**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**







**FORM
      10-Q**




(Mark
      one)




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




For
      the
      Quarterly Period Ended June 30, 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, a non-accelerated filer or a smaller reporting company.
      See
      the definitions of “large accelerated filer” “accelerated
      filer” and “smaller reporting company” in Rule
      12b-2 of the Exchange Act. (Check one):




Large accelerated filer o
            
            Accelerated filer oNon-accelerated filero(Do not check if smaller reporting
              company)
            
            Smaller reporting company x




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
      August 12, 2008, the Registrant had 27,560,527 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 June 30, 2008 and December 31, 2007
            
            1Consolidated
                Statements of Income and Other Comprehensive IncomeFor
                the Three and Six Months Ended June 30, 2008 and 2007
            
            2Consolidated
                Statements of Stockholders' Equity
            
            3Consolidated
                Statements of Cash FlowsFor
                the Six Months Ended June 30, 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







CHINA
        FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
  CONSOLIDATED
          BALANCE SHEETS
 AS
            OF
            JUNE 30, 2008 AND DECEMBER 31, 2007
  ASSETSJune
                  30,
              
              December
                  31,2008
              
              2007CURRENT
                  ASSETS:
              
              (Unaudited)Cash
              
              $
              20,518,916
              
              $
              17,110,449Restricted
                  cash
              
              
              4,563,344
              
              
              3,829,927Accounts
                  receivable, net of allowance for doubtful accounts of $2,827,972
                  and$2,483,359
                  as of June 30, 2008 and December 31, 2007,
                  respectively
              
              
              18,321,528
              
              
              16,525,161Notes
                  receivable
              
              
              6,209,671
              
              
              3,315,811Other
                  receivables
              
              
              1,182,323
              
              
              748,195Other
                  receivable - related party
              
              
              325,177
              
              
              -Inventories
              
              
              5,548,967
              
              
              4,048,283Costs
                  and estimated earnings in excess of billings
              
              
              25,067,016
              
              
              13,068,036Employee
                  advances
              
              
              776,472
              
              
              1,307,433Employee
                  advances - officers and directors
              
              
              25,438
              
              
              18,682Prepayments
                  and deferred expenses
              
              
              3,203,575
              
              
              2,218,391Total
                  current assets
              
              
              85,742,427
              
              
              62,190,368PLANT
                  AND EQUIPMENT, net
              
              
              7,559,581
              
              
              6,568,250OTHER
                  ASSETS:Accounts
                  receivable - retention
              
              
              776,859
              
              
              193,029Deferred
                  expenses - non current
              
              
              30,049
              
              
              21,234Advances
                  on building and equipment purchases
              
              
              185,395
              
              
              366,317Investment
                  in joint ventures
              
              
              1,166,326
              
              
              1,156,294Intangible
                  assets, net of accumulated amortization
              
              
              1,150,733
              
              
              1,150,935Total
                  other assets
              
              
              3,309,362
              
              
              2,887,809Total
                  assets
              
              $
              96,611,370
              
              $
              71,646,427LIABILITIESANDSHAREHOLDERS'
                  EQUITYCURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              6,892,119
              
              $
              6,327,182Customer
                  deposits
              
              
              13,105,751
              
              
              4,757,179Billings
                  in excess of costs and estimated earnings
              
              
              2,820,444
              
              
              4,882,217Other
                  payables
              
              
              988,413
              
              
              168,868Accrued
                  liabilities
              
              
              6,315,280
              
              
              4,214,530Taxes
                  payable
              
              
              1,470,764
              
              
              1,088,335Total
                  current liabilities
              
              
              31,592,771
              
              
              21,438,311COMMITMENTS
                  AND CONTINGENCIES
              
              
              -
              
              
              -SHAREHOLDERS'
                  EQUITY:Common
                  stock, $0.001 par value, 65,000,000 shares authorized,27,560,527
                  and 27,556,893shares
                  issued and outstanding as ofJune
                  30, 2008 and December 31, 2007, respectively
              
              
              27,560
              
              
              27,556Additional
                  paid-in-capital
              
              
              19,350,287
              
              
              19,317,287Statutory
                  reserves
              
              
              5,067,061
              
              
              5,067,061Retained
                  earnings
              
              
              33,644,975
              
              
              22,228,095Accumulated
                  other comprehensive income
              
              
              6,928,716
              
              
              3,568,117Total
                  shareholders' equity
              
              
              65,018,599
              
              
              50,208,116Total
                  liabilities and shareholders' equity
              
              $
              96,611,370
              
              $
              71,646,427




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




1




CHINA
        FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
  CONSOLIDATED
        STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR
        THE
        THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
 (UNAUDITED)
  For
                  the Three Months Ended June 30,
              
              For
                  the Six Months Ended June 30,2008
              
              2007
              
              2008
              
              2007REVENUESSystem
                  contracting projects
              
              $
              14,557,008
              
              $
              9,887,878
              
              $
              25,886,388
              
              $
              17,164,386Products
              
              
              1,533,965
              
              
              1,538,049
              
              
              4,415,136
              
              
              3,639,805Maintenance
                  services
              
              
              562,751
              
              
              121,258
              
              
              1,048,826
              
              
              242,456Total
                  revenues
              
              
              16,653,724
              
              
              11,547,185
              
              
              31,350,350
              
              
              21,046,647COST
                  OF REVENUESSystem
                  contracting projects
              
              
              5,971,745
              
              
              4,379,902
              
              
              11,541,955
              
              
              8,024,570Products
              
              
              217,498
              
              
              811,081
              
              
              1,059,380
              
              
              1,639,783Maintenance
                  services
              
              
              280,188
              
              
              46,689
              
              
              520,327
              
              
              56,874Total
                  cost of revenues
              
              
              6,469,431
              
              
              5,237,672
              
              
              13,121,662
              
              
              9,721,227GROSS
                  PROFIT
              
              
              10,184,293
              
              
              6,309,513
              
              
              18,228,688
              
              
              11,325,420OPERATING
                  EXPENSESelling
                  and marketing
              
              
              1,676,315
              
              
              1,210,100
              
              
              3,010,041
              
              
              1,761,509General
                  and administrative
              
              
              1,126,074
              
              
              1,174,309
              
              
              2,753,120
              
              
              2,185,353Depreciation
                  and amortization
              
              
              154,688
              
              
              133,056
              
              
              321,950
              
              
              259,539Research
                  and development
              
              
              627,952
              
              
              267,626
              
              
              894,601
              
              
              317,921Total
                  operating expense
              
              
              3,585,029
              
              
              2,785,091
              
              
              6,979,712
              
              
              4,524,322INCOME
                  FROM OPERATIONS
              
              
              6,599,264
              
              
              3,524,422
              
              
              11,248,976
              
              
              6,801,098OTHER
                  INCOME (EXPENSE)Other
                  income
              
              
              110,237
              
              
              323,702
              
              
              221,643
              
              
              327,998Other
                  expense
              
              
              (85,332
              )
              
              (2,146
              )
              
              (85,388
              )
              
              (6,417
              )Interest
                  income
              
              
              63,384
              
              
              24,915
              
              
              91,744
              
              
              44,170Change
                  in fair value of derivative instruments
              
              
              -
              
              
              371,628
              
              
              -
              
              
              1,205,791Total
                  other income
              
              
              88,289
              
              
              718,099
              
              
              227,999
              
              
              1,571,542INCOME
                  BEFORE PROVISION FOR INCOME TAXES
              
              
              6,687,553
              
              
              4,242,521
              
              
              11,476,975
              
              
              8,372,640PROVISION
                  FOR INCOME TAXES
              
              
              11,453
              
              
              -
              
              
              60,095
              
              
              -NET
                  INCOME
              
              
              6,676,100
              
              
              4,242,521
              
              
              11,416,880
              
              
              8,372,640OTHER
                  COMPREHENSIVE INCOME:Foreign
                  currency translation adjustment
              
              
              1,293,683
              
              
              514,775
              
              
              3,360,599
              
              
              810,334COMPREHENSIVE
                  INCOME
              
              $
              7,969,783
              
              $
              4,757,296
              
              $
              14,777,479
              
              $
              9,182,974BASIC
                  EARNINGS PER SHAREWeighted
                  average number of shares
              
              
              27,557,297
              
              
              26,461,678
              
              
              27,557,095
              
              
              26,461,678Earnings
                  per share
              
              $
              0.24
              
              $
              0.16
              
              $
              0.41
              
              $
              0.32DILUTED
                  EARNINGS PER SHAREWeighted
                  average number of shares
              
              
              28,200,785
              
              
              27,164,207
              
              
              28,179,595
              
              
              27,085,807Earnings
                  per share
              
              $
              0.24
              
              $
              0.16
              
              $
              0.41
              
              $
              0.31




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




2




CHINA
        FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
  CONSOLIDATED
          STATEMENTS OF SHAREHOLDERS' EQUITY
  Retained
                  Earnings
              
              AccumulatedCommon
                  Stock
              
              Additional
              
              Statutory
              
              
              
              otherShares
              
              Par
                  value
              
              paid-in-capital
              
              reserves
              
              Unrestricted
              
              comprehensive
                    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
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,372,640
              
              
              
              
              
              8,372,640Warrants
                  reclassified from liabilities
              
              
              
              
              
              
              
              
              1,475,020
              
              
              
              
              
              
              
              
              
              
              
              1,475,020Options
                  issued to employees
              
              
              
              
              
              
              
              
              112,000
              
              
              
              
              
              
              
              
              
              
              
              112,000Adjustment
                  to registered capital
              
              
              
              
              
              
              
              
              
              
              
              (605,000
              )
              
              605,000
              
              
              
              
              
              -Foreign
                  currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              810,334
              
              
              810,334BALANCE,
                  June 30, 2007 (Unaudited)
              
              
              26,461,678
              
              $
              26,462
              
              $
              14,980,191
              
              $
              3,425,627
              
              $
              15,440,533
              
              $
              1,875,856
              
              $
              35,748,669Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,428,996
              
              
              
              
              
              8,428,996Issuance
                  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
              
              
              
              
              
              
              
              
              78,719
              
              
              
              
              
              
              
              
              
              
              
              78,719Adjustment
                  to statutory reserves
              
              
              
              
              
              
              
              
              
              
              
              1,641,434
              
              
              (1,641,434
              )
              
              
              
              
              -Foreign
                  currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,692,261
              
              
              1,692,261BALANCE,
                  December 31, 2007
              
              
              27,556,893
              
              $
              27,556
              
              $
              19,317,287
              
              $
              5,067,061
              
              $
              22,228,095
              
              $
              3,568,117
              
              $
              50,208,116Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              11,416,880
              
              
              
              
              
              11,416,880Options
                  issued to employees
              
              
              
              
              
              
              
              
              33,004
              
              
              
              
              
              
              
              
              
              
              
              33,004Warrants
                  exercised
              
              
              3,634
              
              
              4
              
              
              (4
              )
              
              
              
              
              
              
              
              
              
              
              -Foreign
                  currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,360,599
              
              
              3,360,599BALANCE,
                  June 30, 2008 (Unaudited)
              
              
              27,560,527
              
              $
              27,560
              
              $
              19,350,287
              
              $
              5,067,061
              
              $
              33,644,975
              
              $
              6,928,716
              
              $
              65,018,599




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




3


CHINA
      FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES


CONSOLIDATED
          STATEMENTS OF CASH FLOWS
 FOR
            THE
            SIX MONTHS ENDED JUNE 30, 2008 AND 2007
 (UNAUDITED)


2008
              
              2007CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              11,416,880
              
              $
              8,372,640Adjustments
                  to reconcile net income to cashprovided
                  by (used in) operating activities:Depreciation
              
              
              326,548
              
              
              268,868Amortization
                  of land use rights
              
              
              6,970
              
              
              6,735Amortization
                  of technology rights
              
              
              30,438
              
              
              10,146Provision
                  for doubtful accounts
              
              
              180,061
              
              
              208,324Gain
                  on disposal of equipment
              
              
              (31,715
              )
              
              -Compensation
                  expense for options issued to employees
              
              
              33,004
              
              
              112,000Change
                  in fair value of derivative instruments
              
              
              -
              
              
              (1,205,791
              )Change
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (1,450,799
              )
              
              (1,632,577
              )Notes
                  receivable
              
              
              (2,606,423
              )
              
              (615,734
              )Other
                  receivables
              
              
              (375,360
              )
              
              (1,169,318
              )Other
                  receivables - related party
              
              
              (316,128
              )
              
              -Inventories
              
              
              (1,206,309
              )
              
              (437,151
              )Costs
                  and estimated earnings in excess of billings
              
              
              (10,849,628
              )
              
              (2,964,789
              )Employee
                  advances
              
              
              597,770
              
              
              (489,184
              )Employee
                  advances from officers and directors
              
              
              (5,402
              )
              
              428,047Prepayments
                  and deferred expenses
              
              
              (826,585
              )
              
              (73,909
              )Accounts
                  payable
              
              
              154,397
              
              
              (287,314
              )Accounts
                  payable - related party
              
              
              -
              
              
              (324,532
              )Customer
                  deposits
              
              
              7,819,403
              
              
              5,476,662Billings
                  in excess of costs and estimated earnings
              
              
              (2,309,053
              )
              
              (6,672,629
              )Other
                  payables
              
              
              786,202
              
              
              423,280Other
                  payables - related party
              
              
              -
              
              
              (51,118
              )Accrued
                  liabilities
              
              
              1,779,303
              
              
              1,008,098Taxes
                  payable
              
              
              303,874
              
              
              (453,113
              )Net
                  cash provided by (used in) operating activities
              
              
              3,457,448
              
              
              (62,359
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchase
                  of plant and equipment
              
              
              (522,846
              )
              
              (709,403
              )Advances
                  on building and equipment purchase
              
              
              (180,236
              )
              
              (884,657
              )Proceeds
                  from sale of equipment
              
              
              39,545
              
              
              7,183Purchase
                  of intangible assets
              
              
              -
              
              
              (608,745
              )Payments
                  for investment in Hubei Sureland Changjiang Fire Safety Technology
                  Co.,
                  Ltd.
              
              
              -
              
              
              (147,869
              )Proceeds
                  from sale of investment in Tianjin Fire Safety Equipment Co.,
                  Ltd.
              
              
              -
              
              
              507,192Proceeds
                  from sale of Beijing Zhong Xiao Fire Safety Technology Co.,
                  Ltd
              
              
              -
              
              
              1,052,986Net
                  cash used in investing activities
              
              
              (663,537
              )
              
              (783,313
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Change
                  in restricted cash
              
              
              (474,018
              )
              
              759,629Payments
                  to Beijing Zhong Xiao Fire Safety Technology Co., Ltd.
              
              
              -
              
              
              (2,429,681
              )Proceeds
                  from Beijing Zhong Xiao Fire Safety Technology Co., Ltd
              
              
              -
              
              
              1,344,316Net
                  cash used in financing activities
              
              
              (474,018
              )
              
              (325,736
              )EFFECTS
                  OF EXCHANGE RATE CHANGE IN CASH
              
              
              1,088,574
              
              
              232,635INCREASE
                  (DECREASE) IN CASH
              
              
              3,408,467
              
              
              (938,773
              )CASH,
                  beginning of period
              
              
              17,110,449
              
              
              9,426,091CASH,
                  end of period
              
              $
              20,518,916
              
              $
              8,487,318SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATIONIncome
                  taxes paid
              
              $
              23,400
              
              $
              -Interest
                  paid
              
              $
              -
              
              $
              -NON-CASH
                  TRANSACTIONS INVESTING AND FINANCING ACTIVITIES:Reclassification
                  of warrant liability to paid-in capitalupon
                  modification of warrants agreement
              
              $
              -
              
              $
              1,475,020Reclassification
                  of advances on building and equipment purchaseto
                  plant and equipment upon receipt of purchase
              
              $
              378,982
              
              $
              -




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


4


CHINA
        FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 June
        30,
        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.
 
 **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, each discussed briefly
        below.
 
 China
        Fire Protection Group, Inc. (“CFPG”) was incorporated in the British Virgin
        Islands as a limited liability company on June 2, 2006 as a holding
        company.
 
 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.
 
 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 with a registered capital RMB 5,000,000 (approximately
        $619,500). Hua An is a software development company, principally engage in
        the
        design, development and manufacturing of fire protection software.
 
 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. Sureland
        Equipment principally engages in the manufacturing of fire protection products.
 
 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 (approximately $1,295,000). Tianxiao Equipment
        principally engages in the manufacturing of fire protection products.
 
 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.
  5
 CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 (Unaudited)
 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.
 
 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.  6
 CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 (Unaudited)
 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.”
 
 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 $6,928,716 and $3,568,117 as of June
        30,
        2008 and
        December 31, 2007, respectively. Asset and liability accounts at June 30,
        2008
        were translated at 6.85 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 six months
        ended
        June 30, 2008 and 2007 were 7.05 RMB and 7.71 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.
  7
 CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 (Unaudited)
 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. For the three months ended June 30, 2008 and
        2007, depreciation expense amounted to $157,160 and $145,734
        respectively.  Depreciation
        expense amounted to $326,548 and $268,868 for the six months ended June 30,
        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.
 
 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 June 30, 2008,
        the Company expects these assets to be fully recoverable.
  8
 CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 (Unaudited)
 Plant
        and
        equipment consist of the following:
 
 June
                  30, 2008
              
              December
                  31, 2007Buildings
                  and improvements
              
              $
              5,403,273
              
              $
              5,077,373Transportation
                  equipment
              
              
              2,123,915
              
              
              1,985,701Machinery
              
              
              1,104,471
              
              
              970,500Office
                  equipment
              
              
              1,164,634
              
              
              1,047,350Furniture
              
              
              38,281
              
              
              35,972Construction
                  in progress
              
              
              638,511
              
              
              -Total
              
              
              10,473,085
              
              
              9,116,896Less
                  accumulated depreciation
              
              
              (2,913,504
              )
              
              (2,548,646
              )Plant
                  and equipment, net
              
              $
              7,559,581
              
              $
              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. The Company maintains
        balances at financial institutions which, from time to time, may exceed Hong
        Kong Deposit Protection Board insured limits for the banks located in Hong
        Kong.
        Balances at financial institutions or state owned banks within the PRC are
        not
        covered by insurance. As of June 30, 2008 and December 31, 2007, the Company
        had
        deposits (including restricted cash balances) totaling to $25,257,549 and
        $20,940,016, that are not covered by insurance, respectively. 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.
 
 The
        Company had one major customer who represents approximately 28% and15% of
        the
        Company’s sales for the three months and six
        months ended June 30, 2008, respectively .
        Accounts receivable from this customer was $0 as of June 30, 2008. The Company
        had one major customer who represents approximately 21% and 23% of the Company’s
        sales for the three months and six months ended June 30, 2007, respectively.
        Accounts receivable from this customer was $0 as of June 30, 2007.
 
 The
        Company had no major suppliers accounted for more than 10% of the Company’s
        total purchase and total accounts payable as of and for the three months
        and six
        months ended June 30, 2008 and 2007, respectively.
 
 Cash
        and cash equivalents
  9
  CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 (Unaudited)
 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 $4,563,344 and $3,829,927 as of June 30, 2008 and December
        31,
        2007, respectively.
 
 June
                  30, 2008
              
              December
                  31, 2007Restricted
                  CashProducts
                  sales
              
              $
              410,220
              
              $
              102,355System
                  contracting projects
              
              
              4,153,124
              
              
              3,727,572Total
                  Restricted Cash
              
              $
              4,563,344
              
              $
              3,829,927
 
 Inventories
 
 Inventories
        are stated at the lower of cost or market, using weighted average method.
        Inventories consisted of the following at:
 
 June
                  30, 2008
              
              December
                  31, 2007Raw
                  materials
              
              $
              798,599
              
              $
              310,255Finished
                  goods
              
              
              3,389,910
              
              
              2,617,638Work
                  in progress
              
              
              1,360,458
              
              
              1,120,390Total
              
              $
              5,548,967
              
              $
              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 June 30, 2008 and December 31, 2007 the
        Company determined no reserves are necessary.
 
 Accounts
        receivable
 
 Accounts
        receivable represents amounts due from customers for products sales, maintenance
        services and system contracting projects. Overdue balances are reviewed
        regularly by senior management. Reserves are recorded when collection of
        amounts
        due are in doubt.
  10
 CHINA
            FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 June
            30,
            2008
 (Unaudited)
 Accounts
          receivable consists of the following:
  June
                  30, 2008
              
              December
                  31, 2007Accounts
                  receivable:System
                  contracting projects
              
              $
              11,107,591
              
              $
              10,296,762Maintenance
                  services
              
              
              2,047,613
              
              
              670,357Products
                  sales
              
              
              8,771,155
              
              
              8,234,430Total
                  accounts receivable
              
              
              21,926,359
              
              
              19,201,549Allowance
                  for bad debts
              
              
              (2,827,972
              )
              
              (2,483,359
              )Accounts
                  receivable, net
              
              
              19,098,387
              
              
              16,718,190Accounts
                  receivable - non-current retentions
              
              
              (776,859
              )
              
              (193,029
              )Accounts
                  receivable - current
              
              $
              18,321,528
              
              $
              16,525,161
 
 The
        activity in the allowance for doubtful accounts for trade accounts receivable
        for the six months ended June
        30,
        2008 and the
        year ended December 31, 2007 is as follows:
 
 June
                  30, 2008
              
              December
                  31, 2007Beginning
                  allowance for doubtful accounts
              
              $
              2,483,359
              
              $
              1,252,947Additional
                  charged to bad debt expense
              
              
              180,061
              
              
              1,111,051Write-off
                  charged against the allowance
              
              
              -
              
              
              (12,700
              )Foreign
                  currency translation adjustment
              
              
              164,552
              
              
              132,061Ending
                  allowance for doubtful accounts
              
              $
              2,827,972
              
              $
              $2,483,359
 
 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.
 
 June
                  30, 2008
              
              December
                  31, 2007Contract
                  costs incurred plus recognizedprofits
                  less recognized losses to date
              
              $
              74,045,677
              
              $
              50,877,880Less:
                  progress billings
              
              
              48,978,661
              
              
              37,809,844Costs
                  and estimated earnings in excess ofbillings
              
              $
              25,067,016
              
              $
              13,068,036
 
 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.
 
 June
                  30, 2008
              
              December
                  31, 2007Progress
                  billings
              
              $
              11,684,088
              
              $
              15,713,786Less:
                  contracts costs incurred plus recognizedprofits
                  less recognized losses to date
              
              
              8,863,644
              
              
              10,831,569Billings
                  in excess of costs and estimatedearnings
              
              $
              2,820,444
              
              $
              4,882,217
  11
 CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 (Unaudited)
 At
        June
        30, 2008 and December 31, 2007, retentions held by customers of system
        contracting projects included in the Company’s accounts receivable as
        following:
  June
                  30, 2008
              
              December
                  31, 2007RetentionsCurrent
              
              $
              2,112,045
              
              $
              2,829,250Non-current
              
              
              776,859
              
              
              193,029Total
                  retentions
              
              $
              2,888,904
              
              $
              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 June 30, 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.
 
 Fair
        value of financial instruments
 
 On
        January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements,
        defines fair value, established 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:
  12
 CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 (Unaudited)
 ·
            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 $166,326 to Hubei Shou An Changjiang Fire Protection Co.,
        Ltd
        for 19% ownership and invested $1,000,000 to King Galaxy Investments Limited
        for
        5% ownership. Total investment as of June 30, 2008 amounted to $1,166,326.
        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 June 30, 2008 and December 31, 2007, accumulated
        amortization amounted to $164,049 and $137,672, respectively. Amortization expense amounted to $3,341 and $3,386 for the three months ended June
        30,
        2008 and 2007 ,
        and $
        6,970 and $6,735 for the six months ended June 30, 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 June 30, 2008 and December 31, 2007, accumulated
        amortization amounted to $71,021 and $40,583, respectively. A mortization
        expense amounted to $15,218 and $10,146 for the three months ended June 30,
        2008
        and 2007, respectively. A mortization
        expense amounted to $30,438 and $10,146 for the six months ended June 30,
        2008
        and 2007, respectively.
 
 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 June 30, 2008, the Company expects these assets to be fully recoverable.
  13
 CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 (Unaudited)
 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 June 30, 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.
 
 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.
  14
  CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 (Unaudited)
 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 $1,753,759 and $1,328,652 for the
        three
        months ended June 30, 2008, and $1,379,908 and $1,466,771 for the three months
        ended June 30, 2007 respectively. VAT on sales and VAT on purchases amounted
        to
        $2,718,120 and $2,070,716 for the six months ended June 30, 2008, and $2,626,243
        and $2,426,434 for the six months ended June 30, 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.
 
 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.
  15
  CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 (Unaudited)
 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.
 
 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.
  16
  CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 (Unaudited)
 In
        March
        2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
        Instruments and Hedging Activities - An Amendment of SFAS No. 133” (“SFAS
        161”). Effective on January 1, 2009, SFAS 161 seeks to improve financial
        reporting for derivative instruments and hedging activities by requiring
        enhanced disclosures regarding the impact on financial position, financial
        performance, and cash flows. To achieve this increased transparency, SFAS
        161
        requires (1) the disclosure of the fair value of derivative instruments and
        gains and losses in a tabular format; (2) the disclosure of derivative
        features that are credit risk-related; and (3) cross-referencing within the
        footnotes. The Company is in the process of evaluating the new disclosure
        requirements under SFAS 161.
 
 In
        May
        2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
        Accounting Principles" ("SFAS 162"). FAS 162 is intended to improve financial
        reporting by identifying a consistent framework, or hierarchy, for selecting
        accounting principles to be used in preparing financial statements that are
        presented in conformity with U.S. GAAP for nongovernmental entities. SFAS
        162 is
        effective 60 days following the SEC's approval of the Public Company Accounting
        Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly
        in
        Conformity with Generally Accepted Accounting Principles." The Company is
        in the
        process of evaluating the impact of adoption of this statement on the results
        of
        operations, financial position or cash flows.
 
 In
        June
        2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
        an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
        No. 07-5”). This Issue is effective for financial statements issued for fiscal
        years beginning after December 15, 2008, and interim periods within those
        fiscal
        years. Early application is not permitted. Paragraph 11(a) of SFAS No 133
        “Accounting for Derivatives and Hedging Activities” (“SFAS 133”) specifies that
        a contract that would otherwise meet the definition of a derivative but is
        both
        (a) indexed to the Company’s own stock and (b) classified in
        stockholders’ equity in the statement of financial position would not be
        considered a derivative financial instrument. EITF No.07-5 provides a new
        two-step model to be applied in determining whether a financial instrument
        or an
        embedded feature is indexed to an issuer’s own stock and thus able to qualify
        for the SFAS 133 paragraph 11(a) scope exception. This
        standard triggers liability accounting on all options and warrants exercisable
        at strike prices denominated in any currency other than the functional currency
        of the operating entity in China (Renminbi). The
        Company is currently evaluating the impact of the adoption of EITF No. 07-5
        on
        the Company’s consolidated 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.
  17
 CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 (Unaudited)
 **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 and six months ended June 30, 2008 and
        2007:
 
 For
                  the three months ended June 30,
              
              For
                  the six months ended June 30,2008
              
              2007
              
              2008
              
              2007Net
                  income for earnings per share
              
              $
              6,676,100
              
              $
              4,244,521
              
              $
              11,416,880
              
              $
              8,372,640Weighted
                  average shares used in basic computation
              
              
              27,557,297
              
              
              26,461,678
              
              
              27,557,095
              
              
              26,461,678Diluted
                  effect of stock options and warrants
              
              
              643,488
              
              
              702,529
              
              
              622,500
              
              
              624,129Weighted
                  average shares used in diluted computation
              
              
              28,200,785
              
              
              27,164,207
              
              
              28,179,595
              
              
              27,085,807Earnings
                  per share:Basic
              
              $
              0.24
              
              $
              0.16
              
              $
              0.41
              
              $
              0.32Diluted
              
              $
              0.24
              
              $
              0.16
              
              $
              0.41
              
              $
              0.31
  At
        June
        30, 2008, all outstanding stock options and warrants were included in the
        calculation of diluted earnings per share.
 
 **Note
        4 - 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 $6,209,671 and $3,315,811 as of June 30,
        2008 and December 31, 2007, respectively.
  18
 CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 (Unaudited)
 **Note
        5 - Other receivable from related party**
 
 The
        Company has other receivable from Hubei Shou An Changjiang Fire Protection
        Co.,
        Ltd. (“Hubi Shou An”), which the Company has 19% interest in. Receivable due
        from Hubei Shou An was $325,177 and $0 as of June 30, 2008 and December 31,
        2007, respectively. This balance was for the operating cash flow in Hubei
        Shou
        An and expected to be repaid by December 31, 2008 in cash. Receivable is
        non-interest bearing and unsecured.
 
 **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 $3,203,575 and $2,218,391
        as
        of June 30, 2008 and December 31, 2007, respectively.
  **Note
        7 - Investment in joint ventures**
 
 During
        the second quarter of 2007, the Company invested $166,326 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.
 
 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 June 30, 2008 and December 31, 2007,
        customer deposits amounted to $13,105,751 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 June 30, 2008 and December 31, 2007,
        accrued liabilities amounted to $6,315,280 and $4,214,530,
        respectively.
  19
  CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 (Unaudited)
 **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 25% 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.
 
 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.  20
  CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 (Unaudited)
 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 June 30, 2008 and 2007
        amounted to $11,453 and $0, respectively and $60,095 and $0 for the six months
        ended June 30, 2008 and 2007, respectively.
 
 The
        following table reconciles the U.S. statutory rates to the Company’s effective
        tax rate for the three months and six months ended June 30:
 
 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 June 30, 2008 and 2007 amounted
        to $1,955,426 and $1,300,563, 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 June
        30,
        2008 and 2007 by $0.07
        and $0.12, respectively. The estimated tax savings for the six months ended
        June
        30, 2008 and 2007 amounted to $3,196,996 and $2,486,028, respectively. The
        net
        effect on basic earnings per share if the income tax had been applied would
        decrease basic earnings per share for the six months ended June 30, 2008
        and
        2007 by $0.12 and $0.22, respectively.
  21
  CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 (Unaudited)
 China
        Fire & Security Group, Inc. was incorporated in the United States and has
        incurred net operating losses of $0 for income tax purposes for the six months
        ended June 30, 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 June 30, 2008 amounted to $341,501.
        Management will review this valuation allowance periodically and make
        adjustments as warranted.
 
 Taxes
        payable
 
 Taxes
        payable as of June 30, 2008 and December 31, 2007 consisted of the
        following:
 
 June
                  30, 2008
              
              December
                  31, 2007VAT
                  taxes (credit) payable
              
              $
              (63,939
              )
              $
              71,367Income
                  taxes payable
              
              
              45,462
              
              
              5,915Sales
                  taxes
              
              
              1,467,109
              
              
              979,999Other
                  taxes payable
              
              
              22,132
              
              
              31,054Total
              
              $
              1,470,764
              
              $
              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
        $74,147 and $38,691 for
        the
        three months ended June 30, 2008 and 2007 ,
        respectively. The aggregate contributions of the Company to retirement benefit
        schemes amounted to $124,927 and $75,687 for
        the
        six months ended June 30, 2008 and 2007 ,
        respectively.
  **Note
        12 - Statutory reserves**
 
 The
        laws
        and regulations of the People’s Republic of China require that before an
        enterprise distributes profits to its partners, it must first satisfy all
        tax
        liabilities, provide for losses in previous years, and make allocations,
        in
        proportions determined at the discretion of the board of directors, after
        the
        statutory reserve. The statutory reserves include surplus reserve fund and
        the
        enterprise fund. These
        statutory reserves represent restricted retained earnings.
  22
  CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 (Unaudited)
 Surplus
        reserve fund
 
 The
        Company is required to transfer 10% of its net income, as determined in
        accordance with the PRC accounting rules and regulations, to a statutory
        surplus
        reserve fund until such reserve balance reaches 50% of the Company’s registered
        capital.
 
 The
        transfer to this reserve must be made before distribution of any dividend
        to
        shareholders. For the six months ended June 30, 2008 and 2007, the Company
        did
        not make any contribution to this fund. 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 six months ended June 30, 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.
 
 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 also on December 5, 2011 to acquire 184,617 shares
        at $4.88 per share. The Company issued 69231 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.
  23
  CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 (Unaudited)
 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
 June
          30,
          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.
 
 On
        June
        23, 2008, a total of 5,000 warrants were converted into 3,634 shares of common
        stock by the warrants holders using the cashless exercise options.
 
 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
              
              
              
              
              $
              4.25ForfeitedExercised
              
              
              (1,164,306
              )
              
              (1,164,306
              )
              $
              4.23Outstanding,
                  December 31, 2007
              
              
              55,000
              
              
              5,000
              
              $
              4.19
              
              
              4.08Granted
              
              
              
              
              
              50,000
              
              $
              4.25ForfeitedExercised
              
              
              (5,000
              )
              
              (5,000
              )
              $
              3.25Outstanding,
                  June 30, 2008
              
              
              50,000
              
              
              50,000
              
              $
              4.25
              
              
              3.58
 
 **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.
  25
  CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 (Unaudited)
 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. For the three months ended June 30, 2008 and 2007, the
        expense recognized amounted to $7,000 and $47,000, respectively. The expense
        recognized for the six months ended June 30, 2008 and 2007 amounted to $21,000
        and $112,000, 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 June 30, 2008 and 2007 was
        $4,856 and $0, respectively. The
        compensation expense for the six months ended June 30, 2008 was $4,856 and
        $4,857, respectively.
 
 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 and six months
        ended
        June 30, 2008 was $3,574 and $7,148, respectively.
 
 The
        Company has stock options as follows:
 
 WeightedOptions
              
              Average
                  Exercise
              
              AggregateOutstanding
              
              Price
              
              Intrinsic
                  ValueOutstanding,
                  December 31, 2006
              
              
              750,000
              
              $
              1.25
              
              
              2,250,000Granted
              
              
              29,500
              
              $
              5.99ForfeitedExercisedOutstanding,
                  December 31, 2007
              
              
              779,500
              
              $
              1.43
              
              
              8,925,615GrantedForfeitedExercisedOutstanding,
                  June 30, 2008
              
              
              779,500
              
              $
              1.43
              
              
              5,160,290
  26
  CHINA
          FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2008
 (Unaudited)
 Following
        is a summary of the status of options outstanding at June 30, 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
              
              
              3.00
              
              
              703,125
              
              
              1.25
              
              
              3.009,500
              
              
              4.51
              
              
              3.83
              
              
              9,500
              
              
              4.51
              
              
              3.8320,000
              
              
              6.70
              
              
              4.00
              
              
              5,000
              
              
              6.70
              
              
              4.00
  **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, manufacturing 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 in China.
 
 **Reorganization**
 
 We
        were
        organized as a Florida corporation on June 17, 2003.
  On
        September 1, 2006, we entered into a share exchange agreement, pursuant to
        which
        we acquired all of the outstanding capital shares of China Fire Protection
        Group
        Inc. in exchange for a controlling interest in our common shares. The
        transaction was completed on Oct 27, 2006.
 
 China
        Fire Protection Group was organized on June 2, 2006 for the purpose of acquiring
        all of the capital shares of Sureland Industrial Fire Safety Limited (Sureland
        Industrial), a Chinese corporation, and, Sureland Industrial Fire Equipment
        Co.,
        Ltd. (Sureland Equipment), a Chinese corporation, which collectively engage
        in
        the design, development, manufacturing and sale of fire protection products
        and
        services for large industrial consumers in China. As a result of the
        transactions described above, both Sureland Industrial Fire Safety Limited
        and
        Sureland Industrial Fire Equipment Co., Ltd became wholly-owned subsidiaries
        of
        China Fire Protection Group Limited, and China Fire Protection Group Limited
        is
        a wholly-owned subsidiary of Unipro.
 
 On
        February 9, 2007, Unipro changed its name to China Fire & Security Group,
        Inc. (CFSG) and started trading on 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 in China
        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. To a minor extent, it provides maintenance services
        for customers of its industrial fire safety systems. Its business is primarily
        in China, but it has recently begun contract manufacturing products for the
        export market and it has begun to provide a fire safety system for a Chinese
        company operating abroad.
  Sureland
        markets its industrial fire safety products and systems primarily to major
        companies in the iron and steel, power and petrochemical industries in China.
        It
        has also completed projects for highway and railway tunnels, wine distilleries,
        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
        December 31, 2007, Sureland operates more than 30 sales and liaison offices
        in
        China.
  Sureland
        has been ranked as the leading Chinese industrial fire safety company two
        times
        by the China Association for Fire Prevention based on six major factors
        including total revenue, growth rate, net profit, return on assets, investment
        in research and development and intellectual property. Its key products include
        linear heat detectors and water mist extinguishers, whose sales volumes are
        the
        largest in China. Its products have been used by its 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.
  28
  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.
  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.
  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 percent residual value.
  Use
        of
        estimates
  The
        preparation of financial statements in conformity with generally accepted
        accounting principles of the United States of America requires management
        to
        make estimates and assumptions that affect the amounts reported in the combined
        financial statements and accompanying notes. Management believes that the
        estimates utilized in preparing its financial statements are reasonable and
        prudent. Actual results could differ from these estimates.
 
 Certain
        of the Company’s accounting policies require higher degrees of judgment than
        others in their application. These include the recognition of revenue and
        earnings from system contracting projects under the percentage of completion
        method and the allowance 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.
  29
  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.
   **Results
        of Operations**
 
 The
        following is a schedule showing results of our business.
 
 **Three
        Months Financial Results**
 
 ***Comparison
        of the three months ended on June 30, 2008 and 2007:***
  **Three
                  months ended**
                **June
                  30,****2008**
              
              **2007**Revenues
              
              $
              16,653,724
              
              $
              11,547,185Cost
                  of revenues
              
              
              6,469,431
              
              
              5,237,672Gross
                  profits
              
              
              10,184,293
              
              
              6,309,513Operating
                  expenses
              
              
              3,585,029
              
              
              2,785,091Income
                  from operations
              
              
              6,599,264
              
              
              3,524,422Total
                  other income(expense)
              
              
              88,289
              
              
              718,099Change
                  in fair value of derivative instruments
              
              
              -
              
              
              371,628Income
                  before income taxes and minority interest
              
              
              6,687,553
              
              
              4,242,521Income
                  taxes
              
              
              11,453
              
              
              -Minority
                  interest
              
              
              -
              
              
              -Net
                  profit (loss)
              
              
              6,676,100
              
              
              4,242,521Foreign
                  exchange adjustment
              
              
              1,293,683
              
              
              514,775Comprehensive
                  income
              
              
              7,969,783
              
              
              4,757,296weighted
                  average number of shares-basic
              
              
              27,557,297
              
              
              26,461,678weighted
                  average number of shares-diluted
              
              
              28,200,785
              
              
              27,164,207earning
                  per share-basic
              
              
              0.24
              
              
              0.16earning
                  per share-diluted
              
              
              0.24
              
              
              0.16
 
 Total
        revenues were approximately $16.7 million for the three months ended June
        30,
        2008 as compared to approximately $11.5 million for the three months ended
        June
        30, 2007, an increase of approximately $5.1 million or 44.2 percent. This
        increase was primarily due to increases in our revenues from system contracting
        projects and maintenance services during the period. The Company recognized
        revenues from 177 total solution, product sales and maintenance contracts
        for
        the three months ended June 30, 2008 as compared to 109 contracts for the
        three
        months ended June 30, 2007.
 
 The
        revenues from total solution contracts increased by 47.2 percent to $14.6
        million with 104 contracts executed for the three months ended June 30, 2008,
        compared to $9.9 million with 71 contracts executed for the same period of
        last
        year. The revenues from product sales were $1.5 million with 39 contracts
        executed for the three months ended June 30, 2008, compared to $1.5 million
        with
        29 contracts executed for the same period of last year. The revenues from
        maintenance service increased by 364.1 percent to $0.6 million with 34 contracts
        executed for the three months ended June 30, 2008, compared to $0.1 million
        with
        9 contracts executed for the same period of last year. In particular, the
        three
        largest customers were Capital Iron and Steel Group, Anshan Iron and Steel
        Group
        and Baotou Iron and Steel Group, which collectively contributed approximately
        $9.3 million of the revenues, representing 55.3 percent of our total revenues
        for this period.
 
 Gross
        profit for the three months ended June 30, 2008 was approximately $10.2 million
        compared to $6.3 million for the three months ended June 30, 2007, an increase
        of approximately $3.9 million. Gross margin during this period was 61.2 percent,
        which is higher than the gross margin of 54.6 percent for the same period
        of
        2007. The increase in the gross margin was mainly attributable to the execution
        of total solution contracts contributing higher gross margins and a higher
        percentage of revenue contribution from the sales of the Company’s
        self-manufactured proprietary products which enjoy higher gross margins.
  30
  Operating
        expenses were approximately $3.6 million for the three months ended June
        30,
        2008 compared to approximately $2.8 million for the three months ended June
        30,
        2007. This represents an increase of approximately $0.8 million or 28.7 percent.
        Compared to the same period of last year, the Company increased the number
        of
        employees and the expenditure in sales incentive compensation and raised
        the
        compensation for management to be in line with other US public companies.
        The
        increase in operating expenses is also attributable to increased R&D
        expenses in new product development and improvement in our existing product
        offerings.
  Operating
        income was approximately $6.6 million for the three months ended June 30,
        2008
        as compared to approximately $3.5 million for the three months ended June
        30,
        2007, representing an increase of 87.2 percent. The improvement in operating
        income was mainly attributable to the increased revenues and improved gross
        margin during the period.
 
 Total
        other income was $88,289 for the three months ended June 30, 2008, compared
        to
        $718,099 for the three months ended June 30, 2007, which included a one-time
        non-cash gain of $371,628 due to the change in fair value of derivative
        instruments in 2007.
 
 Provision
        for income tax was $11,453 for the three months ended June 30, 2008, compared
        to
        no provisions for income tax for the three months ended June 30, 2007.
 
 Net
        income was approximately $6.7 million for the three months ended June 30,
        2008
        as compared to approximately $4.2 million net income for the three months
        ended
        June 30, 2007, representing an increase of $2.4 million or 57.4 percent.
 
 Excluding
        a one-time non-cash gain of $371,628 for the change in fair value of
        derivative instrument in the three months ended June 30, 2007, the non-GAAP
        net
        income for the three months ended June 30, 2007 was $3.9 million. Our GAAP
        net
        income for the three months ended June 30, 2008 increased 72.5 percent in
        comparison to the non-GAAP net income for the three months ended June 30,
        2007.
        The reason for the increase in our net income was mainly due to the increase
        in
        the Company’s revenues and the improvement in gross margin.
 
 Currency
        translation adjustments resulting from RMB
        appreciation process
        amounted to $1.3 million and $0.5 million for the three months ended June
        30,
        2008 and 2007, respectively.
 
 The
        comprehensive income, which adds the currency adjustment to the net income,
        was
        approximately $8.0 million for the three months ended June 30, 2008 as compared
        to approximately $4.8 million comprehensive income for the three months ended
        June 30, 2007, representing an increase of $3.2 million or 67.5
        percent.
 
 
 **Six
        Months Financial Results**
 
 ***Comparison
        of the six months ended on June 30, 2008 and 2007:***
  **Six
                  months ended**
                **June
                  30,****2008**
              
              **2007**Revenues
              
              $
              31,350,350
              
              $
              21,046,647Cost
                  of revenues
              
              
              13,121,662
              
              
              9,721,227Gross
                  profits
              
              
              18,228,688
              
              
              11,325,420Operating
                  expenses
              
              
              6,979,712
              
              
              4,524,322Income
                  from operations
              
              
              11,248,976
              
              
              6,801,098Total
                  other income(expense)
              
              
              227,999
              
              
              1,571,542Change
                  in fair value of derivative instruments
              
              
              -
              
              
              1,205,791Income
                  before income taxes and minority interest
              
              
              11,476,975
              
              
              8,372,640Income
                  taxes
              
              
              60,095
              
              
              -Minority
                  interest
              
              
              -
              
              
              -Net
                  profit (loss)
              
              
              11,416,880
              
              
              8,372,640Foreign
                  exchange adjustment
              
              
              3,360,599
              
              
              810,334Comprehensive
                  income
              
              
              14,777,479
              
              
              9,182,974weighted
                  average number of shares-basic
              
              
              27,559,095
              
              
              26,461,678weighted
                  average number of shares-diluted
              
              
              28,179,595
              
              
              27,085,807earning
                  per share-basic
              
              
              0.41
              
              
              0.32earning
                  per share-diluted
              
              
              0.41
              
              
              0.31
 
 Total
        revenues were approximately $31.4 million for the six months ended June 30,
        2008
        as compared to approximately $21.0 million for the six months ended June
        30,
        2007, an increase of approximately $10.3 million or 49.0 percent. This increase
        was primarily due to increases in our revenues from system contracting projects
        and maintenance services during the period. The Company recognized revenues
        from
        233 total solution, product sales and maintenance contracts for the six months
        ended June 30, 2008 as compared to 144 contracts for the six months ended
        June
        30, 2007.
  31
  The
        revenues from total solution contracts increased by 50.8 percent to $25.9
        million with 138 contracts executed for the six months ended June 30, 2008,
        compared to $17.2 million with 81 contracts executed for the same period
        of last
        year. The revenues from product sales were $4.4 million with 59 contracts
        executed for the six months ended June 30, 2008, compared to $3.6 million
        with
        49 contracts executed for the same period of last year. The revenues from
        maintenance service increased by 332.6 percent to $1.0 million with 36 contracts
        executed for the six months ended June 30, 2008, compared to $0.2 million
        with
        14 contracts executed for the same period of last year. In particular, the
        three
        largest customers were Capital Iron and Steel Group, Anshan Iron and Steel
        Group
        and Datang Tashan Power Plant, which collectively contributed approximately
        $11.8 million of the revenues, representing 37.7 percent of our total revenues
        for this period.
 
 Gross
        profit for the six months ended June 30, 2008 was approximately $18.2 million,
        as compared to $11.3 million for the six months ended June 30, 2007, an increase
        of approximately $6.9 million. Gross margin during this period was 58.1 percent,
        which is higher than the gross margin of 53.8 percent for the same period
        of
        2007. The increase in the gross margin was mainly attributable to the execution
        of total solution contracts which contributed higher gross margins and a
        higher
        percentage of revenue contribution from the sales of the Company’s
        self-manufactured proprietary products which enjoy higher margins.
  Operating
        expenses were approximately $7.0 million for the six months ended June 30,
        2008,
        as compared to approximately $4.5 million for the six months ended June 30,
        2007. This represents an increase of approximately $2.5 million or 54.3 percent.
        Compared to the same period of last year, the Company increased the number
        of
        employees, its expenditures in sales incentive compensation and raised the
        compensation for management to be in line with other US public companies.
        The
        increase in operating expenses is also attributable to increased R&D
        expenses in new product development and improvement in our existing product
        offerings.
  Operating
        income was approximately $11.2 million for the six months ended June 30,
        2008 as
        compared to approximately $6.8 million for the six months ended June 30,
        2007,
        representing an increase of 65.4 percent. The improvement in operating income
        was mainly attributable to the increased revenues and improved gross margin
        during the period.
 
 Total
        other income was $227,999 for the six months ended June 30, 2008, compared
        to
        $1,571,542 for the six months ended June 30, 2007, which included a one-time
        non-cash gain of $1,205,791 million due to the change in fair value of
        derivative instruments.
 
 Provision
        for income tax was $60,095 for the six months ended June 30, 2008, compared
        to
        no provisions for income tax for the six months ended June 30, 2007.
 
 Net
        income was approximately $11.4 million for the six months ended June 30,
        2008 as
        compared to approximately $8.4 million net income for the six months ended
        June
        30, 2007, representing an increase of $3.0 million or 36.4 percent. Excluding
        a
        one-time non-cash gain of $1.2 million for the change in fair value of
        derivative in the six months ended June 30, 2007, the non-GAAP net income
        for
        the six months ended June 30 of 2007 was $7.2 million. Our GAAP net income
        for
        the six months ended June 30, 2008 increased 59.3 percent in comparison to
        the
        non-GAAP net income for the six months ended June 30, 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 $3.4
        million and $0.8 million for the six months ended June 30, 2008 and 2007,
        respectively.
 
 The
        comprehensive income, which adds the currency adjustment to the net income,
        was
        approximately $14.8 million for the six months ended June 30, 2008 as compared
        to approximately $9.2 million comprehensive income for the six months ended
        June
        30, 2007, representing an increase of $5.6 million or 60.9 percent.
 
 
 **Liquidity
        and Capital Resources**
  As
        of
        June 30, 2008, we had working capital of $54.1 million including cash and
        cash
        equivalents of $20.5 million. The following table sets forth a summary of
        our
        cash flows for the periods indicated:
  
 **Statement
        of Cash Flow**
  Six
                  Months Ended
                June
                  30,2008
              
              2007Net
                  cash provided by (used in) operating activities
              
              $
              3,457,448
              
              $
              (62,359
              )Net
                  cash (used in) investing activities
              
              
              (663,537
              )
              
              (783,313
              )Net
                  cash provided by financing activities
              
              
              (474,018
              )
              
              (325,736
              )Effect
                  of foreign currency translation on cash and cash
                  equivalents
              
              
              1,088,574
              
              
              232,635Net
                  cash flow
              
              $
              3,408,467
              
              $
              (938,773
              )
  32
  ***Operating
        Activities***
  Net
        cash
        provided by operating activities was approximately $3.5 million for the six
        months ended June 30, 2008 as compared to $62,359 net cash used in operating
        activities for the same period in 2007. Net cash provided by operating
        activities in the six months ended June 30, 2008 was mainly due to the results
        of net income of $11.4 millions during the period, a $7.8 million increase
        in
        customer deposits and a $1.8 million increase in accrued liabilities, offset
        by
        a $1.5 million increase in account receivable, a $2.6 million increase in
        notes
        receivable, a $1.2 million increase in inventories, a $10.8 million increase
        in
        costs and estimated earnings in excess of billings and a $2.3 million decrease
        in billings in excess of costs and estimated earnings.
 
 The
        increase of $10.8 million in costs and estimated earnings in excess of billings
        was mainly due to the increased number of projects where we have recognized
        revenues more than we have billed the customers for these projects, while
        the
        decrease of $2.3 million in billings in excess of costs and estimated earnings
        was mainly due to the decreased number of projects where we have billed our
        customers less than we have recognized revenues for these projects.
 
 ***Investing
        Activities***
  Net
        cash
        used in investing activities in the six months ended June 30, 2008 was $663,537
        as compared to net cash used in investing activities of $783,313 in the same
        period of 2007. The cash used in investing activities in the six months ended
        June 30, 2008 was mainly attributable to capital expenditure in the purchase
        of
        new equipments and the improvement of office and manufacturing facilities.
  ***Financing
        Activities***
  Net
        cash
        used by financing activities in the six months ended June 30, 2008 totaled
        $474,018 as compared to $325,736 used in financing activities in the same
        period
        of 2007. The cash used by financing activities in the six months ended June
        30,
        2008 was mainly attributable to the increase in restricted cash during the
        period.
  As
        a
        result of the total cash activities, net cash increased $3.4 million from
        December 31, 2007 to June 30, 2008.  We believe that our currently
        available working capital of $54.1 million including cash and cash equivalents
        of $20.5 million should be adequate to sustain our operations at our current
        level and our anticipated expansion.
 
 **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.**
 
 a) *Evaluation
        of Disclosure Controls.* Brian
        Lin, our Chief Executive Officer and Robert Yuan, our Principal Accounting
        Officer evaluated the effectiveness of our disclosure controls and procedures
        as
        of the end of our second fiscal quarter 2008 pursuant to Rule 13a-15(b) of
        the
        Securities and Exchange Act. Disclosure controls and procedures are controls
        and
        other procedures that are designed to ensure that information required to
        be
        disclosed by us in the reports that we file or submit under the Exchange
        Act is
        recorded, processed, summarized and reported within the time periods specified
        in the SEC’s rules and forms. Disclosure controls and procedures include,
        without limitation, controls and procedures designed to ensure that information
        required to be disclosed by us in the reports that we file under the Exchange
        Act is accumulated and communicated to our management, as appropriate to
        allow
        timely decisions regarding required disclosure. Based on their evaluations,
        Mr.
        Lin and Mr. Yuan concluded that our disclosure controls and procedures were
        effective as of June 30, 2008.
 
 It
        should
        be noted that any system of controls, however well designed and operated,
        can
        provide only reasonable, and not absolute, assurance that the objectives
        of the
        system are met. In addition, the design of any control system is based in
        part
        upon certain assumptions about the likelihood of future events. Because of
        these
        and other inherent limitations of control systems, there can be no assurance
        that any design will succeed in achieving its stated goals under all potential
        future conditions.
  33
 
 ** (b) *Changes
        in internal control over financial reporting.* Other
        than training our staff in US GAAP accounting skills and implementing stronger
        internal audit function during the last quarter, there have been no changes
        in
        our internal control over financial reporting that occurred during the last
        fiscal quarter that has materially affected, or is reasonably likely to
        materially affect, our internal control over financial reporting. Our management
        team will continue to evaluate our internal control over financial reporting
        in
        2008 as we implement our Sarbanes Oxley Act testing.
  34





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 second 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




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.




**CHINA
                FIRE & SECURITY GROUP, INC.**Dated:
                August 13, 2008
            By:
            /s/ Brian
                LinBrian
                LinChief
                Executive Officer




36