General

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

Overview

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

Reorganization

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

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

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

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

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

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

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

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

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

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

Critical Accounting Policies and Estimates

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

Revenue recognition

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

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

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

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

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

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

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 changes in equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Historically, the Company has not entered into any currency trading or hedging, although there is no assurance that the Company will not enter into such activities in the future.

Plant and equipment

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

Use of estimates

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

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

Inventories

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

Accounts receivable

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

Results of Operations

Comparison of the Three Months Ended on September 30, 2009 and 2008:
                                                For the Three Months Ended September 30,
                                   2009                            2008                        Y/Y Change
                                            % of                            % of
                                           Total                           Total
                         Amount ($)        Revenue       Amount ($)       Revenue       Amount ($)          %
Revenue
System contracting
projects                  18,710,099           75.4 %     15,173,858           90.6 %     3,536,241          23.3 %
Products                   5,351,659           21.6 %        978,806            5.9 %     4,372,853         446.8 %
Maintenance Services         754,671            3.0 %        590,603            3.5 %       164,068          27.8 %
Total Revenue             24,816,429          100.0 %     16,743,267          100.0 %     8,073,162          48.2 %

Total revenues were approximately $24.8 million for the three months ended September 30, 2009 as compared to approximately $16.7 million for the three months ended September 30, 2008, an increase of approximately $8.1 million or 48.2 percent. This increase was primarily due to the increase in our revenues from system contracting projects and product sales, which combined contributed 97.0 percent of revenues during the period. The Company recognized revenues from 205 total solution, product sales and maintenance contracts for the three months ended September 30, 2009 as compared to 163 contracts for the three months ended September 30, 2008.

Revenues from system contracting projects increased by 23.3 percent to $18.7 million derived from 101 contracts for the three months ended September 30, 2009, compared to $15.2 million derived from 97 contracts for the three months ended September 30, 2008. The increase in revenues from system contracting projects was mainly attributable to the increase in the number of system contracting projects we executed and the successful execution of large-size iron and steel projects from Jinan Iron and Steel Group and Capital Iron and Steel Group during the period. Revenues from our product sales, which included the sale of our self-manufactured proprietary products and resale of third-party products, were $5.4 million with 45 contracts executed for the three months ended September 30, 2009, compared to $1.0 million with 28 contracts executed for the three months ended September 30, 2008. The increase in revenues from product sales was mainly attributable to the increased demand in our linear heat detectors and other fire protection products in China and our new expansion in India during the period. The revenues from maintenance service increased by 27.8 percent to $0.8 million derived from 59 contracts for the three months ended September 30, 2009, compared to $0.6 million derived from 38 contracts for the three months ended September 30, 2008. The increase in revenues from maintenance service was mainly attributable to the increase in the number of maintenance service contracts that we executed as a result of the expansion in our customer base during the period.

In particular, the three largest total solution projects were from Jinan Iron and Steel Group, Capital Iron and Steel Group, and Dalian Special Iron and Steel Corporation which collectively contributed approximately $7.7 million in revenues, representing 31.2 percent of total revenues for the three months ended September 30, 2009.

                                                For the Three Months Ended September 30,
                                   2009                            2008                       Y/Y Change
                                            % of                           % of
                         Amount ($)       Revenue       Amount ($)       Revenue       Amount ($)          %
Cost of Revenues
System contracting
projects                   7,821,254           41.8 %     6,459,973           42.6 %     1,361,281          21.1 %
Products                   2,559,838           47.8 %       117,258           12.0 %     2,442,580        2083.1 %
Maintenance Services         436,026           57.8 %       301,605           51.1 %       134,421          44.6 %
Total Cost of
Revenues                  10,817,118           43.6 %     6,878,836           41.1 %     3,938,282          57.3 %

Gross Profit
System contracting
projects                  10,888,845           58.2 %     8,713,885           57.4 %     2,174,960          25.0 %
Products                   2,791,821           52.2 %       861,548           88.0 %     1,930,273         224.0 %
Maintenance Services         318,645           42.2 %       288,998           48.9 %        29,647          10.3 %
Total Gross Profit        13,999,311           56.4 %     9,864,431           58.9 %     4,134,880          41.9 %

Cost of revenues for the three months ended September 30, 2009 was approximately $10.8 million, as compared to $6.9 million for the three months ended September 30, 2008, an increase of approximately $3.9 million or 57.3 percent. Gross profit for the three months ended September 30, 2009 was approximately $14.0 million, as compared to $9.9 million for the three months ended September 30, 2008, an increase of approximately $4.1 million or 41.9 percent. Gross margin for the three months ended September 30, 2009 was 56.4 percent, which is lower than the gross margin of 58.9 percent for the three months ended September 30, 2008. The decrease in gross margin was mainly due to the decrease in the gross margin of our product sales during the period.

Gross margin of system contracting projects was 58.2 percent for the three months ended September 30, 2009, which is higher than the gross margin of 57.4 percent for the system contracting projects for the three months ended September 30, 2008. The increase in the gross margin of system contracting projects was mainly attributable to the successful execution of total solution projects from the iron and steel industry during this period. Total solution projects from the iron and steel industry contributed higher gross margins than the projects from other industries due to a higher percentage of our self-manufactured proprietary products being utilized in the iron and steel projects. The gross margin of product sales was 52.2 percent for the three months ended September 30, 2009, compared to 88.0 percent for the three months ended September 30, 2008. The decrease in the gross margin of product sales was mainly attributable to a lower percentage of self-manufactured proprietary products sold through product sales contracts during the period, contributing lower gross margin.

                                               For the Three Months Ended September 30,
                                   2009                           2008                       Y/Y Change
                                           % of                           % of
                                          Total                          Total
                        Amount ($)       Revenue       Amount ($)       Revenue       Amount ($)          %
Operating Expenses
Selling Expense           2,470,092           10.0 %     1,718,929           10.3 %       751,163          43.7 %
General
Administrative            2,416,007            9.7 %     1,132,492            6.8 %     1,283,515         113.3 %
Depreciation and
Amortization                197,042            0.8 %       123,829            0.7 %        73,213          59.1 %
R&D                         390,029            1.6 %       762,382            4.6 %      -372,353         -48.8 %
Total Operating
Expenses                  5,473,170           22.1 %     3,737,632           22.3 %     1,735,538          46.4 %
Income From
Operations                8,526,141           34.4 %     6,126,799           36.6 %     2,399,342          39.2 %

Operating expenses were approximately $5.5 million for the three months ended September 30, 2009 as compared to approximately $3.7 million for the three months ended September 30, 2008, an increase of approximately $1.7 million or 46.4 percent. The increase in operating expenses was mainly due to the increase in selling expenses, general administrative expenses and depreciation and amortization expenses, which was offset by the decrease in R&D expenses during the period.

Selling expenses were approximately $2.5 million for the three months ended September 30, 2009 as compared to approximately $1.7 million for the three months ended September 30, 2008, an increase of approximately $0.8 million or 43.7 percent. The increase in our selling expenses was mainly attributable to the increase in our sales-related activities in iron and steel, power generation and chemical industries and efforts to expand into new industries including nuclear power, transportation and international markets. General administrative expenses were approximately $2.4 million for the three months ended September 30, 2009, as compared to approximately $1.1 million for the three months ended September 30, 2008, an increase of approximately $1.3 million or 113.3 percent. The significant increase in general administrative expenses was mainly attributable to the increase in employees' salary and compensation and the increase in bad debt expenses during the period. Depreciation and amortization expenses were approximately $0.2 million for the three months ended September 30, 2009 as compared to approximately $0.1 million for the three months ended September 30, 2008, an increase of $73,213 or 59.1 percent. The increase in depreciation and amortization expenses was mainly due to the increase in our plant and equipment. R&D expenses were approximately $0.4 million for the three months ended September 30, 2009 as compared to approximately $0.8 million for the three months ended September 30, 2008, a decrease of $372,353 or 48.8 percent. The decrease in R&D expenses was mainly attributable to the variance in expenditures required in different product development cycles.

Operating income was approximately $8.5 million for the three months ended September 30, 2009 as compared to approximately $6.1 million for the three months ended September 30, 2008, an increase of $2.4 million or 39.2 percent. The increase in operating income was mainly attributable to the increase in our revenues offset by lower operating margin during this period.

Total other income was $335,122 for the three months ended September 30, 2009 as compared to $324,429 for the three months ended September 30, 2008, an increase of $10,693 or 3.3 percent.

Income before income tax was approximately $8.9 million for the three months ended September 30, 2009 as compared to approximately $6.5 million for the three months ended September 30, 2008, an increase of $2.4 million or 37.4 percent. The reason for this increase in income before income tax was mainly due to the increase in revenues offset by the decrease in operating margin during the period. Provision for income tax was approximately $1.3 million for the three months ended September 30, 2009 with effective tax rate of approximately 15.0 percent, as compared to $6,736 credit for income tax for the three months ended September 30, 2008, an increase of $1.3 million. The significant increase in our provision for income tax was mainly due to the fact that Sureland Industrial, our major operating subsidiary, began to pay income tax at a rate of 12.5 percent, after the expiration of its tax exemption period in the fourth quarter of 2008.

Our net income was approximately $7.6 million for the three months ended September 30, 2009 as compared to approximately $6.5 million in net income for the three months ended September 30, 2008, an increase of $1.1 million or 17.0 percent. The increase in our net income was mainly attributable to the increase in our revenues during the period, offset by the decrease in gross margin and the increase in income tax expenses during the period.

Currency translation adjustments resulting from RMB appreciation process amounted to $121,290 and $173,873 as of the three months ended September 30, 2009 and 2008, respectively. The positive amount of currency translation adjustments during the period was mainly due to the appreciation of RMB against the US Dollar during the period.

Comprehensive income, which adds the currency adjustment to net income, was approximately $7.7 million for the three months ended September 30, 2009 as compared to approximately $6.6 million in comprehensive income for the three months ended September 30, 2008, a increase of $1 million or 15.7 percent.

Comparison of the Nine Months Ended on September 30, 2009 and 2008:

                                                 For the Nine Months Ended September 30,
                                   2009                            2008                         Y/Y Change
                                            % of                            % of
                                           Total                           Total
                         Amount ($)       Revenue        Amount ($)       Revenue        Amount ($)          %
Revenue
System contracting
projects                  50,004,213           77.8 %     41,060,246           85.4 %      8,943,967          21.8 %
Products                  12,267,472           19.1 %      5,393,942           11.2 %      6,873,530         127.4 %
Maintenance Services       1,988,823            3.1 %      1,639,429            3.4 %        349,394          21.3 %
Total Revenue             64,260,508          100.0 %     48,093,617          100.0 %     16,166,891          33.6 %

Total revenues were approximately $64.3 million for the nine months ended September 30, 2009 as compared to approximately $48.1 million for the nine months ended September 30, 2008, an increase of approximately $16.2 million or 33.6 percent. The increase was primarily due to the increase in revenues from system contracting projects and product sales, which combined contributed 96.9 percent of revenues during the period. The Company recognized revenues from 323 total solution, product sales and maintenance contracts for the nine months ended September 30, 2009 as compared to 278 contracts for the nine months ended September 30, 2008.

Revenues from system contracting projects increased by 21.8 percent to $50.0 million derived from 167 contracts for the nine months ended September 30, 2009, compared to $41.1 million derived from 162 contracts for the nine months ended September 30, 2008. This increase in the revenues from system contracting projects was mainly attributable to the increase in the number of system contracting projects executed and the successful execution of large-size projects from Capital Iron and Steel Group and China Minmetals Corporation during the period. Revenues from product sales, which included the sale of our self-manufactured proprietary products and resale of third-party products, were $12.3 million with 96 contracts executed for the nine months ended September 30, 2009, compared to $5.4 million with 75 contracts executed for the nine months ended September 30, 2008. The increase in revenues from product sales was mainly due to the increased demand for linear heat detectors and other fire protection products and our new expansion in India during the period. The revenues from maintenance services increased by 21.3 percent to $2.0 million derived from 60 contracts for the nine months ended September 30, 2009, compared to $1.6 million derived from 41 contracts for the nine months ended September 30, 2008. The increase in revenues from maintenance service was mainly attributable to the . . .