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 March 31, 2008


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.







Check
      whether the issuer (1) has filed all reports required to be filed by
      Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
      such shorter period that the Registrant was required to file such reports),
      and
      (2) has been subject to such filing requirements for the past 90
      days.    Yes x No o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):





Large
                accelerated filer ̈
            Accelerated
                filer ̈
            Non-accelerated
                filerx




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act)Yes o No x




As
      of May
      13, 2008, the Registrant had 27,556,893 shares of common stock
      outstanding.











China
      Fire & Security Group, Inc.




Table
      of
      Contents




PagePART
                I -
            
            FINANCIAL
                INFORMATIONItem
                1.
            
            Financial
                Statements (unaudited):Consolidated
                Balance Sheets as of March 31, 2008 and December 31, 2007
            
            1Consolidated
                Statements of Income and Other Comprehensive IncomeFor
                the Three Months Ended March 31, 2008 and 2007
            
            2Consolidated
                Statements of Stockholders' Equity
            
            3Consolidated
                Statements of Cash FlowsFor
                the Three Months Ended March 31, 2008 and 2007
            
            4Notes
                to Consolidated Financial Statements
            
            5Item
                2.
            
            Management's
                Discussion and Analysis or Plan of Operation
            
            28Item
                3.
            
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            33Item
                4.
            
            Controls
                and Procedures
            
            33PART II -
            
            OTHER
                INFORMATIONItem
                1.
            
            Legal
                Proceedings
            
            35Item
                1A.
            
            Risk
                Factors
            
            35Item
                2.
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            35Item
                3.
            
            Defaults
                Upon Senior Securities
            
            35Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders.
            
            35Item
                5.
            
            Other
                Information
            
            35Item
                6.
            
            Exhibits
            
            35










PART
      I -
      FINANCIAL INFORMATION




**Item
      1. Financial Statements.**


CHINA
        FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
        BALANCE SHEETS
 AS
        OF
        MARCH 31, 2008 AND DECEMBER 31, 2007
  March 31,
              
              December 31,2008
              
              2007(Unaudited)ASSETSCURRENT
                  ASSETS:Cash
              
              $
              15,111,922
              
              $
              17,110,449Restricted
                  cash
              
              
              4,345,297
              
              
              3,829,927Accounts
                  receivable, net of allowance for doubtful accounts of $2,586,606
                  and
                  $2,483,359 as of March 31, 2008 and December 31, 2007,
                  respectively
              
              
              16,262,560
              
              
              16,525,161Notes
                  receivable
              
              
              3,867,484
              
              
              3,315,811Other
                  receivables
              
              
              1,218,120
              
              
              748,195Inventories
              
              
              4,291,730
              
              
              4,048,283Costs
                  and estimated earnings in excess of billings
              
              
              20,417,138
              
              
              13,068,036Employee
                  advances
              
              
              526,791
              
              
              1,307,433Employee
                  advances - officers and directors
              
              
              14,654
              
              
              18,682Prepayments
                  and deferred expenses
              
              
              2,805,928
              
              
              2,218,391Total
                  current assets
              
              
              68,861,624
              
              
              62,190,368PLANT
                  AND EQUIPMENT, net
              
              
              6,803,292
              
              
              6,568,250OTHER
                  ASSETS:Accounts
                  receivable - retentions
              
              
              602,281
              
              
              193,029Deferred
                  expenses - non current
              
              
              32,492
              
              
              21,234Advances
                  on building and equipment purchases
              
              
              297,552
              
              
              366,317Investment
                  in joint ventures
              
              
              1,162,793
              
              
              1,156,294Intangible
                  assets, net of accumulated amortization
              
              
              1,156,237
              
              
              1,150,935Total
                  other assets
              
              
              3,251,355
              
              
              2,887,809Total
                  assets
              
              $
              78,916,271
              
              $
              71,646,427LIABILITIES
                  AND SHAREHOLDERS' EQUITYCURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              6,169,266
              
              $
              6,327,182Customer
                  deposits
              
              
              6,946,981
              
              
              4,757,179Billings
                  in excess of costs and estimated earnings
              
              
              1,555,297
              
              
              4,882,217Other
                  payables
              
              
              552,448
              
              
              168,868Accrued
                  liabilities
              
              
              5,539,274
              
              
              4,214,530Taxes
                  payable
              
              
              1,114,762
              
              
              1,088,335Total
                  current liabilities
              
              
              21,878,028
              
              
              21,438,311COMMITMENTS
                  AND CONTINGENCIES
              
              
              -
              
              
              -SHAREHOLDERS'
                  EQUITY:Common
                  stock, $0.001 par value, 65,000,000 shares authorized, 27,556,893
                  shares
                  issued and outstanding as of March 31, 2008and December 31, 2007,
                  respectively
              
              
              27,556
              
              
              27,556Additional
                  paid-in-capital
              
              
              19,339,718
              
              
              19,317,287Statutory
                  reserves
              
              
              5,067,061
              
              
              5,067,061Retained
                  earnings
              
              
              26,968,875
              
              
              22,228,095Accumulated
                  other comprehensive income
              
              
              5,635,033
              
              
              3,568,117Total
                  shareholders' equity
              
              
              57,038,243
              
              
              50,208,116Total
                  liabilities and shareholders' equity
              
              $
              78,916,271
              
              $
              71,646,427
 The
          accompanying notes are an integral part of this statement.
 -
            1
            -
 
 CHINA
        FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR
        THE
        THREE MONTHS ENDED MARCH 31, 2008 AND 2007
 (UNAUDITED)
 
 2008
              
              2007REVENUESSystem
                  contracting projects
              
              $
              11,329,380
              
              $
              7,276,508Products
              
              
              2,881,171
              
              
              2,101,754Maintenance
                  services
              
              
              486,075
              
              
              121,198Total
                  revenues
              
              
              14,696,626
              
              
              9,499,460COST
                  OF REVENUESSystem
                  contracting projects
              
              
              5,570,210
              
              
              3,644,668Products
              
              
              841,882
              
              
              828,702Maintenance
                  services
              
              
              240,139
              
              
              10,185Total
                  cost of revenues
              
              
              6,652,231
              
              
              4,483,555GROSS
                  PROFIT
              
              
              8,044,395
              
              
              5,015,905OPERATING
                  EXPENSESelling
                  and marketing
              
              
              1,162,062
              
              
              551,410General
                  and administrative
              
              
              1,798,710
              
              
              1,011,044Depreciation
                  and amortization
              
              
              167,262
              
              
              126,483Research
                  and development
              
              
              266,649
              
              
              50,295Total
                  operating expense
              
              
              3,394,683
              
              
              1,739,232INCOME
                  FROM OPERATIONS
              
              
              4,649,712
              
              
              3,276,673OTHER
                  INCOME (EXPENSE)Other
                  income, net
              
              
              96,299
              
              
              -Interest
                  income, net
              
              
              28,360
              
              
              19,280Investment
                  Income
              
              
              15,051
              
              
              -Change
                  in fair value of derivative instruments
              
              
              -
              
              
              834,163Total
                  other income
              
              
              139,710
              
              
              853,443INCOME
                  BEFORE PROVISION FOR INCOME TAXES
              
              
              4,789,422
              
              
              4,130,116PROVISION
                  FOR INCOME TAXES
              
              
              48,642
              
              
              -NET
                  INCOME
              
              
              4,740,780
              
              
              4,130,116OTHER
                  COMPREHENSIVE INCOME:Foreign
                  currency translation adjustment
              
              
              2,066,916
              
              
              295,559COMPREHENSIVE
                  INCOME
              
              $
              6,807,696
              
              $
              4,425,675BASIC
                  EARNINGS PER SHAREWeighted
                  average number of shares
              
              
              27,556,893
              
              
              26,461,678Earnings
                  per share
              
              $
              0.17
              
              $
              0.16DILUTED
                  EARNINGS PER SHAREWeighted
                  average number of shares
              
              
              28,153,181
              
              
              27,001,528Earnings
                  per share
              
              $
              0.17
              
              $
              0.15
 The
          accompanying notes are an integral part of this statement.
  -
            2
            -
  CHINA
        FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS' EQUITY
 
 Retained Earnings
              
              Accumulated otherCommon Stock
              
              Additional
              
              Statutory
              
              
              
              comprehensiveShares
              
              Par value
              
              paid-in-capital
              
              reserves
              
              Unrestricted
              
              income
              
              TotalsBALANCE,
                  December 31, 2006
              
              
              26,461,678
              
              $
              26,462
              
              $
              13,393,171
              
              $
              4,030,627
              
              $
              6,462,893
              
              $
              1,065,522
              
              $
              24,978,675Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,130,116
              
              
              
              
              
              4,130,116Options
                  issued to employees
              
              
              
              
              
              
              
              
              65,000
              
              
              
              
              
              
              
              
              
              
              
              65,000Foreign
                  currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              295,559
              
              
              295,559BALANCE,
                  March 31, 2007 (Unaudited)
              
              
              26,461,678
              
              $
              26,462
              
              $
              13,458,171
              
              $
              4,030,627
              
              $
              10,593,009
              
              $
              1,361,081
              
              $
              29,469,350Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              12,671,520
              
              
              
              
              
              12,671,520Warrants
                  reclassified from liabilities
              
              
              
              
              
              
              
              
              1,475,020
              
              
              
              
              
              
              
              
              
              
              
              1,475,020Issuance
                  of common stock
              
              
              984,680
              
              
              983
              
              
              4,164,214
              
              
              
              
              
              
              
              
              
              
              
              4,165,197Warrants
                  exercised
              
              
              110,535
              
              
              111
              
              
              (111
              )
              
              
              
              
              
              
              
              
              
              
              -Warrants
                  issued for services
              
              
              
              
              
              
              
              
              94,274
              
              
              
              
              
              
              
              
              
              
              
              94,274Options
                  issued to employees
              
              
              
              
              
              
              
              
              125,719
              
              
              
              
              
              
              
              
              
              
              
              125,719Adjustment
                  to registered capital
              
              
              
              
              
              
              
              
              
              
              
              (605,000
              )
              
              605,000
              
              
              
              
              
              -Adjustment
                  to statutory reserves
              
              
              
              
              
              
              
              
              
              
              
              1,641,434
              
              
              (1,641,434
              )
              
              
              
              
              -Foreign
                  currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,207,036
              
              
              2,207,036BALANCE,
                  December 31, 2007
              
              
              27,556,893
              
              $
              27,556
              
              $
              19,317,287
              
              $
              5,067,061
              
              $
              22,228,095
              
              $
              3,568,117
              
              $
              50,208,116Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,740,780
              
              
              
              
              
              4,740,780Options
                  issued to employees
              
              
              
              
              
              
              
              
              22,431
              
              
              
              
              
              
              
              
              
              
              
              22,431Foreign
                  currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,066,916
              
              
              2,066,916BALANCE,
                  March 31, 2008 (Unaudited)
              
              
              27,556,893
              
              $
              27,556
              
              $
              19,339,718
              
              $
              5,067,061
              
              $
              26,968,875
              
              $
              5,635,033
              
              $
              57,038,243
 The
          accompanying notes are an integral part of this statement.
  -
              3
              -
 
 CHINA
        FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 FOR
        THE
        THREE MONTHS ENDED MARCH 31, 2008 AND 2007
 (UNAUDITED)
 
 2008
              
              2007CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              4,740,780
              
              $
              4,130,116Adjustments
                  to reconcile net income to cash used in operating
                  activities:Depreciation
              
              
              169,388
              
              
              123,134Amortization
                  of land use rights
              
              
              3,629
              
              
              3,349Amortization
                  of technology rights
              
              
              15,219
              
              
              -Provision
                  for doubtful accounts
              
              
              428,347
              
              
              119,382Gain
                  on disposal of equipment
              
              
              (31,252
              )
              
              -Compensation
                  expense for options issued to employees
              
              
              22,431
              
              
              65,000Change
                  in fair value of derivative instruments
              
              
              -
              
              
              (834,163
              )Change
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              536,779
              
              
              (1,397,038
              )Notes
                  receivable
              
              
              (405,036
              )
              
              (71,343
              )Other
                  receivables
              
              
              (429,507
              )
              
              (543,711
              )Inventories
              
              
              (73,543
              )
              
              681,373Costs
                  and estimated earnings in excess of billings
              
              
              (6,661,383
              )
              
              (732,119
              )Employee
                  advances
              
              
              817,282
              
              
              (332,749
              )Employee
                  advances from officers and directors
              
              
              4,703
              
              
              -Prepayments
                  and deferred expenses
              
              
              (494,952
              )
              
              (467,161
              )Accounts
                  payable
              
              
              (412,039
              )
              
              (1,020,929
              )Accounts
                  payable - related party
              
              
              -
              
              
              (322,781
              )Customer
                  deposits
              
              
              1,949,752
              
              
              2,442,783Billings
                  in excess of costs and estimated earnings
              
              
              (3,455,001
              )
              
              (2,063,070
              )Other
                  payables
              
              
              368,569
              
              
              227,663Other
                  payables - related party
              
              
              -
              
              
              (50,321
              )Accrued
                  liabilities
              
              
              1,125,132
              
              
              227,401Taxes
                  payable
              
              
              (18,422
              )
              
              (465,384
              )Net
                  cash used in operating activities
              
              
              (1,799,124
              )
              
              (280,568
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchase
                  of building and equipment
              
              
              (57,661
              )
              
              (226,350
              )Proceeds
                  from sale of equipment
              
              
              38,968
              
              
              -Net
                  cash used in investing activities
              
              
              (18,693
              )
              
              (226,350
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Change
                  in restricted cash
              
              
              (348,582
              )
              
              902,781Net
                  cash (used in) provided by financing activities
              
              
              (348,582
              )
              
              902,781EFFECTS
                  OF EXCHANGE RATE CHANGE IN CASH
              
              
              167,872
              
              
              99,403(DECREASE)
                  INCREASE IN CASH
              
              
              (1,998,527
              )
              
              495,266CASH,
                  beginning of period
              
              
              17,110,449
              
              
              9,426,091CASH,
                  end of period
              
              $
              15,111,922
              
              $
              9,921,357
 The
          accompanying notes are an integral part of this statement.
  -
              4
              -
  CHINA
        FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 March
        31,
        2008
 (Unaudited)
 
 **Note
        1 – Background**
 
 **China
        Fire & Security Group Inc.** (the
        “Company”), is a Florida corporation. The Company, through its subsidiaries, is
        engaged in the design, development, manufacturing and sales of fire protection
        products and services for industrial customers in China.
 
 On
        September 1, 2006, the Company signed a Securities Exchange Agreement (the
        “Agreement”) with China Fire Protection Group, Inc. (“CFPG”). Based on the
        agreement, each CFPG Shareholder agreed to sell, assign, transfer and deliver
        to
        Unipro all of the CFPG’s ordinary shares of capital stock, par value US $0.01
        each (the “CFPG Shares”), in exchange for the issuance by Unipro to each such
        CFPG Shareholder a pro rata share of 701,538.46 Unipro shares of Series A
        Convertible Preferred Stock, no par value (“Unipro Preferred”). Each CFPG
        Shareholder’s pro rata share of the Unipro Preferred was determined by
        multiplying 701,538.46 Unipro Preferred by a fraction, the numerator equaled the
        total number of CFPG Shares owned by the CFPG Shareholder at the Closing
        and the
        denominator was the total number of CFPG Shares issued and outstanding at
        the
        closing. The transaction was completed on October 27, 2006. Prior to closing,
        CFPG had outstanding options to purchase CFPG shares. The options were converted
        into 750,000 options to purchase Unipro Common Stock, $0.001 par value (“Common
        Stock”) on the same terms and conditions as the outstanding options. Fractional
        shares of Unipro Preferred were issued as necessary.
 
 For
        accounting purpose this transaction was treated as a recapitalization of
        CFPG
        where CFPG is considered the accounting acquirer. As a result of the reverse
        acquisition and recapitalization under common control, CFPG’s financial
        statements are presented as the continuing accounting entity. Thus, the
        historical financial statements of CFPG were recapitalized with the historical
        equity shares of the Company.
 
 **China
        Fire Protection Group, Inc. (“CFPG”)** was
        incorporated in the British Virgin Islands as a limited liability company
        on
        June 2, 2006. On June 19, 2006, CFPG entered a sales and purchase agreement
        with
        the existing five shareholders (“Original Shareholders”) of Sureland Industrial
        Fire Safety Limited (“Sureland Industrial”) who agreed to transfer their 100%
        ownership in Sureland Industrial to the CFPG. The total purchase consideration
        was $10,087,527 which was determined based upon the net asset value of Sureland
        Industrial as of December 31, 2005. On July 18, 2006, this transfer was approved
        by the Beijing Bureau of Commerce, and the registration was completed with
        the
        Beijing State Administration for Industry and Commerce of the People’s Republic
        of China, (“PRC”). As a result of this transfer, CFPG became the 100%
        shareholder of Sureland Industrial. On October 30, 2006, CFPG transferred
        25%
        ownership in Sureland Industrial to Sureland Industrial Fire Equipment Co.,
        Ltd.
        The $10,087,527 payment was made in December 2006.
 
 During
        June and July 2006, CFPG issued 33,500 shares of common stock to the Original
        Shareholders in consideration of a promissory note receivable totaling
        $10,752,500 and the total number of shares outstanding in the Company is
        33,500.
        As a result of this transaction, the Original Shareholders exercised control
        over the Company.
  -
            5
            -
 CHINA
            FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 March
            31,
            2008
 (Unaudited)
 The
        purchase of Sureland Industrial and the issuance of CFPG’s common stock has been
        accounted for as a reverse acquisition and recapitalization under common
        control. The assets and liabilities transferred have been accounted for at
        historical cost. The consolidated financial statements have been presented
        as if
        the acquisition of the subsidiary occurred at the beginning of 2006.
 
 **Sureland
        Industrial Fire Safety Limited (“Sureland Industrial”)** was
        established as a Sino-foreign equity joint venture in Beijing, PRC on February
        22, 1995. Sureland Industrial and its subsidiaries in China principally engage
        in the design, development, manufacturing and sale of fire protection products
        and services for industrial customers in China.
 
 On
        June
        12, 2006, the Beijing Administration for Industry and Commerce approved the
        conversion of Sureland Industrial into a limited liability company with
        registered capital at RMB 50,000,000. On May 17, 2007, the Beijing Shunyi
        District Business Administration approved the Company to increase registered
        capital to RMB 100,000,000. The Company obtained a new business license on
        July
        2, 2007 which was issued by the Beijing Administration for Industry and
        Commerce.
 
 **Beijing
        Hua An Times Fire Safety Technology Co., Ltd. (“Beijing Hua
        An”)** is a
        subsidiary of Sureland Industrial established in the PRC as a limited liability
        company on September 22, 2005 upon its establishment, 80% and 20% of its
        registered capital was contributed, in cash, by Sureland Industrial and Sureland
        Creation, respectively. On October 8, 2006, Sureland Industrial and Sureland
        Creation agreed to transfer the 20% ownership in Beijing Hua An from Sureland
        Creation to Sureland Industrial, and Sureland Industrial became 100% shareholder
        of Beijing Hua An.
 
 **Sureland
        Industrial Fire Equipment Co., Ltd. (“Sureland Equipment”)** was
        established as a Sino-foreign equity joint venture in Beijing, the People’s
        Republic of China (the PRC) on April 12, 2006 with a registered capital
        $660,000. Upon its establishment, 75% and 25% of its registered capital was
        contributed, in cash, by Sureland Industrial and Vyle Investment Inc.,
        respectively. On June 22, 2006, CFPG signed a sales and purchase agreement
        with
        the existing two shareholders, Sureland Industrial and Vyle Investment Inc.,
        to
        become 100% shareholder of Sureland Equipment. The purchase price was based
        on
        the registered capital of Sureland Equipment. On August 4, 2006, this
        transaction was approved by the Beijing Bureau of Commerce, and the registration
        with the Beijing State Administration for Industry and Commerce of the People’s
        Republic of China, (“PRC”) was completed on August 15, 2006.
 
 **Tianjin
        Tianxiao Fire Safety Equipment Co., Ltd. (“Tianxiao Equipment”)** was
        established as a limited liability company in Tianjin, PRC on April 11, 2007
        with a registered capital RMB 10,000,000. 100% of its registered capital
        was
        contributed, in cash, by Sureland Industrial. Tianxiao Equipment principally
        engages in the manufacturing and sale of fire protection products and services
        for industrial customers in China.
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            6
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 CHINA
            FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 March
            31,
            2008
 (Unaudited)
 **Note
        2 – Summary of significant accounting policies**
 
 The
        reporting entity
 
 The
        consolidated financial statements of China Fire & Security Group Inc. and
        subsidiaries reflect its wholly-owned subsidiaries CFPG, Sureland Industrial,
        Beijing Hua An, Sureland Equipment, and Tianxiao Equipment.
 
 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 2007 annual report filed on Form
        10-KSB.
 
 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 of doubtful accounts. Management evaluates all of
        its
        estimates and judgments on an on-going basis.
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            7
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 CHINA
            FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 March
            31,
            2008
 (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 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.
 
 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 our own products for each project, it is almost impossible
        to
        provide revenues for each of our 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 our 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 our products.
 
 Shipping
        and handling
 
 Costs
        related to shipping and handlings are included in cost of revenue. The Company
        accounts for shipping and handling fees and costs in accordance with Emerging
        Issues Task Force (“EITF”) Issue No. 00-10 “Accounting for Shipping and Handling
        Fees and Costs.”
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            8
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 CHINA
            FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 March
            31,
            2008
 (Unaudited)
  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.
  Translation
        adjustments amounted to $5,635,033 and $3,568,117 as of March
        31,
        2008 and
        December 31, 2007, respectively. Asset and liability accounts at March 31,
        2008
        were translated at 7.00 RMB to $1.00 USD as compared to 7.29 RMB at December
        31,
        2007. Equity accounts were stated at their historical rate. The average
        translation rates applied to income statements accounts for the three months
        ended March 31, 2008 and 2007 were 7.15 RMB and 7.75 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.
 
 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 amount to $169,388 and
        $123,134 for the three months ended March 31, 2008 and 2007,
        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.
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            9
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 CHINA
            FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 March
            31,
            2008
 (Unaudited)
  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
              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 periodically or 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 March 31,
        2008,
        the Company expects these assets to be fully recoverable.
 
 Plant
        and
        equipment consist of the following:
 
 March 31, 2008
              
              December 31, 2007Buildings
                  and improvements
              
              $
              5,288,468
              
              $
              5,077,373Transportation
                  equipment
              
              
              2,062,667
              
              
              1,985,701Machinery
              
              
              1,005,444
              
              
              970,500Office
                  equipment
              
              
              1,087,138
              
              
              1,047,350Furniture
              
              
              37,468
              
              
              35,972Total
              
              
              9,481,185
              
              
              9,116,896Less
                  accumulated depreciation
              
              
              2,677,893
              
              
              2,548,646Total
              
              $
              6,803,292
              
              $
              6,568,250
  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. Total cash (including
        restricted cash balances) in these banks at March 31, 2008 and December 31,
        2007, amounted to $19,444,952 and $20,940,016, respectively of which no deposits
        are 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.
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            10
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 CHINA
            FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 March
            31,
            2008
 (Unaudited)
 The
        Company has one major customer who represents approximately 15% of the Company’s
        sales for the three months ended
        March 31, 2008 .
        Accounts receivable from this customer was $0 as of March 31, 2008. The Company
        had one major customer who represents approximately 26% of the Company’s
        sales for the three months ended March 31, 2007. Account receivable from
        this
        customer was $0 as of March 31, 2007.
 
 Cash
        and cash equivalents
 
 The
        Company considers all highly liquid investments with original maturities
        of
        three months or less to be cash equivalents. Cash equivalents are carried
        at
        cost, which approximates at
        its
        market value.
  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.
        The amounts are $4,345,297 and $3,829,927 as of March 31, 2008 and December
        31,
        2007, respectively.
 
 March 31, 2008
              
              December 31, 2007Restricted
                  CashProducts
                  sales
              
              $
              298,695
              
              $
              102,355System
                  contracting projects
              
              
              4,046,602
              
              
              3,727,572Total
                  Restricted Cash
              
              $
              4,345,297
              
              $
              3,829,927
 
 Inventories
 
 Inventories
        are stated at the lower of cost or market, using weighted average method.
        Inventories consisted of the following at:
 
 March 31, 2008
              
              December 31, 2007Raw
                  materials
              
              $
              499,609
              
              $
              310,255Finished
                  goods
              
              
              2,388,458
              
              
              2,617,638Work
                  in progress
              
              
              1,403,663
              
              
              1,120,390Total
              
              $
              4,291,730
              
              $
              4,048,283
 
 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 March 31, 2008 and December 31, 2007 the
        Company determined no reserves are necessary.
 
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            11
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 CHINA
            FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 March
            31,
            2008
 (Unaudited)
  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.
 
 Accounts
        receivable consists of the following:
  March 31,
                2008
              
              December 31,
                2007Accounts
                  receivable:System
                  contracting projects
              
              $
              9,320,610
              
              $
              10,296,762Maintenance
                  services
              
              
              2,245,677
              
              
              670,357Products
                  sales
              
              
              7,885,160
              
              
              8,234,430Total
                  accounts receivable
              
              
              19,451,447
              
              
              19,201,549Allowance
                  for bad debts
              
              
              (2,586,606
              )
              
              (2,483,359
              )Accounts
                  receivable, net
              
              
              16,864,841
              
              
              16,718,190Accounts
                  receivable - non-current retentions
              
              
              (602,281
              )
              
              (193,029
              )Accounts
                  receivable - current
              
              $
              16,262,560
              
              $
              16,525,161
 
 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.
 
 March 31,
                2008
              
              December 31,
                2007Contract
                      costs incurred plus recognized profits less recognized losses
                      to
                      date
              
              $
              67,543,054
              
              $
              50,877,880Less
                  progress billings
              
              
              47,125,916
              
              
              37,809,844Costs
                  and estimated earnings in excess of billings
              
              $
              20,417,138
              
              $
              13,068,036
 
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            12
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 CHINA
            FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 March
            31,
            2008
 (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.
 
 March
                  31,
                2008
              
              December
                  31,2007Progress
                  billings
              
              $
              7,886,705
              
              $
              15,713,786Contracts
                  costs incurred plus recognized profits estimated less recognized
                  losses
              
              
              6,331,408
              
              
              10,831,569Billings
                  in excess of costs and estimated earnings
              
              $
              1,555,297
              
              $
              4,882,217
 
 At
        March
        31, 2008 and December 31, 2007, retentions held by customers of system
        contracting projects included in the Company’s accounts receivable as
        following:
  March 31, 2008
              
              December 31, 2007RetentionsCurrent
              
              $
              2,347,466
              
              $
              2,829,250Non-current
              
              
              602,281
              
              
              193,029Total
                  retentions
              
              $
              2,949,747
              
              $
              3,022,279
 
 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.
 
 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 we 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.
 
 Warranties
 
 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. Historically, failure of product
        parts due to materials or workmanship is rare. Therefore, at March 31, 2008
        and
        December 31, 2007, the Company made no provision for warranty claims for
        our
        products. Management continuously evaluates the potential warranty obligation.
        Management will record the expenses related to the warranty obligation when
        the
        estimated amount become material at the time revenue is recorded.
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            13
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 CHINA
            FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 March
            31,
            2008
 (Unaudited)
 Fair
        value of financial instruments
 
 On
        January 1, 2008, the Company adopted SFAS No. 157. SFAS No. 157, Fair Value
        Measurements, 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
        current assets and current liabilities 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
        Company invested $162,793 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 March 31, 2008 amounted to $1,162,793.
        Since there is no quoted or observable market price for the fair value of
        similar long term in joint venture, 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 other assets and liabilities that are required
        to
        be presented on the balance sheet at fair value in accordance with SFAS No.
        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 for $635,757. The land use rights expire in 2051.
        The
        costs of these rights are being amortized over
        fifty years using
        the straight-line method. As of March 31, 2008 and December 31, 2007, accumulated
        amortization amounted to $141,301 and $137,672, respectively. Amortization expense amounted to $3,629 and $3,349 for the three months ended
        March 31, 2008 and 2007, respectively.
 
 Technology
        rights - In May 2007, the Company acquired two technology rights to manufacture
        fire protection products for $608,745. The costs of these rights are being
        amortized over
        ten
        years using
        the straight-line method. As of March 31, 2008, accumulated
        amortization amounted to $55,802. A mortization
        expense amounted to $15,219 for the three months ended March 31,
        2008
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            14
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 CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 March
          31,
          2008
 (Unaudited)
 Intangible
        assets of the Company are reviewed annually 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 March 31, 2008, the Company expects these assets to be fully recoverable.
 
 Income
        taxes
 
 The
        Company adopted Statement of Financial Accounting Standards No. 109, “Accounting
        for Income Taxes” (SFAS 109). 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. There are no deferred tax amounts at March 31, 2008
        and
        December 31, 2007.
 
 The
        Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
        Taxes” (“FIN 48”), as of January 1, 2007. 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 adoption had no affect
        on the
        Company’s financial statements.
 
 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.
 
 The
        Company does not anticipate any events which could cause change to these
        uncertainties.
 
 The
        Company is subject to taxation in the U.S. and in the PRC jurisdictions.
        There
        are no ongoing examinations by taxing authorities at this time. The years
        2005
        to 2008 remain subject to examination by the United States tax authorities.
        The
        year 2008 remain subject to examination by the PRC tax authorities.
 
 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.
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            15
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 CHINA
              FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 March
              31,
              2008
 (Unaudited)
 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
        principle, 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.
 
 Beginning
        January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
        existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
        (“FIEs”).
 
 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 $964,361 and $742,064 for the three
        months ended March 31, 2008, and $1,246,335 and $959,663 for the three months
        ended March 31, 2007 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.
 
 Stock
        based compensation
 
 The
        Company adopted Statement of Financial Accounting Standards No. 123R “Accounting
        for Stock-Based Compensation” (“SFAS 123R”) 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 for
        stock
        granted to non-employees has been determined in accordance with SFAS 123R
        and
        the Emerging Issues Task Force consensus Issue No. 96-18, "Accounting for
        Equity
        Instruments that are issued to Other than Employees for Acquiring, or in
        Conjunction with Selling Goods or Services" ("EITF 96-18"), as the fair value
        of
        the consideration received or the fair value of equity instruments issued,
        whichever is more reliably measured.
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            16
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 CHINA
            FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 March
            31,
            2008
 (Unaudited)
 
 Recently
        issued accounting pronouncements
 
 In
        February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
        Assets and Financial Liabilities—including an amendment of FASB Statement No.
        115 (“FAS 159”). FAS 159 permits companies to choose to measure many financial
        instruments and certain other items at fair value that  are
        not
        currently required to be measured at fair value. The objective of FAS 159
        is to
        provide opportunities to mitigate volatility in reported earnings caused
        by  measuring
        related assets and liabilities differently without having to apply hedge
        accounting provisions. FAS 159 also establishes presentation and
        disclosure  requirements
        designed to facilitate comparisons between companies that choose different
        measurement attributes for similar types of assets and liabilities. SFAS
        No. 159
        is effective as of the beginning of an entity’s first fiscal year that begins
        after November 15, 2007. The Company adopted SFAS No. 159 on January 1, 2008.
        The Company chose not to elect the option to measure the fair value of eligible
        financial assets and liabilities.
 
 In
        June
        2007, the
        FASB
        issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance
        Payments for Goods or Services Received for use in Future Research and
        Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable
        advance payments for goods or services that used or rendered for research
        and
        development activities should be expensed when the advance payment is made
        or
        when the research and development activity has been performed. FSP EITF 07-3
        will be effective for an entity’s financial statements issued for fiscal years
        beginning after than December 15, 2007. The adoption of FSP EITF 07-3 did
        not
        impact our consolidated financial statements.
 
 In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
        Consolidated Financial Statements - an amendment of Accounting Research Bulletin
        No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
        ownership interests in subsidiaries held by parties other than the parent,
        the
        amount of consolidated net income attributable to the parent and to the
        noncontrolling interest, changes in a parent’s ownership interest and the
        valuation of retained non-controlling equity investments when a subsidiary
        is
        deconsolidated. The Statement also establishes reporting requirements that
        provide sufficient disclosures that clearly identify and distinguish between
        the
        interests of the parent and the interests of the non-controlling owners.
        SFAS
        160 is effective for fiscal years beginning after December 15, 2008. The
        Company
        has not determined the effect that the application of SFAS 160 will have
        on its
        consolidated financial statements.
  -
            17
            -
 CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 March
          31,
          2008
 (Unaudited)
 
 In
        December 2007, Statement of Financial Accounting Standards No. 141(R), *Business
        Combinations* ,
        was
        issued. SFAS No. 141R replaces SFAS No. 141, *Business
        Combinations.* SFAS
        141R
        retains the fundamental requirements in SFAS 141 that the acquisition method
        of
        accounting (which SFAS 141 called the *purchase
        method* )
        be used
        for all business combinations and for an acquirer to be identified for each
        business combination. SFAS 141R requires an acquirer to recognize the assets
        acquired, the liabilities assumed, and any noncontrolling interest in the
        acquiree at the acquisition date, measured at their fair values as of that
        date,
        with limited exceptions. This replaces SFAS 141’s cost-allocation process, which
        required the cost of an acquisition to be allocated to the individual assets
        acquired and liabilities assumed based on their estimated fair values. SFAS
        141R
        also requires the acquirer in a business combination achieved in stages
        (sometimes referred to as a step acquisition) to recognize the identifiable
        assets and liabilities, as well as the noncontrolling interest in the acquiree,
        at the full amounts of their fair values (or other amounts determined in
        accordance with SFAS 141R). SFAS 141R applies prospectively to business
        combinations for which the acquisition date is on or after the beginning
        of the
        first annual reporting period beginning on or after December 15, 2008. An
        entity
        may not apply it before that date. The Company is currently evaluating the
        impact that adopting SFAS No. 141R will have on its financial
        statements.
 
 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
        No.
        128, “Earnings per Share.” SFAS No. 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 earnings 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 months ended March 31, 2008 and 2007:
 
 2008
              
              2007Net
                  income for earnings per share
              
              $
              4,740,780
              
              $
              4,130,116Weighted
                  average shares used in basic computation
              
              
              27,556,893
              
              
              26,461,678Diluted
                  effect of stock options and warrants
              
              
              596,288
              
              
              539,850Weighted
                  average shares used in diluted computation
              
              
              28,153,181
              
              
              27,001,528Earnings
                  per share:Basic
              
              $
              0.17
              
              $
              0.16Diluted
              
              $
              0.17
              
              $
              0.15
  -
            18
            -
 CHINA
            FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 March
            31,
            2008
 (Unaudited)
  At
        March
        31, 2008, all outstanding stock options and warrants were included in the
        calculation of diluted earnings per share.
 
 **Note
        4 - Supplemental disclosure of cash flow information**
 
 For
        the
        three months ended March 31, 2008 and 2007, supplemental cash flow information
        is as follows:
  2008
              
              2007Interest
                  paid
              
              $
              -
              
              $
              -Income
                  tax paid
              
              $
              5,510
              
              $
              47,978
 
 **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 $3,867,484 and $3,315,811 as of March 31,
        2008 and December 31, 2007, 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
        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 $2,805,928 and $2,218,391
        as
        of March 31, 2008 and December 31, 2007, respectively.
  **Note
        7 – Investment in joint ventures**
 
 During
        the second quarter of 2007, the Company invested $162,793 for a 19% interest
        in
        Hubei Shou An Changjiang Fire Protection Co., Ltd., located in China Hubei,
        PRC.
        Investment is recorded under cost method.
  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.
  -
            19
            -
 CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 March
          31,
          2008
 (Unaudited)
 The
        Company has not consolidated the financial statements of these two joint
        ventures into its financial statements as the Company does not have the ability
        to exercise significant influence over the joint venture companies.
 
 **Note
        8 – Customer deposits**
 
 Customer
        deposits represent amounts advanced by customers on products orders, 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. As of March 31, 2008 and December 31,
        2007, customer deposits amounted to $6,946,981 and $4,757,179,
        respectively.
 
 **Note
        9 – Accrued liabilities**
 
 Accrued
        liabilities represent subcontractors’ expenses incurred as of balance sheet date
        for system contracting projects. As of March 31, 2008 and December 31, 2007,
        accrued liabilities amounted to $5,539,274 and $4,214,530,
        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
        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.
 
 Under
        the
        Income Tax Laws of Beijing State Administration Taxation of PRC, any enterprise
        with manufacturing operations in the City of Beijing who is a wholly owned
        subsidiary of a foreign enterprise is subject to income tax rate of
        24%.
 
 On
        July
        19, 2006, Sureland Industrial became a wholly owned subsidiary of the Company,
        a
        foreign enterprise, and will start enjoying the exemption from January 1,
        2007
        to December 31, 2008, and is entitled to a 50% reduction of the special income
        tax rate of 24%, which is a rate of 12% from January 2009 to December 31,
        2011.
 
 On
        August
        4, 2006, Sureland Equipment became a wholly owned subsidiary of the Company,
        a
        foreign enterprise, and was granted income tax exemption from April 2006
        to
        December 31, 2007, and is entitled to a 50% reduction of the special income
        tax
        rate of 24%, which is a rate of 12% from January 2008 to December 31,
        2010.
  -
            20
            -
 CHINA
            FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 March
            31,
            2008
 (Unaudited)
 Beijing
        Hua An were established and registered in the New Technology Enterprise
        Development Zone, Beijing, PRC and are subject to the rate of 15% and have
        been
        certified by the relevant PRC authorities high technology enterprises. However
        pursuant to approval documents issued by the relevant tax bureau, Beijing
        Hua An
        obtained additional tax benefits. Beijing Hua An is exempt from income taxes
        from January 2006 to December 31, 2008 and is entitled to a 50% reduction of
        the
        special income tax rate of 15% which is a rate of 7.5% from January 2009
        to
        December 31, 2011.
 
 Tianxiao
        Equipment has no income tax exemption and therefore it has an income tax
        rate of
        33% from its establishment.
 
 Beginning
        from January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
        existing income tax laws for Domestic Enterprises (“DES”) and Foreign Invested
        Enterprises (“FIEs”).
 
 The
        key
        changes are:
 
 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.
 
 Beginning
        from January 1, 2008, Sureland Industrial will
        continue to enjoy the exemption from income tax till December 31, 2008 and
        be entitled
        to a 50% reduction of
        the
        income tax rate of 25% which is a rate of 12.5% from January 2009 to December
        31, 2011. Beginning January 1, 2012, Sureland Industrial will be entitled
        to an
        income tax rate of 25%.
 
 Beginning
        from January 1, 2008, Sureland Equipment will
        continue to enjoy a 50% reduction of
        the
        income tax rate of 25%, which is a rate of 12.5%, till December 31, 2010.
        Beginning January 1, 2011, Sureland Equipment will be entitled to an income
        tax
        rate of 25%.
 
 Beginning
        from January 1, 2008, Tianxiao Equipment will be
        entitled to an income tax rate of 25%.
 
 Beginning
        from January 1, 2008, Beijing Hua An will
        continue to enjoy the exemption from income tax till December 31, 2008 and
        be entitled
        to a reduced income
        tax rate of 10%, 11%, 12% for 2009, 2010 and 2011 respectively. Beginning
        January 1, 2012, Beijing Hua An will be entitled to an income tax rate of
        25%.
 
 The
        provision for income taxes for the three months ended March 31, 2008 and
        2007
        amounted to $48,642 and $0, respectively.
  -
            21
            -
 CHINA
            FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 March
            31,
            2008
 (Unaudited)
  The
        following table reconciles the U.S. statutory rates to the Company’s effective
        tax rate for the three months ended March 31:
 
 2008
              
              2007U.S.
                  Statutory rates
              
              
              34.0
              %
              
              34.0
              %Foreign
                  income not recognized in USA
              
              
              (34.0
              )
              
              (34.0
              )China
                  income taxes
              
              
              25.0
              
              
              33.0China
                  income tax exemption
              
              
              (24.0
              )
              
              (33.0
              )Total
                  provision for income taxes
              
              
              1.0
              %
              
              -
              %
 
 The
        estimated tax savings for the three months ended March 31, 2008 and 2007
        amounted to $1,241,570 and $1,185,465, respectively. The net effect on basic
        earnings per share if the income tax had been applied would decrease basic
        earnings per share for the three months ended March 31, 2008 and 2007 by
        $0.05
        and $0.04, 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 three
        months
        ended March 31, 2008. The 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 utilized,
        beginning in 2025 and continue 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
        accumulated valuation allowance as of March 31, 2008 amounted to $341,501.
        Management will review this valuation allowance periodically and make
        adjustments as warranted.
 
 Taxes
        payable
 
 Taxes
        payable as of March 31, 2008 and December 31, 2007 consisted of the
        following:
 
 March 31, 2008
              
              December 31, 2007VAT
                  taxes (credit) payable
              
              $
              (102,008
              )
              $
              71,367Income
                  taxes payable
              
              
              49,696
              
              
              5,915Sales
                  taxes
              
              
              1,167,378
              
              
              979,999Other
                  taxes (credit) payable
              
              
              (304
              )
              
              31,054Total
              
              $
              1,114,762
              
              $
              1,088,335
 
 **Note
        11 – Retirement plan**
 
 The
        Compan y
        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 2008 and 2007. The contributions
        are charged to the 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
        $50,780 and $36,996 for
        the
        three months ended March 31, 2008 and 2007 ,
        respectively.
  -
            22
            -
 CHINA
            FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 March
            31,
            2008
 (Unaudited)
  **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.
 
 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 three months ended March 31, 2008 and 2007, the Company
        transferred $1,641,434 and $0, respectively. 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.
 
 On
        May
        17, 2007, the Beijing Shunyi District Business Administration approved the
        Company to increase registered capital from RMB 50,000,000 to RMB 100,000,000.
        $605,000 or RMB 5,000,000 was approved by the Beijing Shunyi District Business
        Administration to be transferred out from this surplus reserve fund as an
        increase of 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 three months ended March 31, 2008 and 2007.
 
 **Note
        13 – Shareholders’ equity**
 
 On
        October 27, 2006, pursuant to a Securities Purchase Agreement dated October
        27,
        2006 (“SPA”), the Company issued 1,538,600 units of common stock at $3.25 per
        share, Series A warrants expiring on October 27, 2011 to acquire 307,723
        shares
        at $3.58 per share and Series B warrants expiring on October 27, 2011 to
        acquire
        307,723 shares at $4.88 per share.  The Company also issued 115,395
        warrants at exercise price of $3.25 per share, expiring on October 27,
        2011.
  -
            23
            -
 CHINA
            FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 March
            31,
            2008
 (Unaudited)
 On
        December 5, 2006, under the SPA, the Company issued 923,078 units of common
        stock at $3.25 per share, Series A
        warrants expiring on December 5, 2011 to acquire 184,617 shares at $3.58
        per
        share and Series B warrants expiring on December 5, 2011 to acquire 184,617
        shares at $4.88 per share. The Company also issued 69,231 warrants at exercise
        price of $3.25 per share, expiring December 5, 2011.
  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
        March
        12, 2008, the Company’s Board of Directors authorized the repurchase of up to
        $10 million of the Company's outstanding common stock.
 
 Warrants
 
 In
        order
        for the warrants to be accounted for as equity, the warrants must comply
        with
        FAS 133 and EITF 00-19. Under the original terms, the Series A and Series
        B
        warrant agreements, the warrant holders under certain circumstances, at their
        option, could elect to receive an amount in cash equal to the fair value
        of the
        warrant calculated in accordance with the Black-Scholes formula. Thus, the
        warrant holders had rights to a cash payment that are not available to other
        common stockholders, which failed the test in paragraph 27 of EITF 00-19.
        The
        failure of this test therefore resulted in classification of the warrants
        as
        derivative instrument liabilities, rather than as equity instruments. The
        Company allocated the proceeds received between the common stock and warrants
        based upon the fair values on the dates the proceeds were received. The value
        of
        the warrants was determined using the Cox-Ross-Rubinstein binomial model
        using
        the following assumptions: volatility 75%; risk free interest rate 4.64%;
        dividend yield of 0% and expected term of 5 years. Net proceeds were allocated
        as the follows:
 
 Warrants
              
              $
              1,110,236Common
                  stock
              
              
              6,030,602Total
                  Net Proceeds
              
              $
              7,140,838
 
 Subsequent
        to the initial recording, the change in the fair value of the warrants,
        determined under the Cox-Ross-Rubinstein binomial model, at each reporting
        date
        was recorded as a gain or loss on derivative instruments.
 
 On
        April
        26, 2007, the Company amended its Series A Warrants and Series B Warrants
        issued
        to certain investors on October 27 and December 5, 2006 pursuant to the
        Securities Purchase Agreement in connection with a private placement (the
        “Amendment”). The Amendment eliminates the right of the warrant holders to be
        paid in cash in the event of a merger or other types of reorganization. The
        warrants no longer need to be accounted for as derivative instrument
        liabilities.  The fair value of the warrants were transferred to equity on
        the signing date and no further accounting (i.e., no mark-to-market) is required
        going forward. As of December 31, 2006 the fair value of the derivative
        instrument totaled $2,680,811. At April 26, 2007, the Company determined
        the
        fair value of the warrants was $1,475,020 using the Cox-Ross-Rubinstein binomial
        model with the following assumptions: volatility 25%; risk free interest
        rate
        4.59%; dividend yield of 0% and expected term of 4.5 years. A gain of $1,205,791
        was recognized in the accompanying income statement based on the decrease
        in
        fair value since prior period ended December 31, 2006. On April 26, 2007,
        the
        fair value of the warrants was transferred to additional paid-in capital.
  -
            24
            -
 CHINA
              FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 March
              31,
              2008
 (Unaudited)
 In
        2007,
        a total of 492,340 Series A warrants exercised at $3.58 and 492,340
        Series B warrants exercised at $4.88 for a total of 984,680 shares of
        common stock. The Company received a total of $4,165,197 from various warrant
        holders.
 
 In
        2007,
        a total of 179,626 warrants were converted into 110,535 shares of common
        stock
        by the warrants holders using the cashless exercise options.
 
 On
        February 1, 2007, CFPG issued 50,000 warrants to Hayden Communication, the
        Company’s investor relations consultant, as part of its compensation. These
        warrants meet the conditions for equity classification pursuant to FAS 133
        and
        EITF 00-19. Therefore, the warrants were classified as equity and accounted
        as
        compensation expenses. The warrants vest one year from the grant date. The
        Company used the Black Scholes model to value the options at the time they
        were
        issued, based on the exercise price of $4.25 and expiration dates of the
        instruments and using a risk-free rate of 4.84% and the volatility at 50%
        that
        was estimated by analyzing the trading history of the Company’s stock. At that
        market price, the 50,000 warrants had a fair value of approximately $94,274.
        The
        service that the investor relation consultant provides started from the second
        quarter of 2007; the related compensation expense is recognized on a
        straight-line basis over the total service period and has been fully expensed
        in
        2007.
 
 The
        Company’s warrant activity is as follows:
 
 Weighted
              
              AverageWarrants
              
              Warrants
              
              Average
                Exercise
              
              Remaining
                ContractualOutstanding
              
              Exercisable
              
              Price
              
              LifeOutstanding,
                  December 31, 2006
              
              
              1,169,306
              
              
              1,169,306
              
              $
              4.23
              
              
              4.58Granted
              
              
              50,000
              
              
              50,000
              
              $
              4.25
              
              
              3.58ForfeitedExercised
              
              
              (1,164,306
              )
              
              (1,164,306
              )
              $
              4.23Outstanding,
                  December 31, 2007
              
              
              55,000
              
              
              55,000
              
              $
              4.19
              
              
              3.33GrantedForfeitedExercisedOutstanding,
                  March 31, 2008
              
              
              55,000
              
              
              55,000
              
              $
              4.19
              
              
              3.08
  -
            25
            -
 CHINA
            FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 March
            31,
            2008
 (Unaudited)
 **Note
        14 – Options issued to employees**
 
 On
        July
        1, 2006, CFPG issued 750,000 options to the employees of Sureland Industrial.
        Fifty percent of the options vested immediately, with the balance vesting
        evenly
        each quarter over the following two years. The Company used the
        Cox-Ross-Rubinstein binomial model to value the options at the time they
        were
        issued, based on the stated exercise prices and expiration dates of the
        instruments and using a risk-free rate of 5.11%. Because the Company does
        not
        have a history of employee stock options, the estimated life is based on
        one
        half of the sum of the vesting period and the contractual life of the option.
        This is the same as assuming that the options are exercised at the mid-point
        between the vesting date and expiration date.
 
 The
        Company’s stock was not traded when the options were granted. Therefore, the
        Company had to estimate the market value of its shares. There was no significant
        change in the business between July and October 2006, therefore, the company
        used the fair value from the October 27 transaction of $2.26 and took a discount
        of 30%, to estimate a market price of $1.58. At that market price, the 750,000
        employee options had a fair value of approximately $834,000. Because 50%
        of the
        options vested immediately, the related compensation expense was recognized
        as
        the options vest, rather than on a straight-line basis over the total vesting
        period, as the amount recognized at any point in time must be at least equal
        to
        the portion vested. The expense recognized for the three months ended March
        31,
        2008 and 2007 amounted to $14,000 and $65,000, respectively.
 
 On
        April
        20, 2007, CFPG issued 9,500 options to the Company’s four independent directors
        as part of their compensation. The options will vest immediately after one
        year
        from the issuance date. The fair value of these warrants was determined to
        be
        $19,428 using the Black Sholes model with the following assumptions: volatility
        45%; risk free interest rate 4.57%; dividend yield of 0% and expected term
        of 5
        years. Options were vested immediately at exercise price of $4.51 per share
        which was the close price of the Company’s stock on April 19, 2007. Because the
        services that the independent directors are to provide started from the second
        quarter of 2007 and will last for one year, the related compensation expense
        is
        recognized on a straight-line basis over the total service period. The
        compensation expense for the three months ended March 31, 2008 was
        $4,857.
 
 On
        July
        1, 2007, CFPG issued 20,000 options to Mr. Yuan, Xiaoyuan, who joined the
        Company as Chief Accounting Officer on the same day. The options will vest
        evenly each quarter over the following four years, starting from the third
        quarter of 2007. The Company used the Black Sholes model to value the options
        at
        the time they were issued, based on the exercise price of $6.70, which was
        the
        close price of the Company’s stock on June 30, 2007 and expiration dates of the
        instruments and using a risk-free rate of 4.84% and the volatility of 40%
        that
        was estimated by analyzing the trading history of the Company’s stock. At that
        market price, the 20,000 employee options had a fair value of $57,178. Because
        the options will vest each quarter over the following four years, the related
        compensation expense is recognized on a straight-line basis over the total
        vesting period. The expense recognized for the three months ended March 31,
        2008
        was $3,574.
  -
            26
            -
 CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 March
          31,
          2008
 (Unaudited)
 The
        Company has stock options as follows:
 
 WeightedOptions
              
              Average Exercise
              
              AggregateOutstanding
              
              Price
              
              Intrinsic ValueOutstanding,
                  December 31, 2006
              
              
              750,000
              
              $
              1.25
              
              
              2,782,500Granted
              
              
              29,500
              
              $
              5.99ForfeitedExercisedOutstanding,
                  December 31, 2007
              
              
              779,500
              
              $
              1.43
              
              
              8,925,615GrantedForfeitedExercisedOutstanding,
                  March 31, 2008
              
              
              779,500
              
              $
              1.43
              
              
              4,365,845
 
 Following
        is a summary of the status of options outstanding at March 31,
        2008:
 
 Outstanding Options
              
              Exercisable OptionsNumber of
                Options
              
              Exercise
                Price
              
              Average
                Remaining
                Contractual Life
              
              Number of
                Options
              
              Exercise
                Price
              
              Average
                Remaining
                Contractual Life750,000
              
              
              1.25
              
              
              3.25
              
              
              656,250
              
              
              1.25
              
              
              3.259,500
              
              
              4.51
              
              
              4.08
              
              
              9,500
              
              
              4.51
              
              
              4.0820,000
              
              
              6.70
              
              
              4.25
              
              
              3,750
              
              
              6.70
              
              
              4.25
  **Note
        15** ** **–** ** **Restructuring
        of subsidiaries**
  On
        April
        2, 2007, the Company evaluated the operations of its subsidiary, Beijing
        Zhong
        Xiao Fire Safety Technology Co., Ltd. (“Beijing Zhong Xiao”) and noted
        efficiencies could be obtained by consolidating the operations of Beijing
        Zhong
        Xiao into Sureland Equipment.
 
 Beijing
        Zhong Xiao was a subsidiary of Sureland Industrial established in the PRC
        as a
        limited liability company on March 18, 2003. On April 3, 2007, Sureland
        Industrial signed an agreement to transfer 100% ownership in Beijing Zhong
        Xiao
        to Gong Gang Qiang, a Chinese individual, for consideration price equal to
        the
        net assets of Beijing Zhong Xiao as of March 31, 2007.
  After
        the
        restructuring of Beijing Zhong Xiao, the Company still has a significant
        continuing involvement in the historical operations of the manufacturing
        of fire
        safety and protection products through Sureland Equipment, which results
        in the
        Company failing the test in paragraph 42 of FAS 144 “Accounting for the
        Impairment or Disposal of Long-Lived Assets”. The failure of this test therefore
        does not require the classification of the disposal of Beijing Zhong Xiao as
        a
        discontinued operation.
  -
            27
            -




**Item
      2. Management's Discussion and Analysis or Plan of
      Operation**





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, manufacture and sale of fire protection
      products and services for large industrial consumers 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
      the
      first in China to leverage high technology for fire protection and safety to
      clients such as 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 Sureland Industrial Fire
      Equipment Co. Ltd (Sureland Equipment) in exchange for a controlling interest
      in
      our common shares. The transaction was completed on Oct 27, 2006.





China
      Fire Protection Group, Inc. 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 Equipment, a Chinese
      corporation, which collectively engage in the design, development, manufacturing
      and sale of fire protection products and services for large industrial consumers
      in China. As a result of the transactions described above, both Sureland
      Industrial and Sureland Equipment became wholly-owned subsidiaries of China
      Fire
      Protection Group, Inc., and China Fire Protection Group, Inc. is a wholly-owned
      subsidiary of Unipro Financial Services, Inc. (Unipro).





On
      February 9, 2007, Unipro changed its name to China Fire & Security Group,
      Inc. (CFSG) and started trading on OTC Bulletin Board under its new ticker
      symbol CFSG. On July 16, 2007, China Fire & Security Group, Inc. began
      trading on 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 of a variety
      of fire safety products for the industrial fire safety market and of design
      and
      installation of industrial fire safety systems in which it uses its own fire
      safety products in China. 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 to manufacture products for the export
      market and it has begun to provide a fire safety system for a Chinese company
      operating abroad.




-
          28
          -




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,
      tobacco warehouses and a nuclear reactor. It is developing its business in
      the
      transportation, wine and tobacco, 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.




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 only manufacturer in China which has successfully developed
      a
      comprehensive line of linear heat detectors.




By
      March
      31, 2008, Sureland operates more than 30 sales and liaison offices in
      China.




Sureland
      has been ranked as the leading Chinese industrial fire safety company twice
      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 customers in 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. 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.




-
          29
          -




4.
            Dividend
                income is recognized when the shareholders’ right to receive payment has
                been established.




5.
            Provision
                is made for foreseeable losses as soon as they are anticipated by
                management.




6.
            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.




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 any currency
      trading or hedging, although there is no assurance that the Company will not
      enter into such activities in the future.




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 of 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 or to determine if any reserves
      are necessary for potential obsolescence.




Accounts
      receivable




Accounts
      receivable represents the product 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.




-
          30
          -




**Results
      of Operations**





The
      following is a schedule showing results of our business.





**Three
      Months Financial Results**





***Comparison
      of the three months ended on March 31, 2008 and 2007:***




**Three months ended**
              **March 31,****2008**
            
            **2007**Revenues
            
            $
            14,696,626
            
            $
            9,499,460Cost
                of revenues
            
            
            6,652,231
            
            
            4,483,555Gross
                profits
            
            
            8,044,395
            
            
            5,015,905Operating
                expenses
            
            
            3,394,683
            
            
            1,739,232Income
                from operations
            
            
            4,649,712
            
            
            3,276,673Total
                other income(expense)
            
            
            139,710
            
            
            853,443Change
                in fair value of derivative instruments
            
            
            -
            
            
            834,163Income
                before income taxes and minority interest
            
            
            4,789,422
            
            
            4,130,116Income
                taxes
            
            
            48,642
            
            
            -Minority
                interest
            
            
            -
            
            
            -Net
                profit (loss)
            
            
            4,740,780
            
            
            4,130,116Foreign
                exchange adjustment
            
            
            2,066,916
            
            
            295,559Comprehensive
                income
            
            
            6,807,696
            
            
            4,425,675weighted
                average number of shares-basic
            
            
            27,556,893
            
            
            26,461,678weighted
                average number of shares-diluted
            
            
            28,153,181
            
            
            27,001,528earning
                per share-basic
            
            
            0.17
            
            
            0.16earning
                per share-diluted
            
            
            0.17
            
            
            0.15





Total
      revenues were approximately $14.7 million for the three months ended March
      31,
      2008 as compared to approximately $9.5 million for the three months ended March
      31, 2007, an increase of approximately $5.2 million or 54.7 percent. This
      increase was primarily due to increases in our revenues from system contracting
      projects and maintenance service during the period. The Company performed 146
      total solution, product sales and maintenance service contracts for the three
      months ended March 31, 2008 as compared to 96 contracts for the three months
      ended March 31, 2007.





The
      revenues from total solution contracts increased by 55.7 percent to $11.3
      million with 81 contracts performed for the three months ended March 31, 2008,
      compared to $7.3 million with 63 contracts performed for the same period of
      last
      year; The
      revenues from product sales increased by 37.1 percent to $2.9 million with
      33
      contracts performed for the three months ended March 31, 2008, compared to
      $2.1
      million with 26 contracts performed for the same period of last year. The
      revenues from maintenance service increased by 301.1 percent to $0.5 million
      with 32 contracts performed for the three months ended March 31, 2008, compared
      to $0.1 million with 7 contracts performed for the same period of last year.
      In
      particular, the three largest customers were Anshan Iron and Steel Group, Datang
      Tashan Power Plant and Wuhan Iron and Steel Group, which collectively
      contributed approximately $4.9 million, representing 32.8 percent of our total
      revenues for this period.





Cost
      of
      revenues for the three months ended March 31, 2008 was approximately $6.7
      million or 45.3 percent of revenues, as compared to $4.5 million or 47.2 percent
      of revenue for the three months ended March 31, 2007. Gross margin during this
      period was 54.7 percent, which is higher than the gross margin of 52.8 percent
      for the same period of 2007. The increase in the gross margin was mainly
      attributable to a higher percentage of revenue contribution from the sales
      of
      the Company’s proprietary products which enjoy higher margins.




-
          31
          -




Operating
      expenses were approximately $3.4 million for the three months ended March 31,
      2008, as compared to approximately $1.7 million for the three months ended
      March
      31, 2007. This represents an increase of approximately $1.7 million or 95.2
      percent. Compared to the same period of last year, the Company increased the
      number of its employees, its expenditures in sales-related activities and raised
      the compensation for management to be in line with other US public companies.
      The increase in expenses is also attributable to the increased costs related
      to
      being listed as a public company in the United States.





Operating
      income was approximately $4.6 million for the three months ended March 31,
      2008
      as compared to approximately $3.3 million for the three months ended March
      31,
      2007, representing a 41.9 percent increase. The improvement in operating income
      was mainly attributable to the increased revenues and gross margin during the
      period.





Total
      other income was $139,710 for the three months ended March 31, 2008, compared
      to
      $853,443 for the three months ended March 31, 2007, which included a one-time
      non-cash gain of $853,443 due to the change in fair value of derivative
      instruments.





Provision
      for income tax was $48,642 for the three months ended March 31, 2008, compared
      to no provisions for income tax for the three months ended March 31, 2007.
      Starting in the year 2008, the Company’s two subsidiaries, Sureland Equipment
      and Tianxiao Equipment, are subject to income tax charge rates of 12.5% and
      25%
      respectively, resulting in income tax charges of $32,889 and $15,753 in this
      period.





The
      Company’s net income was approximately $4.7 million for the three months ended
      March 31, 2008 as compared to approximately $4.1 million net income for the
      three months ended March 31, 2007, representing an increase of $0.6 million
      or
      14.8 percent.





Excluding
      a one-time non-cash gain of $0.8 million for the change in fair value of
      derivative in the three months ended March 31, 2007, the non-GAAP net income
      for
      the three months ended March 31 of 2007 was $3.3 million. On a non-GAAP basis,
      our net income for the three months ended March 31, 2008 increased 43.8 percent
      in comparison to the non-GAAP net income for the three months ended March 31,
      2007. The reason for the increase in the net income was mainly due to the
      increase in the Company’s revenues and improvement in gross margin.





Currency
      translation adjustments resulting from RMB
      appreciation process
      amounted to $2,066,916 and $295,559 for the three months ended March 31, 2008
      and 2007, respectively.





The
      comprehensive income, which adds the currency adjustment to the net income,
      was
      approximately $6.8 million for the three months ended March 31, 2008 as compared
      to approximately $4.4 million comprehensive income for the three months ended
      March 31, 2007, representing an increase of $2.4 million or 53.8
      percent.





**Liquidity
      and Capital Resources**




As
      of
      March 31, 2008, we had working capital of $47.0 million including cash and
      cash
      equivalents of $15.1 million. The following table sets forth a summary of our
      cash flows for the period indicated:




-
          32
          -





**Statement
      of Cash Flow**




Three Months Ended
              March 31,2008
            
            2007Net
                cash provided by (used in) operating activities
            
            $
            (1,799,124
            )
            $
            (280,568
            )Net
                cash (used in) investing activities
            
            
            (18,693
            )
            
            (226,350
            )Net
                cash provided by financing activities
            
            
            (348,582
            )
            
            902,781Effect
                of foreign currency translation on cash and cash
                equivalents
            
            
            167,872
            
            
            99,403Net
                cash flow
            
            $
            (1,998,527
            )
            $
            495,266




***Operating
      Activities***




Net
      cash
      used by operating activities was approximately $1.8 million for the three months
      ended March 31, 2008 as compared to approximately $0.3 million net cash used
      by
      operating activities for the same period in 2007. Net cash used by operating
      activities in the three months ended March 31, 2008 was mainly due to the result
      of a $6.7 million increase in costs and estimated earnings in excess of billings
      and a $3.5 million decrease in billings in excess of costs and estimated
      earnings offset by the net income of $4.7 million, a $0.8 million decrease
      in
      employee advances, a $2.0 million increase in customer deposits and a $1.1
      million increase in accrued liabilities.





The
      increase of $6.7 million in costs and estimated earnings in excess of billings
      was mainly due to the increased number of projects where we have billed the
      customers more than we have recognized revenues for these projects, while the
      decrease of $3.5 million in billings in excess of costs and estimated earnings
      was mainly due to the decreased number of projects where we have billed the
      customers less than we have recognized revenues for these projects. The
      Company’s management intends to reinforce its efforts in the collection of
      account receivables in the following quarters of 2008.





***Investing
      Activities***




Net
      cash
      used in investing activities in the three months ended March 31, 2008 was
      $18,693 as compared to net cash used in investing activities of $226,350 in
      the
      same period of 2007 for the purchase of building and equipment.





***Financing
      Activities***




Net
      cash
      used by financing activities in the three months ended March 31, 2008 totaled
      $348,582 as compared to $902,781 provided in financing activities in the same
      period of 2007.




As
      a
      result of the total cash activities, net cash decreased $2.0 million from
      December 31, 2007 to March 31, 2008.  We believe that our currently
      available working capital of $47.0 million including cash and cash equivalents
      of $15.1 million should be adequate to sustain our operations at our current
      level.





**Off-Balance
      Sheet Arrangements**





We
      do not
      have any off-balance sheet financing arrangements.





**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk.**





Not
      required.





**Item
      4. Controls and Procedures**





As
      required by Rule 13a-15 under the Securities Exchange Act, our management has
      carried out an evaluation, with the participation of an external internal
      control consultant and under the supervision of our Chief Executive Officer
      and
      Chief Financial Officer, of the effectiveness of the design and operation of
      our
      disclosure controls and procedures as of March 31, 2008. 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 Chief Financial Officer, as appropriate, to allow
      timely decisions regarding required disclosure. In designing and evaluating
      our
      disclosure controls and procedures, management recognizes that any controls
      and
      procedures, no matter how well designed and operated, can provide only
      reasonable assurance of achieving the desired control objectives, and management
      is required to apply its judgment in evaluating and implementing possible
      controls and procedures.




-
          33
          -




Management
      conducted its evaluation of disclosure controls and procedures under the
      supervision of our Chief Executive Officer and our Chief Financial Officer.
      Based on that evaluation, management concluded that as of March 31, 2008, and
      as
      of the date that the evaluation of the effectiveness of our disclosure controls
      and procedures was completed, our disclosure controls and procedures were
      ineffective subject to the following:





l
            Inadequate
                US GAAP expertise - The current staff in the accounting department
                is
                relatively inexperienced, and needs substantial training so as to
                meet
                with the higher demands of being a U.S. public company. The accounting
                skills and understanding necessary to fulfill the requirements of
                US
                GAAP-based reporting, including the skills of subsidiary financial
                statements consolidation, are
                inadequate.





***Remediation
      Initiative***




We
      have
      recently expanded our internal accounting staff and intend to continue this
      effort in the future. In particular, we are seeking accountants experienced
      in
      several key areas of accounting, including persons with experience in Chinese
      and U.S. GAAP, U.S. GAAP consolidation requirements, and SEC financial reporting
      requirements. In addition, we plan to allocate additional resources to train
      our
      existing accounting staff.





The
      Management assessed the effectiveness of our internal control over financial
      reporting as of March 31, 2008. In making this assessment, management used
      the
      framework set forth in the report entitled Internal Control - Integrated
      Framework issued by the Committee of Sponsoring Organizations of the Treadway
      Commission, or COSO. The COSO framework summarizes each of the components of
      a
      company's internal control system, including (i) the control environment, (ii)
      risk assessment, (iii) control activities, (iv) information and communication
      and (v) monitoring. Based on that evaluation, management concluded that as
      of
      March 31, 2008, and as of the date that the evaluation of the effectiveness
      of
      our disclosure controls and procedures was completed, our disclosure controls
      and procedures were satisfactory subject to the following:





l
            Lack
                of internal audit function – the Company is lacking qualified
                resources to perform the internal audit functions properly.





***Remediation
      Initiative***




We
      have
      committed to set up the internal audit functions but due to limited qualified
      resources in the region, we were not able to hire sufficient internal audit
      resources before end of March 31, 2008. With an internal audit manager on board
      now, we will increase our efforts in hiring the qualified resources through
      the
      assistance from recruitment agents and referral from employees. We also plan
      to
      enhance the training of our internal audit team in order to increase the
      effectiveness of its internal audit function.





Despite
      the deficiencies reported above, the Company's management believes that the
      consolidated financial statements included in this report fairly present in
      all
      material respects the Company's financial condition, results of operations
      and
      cash flows for the periods presented and that this report does not contain
      any
      untrue statement of a material fact or omit a material fact necessary to make
      the statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report.




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***Changes
      in Internal Controls over Financial Reporting***





Other
      than the remediation measures described above, during the period ended March
      31,
      2008, there was no change in our internal controls over financial reporting
      that
      has materially affected, or that is reasonably likely to materially affect
      our
      internal control over financial reporting.





PART
      II -
      OTHER INFORMATION




**Item
      1. Legal Proceedings**





None





**Item
      1A. Risk Factors**





Not
      required.




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





On
      March 12, 2008, the Company announced the authorization of a stock
      repurchase program (the "repurchase program"). Under the repurchase program,
      the
      Company may repurchase up to 5 million shares of its outstanding common
      stock on the open market or in negotiated transactions. The Company did not
      make
      any repurchases under the repurchase program in the first quarter of
      2008.





**Item
      3. Defaults Upon Senior Securities**





None





**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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          35
          -





**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, on May 15, 2008.


**CHINA
                FIRE & SECURITY GROUP, INC.**By:
            /s/ Brian
                LinBrian
                LinChief
                Executive Officer, Principal
                AccountingOfficer




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