U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q


(Mark one)




x
            Quarterly
      Report Under Section 13 or 15(d) of the Securities Exchange Act of
      1934




For the
Quarterly Period Ended June 30, 2009


or




o
            Transition
      Report Under Section 13 or 15(d) of the Securities Exchange Act of
      1934




Commission
File Number 000-50491





China
Fire & Security Group, Inc.


(Name of
small business issuer in its charter)




Florida
                
                65-1193022(State
      or other jurisdiction
                  of
      incorporation or organization)
                
                (I.R.S.
      Employer
                  Identification
      No.)B-2508
      TYG Center, C2
                  Dongsanhuanbeilu,
                  Chaoyang
      District, Beijing 100027,
                  People’s
      Republic of China
                
                100027(Address
      of principal executive offices)
                
                (Zip
      Code)




Issuer’s
telephone number:  (86-10) 8441 7400.





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 xNo
 ̈





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. (Check one):




Large
      accelerated filer  ̈
              
              Accelerated
      filer xNon-accelerated
      filer   ̈(Do
      not check if smaller reporting company)
              
              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 oNo x




As of August 10, 2008, the Registrant
had 27,593,275 shares of common stock outstanding.









China
Fire & Security Group, Inc.




Table of
Contents




PagePART
      I -
                              
                              FINANCIAL
      INFORMATION
                              
                              3Item
      1.
                              
                              Financial
      Statements (unaudited):
                              
                              3Consolidated
      Balance Sheets as of June 30, 2009 (unaudited) and December 31,
      2008
                              
                              3Consolidated
      Statements of Income and Other Comprehensive IncomeFor
      the Three and Six Months Ended June 30, 2009 and 2008
      (unaudited)
                              
                              4Consolidated
      Statements of Changes in Equity
                              
                              5Consolidated
      Statements of Cash FlowsFor
      the Six Months Ended June 30, 2009 and 2008 (unaudited)
                              
                              6Notes
      to Consolidated Financial Statements (unaudited)
                              
                              7Item
      2.
                              
                              Management's
      Discussion and Analysis or Plan of Operation
                              
                              33Item
      3.
                              
                              Quantitative
      and Qualitative Disclosures About Market Risk
                              
                              42Item
      4.
                              
                              Controls
      and Procedures
                              
                              42PART II -
                              
                              OTHER
      INFORMATIONItem
      1.
                              
                              Legal
      Proceedings
                              
                              43Item
      1A.
                              
                              Risk
      Factors
                              
                              43Item
      2.
                              
                              Unregistered
      Sales of Equity Securities and Use of Proceeds
                              
                              43Item
      3.
                              
                              Defaults
      Upon Senior Securities
                              
                              43Item
      4.
                              
                              Submission
      of Matters to a Vote of Security Holders.
                              
                              44Item
      5.
                              
                              Other
      Information
                              
                              44Item
      6.
                              
                              Exhibits
                              
                              44




-2-





Item
1. Financial Statements







CHINA FIRE & SECURITY GROUP, INC. AND
SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS


AS OF
JUNE 30, 2009 AND DECEMBER 31, 2008





June
      30,
                                                              
                                                              
                                                              December
      31,2009
                                                              
                                                              
                                                              2008(Unaudited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                                                              
                                                              $
                                                              27,792,235
                                                              
                                                              
                                                              $
                                                              26,655,333Restricted
      cash
                                                              
                                                              
                                                              4,190,519
                                                              
                                                              
                                                              
                                                              5,377,933Notes
      receivable
                                                              
                                                              
                                                              3,372,656
                                                              
                                                              
                                                              
                                                              3,670,259Accounts
      receivable, net of allowance for doubtful accounts of $5,026,230
      and$4,370,362
      as of June 30, 2009 and December 31, 2008, respectively
                                                              
                                                              
                                                              28,341,492
                                                              
                                                              
                                                              
                                                              25,826,343Receivables
      from related party
                                                              
                                                              
                                                              503,544
                                                              
                                                              
                                                              
                                                              466,223Other
      receivables
                                                              
                                                              
                                                              1,964,715
                                                              
                                                              
                                                              
                                                              1,532,259Inventories
                                                              
                                                              
                                                              6,272,149
                                                              
                                                              
                                                              
                                                              6,538,938Costs
      and estimated earnings in excess of billings
                                                              
                                                              
                                                              29,148,480
                                                              
                                                              
                                                              
                                                              17,821,708Employee
      advances
                                                              
                                                              
                                                              1,076,424
                                                              
                                                              
                                                              
                                                              743,868Prepayments
      and deferred expenses
                                                              
                                                              
                                                              3,427,234
                                                              
                                                              
                                                              
                                                              2,816,976Total
      current assets
                                                              
                                                              
                                                              106,089,448
                                                              
                                                              
                                                              
                                                              91,449,840PLANT
      AND EQUIPMENT, net
                                                              
                                                              
                                                              9,216,505
                                                              
                                                              
                                                              
                                                              8,445,254OTHER
      ASSETS:Restricted
      cash - non current
                                                              
                                                              
                                                              3,869,295
                                                              
                                                              
                                                              
                                                              1,872,828Accounts
      receivable - retentions
                                                              
                                                              
                                                              2,640,877
                                                              
                                                              
                                                              
                                                              1,107,450Advances
      on building and equipment purchases
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              249,859Investment
      in joint ventures
                                                              
                                                              
                                                              1,167,010
                                                              
                                                              
                                                              
                                                              1,167,238Intangible
      assets, net of accumulated amortization
                                                              
                                                              
                                                              1,077,982
                                                              
                                                              
                                                              
                                                              1,116,449Total
      other assets
                                                              
                                                              
                                                              8,755,164
                                                              
                                                              
                                                              
                                                              5,513,824Total
      assets
                                                              
                                                              $
                                                              124,061,117
                                                              
                                                              
                                                              $
                                                              105,408,918LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                                                              
                                                              $
                                                              6,969,382
                                                              
                                                              
                                                              $
                                                              6,664,090Customer
      deposits
                                                              
                                                              
                                                              3,064,353
                                                              
                                                              
                                                              
                                                              6,102,026Billings
      in excess of costs and estimated earnings
                                                              
                                                              
                                                              2,034,737
                                                              
                                                              
                                                              
                                                              4,237,528Other
      payables
                                                              
                                                              
                                                              1,114,393
                                                              
                                                              
                                                              
                                                              837,973Accrued
      liabilities
                                                              
                                                              
                                                              11,342,948
                                                              
                                                              
                                                              
                                                              6,785,409Taxes
      payable
                                                              
                                                              
                                                              6,395,258
                                                              
                                                              
                                                              
                                                              2,092,745Total
      current liabilities
                                                              
                                                              
                                                              30,921,071
                                                              
                                                              
                                                              
                                                              26,719,771COMMITMENTS
      AND CONTINGENCIESEQUITY:Common
      stock, $0.001 par value, 65,000,000 shares authorized,27,593,275
      and 27,586,593 shares issued and outstanding as ofJune
      30, 2009 and December 31, 2008, respectively
                                                              
                                                              
                                                              27,593
                                                              
                                                              
                                                              
                                                              27,586Additional
      paid-in-capital
                                                              
                                                              
                                                              19,847,499
                                                              
                                                              
                                                              
                                                              19,357,409Statutory
      reserves
                                                              
                                                              
                                                              7,148,827
                                                              
                                                              
                                                              
                                                              7,148,827Retained
      earnings
                                                              
                                                              
                                                              58,832,006
                                                              
                                                              
                                                              
                                                              44,850,181Accumulated
      other comprehensive income
                                                              
                                                              
                                                              7,196,221
                                                              
                                                              
                                                              
                                                              7,305,144Total
      shareholders' equity
                                                              
                                                              
                                                              93,052,146
                                                              
                                                              
                                                              
                                                              78,689,147Noncontrolling
      interest
                                                              
                                                              
                                                              87,900
                                                              
                                                              
                                                              
                                                              -Total
      equity
                                                              
                                                              
                                                              93,140,046
                                                              
                                                              
                                                              
                                                              78,689,147Total
      liabilities and equity
                                                              
                                                              $
                                                              124,061,117
                                                              
                                                              
                                                              $
                                                              105,408,918




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





-3-





CHINA FIRE & SECURITY GROUP, INC. AND
SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME


FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(Unaudited)





Three
      Months Ended June 30,
                                                    
                                                    
                                                    Six
      Months Ended June 30,2009
                                                    
                                                    
                                                    2008
                                                    
                                                    
                                                    2009
                                                    
                                                    
                                                    2008REVENUESSystem
      contracting projects
                                                    
                                                    $
                                                    18,290,930
                                                    
                                                    
                                                    $
                                                    14,557,008
                                                    
                                                    
                                                    $
                                                    31,294,114
                                                    
                                                    
                                                    
                                                    25,886,388Products
                                                    
                                                    
                                                    3,791,491
                                                    
                                                    
                                                    
                                                    1,533,965
                                                    
                                                    
                                                    
                                                    6,915,813
                                                    
                                                    
                                                    
                                                    4,415,136Maintenance
      services
                                                    
                                                    
                                                    649,447
                                                    
                                                    
                                                    
                                                    562,751
                                                    
                                                    
                                                    
                                                    1,234,152
                                                    
                                                    
                                                    
                                                    1,048,826Total
      revenues
                                                    
                                                    
                                                    22,731,868
                                                    
                                                    
                                                    
                                                    16,653,724
                                                    
                                                    
                                                    
                                                    39,444,079
                                                    
                                                    
                                                    
                                                    31,350,350COST
      OF REVENUESSystem
      contracting projects
                                                    
                                                    
                                                    6,970,283
                                                    
                                                    
                                                    
                                                    5,971,745
                                                    
                                                    
                                                    
                                                    11,777,541
                                                    
                                                    
                                                    
                                                    11,541,955Products
                                                    
                                                    
                                                    865,395
                                                    
                                                    
                                                    
                                                    217,498
                                                    
                                                    
                                                    
                                                    2,077,048
                                                    
                                                    
                                                    
                                                    1,059,380Maintenance
      services
                                                    
                                                    
                                                    395,619
                                                    
                                                    
                                                    
                                                    280,188
                                                    
                                                    
                                                    
                                                    792,160
                                                    
                                                    
                                                    
                                                    520,327Total
      cost of revenues
                                                    
                                                    
                                                    8,231,297
                                                    
                                                    
                                                    
                                                    6,469,431
                                                    
                                                    
                                                    
                                                    14,646,749
                                                    
                                                    
                                                    
                                                    13,121,662GROSS
      PROFIT
                                                    
                                                    
                                                    14,500,571
                                                    
                                                    
                                                    
                                                    10,184,293
                                                    
                                                    
                                                    
                                                    24,797,330
                                                    
                                                    
                                                    
                                                    18,228,688OPERATING
      EXPENSESelling
      and marketing
                                                    
                                                    
                                                    2,237,873
                                                    
                                                    
                                                    
                                                    1,824,422
                                                    
                                                    
                                                    
                                                    4,140,191
                                                    
                                                    
                                                    
                                                    3,335,713General
      and administrative
                                                    
                                                    
                                                    1,983,443
                                                    
                                                    
                                                    
                                                    977,967
                                                    
                                                    
                                                    
                                                    3,664,082
                                                    
                                                    
                                                    
                                                    2,427,448Depreciation
      and amortization expenses
                                                    
                                                    
                                                    183,456
                                                    
                                                    
                                                    
                                                    154,688
                                                    
                                                    
                                                    
                                                    376,850
                                                    
                                                    
                                                    
                                                    321,950Research
      and development
                                                    
                                                    
                                                    519,987
                                                    
                                                    
                                                    
                                                    627,952
                                                    
                                                    
                                                    
                                                    834,017
                                                    
                                                    
                                                    
                                                    894,601Total
      operating expense
                                                    
                                                    
                                                    4,924,759
                                                    
                                                    
                                                    
                                                    3,585,029
                                                    
                                                    
                                                    
                                                    9,015,140
                                                    
                                                    
                                                    
                                                    6,979,712INCOME
      FROM OPERATIONS
                                                    
                                                    
                                                    9,575,812
                                                    
                                                    
                                                    
                                                    6,599,264
                                                    
                                                    
                                                    
                                                    15,782,190
                                                    
                                                    
                                                    
                                                    11,248,976OTHER
      INCOME (EXPENSE)Other
      income
                                                    
                                                    
                                                    110,346
                                                    
                                                    
                                                    
                                                    110,237
                                                    
                                                    
                                                    
                                                    222,299
                                                    
                                                    
                                                    
                                                    221,643Other
      expense
                                                    
                                                    
                                                    (45
                                                    )
                                                    
                                                    
                                                    (85,332
                                                    )
                                                    
                                                    
                                                    (1,302
                                                    )
                                                    
                                                    
                                                    (85,388
                                                    )Interest
      income, net
                                                    
                                                    
                                                    7,206
                                                    
                                                    
                                                    
                                                    63,384
                                                    
                                                    
                                                    
                                                    129,302
                                                    
                                                    
                                                    
                                                    91,744Total
      other income
                                                    
                                                    
                                                    117,507
                                                    
                                                    
                                                    
                                                    88,289
                                                    
                                                    
                                                    
                                                    350,299
                                                    
                                                    
                                                    
                                                    227,999INCOME
      BEFORE PROVISION FOR INCOME TAXES
                                                    
                                                    
                                                    9,693,319
                                                    
                                                    
                                                    
                                                    6,687,553
                                                    
                                                    
                                                    
                                                    16,132,489
                                                    
                                                    
                                                    
                                                    11,476,975PROVISION
      FOR INCOME TAXES
                                                    
                                                    
                                                    1,357,097
                                                    
                                                    
                                                    
                                                    11,453
                                                    
                                                    
                                                    
                                                    2,150,664
                                                    
                                                    
                                                    
                                                    60,095NET
      INCOME ATTRIBUTABLE TO CONTROLLING INTEREST
                                                    
                                                    
                                                    8,336,222
                                                    
                                                    
                                                    
                                                    6,676,100
                                                    
                                                    
                                                    
                                                    13,981,825
                                                    
                                                    
                                                    
                                                    11,416,880OTHER
      COMPREHENSIVE INCOME (LOSS)Foreign
      currency translation adjustment
                                                    
                                                    
                                                    69,294
                                                    
                                                    
                                                    
                                                    1,293,683
                                                    
                                                    
                                                    
                                                    (108,923
                                                    )
                                                    
                                                    
                                                    3,360,599COMPREHENSIVE
      INCOME
                                                    
                                                    $
                                                    8,405,516
                                                    
                                                    
                                                    $
                                                    7,969,783
                                                    
                                                    
                                                    $
                                                    13,872,902
                                                    
                                                    
                                                    
                                                    14,777,479BASIC
      EARNINGS PER SHAREWeighted
      average number of shares
                                                    
                                                    
                                                    27,588,598
                                                    
                                                    
                                                    
                                                    27,557,297
                                                    
                                                    
                                                    
                                                    27,587,595
                                                    
                                                    
                                                    
                                                    27,557,095Earnings
      per share
                                                    
                                                    $
                                                    0.30
                                                    
                                                    
                                                    $
                                                    0.24
                                                    
                                                    
                                                    $
                                                    0.51
                                                    
                                                    
                                                    
                                                    0.41DILUTED
      EARNINGS PER SHAREWeighted
      average number of shares
                                                    
                                                    
                                                    28,298,850
                                                    
                                                    
                                                    
                                                    28,200,785
                                                    
                                                    
                                                    
                                                    28,258,225
                                                    
                                                    
                                                    
                                                    28,179,595Earnings
      per share
                                                    
                                                    $
                                                    0.29
                                                    
                                                    
                                                    $
                                                    0.24
                                                    
                                                    
                                                    $
                                                    0.49
                                                    
                                                    
                                                    
                                                    0.41




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





-4-





CHINA FIRE & SECURITY GROUP, INC. AND
SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY





China
      Fire & Security, Inc. Shareholders' EquityRetained
      Earnings
                                  
                                  
                                  Accumulated
      otherCommon
      Stock
                                  
                                  
                                  Additional
                                  
                                  
                                  Statutory
                                  
                                  
                                  
                                  
                                  
                                  comprehensive
                                  
                                  
                                  NoncontrollingShares
                                  
                                  
                                  Par
      value
                                  
                                  
                                  paid-in-capital
                                  
                                  
                                  reserves
                                  
                                  
                                  Unrestricted
                                  
                                  
                                  income
                                  
                                  
                                  Interest
                                  
                                  
                                  TotalsBALANCE,
      December 31, 2007
                                  
                                  
                                  27,556,893
                                  
                                  
                                  $
                                  27,556
                                  
                                  
                                  $
                                  19,317,287
                                  
                                  
                                  $
                                  5,067,061
                                  
                                  
                                  $
                                  22,228,095
                                  
                                  
                                  $
                                  3,568,117
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  50,208,116Net
      income
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  11,416,880
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  11,416,880Warrants
      exercised
                                  
                                  
                                  3,634
                                  
                                  
                                  
                                  4
                                  
                                  
                                  
                                  (4
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  -Options
      issued to employees
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  33,004
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  33,004Foreign
      currency translation adjustment
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  3,360,599
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  3,360,599BALANCE,
      June 30, 2008 (Unaudited)
                                  
                                  
                                  27,560,527
                                  
                                  
                                  $
                                  27,560
                                  
                                  
                                  $
                                  19,350,287
                                  
                                  
                                  $
                                  5,067,061
                                  
                                  
                                  $
                                  33,644,975
                                  
                                  
                                  $
                                  6,928,716
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  65,018,599Net
      income
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  13,286,972
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  13,286,972Warrants
      exercised
                                  
                                  
                                  26,066
                                  
                                  
                                  
                                  26
                                  
                                  
                                  
                                  (26
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  -Options
      issued to employees
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  7,148
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  7,148Adjustment
      on statutory reserves
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  2,081,766
                                  
                                  
                                  
                                  (2,081,766
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  -Foreign
      currency translation adjustment
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  376,428
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  376,428BALANCE,
      December 31, 2008
                                  
                                  
                                  27,586,593
                                  
                                  
                                  $
                                  27,586
                                  
                                  
                                  $
                                  19,357,409
                                  
                                  
                                  $
                                  7,148,827
                                  
                                  
                                  $
                                  44,850,181
                                  
                                  
                                  $
                                  7,305,144
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  78,689,147Capital
      received from noncontrolling interest
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  87,900
                                  
                                  
                                  
                                  87,900Net
      income
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  13,981,825
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  13,981,825Warrants
      exercised
                                  
                                  
                                  6,682
                                  
                                  
                                  
                                  7
                                  
                                  
                                  
                                  (7
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  -Options
      issued to employees
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  490,097
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  490,097Foreign
      currency translation adjustment
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (108,923
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (108,923
                                  )BALANCE,
      June 30, 2009 (Unaudited)
                                  
                                  
                                  27,593,275
                                  
                                  
                                  $
                                  27,593
                                  
                                  
                                  $
                                  19,847,499
                                  
                                  
                                  $
                                  7,148,827
                                  
                                  
                                  $
                                  58,832,006
                                  
                                  
                                  $
                                  7,196,221
                                  
                                  
                                  $
                                  87,900
                                  
                                  
                                  $
                                  93,140,046





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





-5-





CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(Unaudited)





Six
      Months Ended June 30,2009
                                                
                                                
                                                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income attributable to controlling interest
                                                
                                                $
                                                13,981,825
                                                
                                                
                                                $
                                                11,416,880Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
                                                
                                                
                                                410,521
                                                
                                                
                                                
                                                326,548Amortization
                                                
                                                
                                                37,641
                                                
                                                
                                                
                                                37,408Provision
      for doubtful accounts
                                                
                                                
                                                662,143
                                                
                                                
                                                
                                                180,061Gain
      (loss) on disposal of equipments
                                                
                                                
                                                8,512
                                                
                                                
                                                
                                                (31,715
                                                )Stock
      compensation to employees
                                                
                                                
                                                490,097
                                                
                                                
                                                
                                                33,004Provision
      for estimated warranty claims
                                                
                                                
                                                62,973
                                                
                                                
                                                
                                                -Change
      in operating assets and liabilitiesNotes
      receivable
                                                
                                                
                                                292,739
                                                
                                                
                                                
                                                (2,606,423
                                                )Accounts
      receivable
                                                
                                                
                                                (4,749,389
                                                )
                                                
                                                
                                                (1,450,799
                                                )Receivables
      from related party
                                                
                                                
                                                (37,975
                                                )
                                                
                                                
                                                (321,530
                                                )Other
      receivables
                                                
                                                
                                                (509,019
                                                )
                                                
                                                
                                                (375,360
                                                )Inventories
                                                
                                                
                                                257,998
                                                
                                                
                                                
                                                (1,206,309
                                                )Costs
      and estimated earnings in excess of billings
                                                
                                                
                                                (11,713,121
                                                )
                                                
                                                
                                                (10,849,628
                                                )Employee
      advances
                                                
                                                
                                                (333,729
                                                )
                                                
                                                
                                                597,770Prepayments
      and deferred expenses
                                                
                                                
                                                (183,819
                                                )
                                                
                                                
                                                (826,585
                                                )Accounts
      payable
                                                
                                                
                                                314,470
                                                
                                                
                                                
                                                154,397Customer
      deposits
                                                
                                                
                                                (3,030,801
                                                )
                                                
                                                
                                                7,819,403Billings
      in excess of costs and estimated earnings
                                                
                                                
                                                (2,198,063
                                                )
                                                
                                                
                                                (2,309,053
                                                )Other
      payables
                                                
                                                
                                                277,696
                                                
                                                
                                                
                                                786,202Accrued
      liabilities
                                                
                                                
                                                4,505,900
                                                
                                                
                                                
                                                1,779,303Taxes
      payable
                                                
                                                
                                                4,307,424
                                                
                                                
                                                
                                                303,874Net
      cash provided by operating activities
                                                
                                                
                                                2,854,023
                                                
                                                
                                                
                                                3,457,448CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of equipments
                                                
                                                
                                                (962,362
                                                )
                                                
                                                
                                                (522,846
                                                )Advances
      on building and equipment purchase
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (180,236
                                                )Proceeds
      from sale of equipments
                                                
                                                
                                                9,827
                                                
                                                
                                                
                                                39,545Net
      cash used in investing activities
                                                
                                                
                                                (952,535
                                                )
                                                
                                                
                                                (663,537
                                                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Change
      in restricted cash
                                                
                                                
                                                (818,891
                                                )
                                                
                                                
                                                (474,018
                                                )Capital
      contributed by noncontrolling interest shareholder
                                                
                                                
                                                87,942
                                                
                                                
                                                
                                                -Net
      cash used in financing activities
                                                
                                                
                                                (730,949
                                                )
                                                
                                                
                                                (474,018
                                                )EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                                                
                                                
                                                (33,637
                                                )
                                                
                                                
                                                1,088,574INCREASE
      IN CASH
                                                
                                                
                                                1,136,902
                                                
                                                
                                                
                                                3,408,467CASH
      and CASH EQUIVALENTS, beginning of period
                                                
                                                
                                                26,655,333
                                                
                                                
                                                
                                                17,110,449CASH
      and CASH EQUIVALENTS, end of period
                                                
                                                $
                                                27,792,235
                                                
                                                
                                                $
                                                20,518,916SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONIncome
      taxes paid
                                                
                                                $
                                                311,505
                                                
                                                
                                                $
                                                23,400Interest
      paid
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                -NON-CASH
      TRANSACTIONS INVESTING AND FINANCING ACTIVITIES:Reclassification
      of advances on building and equipment purchaseto
      plant and equipment upon receipt of purchase
                                                
                                                $
                                                249,638
                                                
                                                
                                                $
                                                378,982





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




-6-




CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
 
 Note
1 - Background
 
 Principal Activities and
Reorganization
 
 China Fire & Security Group
Inc.(the “Company” or “CFSG”), is a Florida corporation. The
Company, through its subsidiaries, is engaged in the design, development,
manufacture and sale of fire protection products and services for industrial
customers in People’s Republic of China (“China”).
 
 Current
Development
 
 Formation
ofBeijing
Shian Kexin Technology Co., Ltd (“Shian Kexin”)
 
 Shian
Kexin was incorporated in May 2009 in Beijing, China with registered capital
amounted to $732,500 (RMB5,000,000).  Shian Kexin is 100% owned by
Sureland Industrial and engages in technology developing, transferring and
consulting, computer software development and selling of fire safe product and
equipment.
 
 Formation ofShenyang
Hongshida Electronics Co., Ltd (“Shenyang Hongshida”)
 
 Shenyang
Hongshida was incorporated in Shenyang, Liaoning Province, China with registered
capital amounted to $1,465,000 (RMB10,000,000). Pursuant to Shengyang
Hongshida’s by-laws dated on June 1, 2009, the registered capital is required to be injected over the
subsequent two years. ShenyangHongshida is 80% owned by Beijing Hua An
with 20% noncontrolling interest owned by an unrelated party. Shenyang Hongshida
engages in production and selling of fire equipment, electronic products,
instrumentation, computer parts and providing technical
advisory services. Shenyang Hongshida will focus on the low-end and
middle-end market of linear heat detectors. As of June 30, 2009, the registered
capital received was $439,500 (RMB3,000,000) and the Company is in pre-operating
stage.
 
 Note
2 - Summary of significant accounting policies
 
 The reporting
entity
 
 The
consolidated financial statements of China Fire & Security Group Inc. and
Subsidiaries reflect the activities of the parent and the following
subsidiaries:
 
 -7-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  Subsidiaries
                            
                            Incorporated
      in
                            
                            Ownership
                              PercentageChina
      Fire Protection Group Inc. (“CFPG”)
                            
                            British
      Virgin Islands
                            
                            
                            100
                            %Sureland
      Industrial Fire Safety Limited (“Sureland Industrial”)
                            
                            People’s
      Republic of China
                            
                            
                            100
                            %Sureland
      Industrial Fire Equipment Co. Ltd.  (“Sureland Equipment”)
                            
                            People’s
      Republic of China
                            
                            
                            100
                            %Tianxiao
      Fire Safety Equipment Co., Ltd. (“Tianxiao Equipment”)
                            
                            People’s
      Republic of China
                            
                            
                            100
                            %Beijing
      Hua An Times Fire Safety Technology Co., Ltd. (“Beijing Hua An”)
                            
                            People’s
      Republic of China
                            
                            
                            100
                            %Beijing
      Shian Kexin Technology Co., Ltd
                            
                            People’s
      Republic of China
                            
                            
                            100
                            %Shenyang
      Hongshida Electronics Co., Ltd
                            
                            People’s
      Republic of China
                            
                            
                            80
                            %
  Basis of
presentation
 
 The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
All material intercompany transactions and balances have been eliminated in
consolidation.
 
 Management
has included all normal recurring adjustments considered necessary to give a
fair presentation of operating results for the periods presented. Interim
results are not necessarily indicative of results for a full year. The
information included in this Form 10-Q should be read in conjunction with
information included in the 2008 annual report filed on Form 10-K.
 
 Use of
estimates
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles of the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the combined
financial statements and accompanying notes. Management believes that the
estimates utilized in preparing its financial statements are reasonable and
prudent. Actual results could differ from these estimates.
 
 The
Company’s certain accounting policies require higher degrees of judgment than
others in their application. These include the recognition of revenue and
earnings from system contracting projects under the percentage-of-completion
method, determining the fair value of stock based compensation and the allowance
of doubtful accounts and warranty expenses. Management evaluates all of its
estimates and judgments on an on-going basis.
  -8-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  Revenue
recognition
 
 Revenue
is recognized when it is probable that the economic benefits will flow to the
Company as follows:
 
 1.
              Revenue
      from system contracting projects are recognized using the
      percentage-of-completion method of accounting and, therefore, take into
      account the costs, estimated earnings and revenue to date on contracts not
      yet completed. Revenue recognized is that percentage of the total contract
      price that cost expended to date bears to anticipated final total cost,
      based on current estimates of costs to complete. Contract costs include
      all direct material and labor costs and those indirect costs related to
      contract performance, such as indirect labor, supplies, tools, repairs,
      and depreciation costs. Selling, general, and administrative costs are
      charged to expense as incurred. At the time a loss on a contract becomes
      known, the entire amount of the estimated ultimate loss is recognized in
      the consolidated financial statements. Claims for additional contract
      costs are recognized upon a signed change order from the customer or in
      accordance with paragraphs 62 and 65 of the AICPA’S Statement of Position
      ("SOP") 81-1, "Accounting for Performance of Construction - Type and
      Certain Production - Type Contracts" ("SOP
  81-1").
 
 2.
              Revenue
      from product sales is recognized when the goods are delivered and title
      has passed. Product sales revenue is presented net of a value-added tax
      (VAT). All of the Company’s products that are sold in the People’s
      Republic of China (“PRC”) are subject to a Chinese value-added tax at a
      rate of 17% of the gross sales price. This VAT may be offset by VAT paid
      by the Company on raw materials and other materials included in the cost
      of producing their finished
product.
 
 3.
              Revenue
      from the rendering of Maintenance Services is recognized over the service
      period on a straight-line basis.
 
 In
accordance with SFAS 48, “Revenue Recognition when Right of Return Exists,”
revenue is recorded net of an estimate of markdowns, price concessions and
warranty costs. Such reserve is based on management’s evaluation of historical
experience, current industry trends and estimated costs.
 
 Enterprise Wide
Disclosure
 
 Almost
all the Company’s products (fire detecting products, fire alarm control device,
and water mist/sprinkler systems) are sold via system contracting projects or as
part of the integrated products sales. The composition of these three types of
products varies significantly from project to project, both in quantity and in
dollar amounts. Although the Company could provide a breakdown of sales
contribution for the Company’s own products for each project, it is almost
impossible to provide revenues for each of the products when the revenue from
each project is recognized based on percentage of completion.  More
importantly, the revenues from the Company’s own products do not accurately
reflect the Company’s overall financial performance. The Company is a system
contracting projects provider rather than product vendors who sell their own
products directly or through channels.  Therefore, it is not practical
to separately disclose the revenues from external customers for each of the
products.
  -9-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  The
Company’s chief operating decision-makers (i.e. chief executive officer and his
direct reports) review financial information presented on a consolidated basis,
accompanied by disaggregated information about revenues by business lines for
purposes of allocating resources and evaluating financial performance. There are
no segment managers who are held accountable for operations, operating results
and plans for levels or components below the consolidated unit level. Based on
qualitative and quantitative criteria established by SFAS 131, “Disclosures
about Segments of an Enterprise and Related Information”, the Company considers
itself to be operating within one reportable segment.
  Shipping and
handling
 
 Costs
related to shipping and handling are included in cost of revenue pursuant to
EITF 00-10 “Accounting for Shipping and Handling Fees and Costs.”
 
 Foreign currency
translation
  The
reporting currency of the Company is the US dollar. The Company uses their local
currency, Renminbi (RMB), as their functional currency. Results of operations
and cash flow are translated at average exchange rates during the period, and
assets and liabilities are translated at the unified exchange rate as quoted by
the People’s Bank of China at the end of the period. Translation adjustments
resulting from this process are included in accumulated other comprehensive
income in the consolidated statements of shareholders’ equity.
  Asset and
liability accounts at June 30, 2009 were translated at 6.83 RMB to $1.00 as
compared to 6.82 RMB at December 31, 2008.  Equity accounts were
stated at their historical rate.  The average translation rates
applied to income statements accounts for the six months ended June 30, 2009 and
2008 were 6.82 RMB and 7.05 RMB, respectively. Cash flows are also translated at
average translation rates for the period, therefore, amounts reported on the
statement of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheet.
  -10-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred.  Historically, the Company has not
entered any currency trading or hedging transactions, although there is no
assurance that the Company will not enter into such transactions in the
future.
 
 Plant and
equipment
 
 Plant and
equipment are stated at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets with 5% residual value.  Depreciation expense amounted to
$209,754 and $157,160 for the three months ended June 30, 2009 and 2008,
respectively. Depreciation expense amounted to $410,521 and $326,548 for the six
months ended June 30, 2009 and 2008, respectively.
 
 Estimated
useful lives of the assets are as follows:
 
 Useful
                      LifeBuildings
      and improvements
                    40
      yearsTransportation
      equipment
                    5
      yearsMachinery
                    10
      yearsOffice
      equipment
                    5
      yearsFurniture
                    5
      years
  Construction
in progress represents the costs incurred in connection with the construction of
buildings or additions to the Company’s plant facilities. No depreciation is
provided for construction in progress until such time as the assets are
completed and placed into service. Interest incurred during construction is
capitalized into construction in progress. All other interest is expensed as
incurred.
 
 The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the
consolidated statements of income. Maintenance, repairs and minor renewals are
charged directly to expense as incurred. Major additions and betterment to
buildings and equipment are capitalized.
 
 Long-term
assets of the Company are reviewed at least annually, more often if
circumstances dictate, to determine whether their carrying value has become
impaired. The Company considers assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations. The Company
evaluates the periods of depreciation and amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives.
As of June 30, 2009, the Company expects these assets to be fully
recoverable.
  -11-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  Plant and
equipment consists of the following:
 
 June
      30, 2009
                          (Unaudited)
                        
                        
                        December
      31,
                          2008Buildings
      and improvements
                        
                        $
                        6,430,237
                        
                        
                        $
                        6,417,304Transportation
      equipment
                        
                        
                        3,469,146
                        
                        
                        
                        2,747,038Machinery
                        
                        
                        1,277,411
                        
                        
                        
                        1,249,470Office
      equipment
                        
                        
                        1,276,966
                        
                        
                        
                        1,262,426Furniture
                        
                        
                        94,654
                        
                        
                        
                        90,882Total
      depreciable assets
                        
                        
                        12,548,414
                        
                        
                        
                        11,767,120Less
      accumulated depreciation
                        
                        
                        (3,589,164
                        )
                        
                        
                        (3,321,866
                        )Construction
      in progress
                        
                        
                        257,255
                        
                        
                        
                        -Plant
      and equipment, net
                        
                        $
                        9,216,505
                        
                        
                        $
                        8,445,254
  Concentration of
risk
 
 Cash
includes cash on hand and demand deposits in accounts maintained with state
owned banks within the People’s Republic of China and Hong Kong. The Company
maintains balances at financial institutions which, from time to time, may
exceed Hong Kong Deposit Protection Board insured limits for the banks located
in Hong Kong. Balances at financial institutions or state owned banks within the
PRC are not covered by insurance.  As of June 30, 2009  and
December 31, 2008, the Company had deposits (including restricted cash balances)
totaling to $33,388,612 and $30,765,488, respectively, that are not covered by
insurance. The Company has not experienced any losses in such accounts and
believes it is not exposed to any risks on its cash in bank
accounts.
 
 The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the PRC's economy. The Company's operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in the North America and Western Europe. These include risks
associated with, among others, the political, economic and legal environments
and foreign currency exchange. The Company's results may be adversely affected
by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
  -12-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  The
Company has one major customer who represents approximately 12% and 11% of the
Company’s sales for the three and six months ended June 30, 2009 , respectively.
Accounts receivable from this customer was $0 as of June 30, 2009. The Company
had one major customer who represents approximately 28% and 15% of the Company’s
sales for the three months and six months ended June 30, 2008, respectively.
Accounts receivable from this customer was $0 as of June 30, 2008.
 
 Cash and cash
equivalents
 
 The
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.  Cash and cash
equivalents also include unrestricted time deposits.
  Restricted
cash
 
 Restricted
cash represents cash required to be deposited in a separate bank account subject
to withdrawal restrictions by its system contracting projects and product sales
customers to guarantee its contracts will be performed. The deposit cannot be
drawn or transferred by the Company until the restriction period has
expired.
 
 Restricted
cash consists of the following:
 
 June
      30, 2009
                            (Unaudited)
                          
                          
                          December
      31,
                            2008Restricted
      cashProducts
      sales
                          
                          $
                          3,441,995
                          
                          
                          $
                          1,608,056System
      contracting projects
                          
                          
                          4,617,819
                          
                          
                          
                          5,642,705Total
      restricted cash
                          
                          
                          8,059,814
                          
                          
                          
                          7,250,761Restricted
      cash - non current
                          
                          
                          (3,869,295
                          )
                          
                          
                          (1,872,828
                          )Restricted
      cash - current
                          
                          $
                          4,190,519
                          
                          
                          $
                          5,377,
      933
 
 Inventories
 
 Inventories
are stated at the lower of cost or market, using weighted average
method.
 
 Inventories
consist of the following as of:
 
 -13-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  June
      30, 2009
                          (Unaudited)
                        
                        
                        December
      31,
                          2008Raw
      materials
                        
                        $
                        877,116
                        
                        
                        $
                        896,797Finished
      goods
                        
                        
                        3,934,569
                        
                        
                        
                        4,597,407Work
      in progress
                        
                        
                        1,460,464
                        
                        
                        
                        1,044,734Total
                        
                        $
                        6,272,149
                        
                        
                        $
                        6,538,938
 
 Raw
materials consist primarily of materials used in production. Finished goods
consist primarily of equipment used in product sales and system contracting
projects. The costs of finished goods include direct costs of raw materials as
well as direct labor used in production. Indirect production costs such as
utilities and indirect labor related to production such as assembling, shipping
and handling costs are also included in the cost of inventory.  The
Company reviews its inventories periodically to determine if any reserves are
necessary for potential obsolescence. As of June 30, 2009  and
December 31, 2008, the Company determined no reserves are
necessary.
 
 Accounts
receivable
 
 Accounts
receivable represents amounts due from customers for products sales, maintenance
services and system contracting projects. Overdue balances are reviewed
regularly by senior management. Reserves are recorded when collection of amounts
due are in doubt.  Delinquent account balances are written-off after
management has determined that the likelihood of collection is not probable,
known bad debts are written off against allowance for doubtful accounts when
identified.
 
 Accounts
receivable consists of the following:
  June
      30, 2009
                            (Unaudited)
                          
                          
                          December
      31,
                            2008Accounts
      receivable:System
      contracting projects
                          
                          $
                          18,461,887
                          
                          
                          $
                          19,167,096Maintenance
      services
                          
                          
                          3,005,537
                          
                          
                          
                          3,193,166Products
      sales
                          
                          
                          14,541,175
                          
                          
                          
                          8,943,893Total
      accounts receivable
                          
                          
                          36,008,599
                          
                          
                          
                          31,304,155Allowance
      for bad debts
                          
                          
                          (5,026,230
                          )
                          
                          
                          (4,370,362
                          )Accounts
      receivable, net
                          
                          
                          30,982,369
                          
                          
                          
                          26,933,793Accounts
      receivable - non-current retentions
                          
                          
                          (2,640,877
                          )
                          
                          
                          (1,107,450
                          )Accounts
      receivable - current
                          
                          $
                          28,341,492
                          
                          
                          $
                          25,826,343
  -14-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  The
activity in the allowance for doubtful accounts for trade accounts receivable
for the six months ended June 30, 2009 and for the year ended December 31, 2008
is as follows:
 
 June
      30, 2009
                        (Unaudited)
                      
                      
                      December
      31,
                        2008Beginning
      allowance for doubtful accounts
                      
                      $
                      4,370,362
                      
                      
                      $
                      2,483,359Additional
      charged to bad debt expense
                      
                      
                      662,143
                      
                      
                      
                      1,683,336Write-off
      charged against the allowance
                      
                      
                      -
                      
                      
                      
                      -Foreign
      currency translation adjustment
                      
                      
                      (6,275
                      )
                      
                      
                      203,667Ending
      allowance for doubtful accounts
                      
                      $
                      5,026,230
                      
                      
                      $
                      4,370,362
 
 Retentions
held by customers of system contracting projects included in the Company’s
accounts receivable as follows:
  June
      30, 2009
                        (Unaudited)
                      
                      
                      December
      31,
                        2008RetentionsCurrent
                      
                      $
                      3,115,339
                      
                      
                      $
                      3,685,136Non-current
                      
                      
                      2,640,877
                      
                      
                      
                      1,107,450Total
      retentions
                      
                      $
                      5,756,216
                      
                      
                      $
                      4,792,586
 
 These
balances represent portions of billings made by the Company but held for payment
by the customer pending satisfactory completion of the project. Retention
payments are generally collected within one year of the completion of the
project.
 
 Costs and estimated earnings
in excess of billings
 
 The
current asset, “Costs and estimated earnings in excess of billings” on
contracts, represents revenues recognized in excess of amounts
billed.
 
 Costs and
estimated earnings in excess of billings consist of the following:
 
 June
      30, 2009
                          (Unaudited)
                        
                        
                        December
      31,
                          2008Contract
      costs incurred plus recognizedprofits
      less recognized losses to date
                        
                        $
                        111,104,359
                        
                        
                        $
                        68,149,817Less:
      progress billings
                        
                        
                        (81,955,879
                        )
                        
                        
                        (50,328,109
                        )Costs
      and estimated earnings in excess of billings
                        
                        $
                        29,148,480
                        
                        
                        $
                        17,821,708
 
 -15-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  Billings in excess of costs
and estimated earnings
 
 The
current liability, “Billings in excess of costs and estimated earnings” on
contracts, represents billings in excess of revenues recognized.
 
 Billings
in excess of costs and estimated earnings consists of the
following:
 
 June
      30, 2009
                            (Unaudited)
                          
                          
                          December
      31,
                            2008Progress
      billings
                          
                          $
                          13,386,958
                          
                          
                          $
                          31,456,807Less:
      contracts costs incurred plus recognizedprofits
      less recognized losses to date
                          
                          
                          (11,352,221
                          )
                          
                          
                          (27,219,279
                          )Billings
      in excess of costs and estimated earnings
                          
                          $
                          2,034,737
                          
                          
                          $
                          4,237,528
 
 Research and
development
 
 Research
and development expenses include salaries, consultant fees, supplies and
materials, as well as costs related to other overhead such as depreciation,
facilities, utilities and other departmental expenses. The costs the Company
incur with respect to internally developed technology and engineering services
are included in research and development expenses as incurred as they do not
directly relate to any particular licensee, license agreement or licenses
fee.
 
 Warranty
 
 Generally,
the Company’s products are not covered by specific warranty terms. However, it
is the Company’s policy to replace parts if they become defective within one
year after deployment at no additional charge.  The Company maintains
a provision for potential warranty costs on these products for one
year.  This provision represents management’s assessment of the
Company’s history of warranty costs while incorporating estimates by the quality
review staff of the potential product failure rates.  The Company
records a warranty obligation in selling expense at the time revenue is
recognized.  As of June 30, 2009 and December 31, 2008, the Company
recorded $590,343 and $518,940, respectively, as reserve for estimated warranty
claims.
  -16-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  Fair value of financial
instruments
 
 SFAS 107,
Disclosures About Fair Value of Financial Instruments, defines financial
instruments and requires fair value disclosures for those
instruments.  SFAS 157, Fair Value Measurements, adopted January 1,
2008, defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures. The carrying amounts reported in the balance sheets for
receivables and payables qualify as financial instruments and are a reasonable
estimate of fair value because of the short period of time between the
origination of such instruments and their expected realization and their current
market rate of interest. The three levels are defined as follow:
 
 ·
              Level
      1 inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active markets.·
              Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the assets or liability, either directly or indirectly, for
      substantially the full term of the financial
  instruments.·
              Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value.
 
 The
investment in joint ventures is also a financial instrument.  The
Company invested $167,010 (RMB 1,140,000) to Hubei Shou An Changjiang Fire
Protection Co., Ltd for 19% ownership and invested $1,000,000 to King Galaxy
Investments Limited for 5% ownership. Total investment as of June 30, 2009
amounted to $1,167,010. Since there is no quoted or observable market price for
the fair value of similar long term investments in joint ventures, the Company
then used the level 3 inputs for its valuation methodology. The determination of
the fair value was based on the cost of the capital contribution to the joint
ventures.
 
 The
Company did not identify any assets and liabilities that are required to be
presented on the balance sheet at fair value in accordance with SFAS
157.
 
 Intangible
assets
 
 Land use
rights - All land in the People’s Republic of China is owned by the government.
However, the government grants the user “land use rights”. The Company acquired
land use rights in 2001 and the land use rights expire in 2051. The costs of
these rights are being amortized over fifty years using the straight-line
method.
 
 Technology
rights - In May 2007, the Company acquired two technology rights to manufacture
fire protection products and the costs of these rights are being amortized over
ten years using the straight-line method.
 
 Intangible
assets consist of the following:
 
 -17-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  June
      30, 2009
                        (Unaudited)
                      
                      
                      December
      31,
                        2008Land
      use rights
                      
                      $
                      770,789
                      
                      
                      $
                      770,789Technology
      rights
                      
                      
                      608,745
                      
                      
                      
                      608,745Accumulated
      amortization
                      
                      
                      (301,552
                      )
                      
                      
                      (263,085
                      )Balance
                      
                      $
                      1,077,982
                      
                      
                      $
                      1,116,449
 
 Amortization
expense amounted to $18,822 and $ 18,560 for the three months ended June 30,
2009 and 2008, respectively. Amortization expense amounted to $37,641, and
$37,408 for the six months ended June 30, 2009 and 2008,
respectively.
 
 Intangible
assets of the Company are reviewed annually, more often when circumstances
require, to determine whether their carrying value has become impaired. The
Company considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations. The Company also evaluates the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of June 30, 2009, the Company
expects these assets to be fully recoverable.
 
 Income
taxes
 
 The
Company reports income taxes pursuant to SFAS 109, “Accounting for Income Taxes”
and FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN
48”).  SFAS 109 requires the recognition of deferred income tax
liabilities and assets for the expected future tax consequences of temporary
differences between income tax basis and financial reporting basis of assets and
liabilities. Provision for income taxes consist of taxes currently due plus
deferred taxes. Deferred tax assets amounted to $73,793 and $0 as of June 30,
2009 and December 31, 2008, respectively.
 
 Under FIN
48.a tax position is recognized as a benefit only if it is “more likely than
not” that the tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination.
For tax positions not meeting the “more likely than not” test, no tax benefit is
recorded. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosures, and
transition.
 
 The
Company’s operations are subject to income and transaction taxes in the United
States and in the PRC jurisdictions. Significant estimates and judgments are
required in determining the Company’s worldwide provision for income taxes. Some
of these estimates are based on interpretations of existing tax laws or
regulations. The ultimate amount of tax liability may be uncertain as a
result.
  -18-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  The
Company does not anticipate any events which could cause change to these
uncertainties.
 
 The
charge for taxation is based on the results for the year as adjusted for items,
which are non-assessable or disallowed. It is calculated using tax rates that
have been enacted or substantively enacted by the balance sheet
date.
 
 Deferred
tax is accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax
basis used in the computation of assessable tax profit.
 
 In
principal, deferred tax liabilities are recognized for all taxable temporary
differences, and deferred tax assets are recognized to the extent that it is
probably that taxable profit will be available against which deductible
temporary differences can be utilized. Deferred tax is calculated using tax
rates that are expected to apply to the period when the asset is realized or the
liability is settled. Deferred tax is charged or credited in the income
statement, except when it is related to items credited or charged directly to
equity, in which case the deferred tax is also dealt with in equity. Deferred
tax assets and liabilities are offset when they relate to income taxes levied by
the same taxation authority and the Company intends to settle its current tax
assets and liabilities on a net basis.
 
 Value Added
Tax
 
 Enterprises
or individuals who sell products, engage in repair and maintenance or import and
export goods in the PRC are subject to a value added tax in accordance with
Chinese laws. The value added tax standard rate is 17% of the gross sales price.
A credit is available whereby VAT paid on the purchases of semi-finished
products or raw materials used in the contract and production of the Company’s
finished products can be used to offset the VAT due on sales of the finished
product.
 
 VAT on
sales and VAT on purchases amounted to $2,046,371 and $1,401,272 for the three
months ended June 30, 2009.VAT on sales
and VAT on purchases amounted to $3,026,838 and $2,195,044, respectively for the
six months ended June 30, 2009. VAT on sales and VAT on purchases amounted to
$1,753,759 and $1,328,652 for the three months ended June 30, 2008. VAT on sales
and VAT on purchases amounted to $2,718,120 and $2,070,716 for the six months
ended June 30, 2008, respectively. Sales and purchases are recorded net of VAT
collected and paid as the Company acts as an agent for the government. VAT taxes
are not impacted by the income tax holiday.
  -19-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  Stock-based
compensation
 
 The
Company adopted SFAS 123R “Accounting for Stock-Based Compensation” at the
beginning of 2006, which defines a fair-value-based method of accounting for
stock-based employee compensation and transactions in which an entity issues its
equity instruments to acquire goods and services from non-employees. Stock
compensation granted to non-employees has been determined in accordance with
SFAS 123R and the EITF 96-18, "Accounting for Equity Instruments that are issued
to Other than Employees for Acquiring, or in Conjunction with Selling Goods or
Services", as the fair value of the consideration received or the fair value of
equity instruments issued, whichever is more reliably measured.
 
 Recently issued accounting
pronouncements
 
 In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, “Recognition of Interest Income and Impairment
on Purchased and Retained Beneficial Interests in Securitized Financial Assets”.
FSP EITF 99-20-1 changes the impairment model included within EITF 99-20 to be
more consistent with the impairment model of SFAS 115. FSP EITF 99-20-1
achieves this by amending the impairment model in EITF 99-20 to remove its
exclusive reliance on “market participant” estimates of future cash flows used
in determining fair value. Changing the cash flows used to analyze
other-than-temporary impairment from the “market participant” view to a holder’s
estimate of whether there has been a “probable” adverse change in estimated cash
flows allows companies to apply reasonable judgment in assessing whether an
other-than-temporary impairment has occurred. The adoption of FSP EITF 99-20-1
did not have a material impact on the Company’s consolidated financial
statements because all of the investments in debt securities are classified as
trading securities.
 
 In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4
amends SFAS 157 and provides additional guidance for estimating fair value in
accordance with SFAS 157 when the volume and level of activity for the asset or
liability have significantly decreased and also includes guidance on identifying
circumstances that indicate a transaction is not orderly for fair value
measurements. This FSP shall be applied prospectively with retrospective
application not permitted. The adoption of FSP FAS 157-4 did not have a material
impact on the Company’s consolidated financial statements.
  -20-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations,” and
EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held
by a Transferor in Securitized Financial Assets,” to make the
other-than-temporary impairments guidance more operational and to improve the
presentation of other-than-temporary impairments in the financial statements.
This FSP will replace the existing requirement that the entity’s management
assert it has both the intent and ability to hold an impaired debt security
until recovery with a requirement that management assert it does not have the
intent to sell the security, and it is more likely than not it will not have to
sell the security before recovery of its cost basis. This FSP provides increased
disclosure about the credit and noncredit components of impaired debt securities
that are not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this FSP does not result in a change
in the carrying amount of debt securities, it does require that the portion of
an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. The adoption of FSP FAS 115-2
and FAS 124-2 did not have a material impact on the Company’s consolidated
financial statements.
 
 In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS
No. 107, “Disclosures about Fair Value of Financial Instruments,” to
require disclosures about fair value of financial instruments not measured on
the balance sheet at fair value in interim financial statements as well as in
annual financial statements. Prior to this FSP, fair values for these assets and
liabilities were only disclosed annually. This FSP applies to all financial
instruments within the scope of SFAS 107 and requires all entities to disclose
the method(s) and significant assumptions used to estimate the fair value of
financial instruments.  The adoption of FSP FAS 107-1 and APB 28-1 did
not have a material impact on the Company’s consolidated financial
statements.
 
 In May
2009, the FASB issued Statement of Financial Accounting Standards No. 165,
“Subsequent Events,” (FAS 165, Subsequent Events [ASC 855-10-05],
which provides guidance to establish general standards of accounting for
and disclosures of events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. FAS
165 also requires entities to disclose the date through which subsequent
events were evaluated as well as the rationale for why that date was
selected. FAS 165 is effective for interim and annual periods ending after June
15, 2009, and accordingly, the Company adopted this Standard during the
second quarter of 2009. FAS 165 requires that public entities evaluate
subsequent events through the date that the financial statements are
issued. The Company has evaluated subsequent events through the time of filing
these consolidated financial statements with the SEC on August 10,
2009.
  -21-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  In June
2009, the FASB issued Statement of Financial Accounting Standards No. 166,
Accounting for Transfers of Financial Assets — an amendment of FASB
Statement No. 140 (“FAS 166”) [ASC 860], which requires entities to provide more
information regarding sales of securitized financial assets and similar
transactions, particularly if the entity has continuing exposure to the risks
related to transferred financial assets. FAS 166 eliminates the concept of
a “qualifying special-purpose entity,” changes the requirements for
derecognizing financial assets and requires additional disclosures. FAS 166
is effective for fiscal years beginning after November 15, 2009. The Company has
not completed the assessment of the impact FAS 166 will have on the
Company’s financial condition, results of operations or cash flows.
 
 In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167,
Amendments to FASB Interpretation No. 46(R) (“FAS 167”) [ASC 810-10], which
modifies how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should
be consolidated. FAS 167 clarifies that the determination of whether a company
is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities of
the entity that most significantly impact the entity’s economic
performance. FAS 167 requires an ongoing reassessment of whether a company is
the primary beneficiary of a variable interest entity. FAS 167 also
requires additional disclosures about a company’s involvement in variable
interest entities and any significant changes in risk exposure due to that
involvement. FAS 167 is effective for fiscal years beginning after November 15,
2009. The Company has not completed the assessment of the impact FAS 167
will have on the Company’s financial condition, results of operations or cash
flows.
 
 In June
2009, the FASB issued Statement of Financial Accounting Standards No. 168, The
FASB Accounting Standards CodificationTM and the Hierarchy of Generally
Accepted Accounting Principles a Replacement of FASB Statement No. 162 (“FAS
168”). This Standard establishes the FASB Accounting Standards Codification
(the “Codification”) as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with U.S. GAAP. The
Codification does not change current U.S. GAAP, but is intended to simplify
user access to all authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place. The Codification is
effective for interim and annual periods ending after September 15, 2009, and as
of the effective date, all existing accounting standard documents will be
superseded. The Codification is effective for the Company in the third quarter
of 2009, and accordingly, the Company’s Quarterly Report on Form 10-Q for
the quarter ending September 30, 2009 and all subsequent public filings will
reference the Codification as the sole source of authoritative
literature.
  -22-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  Reclassifications
 
 Certain
prior period amounts have been reclassified to conform to the current period
presentation. These reclassifications have no effect on net income or cash
flows.
 
 Note
3 - Earnings per share
 
 The
Company reports earnings per share in accordance with the provisions of SFAS
128, “Earnings per Share.” SFAS 128 requires presentation of basic and diluted
earnings per share in conjunction with the disclosure of the methodology used in
computing such earnings per share.  Basic earning per share is
computed by dividing income available to common stockholders by the weighted
average common shares outstanding during the period. Diluted earnings per share
takes into account the potential dilution that could occur if securities or
other contracts to issue common stock were exercised and converted into common
stock.
 
 The
following is a reconciliation of the basic and diluted earnings per share
computation for the three and six months ended June 30:
 
 Three
      months ended June 30,
                                  
                                  
                                  Six
      months ended June 30,2009
                                  
                                  
                                  2008
                                  
                                  
                                  2009
                                  
                                  
                                  2008Net
      income for earnings per share
                                  
                                  $
                                  8,336,222
                                  
                                  
                                  $
                                  6,676,100
                                  
                                  
                                  $
                                  13,981,825
                                  
                                  
                                  $
                                  11,416,880Weighted
      average shares used in basic computation
                                  
                                  
                                  27,588,598
                                  
                                  
                                  
                                  27,557,297
                                  
                                  
                                  
                                  27,587,595
                                  
                                  
                                  
                                  27,557,095Diluted
      effect of stock options and warrants
                                  
                                  
                                  710,252
                                  
                                  
                                  
                                  643,488
                                  
                                  
                                  
                                  670,630
                                  
                                  
                                  
                                  622,500Weighted
      average shares used in diluted computation
                                  
                                  
                                  28,298,850
                                  
                                  
                                  
                                  28,200,785
                                  
                                  
                                  
                                  28,258,225
                                  
                                  
                                  
                                  28,179,595Earnings
      per share:Basic
                                  
                                  $
                                  0.30
                                  
                                  
                                  $
                                  0.24
                                  
                                  
                                  $
                                  0.51
                                  
                                  
                                  $
                                  0.41Diluted
                                  
                                  $
                                  0.29
                                  
                                  
                                  $
                                  0.24
                                  
                                  
                                  $
                                  0.49
                                  
                                  
                                  $
                                  0.41
 
 As of
June 30, 2009 and 2008, all outstanding stock options and warrants were included
in the calculation of diluted earnings per share.
 
 -23-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  Note
4 - Related party transactions
 
 The
Company has accounts receivable from Hubei Shou An Changjiang Fire Protection
Co., Ltd. (“Hubei Shou An”), in which the Company has 19% ownership interest.
The receivable due from Hubei Shou An was $153,068 and $114,388 as of June 30,
2009 and December 31, 2008, respectively, resulted from product sales. This
amount was expected to be repaid by December 31, 2009 in cash.
 
 The
Company has other receivable from Hubei Shou An. The receivable due from Hubei
Shou An was $350,476 and $351,835 as of June 30, 2009 and December 31, 2008,
respectively.  This balance was for operating capital in Hubei Shou
and expected to be repaid by December 31, 2009 in cash.
 
 Note
5 - Notes receivable
 
 Notes
receivable represents trade accounts receivable due from various customers where
the customers’ bank has guaranteed the payment of the receivable. This amount is
non-interest bearing and is normally paid within three to six months. The
Company has the ability to submit their request for payment to the customer’s
bank earlier than the scheduled payment date. However, the Company will incur an
interest charge and a processing fee when they submit the payment request early.
The Company‘s notes receivable totaled $3,372,656 and $3,670,259 as of June 30,
2009 and December 31, 2008, respectively.
 
 Note
6 - Prepayments and deferred expenses
 
 Prepayments
and deferred expenses are monies deposited with or advanced to subcontractors to
perform services on System Contracting Projects. Some subcontractors require a
certain amount of money to be deposited as a guarantee payment in order for them
to start performing the services.  Prepayments and deferred expenses
also include monies deposited or advanced to vendors on future inventory
purchases to ensure timely delivery. The total outstanding amount was $3,427,234
and $2,816,976 as of June 30, 2009and December
31, 2008, respectively.
 
 Note
7 - Investment in joint ventures
 
 During
the second quarter of 2007, the Company invested $167,010 (RMB 1,140,000) for a
19% interest in Hubei Shou An Changjiang Fire Protection Co., Ltd., located in
China Hubei, PRC.  The investment is recorded under the cost
accounting method.
  -24-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  During
the third quarter of 2007, the Company invested $1,000,000 for a 5% interest in
King Galaxy Investments Limited. “King Galaxy” through its wholly owned
subsidiary, China Alliance Security Holdings Company Limited owns 100% of Wan
Sent (China) Technology Co., Ltd. (“Wan Sent”), an emerging Chinese fire
emergency remote-monitoring system provider based in Beijing, PRC. The
investment has been recorded under the cost accounting method.
  Note
8 - Customer deposits
 
 Customer
deposits represent amounts advanced by customers on products orders and
maintenance services deposits and system contracting projects deposits. The
product or service normally is shipped or performed within six months after
receipt of the advance payment and the related sale is recognized in accordance
with the Company’s revenue recognition policy.  Customer deposits also
represent amounts advanced by customers on system contracting projects deposits.
The advance payment will apply to the invoices when the Company billed our
customer based on the progression of the projects. As of June 30, 2009 and
December 31, 2008 customer deposits amounted to $3,064,353, and $6,102,026,
respectively.
 
 Note
9 - Accrued liabilities
 
 Accrued
liabilities represent subcontractors’ expenses incurred as of balance sheet date
for system contracting projects. Accrued liabilities also represent accrued
estimation of warranty expenses.  As of June 30, 2009and December
31, 2008, accrued liabilities amounted to $11,342,948 and $6,785,409
respectively.
 
 Note
10 - Income taxes
 
 Prior to
January 1, 2008, under the Income Tax Laws of PRC, the Company’s subsidiaries
are generally subject to an income tax at an effective rate of 33% on income
reported in the statutory financial statements after appropriate tax
adjustments, unless the enterprise is recognized by the government as a
high-tech enterprise and located in a specially designated region where it
allows enterprises a three-year income tax exemption and a 50% income tax
reduction for the following three years or the enterprise is a manufacturing
related joint venture with a foreign enterprise or a wholly owned subsidiary of
a foreign enterprise, where it allows enterprises a two-year income tax
exemption and a 50% income tax reduction for the following three
years.
 
 Beginning
from January 1, 2008, the new Enterprise Income Tax (“EIT”) law replaced the
existing income tax laws for Domestic Enterprises (“DES”) and Foreign Invested
Enterprises (“FIEs”).
 
 The key
changes are:
 
 -25-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  a.
              The
      new standard EIT rate of 25% will replace the 33% rate currently
      applicable to both DES and FIEs, except for high-tech companies who pays a
      reduced rate of 15%;b.
              Companies
      established before March 16, 2007 will continue to enjoy tax holiday
      treatment approved by local government for a grace period of the next 5
      years or until the tax holiday term is completed, whichever is
      sooner.
 
 The
Company’s subsidiaries were paying the following tax rate for the three and six
months ended June 30, 2008 (Unaudited):
 
 Subsidiaries
                      
                      Income
      tax
                        exemption
                      
                      
                      Effective
                        income
      tax
                        rateSureland
      Industrial
                      
                      
                      25.0
                      %
                      
                      
                      -
                      %Sureland
      Equipment
                      
                      
                      12.5
                      %
                      
                      
                      -
                      %Beijing
      Hua An
                      
                      
                      25.0
                      %
                      
                      
                      -
                      %Tianxiao
      Equipment
                      
                      
                      -
                      %
                      
                      
                      25.0
                      %
 
 The
Company’s subsidiaries are paying the following tax rate for the three and six
months ended June 30, 2009 (Unaudited):
 
 Subsidiaries
                      
                      Income
      tax
                        exemption
                      
                      
                      Effective
                        income
      tax
                        rateSureland
      Industrial
                      
                      
                      12.5
                      %
                      
                      
                      12.5
                      %Sureland
      Equipment
                      
                      
                      12.5
                      %
                      
                      
                      12.5
                      %Beijing
      Hua An
                      
                      
                      17.5
                      %
                      
                      
                      7.5
                      %Tianxiao
      Equipment
                      
                      
                      -
                      %
                      
                      
                      25.0
                      %Shian
      Kexin
                      
                      
                      -
                      %
                      
                      
                      25.0
                      %Shanyang
      Hongshida
                      
                      
                      -
                      %
                      
                      
                      25.0
                      %
 
 The
provision for income taxes amounted to $1,357,097 and $11,453 for the three
months ended June 30, 2009 and 2008, respectively. The provision for income
taxes amounted to $2,150,664, and $60,095 for the six months ended June 30,
2009and 2008, respectively.
 
 The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the three and six months ended June 30:
 
 -26-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  Three
      months ended June 30,
                  
                  
                  Six
      months ended June 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008(Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)U.S.
      Statutory rates
                  
                  
                  34.0
                  %
                  
                  
                  34.0
                  %
                  
                  
                  34.0
                  %
                  
                  
                  34.0
                  %Foreign
      income not recognized in USA
                  
                  
                  (34.0
                  )
                  
                  
                  (34.0
                  )
                  
                  
                  (34.0
                  )
                  
                  
                  (34.0
                  )China
      income taxes
                  
                  
                  25.0
                  
                  
                  
                  25.0
                  
                  
                  
                  25.0
                  
                  
                  
                  25.0China
      income tax exemption
                  
                  
                  (11.8
                  )
                  
                  
                  (24.8
                  )
                  
                  
                  (12.6
                  )
                  
                  
                  (24.5
                  )Other
      item (1)
                  
                  
                  0.8
                  
                  
                  
                  0.0
                  
                  
                  
                  0.9
                  
                  
                  
                  0.0Total
      provision for income taxes
                  
                  
                  14.0
                  %
                  
                  
                  0.2
                  %
                  
                  
                  13.3
                  %
                  
                  
                  0.5
                  %
 
 (1)  The
0.8% and 0.0% represents $583,352 and $197,938 expenses incurred by CFSG and
CFPG that are not deductible in PRC for the three months ended June 30, 2009 and
2008. The 0.9% and 0.0% represents the $1,164,075 and $618,001 expenses incurred
by CFSG and CFPG that are not deductible in PRC for the six months ended June
30, 2009 and 2008.
 
 The
estimated tax savings for the three months ended June 30, 2009 and 2008 amounted
to $1,375,546 and $1,955,426, respectively. The net effect on basic and diluted
earnings per share if the income tax had been applied would decrease basic and
diluted earnings per share for the three months ended June 30, 2009, and 2008 by
$0.05 and $0.07, respectively. The estimated tax savings for the six months
ended June 30, 2009 and 2008 amounted to $2,161,025 and $3,196,996,
respectively. The net effect on basic and diluted earnings per share if the
income tax had been applied would decrease basic and diluted earnings per share
for the six months ended June 30, 2009, and 2008 by $0.08 and $0.012,
respectively.
 
 China
Fire & Security Group, Inc. was incorporated in the United States and has
incurred net operating losses of $0 for income tax purposes for the six months
ended June 30, 2009, respectively.  The estimated net operating loss
carry forwards for United States income taxes amounted to $1,004,414 which may
be available to reduce future years’ taxable income.  These carry
forwards will expire, if not utilize, from 2025 through
2027.  Management believes that the realization of the benefits from
these losses appears uncertain due to the Company’s limited operating history
and continuing losses for United States income tax
purposes.  Accordingly, the Company has provided a 100% valuation
allowance on the deferred tax asset benefit to reduce the asset to
zero.  The net change in the valuation allowance for the period ended
June 30, 2009 was $0 and the accumulated valuation allowance as of June 30, 2009
amounted to $341,501. Management reviews this valuation allowance periodically
and makes adjustments as warranted.
  -27-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $60.8 million as of June 30, 2009, is included in consolidated
retained earnings and will continue to be indefinitely reinvested in
international operations.  Accordingly, no provision has been made for U.S.
deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if the Company concluded that such earnings will be remitted in the
future.
 
 Taxes
payable
 
 Taxes
payable consisted of the following:
 
 June
      30, 2009
                        (Unaudited)
                      
                      
                      December
      31,
                        2008VAT
      taxes payable
                      
                      $
                      3,188,687
                      
                      
                      $
                      1,094,089Income
      taxes payable
                      
                      
                      1,850,783
                      
                      
                      
                      38,406Sales
      taxes
                      
                      
                      1,323,826
                      
                      
                      
                      936,164Other
      taxes payable
                      
                      
                      31,962
                      
                      
                      
                      24,086Total
                      
                      $
                      6,395,258
                      
                      
                      $
                      2,092,745
 
 Note
11 - Retirement plan
 
 The
Company and its subsidiaries are required to participate in a central pension
scheme operated by the local municipal government. The Company is required to
contribute 20% of its payroll costs to the central pension scheme in 2009 and
2008. The contributions are charged to the consolidated income statement of the
Company as they become payable in accordance with the rules of the scheme. The
aggregate contributions of the Company to retirement benefit schemes amounted to
$101,489 and $74,147 for the three months ended June 30, 2009 and
2008, respectively.  The aggregate contributions of the Company to
retirement benefit schemes amounted to $176,477 and $124,927 for the
six months ended June 30, 2009 and 2008, respectively.
 
 Note
12 - Statutory reserves
 
 The laws
and regulations of the People’s Republic of China require that before an
enterprise distributes profits to its partners, it must first satisfy all tax
liabilities, provide for losses in previous years, and make allocations, in
proportions determined at the discretion of the board of directors, after the
statutory reserve. The statutory reserves include surplus reserve fund and the
enterprise fund. These statutory reserves represent restricted retained
earnings.
 
 -28-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  Surplus reserve
fund
 
 The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital.
 
 The
transfer to this reserve must be made before distribution of any dividend to
shareholders. For the six months ended June 30, 2008, the Company did not make
any contribution to this fund. Due to the balance of Surplus reserve fund
already reaches 50% of the Company’s registered capital, the Company did not
reserve any surplus reserve fund for the six months ended June 30,
2009.  The surplus reserve fund is non-distributable other than during
liquidation and can be used to fund previous years’ losses, if any, and may be
utilized for business expansion or converted into share capital by issuing new
shares to existing shareholders in proportion to their shareholding or by
increasing the par value of the shares currently held by them, provided that the
remaining reserve balance after such issue is not less than 25% of the
registered capital.
 
 Enterprise
fund
 
 The
enterprise fund may be used to acquire plant and equipment or to increase the
working capital to expend on production and operation of the business. No
minimum contribution is required and the Company did not make any contribution
to this fund for the six months ended June 30, 2009 and 2008.
 
 Note 13 -
Warrants
 
 In 2008,
a total of 45,000 warrants were converted into 29,700 shares of common stock by
the warrants holders using the cashless exercise option.
 
 In June
2009, 10,000 warrants were converted into 6,682 shares of common stock by the
warrants holders using the cashless exercise option.
 
 The
Company’s warrant activity is as follows:
 
 -29-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  Weighted
                                
                                
                                AverageAverage
                                
                                
                                RemainingWarrants
                                
                                
                                Exercise
                                
                                
                                ContractualOutstanding
                                
                                
                                Price
                                
                                
                                Life
      (years)Outstanding,
      December 31, 2007
                                
                                
                                55,000
                                
                                
                                $
                                4.19
                                
                                
                                
                                4.08Granted
                                
                                
                                
                                
                                
                                
                                4.25ForfeitedExercised
                                
                                
                                (45,000
                                )
                                
                                
                                4.24Outstanding,
      December 31, 2008
                                
                                
                                10,000
                                
                                
                                $
                                4.25
                                
                                
                                
                                2.09GrantedForfeitedExercised
                                
                                
                                10,000Outstanding,
      June 30, 2009 (Unaudited)
                                
                                
                                -
                                
                                
                                $
                                -
                                
                                
                                
                                -
 
 Note
14 - Options issued to employees
 
 On
January 30, 2008, the Company’s 2008 Omnibus Long-term Incentive Plan was
adopted and approved by shareholders. Pursuant to the 2008 Omnibus Long-term
Incentive Plan, the Company reserved 2,000,000 shares of our common stock for
issuance.
  On
December 31, 2008, pursuant to the Company's 2008 Omnibus Long-term Incentive
Plan, the Company's Board of Directors authorized the issuance of 1,000,000
shares of options for its employee with total 800,000 shares options issued to
executive officers. The options will vest evenly each quarter over the following
four years, starting from the first quarter of 2009. The Company used the Black
Scholes Model to value the options at the time they were issued, based on the
exercise price of $6.81, which was the close price of the Company’s stock on
December 31, 2008 and using the risk-free rate of 0.875%, 1.125%, 1.313% and
1.5% and the volatility of 86% that was estimated by analyzing the trading
history of the Company’s stock. Because the Company do not have historical
history exercise period from its previous issued option, the Company used the
simplified method to calculate the term, which is the midpoint between the start
vesting date and expiration date of the options, as a variable of the model. The
1,000,000 employee options had a fair value of $3,863,606. The related
compensation expense is recognized on a straight-line basis over the four year
vesting period.
 
 The total
stock option compensation expense recognized for the three months ended June 30,
2009 and 2008 was $245,048 and $10,573, respectively.  The total stock
option compensation expense recognized for the six months ended June 30, 2009
and 2008 was $490,097 and $33,004, respectively. As of June 30, 2009,
approximately $3.4 million of estimated expense with respect to un-vested
stock-based awards has yet to be recognized and will be recognized in expense
over the employee’s remaining service period of approximately 4.5
years.
  -30-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  The
Company has stock options as follows:
 
 WeightedAverage
                            
                            
                            AggregateOptions
                            
                            
                            Exercise
                            
                            
                            IntrinsicOutstanding
                            
                            
                            Price
                            
                            
                            ValueOutstanding,
      December 31, 2007
                            
                            
                            779,500
                            
                            
                            $
                            1.43
                            
                            
                            $
                            8,925,615GrantedForfeitedExercisedOutstanding,
      December 31, 2008
                            
                            
                            779,500
                            
                            
                            $
                            1.43
                            
                            
                            $
                            4,194,190Granted
                            
                            
                            1,000,000
                            
                            
                            
                            6.81ForfeitedExercisedOutstanding,
      June 30, 2009 (Unaudited)
                            
                            
                            1,779,500
                            
                            
                            $
                            4.45
                            
                            
                            $
                            13,737,740
 
 Following
is a summary of the status of options outstanding at June 30, 2009:
 
 Outstanding
      Options
                        
                        
                        Exercisable
      OptionsAverage
                        
                        
                        
                        
                        
                        
                        
                        
                        AverageRemaining
                        
                        
                        
                        
                        
                        
                        
                        
                        RemainingNumber
      of
                        
                        
                        Exercise
                        
                        
                        Contractual
                        
                        
                        Number
      of
                        
                        
                        Exercise
                        
                        
                        ContractualOptions
                        
                        
                        Price
                        
                        
                        Life
                        
                        
                        Options
                        
                        
                        Price
                        
                        
                        Life750,000
                        
                        
                        $
                        1.25
                        
                        
                        
                        7.0
                        
                        
                        
                        750,000
                        
                        
                        $
                        1.25
                        
                        
                        
                        7.09,500
                        
                        
                        $
                        4.51
                        
                        
                        
                        2.8
                        
                        
                        
                        9,500
                        
                        
                        $
                        4.51
                        
                        
                        
                        2.820,000
                        
                        
                        $
                        6.70
                        
                        
                        
                        3.0
                        
                        
                        
                        10,000
                        
                        
                        $
                        6.70
                        
                        
                        
                        3.01,000,000
                        
                        
                        $
                        6.81
                        
                        
                        
                        4.5
                        
                        
                        
                        125,000
                        
                        
                        $
                        6.81
                        
                        
                        
                        4.5
 
 Note 15 - Commitments and
Contingencies
 
 Operating Lease
Commitment
 
 Currently
the Company is engaged in an operating lease with Tianjin Fire Protection
Equipment Company Ltd for the use of approximately 17,230 square meters land in
Tianjin, consisting of manufacturing facilities, warehouses and office
buildings.  The term of the operating lease is three years,
starting from May 2007. The monthly payment for the lease is 66,000RMB or
$9,670. The Company recorded rental expense for the three and six months ended
June 30, 2009 was $29,033 and $58,042, respectively. At June 30, 2009, total
future minimum lease payments under the operating lease were as
follows:
  -31-
  CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)
  Year
      Ending December 31
                        
                        Amount2009
                        
                        $
                        58,042Thereafter
                        
                        
                        38,694
 
 Contingencies
  In 2008,
the Company filed five lawsuits against four different companies for the
infringement of the Company's intellectual properties. One of these cases was
eventually settled in the Company's favor in 2009. The other four cases are
still pending and management expects these cases will be settled in the
Company’s favor as well.
 
 In 2008,
the Company was sued by three different companies for the invalidation of the
Company's intellectual properties. All of these three cases were eventually
settled in the Company's favor.
 
 Management
expects the outcome from the above pending lawsuits will have no material impact
of the Company’s consolidated financial statements.
  -32-




Item 2. Management's Discussion and
Analysis or Plan of Operation
  General
 
 The
following discussion and analysis provides information which the management of
China Fire & Security Group, Inc., (the "Company" or "CFSG") believes to be
relevant to an assessment and understanding of the Company's results of
operations and financial condition. This discussion should be read together with
the Company's financial statements and the notes to financial statements, which
are included in this report.


Overview





We are
engaged in the design, development, manufacturing and sale of fire protection
products and services for large industrial firms in China. We have developed a
proprietary product line that addresses all aspects of industrial fire safety
from fire detection to fire system control and extinguishing. The Company is one
of the first in China to leverage high technology for fire protection and safety
on behalf of its clients including iron and steel companies, power plants,
petrochemical plants, as well as, special purpose construction companies in
China.





Reorganization





We were
organized as a Florida corporation on June 17, 2003.




On
September 1, 2006, we entered into a share exchange agreement, pursuant to which
we acquired all of the outstanding capital shares of China Fire Protection Group
Inc. in exchange for a controlling interest in our common shares. The
transaction was completed on Oct 27, 2006.





China
Fire Protection Group was organized on June 2, 2006 for the purpose of acquiring
all of the capital shares of Sureland Industrial Fire Safety Limited (Sureland
Industrial), a Chinese corporation, and, Sureland Industrial Fire Equipment Co.,
Ltd. (Sureland Equipment), a Chinese corporation, which collectively engage in
the design, development, manufacturing and sale of fire protection products and
services for large industrial firms in China. As a result of the transactions
described above, both Sureland Industrial Fire Safety Limited and Sureland
Industrial Fire Equipment Co., Ltd became wholly-owned subsidiaries of China
Fire Protection Group Limited, and China Fire Protection Group Limited is a
wholly-owned subsidiary of Unipro.





On
February 9, 2007, Unipro changed its name to China Fire & Security Group,
Inc. (CFSG) and started trading on the OTC Bulletin Board under its new ticker
symbol CFSG. On July 16, 2007, China Fire & Security Group, Inc. began
trading on the Nasdaq Capital Market and retained the ticker symbol
CFSG.




CFSG
owns, through its wholly owned subsidiary China Fire Protection Group, Inc.,
Sureland Industrial and Sureland Equipment (jointly “Sureland”). Sureland is
engaged primarily in the design, development, manufacture and sale in China of a
variety of fire safety products for the industrial fire safety market as well as
the design and installation of industrial fire safety systems in which it uses a
combination of fire safety products including its own fire safety products. To a
minor extent, it provides maintenance services for customers of its industrial
fire safety systems. Its business is primarily in China, but it has recently
begun contract manufacturing products for the export market and it has begun to
provide a fire safety system for a Chinese company operating
abroad.




Sureland
markets its industrial fire safety products and systems primarily to major
companies in the iron and steel, power and petrochemical industries in China. It
has also completed projects for highway and railway tunnels, wine distilleries
and a nuclear reactor. It is expanding its business in the transportation, wine,
vessels, nuclear energy, and public space markets. Its products can be readily
adapted for use on vessels and in exhibition halls and theatres. It plans to
expand its marketing efforts to secure business in these
industries.





-33-




Sureland
has internal research and development facilities engaged primarily in furthering
fire safety technologies. It believes that its technologies allow it to offer
cost-effective and high-quality fire safety products and systems. It has
developed products for industrial fire detecting and extinguishing. It believes
that it is the largest manufacturer in China that has successfully
developed a comprehensive line of linear heat detectors.




In May
2009, Beijing Shian Kexin Technology Co., Ltd. (“Shian Kexin”) was incorporated
in Beijing, China under the laws of the PRC with registered capital of
RMB5,000,000 or approximately $732,500. Shian Kexin is 100% owned by Sureland
Industrial.





In May
2009, Shenyang Hongshida Electronics Co., Ltd. (“Hongshida”) was incorporated in
Shenyang, Liaoning Province, China under the laws of the PRC with registered
capital of RMB10,000,000 or approximately  $1,465,000. Hongshida is
80% owned by Beijing Hua An Times Fire Safety Technology Co., Ltd. with a 20%
non-controlling interest owned by an unrelated party.





ByJune 30, 2009, Sureland operatedmore than 20 sales and liaison offices
in China. Sureland has
been ranked as the leading Chinese industrial fire safety company and the
largest contractor both times by the China Association for Fire Prevention based
on six major factors including total revenue, growth rate, net profit, return on assets, investment in
research and development and intellectual property. Its key products include
linear heat detectors and water mist extinguishers, whose sales volumes are the
largest in China. Its products have been used by its customersin more than 20 provinces throughout
China.





Critical
Accounting Policies and Estimates




While our
significant accounting policies are more fully described in Note 2 to our
consolidated financial statements appearing at the end of this quarterly report,
we believe that the following accounting policies are the most critical to aid
you in fully understanding and evaluating our reported financial
results.




Revenue
recognition




Revenue
is recognized when it is probable that the economic benefits will flow to the
Company as follows:




1.
            Revenue
      from system contracting projects are recognized using the
      percentage-of-completion method of accounting and, therefore, take into
      account the costs, estimated earnings and revenue to date on contracts not
      yet completed. Revenue recognized is that percentage of the total contract
      price that cost expended to date bears to anticipated final total cost,
      based on current estimates of costs to complete the contract. Contract
      costs include all direct material and labor costs and those indirect
      costs related to contract performance, such as indirect labor, supplies,
      tools, repairs, and depreciation costs. Selling, general, and
      administrative costs are charged to expense as incurred. At the time a
      loss on a contract becomes known, the entire amount of the estimated
      ultimate loss is recognized in the consolidated financial statements.
      Claims for additional contract costs are recognized upon a signed change
      order from the customer or in accordance with paragraphs 62 and 65 of
      AICPA Statement of Position 81-1, "Accounting for Performance of
      Construction - Type and Certain Production - Type Contracts" ("SOP
      81-1")




2.
            Revenue
      from product sales is recognized when the goods are delivered and title
      has passed. Product sales revenue represents the invoiced value of goods,
      net of a value-added tax (VAT). All of the Company’s products that are
      sold in the PRC are subject to a Chinese value-added tax at a rate of 17
      percent of the gross sales price. This VAT may be offset by VAT paid by
      the Company on raw materials and other materials included in the cost of
      producing their finished product.




3.
            Revenue
      from the rendering of Maintenance Services is recognized when such
      services are provided.




4.
            Provision
      is made for foreseeable losses as soon as they are anticipated by
      management.




5.
            Where
      contract costs incurred to date plus recognized profits less recognized
      losses exceed progress billings, the surplus is treated as an amount due
      from contract consumers. Where progress billings exceed contract costs
      incurred to date plus recognized profits less recognized losses, the
      surplus is treated as an amount due to contract
  customers.




-34-




Foreign currency
translation




The
reporting currency of the Company is the US dollar. The Company uses their local
currency, Renminbi (RMB), as their functional currency. Results of operations
and cash flow are translated at average exchange rates during the period, and
assets and liabilities are translated at the unified exchange rate as quoted by
the People’s Bank of China at the end of the period. Translation adjustments
resulting from this process are included in accumulated other comprehensive
income in the statement of shareholders’ equity. Transaction gains and losses
that arise from exchange rate fluctuations on transactions denominated in a
currency other than the functional currency are included in the results of
operations as incurred. Historically, the Company has not entered into any
currency trading or hedging, although there is no assurance that the
Company will not enter into such activities in the future.




Plant and
equipment




Plant and
equipment are stated at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets with a 5 percent residual value.




Use of
estimates




The
preparation of financial statements in conformity with generally accepted
accounting principles of the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the combined
financial statements and accompanying notes. Management believes that the
estimates utilized in preparing its financial statements are reasonable and
prudent. Actual results could differ from these estimates.





Certain
of the Company’s accounting policies require higher degrees of judgment than
others in their application. These include the recognition of revenue and
earnings from system contracting projects under the percentage of completion
method and the allowance for doubtful accounts. Management evaluates all of its
estimates and judgments on an on-going basis.




Inventories




Inventories
are stated at the lower of cost or market, using the weighted average method.
Inventories consist of raw materials, work in progress, finished goods and
consumables. Raw materials consist primarily of materials used in production.
Finished goods consist primarily of equipment used in project contracts. The
cost of finished goods included direct costs of raw materials as well as
direct labor used in production. Indirect production costs such as
utilities and indirect labor related to production such as assembling, shipping
and handling costs are also included in the cost of inventory. The Company
reviews its inventory annually for possible obsolete goods and to determine if
any reserves are necessary for potential obsolescence.





Accounts
receivable




Accounts
receivable represents the products sales, maintenance services and system
contracting projects with its customers that were on credit. The credit term is
generally for a period of three months for major customers. Each customer has a
maximum credit limit. The Company seeks to maintain strict control over its
outstanding receivables. Overdue balances are reviewed regularly by senior
management.





-35-





Results
of Operations





Comparison
of the Three Months Ended June 30, 2009 and 2008:





For
      the Three Months Ended June 30,2009
                        
                        
                        2008
                        
                        
                        Y/Y
      ChangeAmount
      ($)
                        
                        
                        %
      of
                          Total
                          Revenue
                        
                        
                        Amount
      ($)
                        
                        
                        %
      of
                          Total
                          Revenue
                        
                        
                        Amount
      ($)
                        
                        
                        %RevenueSystem
      contracting projects
                        
                        
                        18,290,930
                        
                        
                        
                        80.5
                        %
                        
                        
                        14,557,008
                        
                        
                        
                        87.4
                        %
                        
                        
                        3,733,922
                        
                        
                        
                        25.7
                        %Products
                        
                        
                        3,791,491
                        
                        
                        
                        16.7
                        %
                        
                        
                        1,533,965
                        
                        
                        
                        9.2
                        %
                        
                        
                        2,257,526
                        
                        
                        
                        147.2
                        %Maintenance
      Services
                        
                        
                        649,447
                        
                        
                        
                        2.8
                        %
                        
                        
                        562,751
                        
                        
                        
                        3.4
                        %
                        
                        
                        86,696
                        
                        
                        
                        15.4
                        %Total
      Revenue
                        
                        
                        22,731,868
                        
                        
                        
                        100.0
                        %
                        
                        
                        16,653,724
                        
                        
                        
                        100.0
                        %
                        
                        
                        6,078,144
                        
                        
                        
                        36.5
                        %





Total
revenues were approximately $22.7 million for the three months ended June
30, 2009 as compared to approximately $16.7 million for the three months ended
June 30, 2008, an increase of approximately $6.1 million or 36.5 percent. This
increase was primarily due to the increase in our revenues from system
contracting projects and product sales, which totally contributed 97.2 percent
of revenues during the period. The Company recognized revenues from 205 total
solution, product sales and maintenance contracts for the three months ended
June 30, 2009 as compared to 177 contracts for the three months ended June 30,
2008.





Revenues
from system contracting projects increased by 80.5 percent to $18.3 million
derived from 113 contracts for the three months ended June 30, 2009, compared to
$14.6 million derived from 104 contracts for the three months ended June 30,
2008. This increase in the revenues from system contracting projects was mainly
attributable to the increase in the number of system contracting projects we
executed and the successful execution of large-size iron and steel projects from
Capital Iron and Steel Group and Minmetals Corporation during the period.
Revenues from our product sales were $3.8 million with 40 contracts executed for
the three months ended June 30, 2009, compared to $1.5 million with 39 contracts
executed for the three months ended June 30, 2008. The increase in the revenues
from product sales was mainly attributable to the increased demand in our linear
heat detectors and other products during the period. The revenues from
maintenance service increased by 15.4 percent to $0.6 million derived from 52
contracts for the three months ended June 30, 2009, compared to $0.6 million
derived from 34 contracts for the three months ended June 30, 2008. The increase
in revenues from maintenance service was mainly attributable to the increase in
the number of maintenance service contracts that we executed as the result of
the expansion in our customer basis during the period.





In
particular, the three largest total solution projects were from Capital Iron and
Steel Group, China Minmetals Corporation, Wuhan Iron and Steel Group which
collectively contributed approximately $7.8 million of revenues, representing
34.4 percent of total revenues for the three months ended June 30,
2009.





For
      the Three Months Ended June 30,2009
                            
                            
                            2008
                            
                            
                            Y/Y
      ChangeAmount
      ($)
                            
                            
                            %
      of
                              Revenue
                            
                            
                            Amount
      ($)
                            
                            
                            %
      of
                              Revenue
                            
                            
                            Amount
      ($)
                            
                            
                            %Cost
      of RevenuesSystem
      contracting projects
                            
                            
                            6,970,283
                            
                            
                            
                            38.1
                            %
                            
                            
                            5,971,745
                            
                            
                            
                            41.0
                            %
                            
                            
                            998,538
                            
                            
                            
                            16.7
                            %Products
                            
                            
                            865,395
                            
                            
                            
                            22.8
                            %
                            
                            
                            217,498
                            
                            
                            
                            14.2
                            %
                            
                            
                            647,897
                            
                            
                            
                            297.9
                            %Maintenance
      Services
                            
                            
                            395,619
                            
                            
                            
                            60.9
                            %
                            
                            
                            280,188
                            
                            
                            
                            49.8
                            %
                            
                            
                            115,431
                            
                            
                            
                            41.2
                            %Total
      Cost of Revenues
                            
                            
                            8,231,297
                            
                            
                            
                            36.2
                            %
                            
                            
                            6,469,431
                            
                            
                            
                            38.8
                            %
                            
                            
                            1,761,866
                            
                            
                            
                            27.2
                            %Gross
      ProfitSystem
      contracting projects
                            
                            
                            11,310,647
                            
                            
                            
                            61.8
                            %
                            
                            
                            8,585,263
                            
                            
                            
                            59.0
                            %
                            
                            
                            2,725,384
                            
                            
                            
                            31.7
                            %Products
                            
                            
                            2,926,096
                            
                            
                            
                            77.2
                            %
                            
                            
                            1,316,467
                            
                            
                            
                            85.8
                            %
                            
                            
                            1,609,629
                            
                            
                            
                            122.3
                            %Maintenance
      Services
                            
                            
                            253,828
                            
                            
                            
                            39.1
                            %
                            
                            
                            282,563
                            
                            
                            
                            50.2
                            %
                            
                            
                            (28,735
                            )
                            
                            
                            (10.2
                            )%Total
      Gross Profit
                            
                            
                            14,500,571
                            
                            
                            
                            63.8
                            %
                            
                            
                            10,184,293
                            
                            
                            
                            61.2
                            %
                            
                            
                            4,316,278
                            
                            
                            
                            42.4
                            %





-36-





Cost of
revenues for the three months ended June 30, 2009 was approximately $8.2
million, as compared to $6.5 million for the three months ended June 30, 2008,
an increase of approximately $1.8 million or 27.2%. Gross profit for the three
months ended June 30, 2009 was approximately $14.5 million, as compared to $10.2
million for the three months ended June 30, 2008, an increase of approximately
$4.3 million or 42.4 percent. Gross margin for the three months ended June 30,
2009 was 63.8 percent, as compared to the gross margin of 61.2 percent for the
three months ended June 30, 2008. The increase in our gross margin was mainly
due to the increase in the gross margin of our system contracting projects,
offset by the decrease in the gross margins of product sales and maintenance
service during the period.





Gross
margin of system contracting projects was 61.8 percent for the three months
ended June 30, 2009, compared to 59.0 percent for the three months ended June
30, 2008. This increase in the gross margin of system contracting projects was
mainly attributable to our successful execution of total solution projects in
the iron and steel industry during this period. Total solution projects from the
iron and steel industry contributed higher gross margins than the projects from
other industries due to a higher percentage of our self-manufactured proprietary
products being utilized in the iron and steel projects. The gross margin of
product sales was 77.2 percent for the three months ended June 30, 2009,
compared to 85.8 percent for the three months ended June 30, 2008. The decrease
in the gross margin of product sales was mainly attributable to the product mix
during the period, as a lower percentage of self-manufactured proprietary
products sold through product sales contracts during the period contributed to
lower gross margins.




For
      the Three Months Ended June 30,2009
                        
                        
                        2008
                        
                        
                        Y/Y
      ChangeAmount
      ($)
                        
                        
                        %
      of
                          Total
                          Revenue
                        
                        
                        Amount
      ($)
                        
                        
                        %
      of
                          Total
                          Revenue
                        
                        
                        Amount
      ($)
                        
                        
                        %Operating
      ExpensesSelling
      Expense
                        
                        
                        2,237,873
                        
                        
                        
                        9.8
                        %
                        
                        
                        1,824,422
                        
                        
                        
                        11.0
                        %
                        
                        
                        413,451
                        
                        
                        
                        22.7
                        %General
      Administrative
                        
                        
                        1,983,443
                        
                        
                        
                        8.7
                        %
                        
                        
                        977,967
                        
                        
                        
                        5.9
                        %
                        
                        
                        1,005,476
                        
                        
                        
                        102.8
                        %Depreciation
      and Amortization
                        
                        
                        183,456
                        
                        
                        
                        0.8
                        %
                        
                        
                        154,688
                        
                        
                        
                        0.9
                        %
                        
                        
                        28,768
                        
                        
                        
                        18.6
                        %R&D
                        
                        
                        519,987
                        
                        
                        
                        2.3
                        %
                        
                        
                        627,952
                        
                        
                        
                        3.8
                        %
                        
                        
                        (107,965
                        )
                        
                        
                        (17.2
                        )%Total
      Operating Expenses
                        
                        
                        4,924,759
                        
                        
                        
                        21.6
                        %
                        
                        
                        3,585,029
                        
                        
                        
                        21.6
                        %
                        
                        
                        1,339,730
                        
                        
                        
                        37.4
                        %Income
      From Operations
                        
                        
                        9,575,812
                        
                        
                        
                        42.1
                        %
                        
                        
                        6,599,264
                        
                        
                        
                        39.6
                        %
                        
                        
                        2,976,548
                        
                        
                        
                        45.1
                        %





Operating
expenses were approximately $4.9 million for the three months ended June 30,
2009 as compared to approximately $3.6 million for the three months ended June
30, 2008, an increase of approximately $1.3 million or 37.4 percent. The
increase in operating expenses was mainly due to the increase in our selling
expenses and general administrative expenses during the
period.





Selling
expenses were approximately $2.2 million for the three months ended June 30,
2009 as compared to approximately $1.8 million for the three months ended June
30, 2008, an increase of approximately $0.4 million or 22.7 percent. The
increase in our selling expenses was mainly attributable to the increase in our
sales-related activities in the iron and steel, power generation and chemistry
industries and our efforts to expand our business in new industries including
nuclear power and transportation and international markets. General
administrative expenses were approximately $2.0 million for the three months
ended June 30, 2009, as compared to approximately $1.0 million for the three
months ended June 30, 2008,  an increase of approximately $1.0 million
or 102.8 percent. The significant increase in general administrative expenses
were mainly attributable to the increase in employees’ salary and compensation
related to 1 million options issued and the increase in bad debt expenses during
the period. Depreciation and amortization expenses were approximately $0.2
million for the three months ended June 30, 2009 as compared to approximately
$0.2 million for the three months ended June 30, 2008, an increase of
$28,768 or 18.6 percent. The increase in depreciation and amortization expenses
was mainly due to the increase in our equipment used for the business
operations. R&D expenses were approximately $0.5 million for the three
months ended June 30, 2009 as compared to approximately $0.6 million for
the three months ended June 30, 2008, a decrease of $107,965 or 17.2 percent.
The decrease in our R&D expenses was mainly attributable to the variance in
expenditure required in different product development cycles.





-37-





Operating
income was approximately $9.6 million for the three months ended June 30, 2009
as compared to approximately $6.6 million for the three months ended June 30,
2008, an increase of approximately $3.0 million or 45.1 percent. The increase in
our operating income was mainly attributable to the increase in our revenues and
higher gross margin during this period.





Total
other income was $117,507 for the three months ended June 30, 2009 as compared
to $88,289 for the three months ended June 30, 2008, an increase of $29,218
million or 33.1 percent.





Income
before income tax was approximately $9.7 million for the three months ended June
30, 2009 as compared to approximately $6.7 million of income before income tax
for the three months ended June 30, 2008, an increase of $3.0 million or 44.9
percent. This increase in income before income tax was mainly due to the
increase in our revenues and the improvement in our operating margin during the
period. Provision for income tax was approximately $1.4 million for the
three months ended June 30, 2009 with effective tax rate of approximately
14.0 percent, as compared to approximately $11,453 provision for income tax
for the three months ended June 30, 2008, an increase of $1.3 million. This
significant increase in our provision for income tax was mainly due to the fact
that Sureland Industrial, our major operating subsidiary,  became
subject to 12.5 percent in income tax rate, starting from the first quarter of
2009, after the expiration of its tax exemption period ended December 31,
2008.





Our net
income was approximately $8.3 million for the three months ended June 30, 2009
as compared to approximately $6.7 million net income for the three months ended
June 30, 2008, an increase of $1.7 million or 24.9 percent. The increase in
the net income was mainly due to the increase in our revenues and the
improvement in our operating margin, offset by the increase in income tax
expenses during the period.





Currency
translation adjustments resulting from RMB appreciation amounted to $69,294 and
$1.3 million as of the three months ended June 30, 2009 and 2008, respectively.
The positive amount of currency translation adjustments during the period is due
to the appreciation of the RMB against the U.S. Dollar during the
period.





The
comprehensive income, which adds the currency adjustment to the net income, was
approximately $8.4 million for the three months ended June 30, 2009 as compared
to approximately $8.0 million in comprehensive income for the three months ended
June 30, 2008, a increase of $0.4 million or 5.5 percent.





Comparison
of the Six Months Ended June 30, 2009 and 2008:


For
      the Six Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      Y/Y
      ChangeAmount
      ($)
                      
                      
                      %
      of
                        Total
                        Revenue
                      
                      
                      Amount
      ($)
                      
                      
                      %
      of
                        Total
                        Revenue
                      
                      
                      Amount
      ($)
                      
                      
                      %RevenueSystem
      contracting projects
                      
                      
                      31,294,114
                      
                      
                      
                      79.4
                      %
                      
                      
                      25,886,388
                      
                      
                      
                      82.6
                      %
                      
                      
                      5,407,726
                      
                      
                      
                      20.9
                      %Products
                      
                      
                      6,915,813
                      
                      
                      
                      17.5
                      %
                      
                      
                      4,415,136
                      
                      
                      
                      14.1
                      %
                      
                      
                      2,500,677
                      
                      
                      
                      56.6
                      %Maintenance
      Services
                      
                      
                      1,234,152
                      
                      
                      
                      3.1
                      %
                      
                      
                      1,048,826
                      
                      
                      
                      3.3
                      %
                      
                      
                      185,326
                      
                      
                      
                      17.7
                      %Total
      Revenue
                      
                      
                      39,444,079
                      
                      
                      
                      100.0
                      %
                      
                      
                      31,350,350
                      
                      
                      
                      100.0
                      %
                      
                      
                      8,093,729
                      
                      
                      
                      25.8
                      %





Total
revenues were approximately $39.4 million for the six months ended June 30,
2009 as compared to approximately $31.4 million for the six months
ended June 30, 2008, an increase of approximately $8.1 million or 25.8
percent. This increase was primarily due to the increase in our revenues from
system contracting projects and product sales, which together contributed 96.9
percent of revenues during the period. The Company recognized revenues from 256
total solution, product sales and maintenance contracts for the six months ended
June 30, 2009 as compared to 233 contracts for the six months ended June 30,
2008.





-38-





Revenues
from system contracting projects increased by 20.9 percent to $31.3 million
derived from 140 contracts for the six months ended June 30, 2009, compared to
$25.9 million derived from 138 contracts for the six months ended June 30, 2008.
This increase in the revenues from system contracting projects was mainly
attributable to the increase in the number of system contracting projects we
executed and the successful execution of large-size projects from Capital Iron
and Steel Group during the period. Revenues from our product sales were $6.9
million with 62 contracts executed for the six months ended June 30, 2009,
compared to $4.4 million with 59 contracts executed for the six months ended
June 30, 2008. The increase in the revenues from product sales was mainly due to
the increased demand in our linear heat detectors and other products during the
period. The revenues from maintenance services increased by 17.7 percent to $1.2
million derived from 54 contracts for the six months ended June 30, 2009,
compared to $1.0 million derived from 36 contracts for the six months ended June
30, 2008. The increase in revenues from maintenance service was mainly
attributable to the increase in the number of maintenance service contracts that
we executed as the result of the expansion in our customer basis during the
period.





In
particular, the three largest customers were Capital Iron and Steel Group, China
Minmetals Corporation, and Jiuquan Iron and Steel Group which
collectively contributed approximately $10.1 million of revenues, representing
25.6 percent of total revenues for the six months ended June 30,
2009.





For
      the Six Months Ended June 30,2009
                            
                            
                            2008
                            
                            
                            Y/Y
      ChangeAmount
      ($)
                            
                            
                            %
      of
                              Revenue
                            
                            
                            Amount
      ($)
                            
                            
                            %
      of
                              Revenue
                            
                            
                            Amount
      ($)
                            
                            
                            %Cost
      of RevenuesSystem
      contracting projects
                            
                            
                            11,777,541
                            
                            
                            
                            37.6
                            %
                            
                            
                            11,541,955
                            
                            
                            
                            44.6
                            %
                            
                            
                            235,586
                            
                            
                            
                            2.0
                            %Products
                            
                            
                            2,077,048
                            
                            
                            
                            30.0
                            %
                            
                            
                            1,059,380
                            
                            
                            
                            24.0
                            %
                            
                            
                            1,017,668
                            
                            
                            
                            96.1
                            %Maintenance
      Services
                            
                            
                            792,160
                            
                            
                            
                            64.2
                            %
                            
                            
                            520,327
                            
                            
                            
                            49.6
                            %
                            
                            
                            271,833
                            
                            
                            
                            52.2
                            %Total
      Cost of Revenues
                            
                            
                            14,646,749
                            
                            
                            
                            37.1
                            %
                            
                            
                            13,121,662
                            
                            
                            
                            41.9
                            %
                            
                            
                            1,525,087
                            
                            
                            
                            11.6
                            %Gross
      ProfitSystem
      contracting projects
                            
                            
                            19,516,573
                            
                            
                            
                            62.4
                            %
                            
                            
                            14,344,433
                            
                            
                            
                            55.4
                            %
                            
                            
                            5,172,140
                            
                            
                            
                            36.1
                            %Products
                            
                            
                            4,838,765
                            
                            
                            
                            70.0
                            %
                            
                            
                            3,355,756
                            
                            
                            
                            76.0
                            %
                            
                            
                            1,483,009
                            
                            
                            
                            44.2
                            %Maintenance
      Services
                            
                            
                            441,992
                            
                            
                            
                            35.8
                            %
                            
                            
                            528,499
                            
                            
                            
                            50.4
                            %
                            
                            
                            (86,507
                            )
                            
                            
                            (16.4
                            )%Total
      Gross Profit
                            
                            
                            24,797,330
                            
                            
                            
                            62.9
                            %
                            
                            
                            18,228,688
                            
                            
                            
                            58.1
                            %
                            
                            
                            6,568,642
                            
                            
                            
                            36.0
                            %





Cost of
revenues for the six months ended June 30, 2009 was approximately $14.6 million,
as compared to $13.1 million for the six months ended June 30, 2008, an increase
of approximately $1.5 million or 11.6%. Gross profit for the six months ended
June 30, 2009 was approximately $24.8 million, as compared to $18.2 million for
the six months ended June 30, 2008, an increase of approximately $6.6 million or
36.0 percent. Gross margin for the six months ended June 30, 2009 was 62.9
percent, as compared to the gross margin of 58.1 percent for the six months
ended June 30, 2008. The increase in our gross margin was mainly due to the
increase in the gross margin of our system contracting projects, offset by the
decrease in the gross margins of product sales and maintenance service during
the period.





Gross
margin of system contracting projects was 62.4 percent for the six months ended
June 30, 2009, compared to 55.4 percent for the six months ended June 30, 2008.
This increase in the gross margin of system contracting projects was mainly
attributable to our successful execution of total solution projects from iron
and steel industry during this period. Total solution projects from iron and
steel industry contributed higher gross margins than the projects from other
industries, due to a higher percentage of our self-manufactured proprietary
products being utilized in the iron and steel projects. The gross margin of
product sales was 70.0 percent for the six months ended June 30, 2009, compared
to 76.0 percent for the six months ended June 30, 2008. The decrease in the
gross margin of product sales was mainly attributable to a lower percentage of
our self-manufactured proprietary products being sold in product sales
contracts, which contributed higher gross margins than our outsourced products
manufactured by third parties.





-39-





For
      the Six Months Ended June 30,2009
                        
                        
                        2008
                        
                        
                        Y/Y
      ChangeAmount
      ($)
                        
                        
                        %
      of
                          Total
                          Revenue
                        
                        
                        Amount
      ($)
                        
                        
                        %
      of
                          Total
                          Revenue
                        
                        
                        Amount
      ($)
                        
                        
                        %Operating
      ExpensesSelling
      Expense
                        
                        
                        4,140,191
                        
                        
                        
                        10.5
                        %
                        
                        
                        3,335,713
                        
                        
                        
                        10.6
                        %
                        
                        
                        804,478
                        
                        
                        
                        24.1
                        %General
      Administrative
                        
                        
                        3,664,082
                        
                        
                        
                        9.3
                        %
                        
                        
                        2,427,448
                        
                        
                        
                        7.8
                        %
                        
                        
                        1,236,634
                        
                        
                        
                        50.9
                        %Depreciation
      and Amortization
                        
                        
                        376,850
                        
                        
                        
                        1.0
                        %
                        
                        
                        321,950
                        
                        
                        
                        1.0
                        %
                        
                        
                        54,900
                        
                        
                        
                        17.1
                        %R&D
                        
                        
                        834,017
                        
                        
                        
                        2.1
                        %
                        
                        
                        894,601
                        
                        
                        
                        2.9
                        %
                        
                        
                        (60,584
                        )
                        
                        
                        (6.8
                        )%Total
      Operating Expenses
                        
                        
                        9,015,140
                        
                        
                        
                        22.9
                        %
                        
                        
                        6,979,712
                        
                        
                        
                        22.3
                        %
                        
                        
                        2,035,428
                        
                        
                        
                        29.2
                        %Income
      From Operations
                        
                        
                        15,782,190
                        
                        
                        
                        40.0
                        %
                        
                        
                        11,248,976
                        
                        
                        
                        35.9
                        %
                        
                        
                        4,533,214
                        
                        
                        
                        40.3
                        %





Operating
expenses were approximately $9.0 million for the six months ended June 30, 2009
as compared to approximately $7.0 million for the six months ended June 30,
2008, an increase of approximately $2.0 million or 29.2 percent. The increase in
operating expenses was mainly due to the increase in our selling expenses,
general administrative expenses, depreciation and amortization expenses,
which was offset by a decrease in R&D expenses during the
period.





Selling
expenses were approximately $4.1 million for the six months ended June 30, 2009
as compared to approximately $3.3 million for the six months ended June 30,
2008, an increase of approximately $0.8 million or 24.1 percent. The increase in
our selling expenses was mainly attributable to the increase in our
sales-related activities in the iron and steel, power generation and chemistry
industries and our efforts to expand our business in new industries including
nuclear power and transportation and certain international markets. General
administrative expenses were approximately $3.7 million for the six months ended
June 30, 2009, as compared to approximately $2.4 million for the six months
ended June 30, 2008, an increase of approximately $1.2 million or 50.9 percent.
The significant increase in general administrative expenses were mainly
attributable to the increase in employees’ salary and compensation related to 1
million options issued and the increase in bad debt expenses during the period.
Depreciation and amortization expenses were approximately $0.4 million for the
six months ended June 30, 2009 as compared to approximately $0.3 million for the
six months ended June 30, 2008, an increase of $54,900 or 17.1 percent. The
increase in depreciation and amortization expenses was mainly due to an increase
in our fixed assets for operations. R&D expenses were approximately $0.8
million for the six months ended June 30, 2009 as compared to approximately $0.9
million for the six months ended June 30, 2008, a decrease of $60,584 or 6.8
percent. The decrease in our R&D expenses was mainly attributable to the
variance in expenditure required in different product development
cycles.





Operating
income was approximately $15.8 million for the six months ended June 30, 2009 as
compared to approximately $11.2 million for the six months ended June 30, 2008,
an increase of $4.5 million or 40.3 percent. The increase in our operating
income was mainly attributable to the increase in our revenues and higher gross
margin during this period.





Total
other income was approximately $0.4 million for the six months ended June 30,
2009 as compared to approximately $0.2 million for the six months ended June 30,
2008, an increase of $122,300 or 53.6 percent. This increase was mainly
attributable to the increase in our interest income during the
period.





-40-





Income
before income tax was approximately $16.1 million for the six months ended June
30, 2009 as compared to approximately $11.5 million of income before income tax
for the six months ended June 30, 2008, an increase of $4.7 million or 40.6
percent. This increase in income before income tax was mainly due to the
increase in our revenues and the improvement in our gross margin during the
period. Provision for income tax was approximately $2.2 million for the six
months ended June 30, 2009 as compared to approximately $60,095 provision
for income tax for the six months ended June 30, 2008, an increase of $2.1
million. This significant increase in our provision for income tax was mainly
due to the fact that Sureland Industrial, our major operating
subsidiary,  became subject to 12.5 percent in income tax rate,
starting from the first quarter of 2009, after the expiration of its tax
exemption period.





Our net
income was approximately $14.0 million for the six months ended June 30, 2009 as
compared to approximately $11.4 million net income for the six months ended June
30, 2008, an increase of $2.6 million or 22.5 percent. The increase in the net
income was mainly due to the increase in our revenues and the improvement in our
gross margin during the period.





Currency
translation adjustments resulting from RMB appreciation amounted to negative
$0.1 million and $3.4 million as of the six months ended June 30, 2009 and
2008, respectively. The negative amount of currency translation adjustments
during the period is due to the depreciation of the RMB during the
period.





The
comprehensive income, which adds the currency adjustment to the net income, was
approximately $13.9 million for the six months ended June 30, 2009 as compared
to approximately $14.8 million comprehensive income for the six months ended
June 30, 2008, a decrease of $0.9 million or 6.1 percent.





Liquidity
and Capital Resources





As of
June 30, 2009, we had working capital of $75.2 million including cash and
cash equivalents of $27.8 million.





The
following table sets forth a summary of our cash flows for the periods
indicated:





Statement
of Cash Flow





For
      the Six Months Ended June 30,2009
                    
                    
                    2008Net
      cash provided by operating activities
                    
                    $
                    2,854,023
                    
                    
                    $
                    3,457,448Net
      cash used in investing activities
                    
                    
                    (952,535
                    )
                    
                    
                    (663,537
                    )Net
      cash used in financing activities
                    
                    
                    (730,949
                    )
                    
                    
                    (474,018
                    )Effect
      of foreign currency translation on cash and cash
    equivalents
                    
                    
                    (33,637
                    )
                    
                    
                    1,088,574Net
      cash flow
                    
                    $
                    1,136,902
                    
                    
                    $
                    3,408,467





Operating
Activities





Net cash
provided by operating activities was approximately $2.9 million for the six
months ended June 30, 2009 as compared to approximately $3.5 million in net cash
provided by operating activities for the same period in 2008. Net cash provided
by operating activities in the six months ended June 30, 2009 was mainly due to
the net income of $14.0 million, a $4.5 million increase in accrued liabilities
and a $4.3 million increase in tax payable, offset by a $4.7 million increase in
accounts receivable, a $11.7 million increase in costs and estimated earnings in
excess of billings, a $3.0 million decrease in customer deposits and a $2.2
million decrease in billings in excess of costs and estimated
earnings.





The
increase of $11.7 million in costs and estimated earnings in excess of billings
was mainly due to the increase in the aggregate value of projects where we have
recognized revenues more than we have billed the customers. The decrease of
$2.2 million in billings in excess of costs and estimated earnings was mainly
due to the decrease in the aggregate value of projects where we have billed our
customers less than we have recognized revenues.





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Investing
Activities





Net cash
used in investing activities in the six months ended June 30, 2009 was $1.0
million as compared to net cash used in investing activities of $0.7 million in
the same period of 2008. Cash used in investing activities in the six months
ended June 30, 2008 was mainly attributable to capital expenditure in the
purchase of new equipments.





Financing
Activities





Net
cash used in financing activities in the six months ended June 30,
2009 totaled $0.7 million as compared to $0.5 million used in financing
activities in the same period of 2008. Cash used in financing activities in the
six months ended June 30, 2009 was mainly attributable to the increase in
restricted cash during the period.





As a
result of the total cash activities, net cash increased by $1.1 million from
December 31, 2008 to June 30, 2009.  We believe that our currently
available working capital of $75.2 million including cash and cash equivalents
of $27.8 million should be adequate to sustain our operations at our current
level and our anticipated expansion.




Item
3. Quantitative and Qualitative Disclosures about Market Risk





Market
risk is the risk of loss to future earnings, to fair values or to future cash
flows that may result from changes in the price of a financial instrument. The
value of a financial instrument may change as a result of changes in interest
rates, exchange rates, commodity prices, equity prices and other market changes.
Our cash and cash equivalents are held for working capital purposes and consist
primarily of bank deposits. We do not enter into investments for trading or
speculative purposes.





Interest
Rate Risk





We
currently do not have any long-term debt. Our exposure to interest rate risk
primarily relates to the interest income generated by excess cash invested in
demand deposits. We have not used derivative financial instruments in our
investment portfolio in order to reduce interest rate risk. Interest earning
instruments carry a degree of interest rate risk and our future interest income
may change, depending on market interest rate movement.





Foreign
Currency Risk





Our
business is operated in the PRC, and its value is effectively denominated in
Renminbi. The fluctuation of foreign exchange rate between U.S. dollars and
Renminbi could affect the value of our common stock. Our revenues and expenses
are primarily denominated in Renminbi, and so our exposure to foreign exchange
risks should generally be limited. We do not have material monetary assets and
liabilities denominated in U.S. dollars, although to the extent that we do in
the future, the fluctuation of foreign exchange rate would affect the value of
these monetary assets and liabilities denominated in U.S. dollars. Generally,
appreciation of Renminbi against U.S. dollars will devaluate the assets and
liabilities denominated in U.S. dollar, while devaluation of Renminbi again U.S.
dollars will appreciate the assets and liabilities denominated in U.S. dollar.
In China, very limited hedging transactions are available to reduce our exposure
to exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange
risk. While we may decide to enter into hedging transactions in the future, the
availability and effectiveness of these hedges may be limited and we may not be
able to successfully hedge our exposure at all.





Item
4. Controls and Procedures.





(a)
  Evaluation of
Disclosure Controls. As required by Exchange Act Rule 13a-15(b), our
management has carried out an evaluation, under the supervision of our Chief
Executive Officer and Principal Accounting Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of June 30,
2009.





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




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Based on
that evaluation, the Chief Executive Officer and Principal Accounting Officer
have concluded that the Company’s disclosure controls and procedures are
effective at June 30, 2009.





(b)
 Changes in internal
control over financial reporting.  During the three months ended
June 30, 2009, management had conducted the remediation activities below to
address the material weaknesses identified by management in the assessment of
the effectiveness of the Company's internal control over financial reporting as
of December 31, 2008.





l
            Lack
      of internal controls over the project budgeting
  process





Remediation
Activities


The
Company hired more skilled project budgeting personnel and senior managers to
enhance the our project budgeting team to meet the increased needs of our
expanding number of projects. We redesigned our project budgeting process
and augmented our monitoring procedures to ensure timely updates of project
budgets that reflect the best estimate of project costs under construction. We
also increased the effectiveness and frequency of communication between our
accounting, project budgeting and project implementation departments through
regularly scheduled inter-department meetings.





l
            Lack
      of internal accounting staff with adequate US GAAP knowledge and
      inadequate supervisory review of the construction accounting
      process





Remediation
Activities





The
Company hired an external U.S. GAAP accounting consultant with relevant
accounting experience, skills and knowledge in the financial
reporting processes to provide U.S. GAAP knowledge training to our existing
accounting staff. The Company enforced senior management’s checks and
approvals process to ensure the accuracy of our daily book keeping.




Except as
described above, there were no changes in our internal control over financial
reporting during the quarter ended June 30, 2009 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.




PART
II - OTHER INFORMATION




Item
1. Legal Proceedings





None.





Item
1A. Risk Factors





We have
no material changes to the risk factors previously disclosed in our Form 10-K
for the year ended December 31, 2008.




Item
2. Unregistered Sales of Equity Securities and Use of Proceeds





None.





Item
3. Defaults Upon Senior Securities





None.




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Item
4. Submission of Matters to a Vote of Security Holders





None.





Item
5. Other Information





None.





Item
6.  Exhibits




The
following exhibits are hereby filed as part of this Quarterly Report on Form
10-Q.




Exhibit
                Number:
              
              Description31.1
              
              Certification
      of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
              
              Certification
      of Principal Accounting Officer under Section 302 of the Sarbanes-Oxley
      Act of 2002.32.1
              
              Certifications
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
      Section 135033.2
              
              Certification
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
      Section 1350




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SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant certifies that it has duly caused this Quarterly Report on
Form 10-Q to be signed on its behalf by the undersigned, thereunto duly
authorized, in Beijing.




CHINA
      FIRE & SECURITY GROUP, INC.Dated:
      August 10, 2009
                  By:
                  /s/ Brian
      LinBrian
      LinChief
      Executive Officer




Dated:
      August 10, 2009
                By:
                /s/ Robert
      YuanRobert
      YuanChief
      Accounting Officer/Principal Accounting Officer





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