		11,817,789		35.26%		(6,250,328	)	-52.89%
Income Tax Expense		(239,440	)	-0.86%		(2,163,609	)	-6.46%		1,924,169		-88.93%
Net Income		5,328,021		19.11%		9,654,180		28.80%		(4,326,159	)	-44.81%
Less Net Loss/(Income) Attributable to NCI		273,666		0.98%		(302,111	)	-0.90%		575,777		-190.58%
Net Income Attributable to CNIT	$	5,601,687		20.09%	$	9,352,069		27.90%	$	(3,750,382	)	-40.10%

Revenue. Our revenue is generated from the sales of our software and hardware products, our fully integrated total solutions, and the related after-sales services. For the three months ended June 30, 2011, our revenue was $27.89 million, compared to $33.52 million for the three months ended June 30, 2010, a decrease of $5.63 million, or 16.79% . The decrease was primarily due to the Chinese government’s recent implementation of new monetary tightening policies, which led to a slow-down in projects for our government customers, which generated over half of our revenues during the three-month periods ended June 30, 2011 and 2010.

Product sales increased by $3.64 million, or 48.74%, to $11.11 million for the three months ended June 30, 2011, as compared to $7.47 million in the same period of 2010. Product sales constituted 39.85% of total revenue during the three-month period ended June 30, 2011, as compared with 22.29% during the same period ended June 30, 2010. The increase mainly reflected our efforts to grow our Display Technology solutions segment.

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Software sales decreased by $13.15 million, or 58.69%, to $9.26 million for the three months ended June 30, 2011, from $22.41 million for the three months ended June 30, 2010. Software sales constituted 33.19% of our total revenue, which decreased from 66.85% during the same period in the prior year. The decrease was mainly due to the Chinese government’s recent implementation of new monetary tightening policies, which led to a slow-down in software projects for our government customers.

Sales of system integration services increased by $3.65 million, or 104.71%, to $7.14 million for the three months ended June 30, 2011, as compared to $3.49 million for the same period of 2010. As a percentage of revenue, system integration sales increased from 10.40% during the three months ended June 30, 2010 to 25.59% during the three months ended June 30, 2011. The increase was mainly the result of an increase in demand for system integration solutions in connection with the Shenzhen Summer Universiade, which will be held in August 2011, and new integration projects we secured during the fiscal quarter ended June 30, 2011, including a $3.5 million system integration contract with the Shenzhen Traffic Police Bureau.

Other revenue increased by $0.23 million, or 149.68%, from $0.15 million in the three months ended June 30, 2010 to $0.38 million in the same period of 2011. Other revenue was derived from maintenance services during the current period while during the three months ended June 30, 2010, we also generated royalty income.

The following table shows our revenue by categories:

(Unaudited: All amounts, other than percentages, in U.S. dollars)

				Table 1

		Three months Ended June 30, 2011				Three months Ended June 30, 2010
		Revenue	% of	Gross		Revenue	% of	Gross
			Revenue	Margin			Revenue	Margin

Revenue - Products	$	11,113,382	39.85%	20.95%	$	7,471,511	22.29%	22.19%
Revenue - Software		9,255,633	33.19%	76.91%		22,406,236	66.85%	54.22%
Revenue - System integration		7,135,217	25.59%	30.33%		3,485,523	10.40%	83.63%
Revenue - Others		383,547	1.38%	81.29%		153,618	0.46%	50.22%
Total Revenue	$	27,887,779	100.00%	42.75%	$	33,516,888	100.00%	50.12%

Revenue breakdown by segments is as follows:

(Unaudited: All amounts, other than percentages, in U.S. dollars)

Table 2
		Three Months Ended June 30, 2011					Three Months Ended June 30, 2010
		Revenue	% of	Cost	Gross		Revenue	% of	Cost	Gross
			Revenue		Margin			Revenue		Margin
IT Segment	$	16,795,401	60.22%	7,188,041	57.20%	$	27,604,567	82.36%	12,001,118	56.52%
DT Segment		11,092,378	39.78%	8,777,182	20.87%		5,912,321	17.64%	4,717,464	20.21%
Total	$	27,887,779	100.00%	15,965,223	42.75%	$	33,516,888	100.00%	16,718,582	50.12%

The revenue increase of our DT segment and the decline in revenue from our IT segment reflect two initiatives we are taking in fiscal year 2011. The first initiative is to grow our DT segment in response to increased demand from the broader market for more specialized solutions. The second initiative is to be more selective with our acceptance of orders in an effort to improve the quality of our earnings.

Cost of revenue and gross profit. Our cost of revenues decreased by $0.75 million, or 4.51%, to $15.97 million for the three months ended June 30, 2011, as compared with $16.72 million for the three months ended June 30, 2010. As a percentage of revenues, our cost of revenue increased to 57.25% during the three months ended June 30, 2011, from 49.88% in the same period of 2010. As a result, gross margin was 42.75% for the three months ended June 30, 2011, a decrease of 737 basis points from 50.12% in the same period of 2010.

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The decrease in gross profit margins, as displayed in tables 1 and 2 above, resulted from several factors. During the current quarter, we continued to grow our DT solutions, and the percentage of revenue increased from 17.64% during the three months ended June 30, 2010 to 39.78% during the three months ended June 30, 2011. The increase in contribution from DT revenues resulted in a decrease in gross profit margin for the three months ended June 30, 2011. The gross profit margin for our system integration business decreased from 83.63% during the three months ended June 30, 2010 to 30.33% in the three months ended June 30, 2011 primarily due to the high profit margin of certain projects in the 2010 period. However, gross margin from the Company’s software business increased to 76.91% during the three months ended June 30, 2011 from 54.22% during the three months ended June 30, 2010, primarily due to reduced production outsourcing. Following the contraction of our software business described above, our own resources were able to handle and complete most of the work, resulting in lower subcontractor fees for the three months ended June 30, 2011.

The increase in gross profit margin for all of our key segments is due to our recent effort to be more discerning with new contracts we sign, following our previously stated initiative towards improving the quality of our earnings. These changes were the result of our being more selective with the profitability and accounts receivable turnover of projects.

Administrative expenses. Administrative expenses consist primarily of compensation and benefits to our general management, finance and administrative staff, professional advisor fees, audit fees and other expenses incurred in connection with general operations. Our administrative expenses increased by $0.75 million, or 28.76%, to $3.38 million for the three months ended June 30, 2011, from $2.62 million in the same period of 2010. Notable changes that resulted in the increase of administrative expenses were: a) an increase in the impairment of a long-term investment of $0.34 million compared with impairment recognized during the second fiscal quarter of 2010; b) an increase of provisions for accounts receivables and inventories of $0.19 million and $0.11 million, respectively, from the second fiscal quarter of 2010; c) a $0.34 million increase in depreciation and amortization expenses from the second fiscal quarter of 2010; and d) offset by a $0.25 million decrease in salary cost as a result of the reduction in our head count, which decreased from 1,490 as at 30 June 2010 to 1,370 as at this period end.

Research and development expenses. Our research and development expenses consist primarily of personnel-related expenses, as well as costs associated with new software and hardware development and enhancement. Research and development expenses increased by $0.59 million, or 105.19%, to $1.15 million for the three months ended June 30, 2011, from $0.56 million in the same period of 2010. As a percentage of revenue, research and development expenses accounted for approximately 4.13% of total revenue for the three months ended June 30, 2011, compared with 1.67% of total revenue for the same period in 2010. Such an increase was primarily due to efforts to improve the profitability of existing products as well as development of new products.

Selling expenses. Selling expenses consist primarily of compensation and benefits to our sales and marketing staff, sales and after-sales traveling costs, and other sales-related costs. Our selling expenses increased $0.45 million, or 30.05%, to $1.94 million for the three months ended June 30, 2011, from $1.49 million in the corresponding period of 2010. This increase was due to our increasingly nationwide market expansion, which requires increased travel and telecommunication expenses as well as increased total compensation to sales and marketing staff.

Subsidy Income. For the three months ended June 30, 2011 and 2010, in connection with research and development activities in a designated locale, we received approximately $87,000 and $269,000, respectively, as a subsidy from the local governmental agency in China.

Other income, net. Key components of other income in the net amount of $0.76 million for the three months ended June 30, 2011 was attributable to two factors. First, a gain of $0.29 million resulted from a decrease in fair value of the liability associated with the contingent consideration for the HPC acquisition during the period. Following our stock price decline during the period, the contingent liability, which is based on stock price, also decreased in fair value. This decrease in contingent liability contributed to our other income. Second, we recognized a loss reversal of approximately $0.45 million for a pending lawsuit based on our reevaluation of the likelihood and value of related contingent liability during the quarter ended June 30, 2011.

- 27 -

Income tax expense. Income tax expense for the three months ended June 30, 2011 was $0.24 million, as compared with $2.16 million for the same period in 2010. The decrease was largely attributable to three factors. First, income tax expense decreased approximately $0.94 million due to the decrease of income before taxes of $6.25 million during the fiscal quarter ended June 30, 2011 compared to the fiscal quarter ended June 30, 2010. Second, our subsidiary, ISS, obtained China’s High Technology Enterprise designation during the quarter ended June 30, 2011 and was approved to enjoy the PRC enterprise income tax, or EIT, rate at 15% retroactive effect from fiscal year 2010. As a result, approximately $0.5 million accrued income tax for 2010 was reversed during the quarter ended June 30, 2011. Third, the EIT tax rate of ISS was reduced from 22% to 15% in the current period, which lowered our income tax expense during the current period as compared with the same period of last year.

Non-controlling interest. A non-controlling interest generated net loss of $0.27 million for the three months ended June 30, 2011. This non-controlling interest loss represents a $0.14 million fee retained by iASPEC under the MSA, and $0.41 million from Geo’s loss due to its 47.46% non-controlling interest.

Net income attributable to the Company. As a result of the factors described above, net income decreased $3.75 million, or 40.1%, to $5.6 million during the three months ended June 30, 2011, from $9.35 million for the same period in 2010.

Comparison of Six Months Ended June 30, 2011 and June 30, 2010

(All amounts, other than percentages, in U.S. dollars)

								Period-over-period
		2011			2010			Increase (Decrease)
				% of			% of
		Amount		Revenue	Amount		Revenue	Amount		%
Revenue	$	54,836,527		100.00%	58,821,995		100.00%	(3,985,468	)	-6.78%
Costs of revenue		29,259,131		53.36%	30,906,236		52.54%	(1,647,105	)	-5.33%
Gross Profit		25,577,396		46.64%	27,915,759		47.46%	(2,338,363	)	-8.38%
Administrative expenses		(5,879,779	)	-10.72%	(5,391,532	)	-9.17%	(488,247	)	9.06%
Research and development expenses		(1,883,737	)	-3.44%	(1,130,080	)	-1.92%	(753,657	)	66.69%
Selling expenses		(3,438,894	)	-6.27%	(2,703,774	)	-4.60%	(735,120	)	27.19%
Income from operations		14,374,986		26.21%	18,690,373		31.77%	(4,315,387	)	-23.09%
Subsidy income		117,504		0.21%	431,680		0.73%	(314,176	)	-72.78%
Other income, net		1,591,251		2.90%	642,099		1.09%	949,152		147.82%
Interest income		134,946		0.25%	29,294		0.05%	105,652		360.66%
Interest expense		(1,476,653	)	-2.69%	(412,647	)	-0.70%	(1,064,006	)	257.85%
Income before Income Taxes		14,742,034		26.88%	19,380,799		32.95%	(4,638,765	)	-23.93%
Income Tax Expense		(1,319,958	)	-2.41%	(3,334,692	)	-5.67%	2,014,734		-60.42%
Net Income		13,422,076		24.48%	16,046,107		27.28%	(2,624,031	)	-16.35%
Less Net Loss/(Income) Attributable to NCI		401,944		0.73%	(412,930	)	-0.70%	814,874		-197.34%
Net Income Attributable to CNIT	$	13,824,020		25.21%	15,633,177		26.58%	(1,809,157	)	-11.57%

Product sales increased by $5.3 million, or 38.36%, to $ 19.12 million for the six months ended June 30, 2011, as compared to $13.82 million in the same period of 2010. Product sales constituted 34.87% of total revenue during the current period as compared with 23.49% during the same period in the prior year. The increase of product sales business reflected our efforts to grow our Display Technology solutions segment.

Software sales decreased by $14.44 million, or 38.41%, to $23.15 million for the six months ended June 30, 2011, from $37.58 million for the six months ended June 30, 2010. Software sales constituted 42.21% of our total revenue during the six months ended June 30, 2011, compared with 63.9% during the same period in the prior year. The decrease was mainly due to the Chinese government’s recent implementation of new monetary tightening policies, which led to a slow-down in software projects for our government customers.

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Sales of system integration services increased by $5.79 million, or 92.29%, to $ 12.06 million for the six months ended June 30, 2011, as compared to the same period of 2010. As a percentage of revenue, it increased from 10.66% during the six months ended June 30, 2010 to 21.98% during the current period. Such growth primarily resulted from an increase in demand for system integration solutions in connection with the Shenzhen Summer Universiade, which will be held in August 2011, and other new secured projects during the current year.

Other revenue decreased from $1.15 million in the six months ended June 30, 2010 to $0.51 million in the same period of 2011, a decrease of $0.63 million or 55.30% . Other revenue mainly derived from maintenance services in the six months ended June 30, 2011, while in the same period of 2010, in addition to maintenance services, we also generated $0.37 million in royalty income from Huipu by licensing other manufacturers to use the HPC trademark.

The following table displays our revenue by category:

(Unaudited: All amounts, other than percentages, in U.S. dollars)

		Table 1
		Six months Ended June 30, 2011				Six months Ended June 30, 2010
		Revenue	% of Revenue	Gross Margin		Revenue	% of Revenue	Gross Margin
Revenue - Products	$	19,120,375	34.87%	23.67%	$	13,819,481	23.49%	20.01%
Revenue - Software		23,147,158	42.21%	72.41%		37,584,868	63.90%	55.68%
Revenue - System integration		12,055,717	21.98%	32.69%		6,269,406	10.66%	51.41%
Revenue - Others		513,277	0.94%	68.26%		1,148,240	1.95%	87.24%
Total Revenue	$	54,836,527	100.00%	46.64%	$	58,821,995	100.00%	47.46%

Revenue breakdown by segments is as follows:

(Unaudited: All amounts, other than percentages, in U.S. dollars)

Table 2
		Six Months Ended June 30, 2011					Six Months Ended June 30, 2010
		Revenue	% of Revenue	Cost	Gross Margin		Revenue	% of Revenue	Cost	Gross Margin
IT Segment	$	35,774,150	65.24%	14,671,926	58.99%	$	46,811,208	79.58%	21,720,951	53.60%
DT Segment		19,062,377	34.76%	14,587,205	23.48%		12,010,787	20.42%	9,185,285	23.52%
Total	$	54,836,527	100.00%	29,259,131	46.64%	$	58,821,995	100.00%	30,906,236	47.46%

Cost of revenue and gross profit. As indicated in the table above, our cost of revenues decreased $1.65 million, or 5.33%, to $29.26 million, for the six months ended June 30, 2011, from $30.91 million for the six months ended June 30, 2010. As a percentage of revenues, our cost of revenue increased to 53.36% during the six months ended June 30, 2011, from 52.54% in the same period of 2010. As a result, gross margin was 46.64% for the six months ended June 30, 2011, a decrease of 0.82%, from 47.46% in the same period of 2010.

The decrease in gross profit margins, as displayed in table 2 above, resulted from our efforts in continuing to grow our DT solutions during the current period. The percentage of DT revenue increased from 20.42% during the six months ended June 30, 2010 to 34.76% during the six months ended June 30, 2011. The increase in contribution from DT revenues resulted in a decrease in gross profit margin for the six months ended June 30, 2011.

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Administrative Expenses. Administrative expenses consist primarily of compensation and benefits to our general management, finance and administrative staff, professional advisor fees, audit fees and other expenses incurred in connection with general operations. Our administrative expenses increased by about $0.49 million, or 9.06%, to $5.88 million for the six months ended June 30, 2011, from $5.39 million in the same period of 2010. Notable changes that resulted in increased administrative expenses were: a) an increase of impairment of a long term investment of $0.89 million during the six-month period ended June 30, 2011 compared with the same period of 2010; b) the increase of depreciation and amortization expenses of $0.87 million; c) the decrease of provisions of accounts receivables and other receivables of $0.85 million during the six-month period ended June 30, 2011 compared with the same period of 2010; and d)offset by the decrease of salary cost of $0.29 million, which resulted from our control measures, including a reduction of our staff.

Research and Development Expenses. Research and development expenses consist primarily of personnel-related expenses, as well as costs associated with new software product development and enhancement. Research and development expenses increased by $0.75 million or 66.69% to $1.88 million for the six months ended June 30, 2011, from $1.13 million in the same period of 2010. As a percentage of sales, research and development expenses accounted for approximately 3.44% of the total revenue for the six months ended June 30, 2011, compared with 1.92% of total revenue for the same period in 2010. Such an increase was primarily a result of our efforts in improving product profitability and developing new products.

Selling Expenses. Selling expenses consist primarily of compensation and benefits to our sales and marketing staff, sales and after-sales traveling costs, and other sales-related costs. Our selling expenses increased $0.74 million, or 27.19%, to $3.44 million for the six months ended June 30, 2011, from $2.70 million in the corresponding period of 2010. The increase in selling expenses reflects our heightened efforts in national market expansion.

Income from Operations. Income from operations decreased $4.32 million, or 23.09%, to $14.37 million for the six months ended June 30, 2011, from $18.69 million in the corresponding period in 2010. Income from operations as a percentage of revenue decreased to 26.21% during the six months ended June 30, 2011, from 31.77% in 2010.

Other Income, net. Other income, net of $1.59 million for the six months ended June 30, 2011, was primarily due to the fair value change for contingent shares paid towards the HPC acquisition. The approximate gain of $1.47 million resulted from a decrease of fair value of the liability associated with issuing contingent consideration that was recorded during the six-month period ended June 30, 2011. Because our stock price declined during the period, the contingent liability, which is based on our stock price, also decreased in fair value. This decrease in contingent liability served to increase our income.

Non-controlling interest. Non-controlling interest of a net loss of $0.4 million for the six months ended June 30, 2011 represents the $0.32 million fee retained by iASPEC under the MSA, and $0.72 million of Geo’s losses retained by the 47.46% non-controlling interest in Geo.

Income Tax Expense. Income tax expense for the six months ended June 30, 2011 was $1.32 million, a decrease from $3.33 million for the same period in 2010. The decrease was largely due to the following factors: a) income before taxes decreased $4.64 million, causing approximately $0.7 million of the decrease; b) our subsidiary ISS obtained the High Technology Enterprise designation during the six-month period ended June 30, 2011 and was approved to enjoy the EIT rate at 15% with retroactive effect from fiscal year 2010, causing approximately $0.5 million of the decrease from the reversal of accrued income tax for 2010; c) deferred tax resulting from the temporary differences between the accounting basis and tax basis generated a negative impact to income tax expense of $0.31 million during the current period, whereas a positive impact of $0.22 million was generated during the corresponding period of 2010, resulting in a decrease of income tax expense of $0.53 million during the current period.

Net income attributable to the Company. As a result of the factors described above, net income decreased $1.81 million, or 11.57%, to $13.82 million during the six months ended June 30, 2011, from $15.63 million for the same period in 2010.

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Liquidity and Capital Resources

As of June 30, 2011, we had cash and cash equivalents of $9.63 million. The following table summarizes the key cash flow metrics from our condensed consolidated statements of cash flows for the six months ended June 30, 2011 and 2010.

Cash Flows (Unaudited: All amounts in U.S. dollars)

		Six Months Ended June 30,
		2011			2010
Net cash provided by operating activities	$	1,901,853		$	3,454,340
Net cash used in investing activities		(9,486,173	)		(16,600,871	)
Net cash (used in)/provided by financing activities		(1,161,374	)		17,242,364
Effect of exchange rate changes on cash and cash equivalents		210,455			170,806
Net (decrease)/increase in cash and cash equivalents		(8,535,239	)		4,266,639
Cash and cash equivalents at beginning of the period		18,166,857			13,478,633
Cash and cash equivalents at end of the period	$	9,631,618		$	17,745,272

Operating Activities

Net cash provided by operating activities was $1.9 million for the six months ended June 30, 2011, a decrease from $3.45 million in net cash provided by operating activities for the same period of 2010. The decrease was primarily due to an increase of our accounts receivables turnover days during the six months ended June 30, 2011. Many government customers slowed down their payments as a result of China’s implementation of monetary tightening policies. Because over half of our total revenues are generated from government projects, accounts receivable turnover days increased from 224 days during the six months ended June 30, 2010 to 339 days during the six months ended June 30, 2011.

Investing Activities

Net cash used in investing activities was $9.49 million for the six months ended June 30, 2011, as compared to $16.6 million net cash used in investing activities for the same period of 2010. The decrease was primarily due to using approximately $5 million to complete the construction of the plant acquired in the Huipu transaction during the six months ended June 30, 2010.

Financing Activities

Net cash used in financing activities was $1.16 million during the six months ended June 30, 2011, as compared to $17.24 million provided by financing activities during the same period of 2010. The change was mainly attributable to the net proceeds of $9.38 million raised from an offering of common stock during the six months ended June 30, 2010, and a decrease in net bank borrowings of $7.13 million during the six months ended June 30, 2011 as compared with the same period of last year.

Loan Facilities

As of June 30, 2011 and December 31, 2010, our short-term loan facilities were as follows: (a) Short-term bank loans

		June 30,		December 31,
		2011		2010
		(Unaudited)
Secured short-term loans	$	36,620,542	$	33,051,066
Add: Amounts due within one year under long-term loan contracts		6,594,746		2,275,500
Total short-term bank loans	$	43,215,288	$	35,326,566

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(b) Long-term bank loans

		June 30,			December 31,
		2011			2010
		(Unaudited)
Secured long-term loans	$	7,301,958		$	8,138,705
Less: Amounts due within one year under long-term loan contracts		(6,594,746	)		(2,275,500	)
Total long-term bank loans	$	707,212		$	5,863,205

Obligations Under Material Contracts

The following table sets forth our material contractual obligations as of June 30, 2011:

		Payments Due by Period
				Less than					More than
Contractual Obligations		Total		1 year		1-3 years		3-5 years	5 years
Operating Lease Obligations	$	157,837	$	128,916	$	28,921	$	- $	-
Purchase Obligations		5,208,799		5,208,799		-		-	-
Total	$	5,366,636	$	5,337,715	$	28,921	$	- $	-

Critical Accounting Policies

There have been no changes in our critical accounting policies from those disclosed under Item 7, “Management's Discussion and Analysis of Results of Operations and Financial Condition” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Seasonality of our Sales

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

Inflation

Inflation does not materially affect our business or the results of our operations.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Risk

We deposit surplus funds with Chinese banks earning daily interest. We do not invest in any instruments for trading purposes. Most of our outstanding debt instruments carry fixed rates of interest. Our operations generally are not directly sensitive to fluctuations in interest rates. The amount of long-term debt outstanding as of June 30, 2011 and December 31, 2010 was $0.71 million and $5.86 million, respectively. A hypothetical 1.0% increase in the annual interest rates for all of our credit facilities under which we had outstanding borrowings at June 30, 2011, would decrease net income before provision for income taxes by approximately $90,000, or less than 1% for the three months ended June 30, 2011. Management monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.

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Foreign Exchange Risk

While our reporting currency is the U.S. dollars, substantially all of our consolidated revenues and consolidated costs and expenses are denominated in RMB. Substantially all of our assets are denominated in RMB except for cash. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. dollars and RMB. If the RMB depreciates against the U.S. dollars, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollars financial statements will decline. Assets and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and equity is translated at historical exchange rates. Any resulting translation adjustments are not included in determining net income but are included in determining other comprehensive income, a component of equity. An average appreciation (depreciation) of the RMB against the U.S. dollars of 5% would increase (decrease) our comprehensive income by $12.71 million based on our outstanding revenues, costs and expenses, assets and liabilities denominated in RMB as of June 30, 2011. As of June 30, 2011, our accumulated other comprehensive income was $16.06 million. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.

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

Inflation

Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

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

As required by Rule 13a-15(e), our management has carried out an evaluation, with the participation and under the supervision of our Chief Executive Officer, Mr. Jiang Huai Lin and our Interim Chief Financial Officer, Mr. Zhi Qiang Zhao, of the effectiveness of the design and operation of our disclosure controls and procedures, as of June 30, 2011. Based upon, and as of the date of this evaluation, Mr. Lin and Mr. Zhao, determined that, as of June 30, 2011, and as of the date of this report, our disclosure controls and procedures were effective.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting during the second quarter of fiscal 2011 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

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PART II

OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

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

ITEM 1A.

RISK FACTORS.

There are no material changes from the risk factors previously disclosed in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2010.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.

(REMOVED AND RESERVED).

ITEM 5.

OTHER INFORMATION.

On August 5, 2011, the Board of Directors of the Company resolved to approve Mr. Zhao Zhi Qiang as the Company’s Interim Chief Financial Officer effective as of August 5, 2011.

Zhi Qiang Zhao, 40, has been the Company’s Chief Operating Officer since November 2009. He had previously served as the Company’s Chief Administrative Officer from September, 2008 to November 2009. Mr. Zhao has also served as a member of the Company’s Board of Directors since September 1, 2008. In addition, since January 2010, Mr. Zhao has served as the President of the Company’s subsidiary IST. Mr. Zhao has extensive experience in corporate operations and integrations, strategy planning and human resources management. Mr. Zhao has served as Admin and Human Resource Director of iASPEC since April 2005, and as Deputy General Manager of iASPEC since July 2006. Prior to that, Mr. Zhao served, from March 2003 to March 2005, as Supervisor of Human Resources for Foxconn Technology Group. Mr. Zhao holds a Bachelor’s degree in Mechanical and Electrical Engineering from Inner Mongolia University.

There are no arrangements or understandings between Mr. Zhao and any other persons pursuant to which he was selected as Interim Chief Financial Officer. There have been and are no transactions, relationships or arrangements in which Mr. Zhao has or had an interest requiring disclosure under Item 404(a) of Regulation S-K. No family relationship exists between Mr. Zhao and any other director or executive officer of the Company. No material plan, contract or arrangement, or material amendment thereto, was entered into in connection with this appointment. No grant or award or modification thereto occurred under any plan, contract or arrangement in connection with this appointment.

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ITEM 6. EXHIBITS.

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

Exhibit No.		Description

31.1		Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

Date: August 9 , 2011	CHINA INFORMATION TECHNOLOGY, INC.

	By:	/s/ Jiang Huai Lin
		Jiang Huai Lin, Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Zhi Qiang Zhao
		Zhi Qiang Zhao, Interim Chief Financial Officer,
		(Principal Financial Officer and Accounting Officer)

China Information Technology, Inc. - FORM 10-Q - August 9, 2011

Attached files

China Information Technology, Inc. Reports