Unassociated Document

CHINA ARCHITECTURAL ENGINEERING, INC.

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont’d)

(Stated in US Dollars)

On April 12, 2007, the Company entered into a warrant instrument with the Subscriber pursuant to which the Subscriber purchased the Warrants from the Company (the “Warrant Instrument”). The Warrants, which are represented by a global certificate, are also subject to a warrant agency agreement by and among the Company, The Bank of New York and The Bank of New York, London Branch dated April 12, 2007 (the “Warrant Agency Agreement”). Pursuant to the terms and conditions of the Warrant Instrument and the Warrant Agency Agreement, the Warrants vested on April 12, 2007 and will terminate on April 12, 2010. The Bond Warrants are exercisable at a per share exercise price of $0.01. The Company has listed the Warrants on the NYSE Alternext U.S. (formerly AMEX) by April 12, 2008.

On April 12, 2007, the Company also entered into a registration rights agreement with the Subscriber pursuant to which the Company agreed to include the Bonds, the Warrants, and the shares of common stock underlying the Bonds and Warrants in a pre-effective amendment to a registration statement that the Company have on file with the SEC. Subsequently, the Company verbally agreed with the Subscriber not to include the Subscriber’s securities in the pre-effective amendment to the registration statement and to register them in a separate registration statement to be filed promptly after the effective date of the previously filed registration statement. The Company registered the resale of the Bonds, the Warrants, and the shares of common stock underlying the Bonds and Warrants in a registration statement that was declared effective by the SEC on February 7, 2008.

On April 12, 2007, the date of issuance, the Company determined the fair value of the Bonds to be $9,700,000. The warrants and the beneficial conversion feature were $3,207,790 and $3,507,791 respectively, which were determined under the Black-Scholes valuation method. They are included under stockholders’ equity as additional paid in capital – stock warrants and additional paid in capital – beneficial conversion feature respectively in accordance with guidance of APB 14 and EITF No. 98-5. Accordingly, the interest discount on the warrants and beneficial conversion feature were recorded, and are being amortized by the interest method of 5 years.

As addressed in an earlier paragraph under Mandatory Redemptions, the Company will redeem each bond at 150.87% of its principal amount on April 4, 2012 (the maturity date). On the basis of this commitment, the Company has determined the total redemption premium to be $5,087,100, which is an addition to the original face value of the Bonds of $10,000,000. This redemption premium is to be amortized to interest expense over the term of the Bonds by the interest method.

Because of the fact that the $10,000,000 Variable Rate Convertible Bonds contain three separate securities and yet merged into one package, the bond security must identify its constituents and establish the individual value as determined by the Company as follows:

(1)	Bond Discount	$	300,000
(2)	Warrants	$	2,183,000
(3)	Beneficial Conversion Feature	$	2,171,429

On September 29, 2008, the Subscriber converted $2,000,000 into 571,428 shares at the conversion price of $3.50 per share.

CHINA ARCHITECTURAL ENGINEERING, INC.

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont’d)

(Stated in US Dollars)

B. $20,000,000 12% Convertible Bonds due in 2011

On April 15, 2008, the Company completed a financing transaction with ABN AMRO Bank N.V., London Branch (“ABN AMRO”), CITIC Allco Investments Limited (together with ABN AMRO, the “Subscribers,” and each a “Subscriber”), and CITIC Capital Finance Limited issuing (i) $20,000,000 12% Convertible Bonds due in 2011 (the “Bonds”) and (ii) 300,000 warrants to purchase an aggregate of 300,000 shares of the Company’s common stock, subject to certain adjustments as set forth in the warrant instrument, that expire in 2013 (the “Bond Warrants”). The transaction was completed in accordance with a subscription agreement entered into by the Company, Subscribers, and CITIC Capital Finance Limited, dated April 2, 2008 (the “Subscription Agreement”).

The Bonds were subscribed at a price equal to 100% of their principal amount. The Company agreed to pay to the Subscribers an aggregate commission of 2.5% of the principal amount of the Bonds and of the aggregate warrant issue price for the Bond Warrants. The Bonds were issued pursuant to, and are subject to the terms and conditions of, a trust deed dated April 15, 2008 between the Company and The Bank of New York, London Branch (the “Trust Deed”). The Bonds are also subject to a paying and conversion agency agreement dated April 15, 2008 between the Company, The Bank of New York, and The Bank of New York, London Branch. The terms and conditions of the Bonds, as set forth in the Trust Deed include, among other things, the following terms:

Interest Rate. The Bonds bear cash interest from April 15, 2008 at the rate of 12% per annum of the principal amount of the Bonds.

Conversion. Each Bond is convertible at the option of the holder at any time during the period (i) beginning on the earlier of (a) the date that a registration statement for the shares to be issued upon conversion of the Bonds is first declared effective by the United States Securities and Exchange Commission (the “SEC”) and (b) October 15, 2008 and (ii) ending at the close of business on April 8, 2011, subject to certain exceptions, into shares of the Company’s common stock at an initial conversion price equal to $6.35 per share, which is the product of 1.1 and the average closing price per share of the Company’s common stock for the period of 20 consecutive trading days immediately prior to April 15, 2008. The conversion price is subject to adjustment in certain events, including the Company’s issuance of additional shares of common stock or rights to purchase common stock at a per share or per share exercise or conversion price, respectively, at less than the applicable per share conversion price of the Bonds.

Mandatory Redemptions. Interest is payable semi-annually in arrears on April 15 and October 15 of each year (each an “Interest Payment Date”) commencing October 15, 2008. On any Interest Payment Date on or after April 15, 2010, the holders of the Bonds can require the Company to redeem the Bonds at 116.61% of the principal amount of the Bonds redeemed, plus all accrued but unpaid interest. The Company is required to redeem any outstanding Bonds at 116.61% of its principal amount on April 15, 2011.

On April 15, 2008, the Company entered into a warrant instrument with the Subscribers pursuant to which the Subscribers purchased the Bond Warrants from the Company (the “Warrant Instrument”). The Bond Warrants, which are represented by a global certificate, are also subject to a warrant agency agreement by and among the Company, The Bank of New York and The Bank of New York, London Branch dated April 15, 2008 (the “Warrant Agency Agreement”). Pursuant to the terms and conditions of the Warrant Instrument and the Warrant Agency Agreement, the Bond Warrants became exercisable on April 15, 2008 and terminate on April 15, 2013. The Bond Warrants have an initial exercise price per share of $6.35, subject to adjustment in certain events.

CHINA ARCHITECTURAL ENGINEERING, INC.

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont’d)

(Stated in US Dollars)

The Company agreed to list the shares of common stock underlying the Bonds and the Bond Warrants on the NYSE Alternext U.S. (formerly AMEX), or any alternative stock exchange by the earlier of October 15, 2008 and the date on which a registration statement registering the shares of common stock underlying the Bonds and the Bond Warrants is first declared effective by the SEC. In addition, the Company agreed to register the shares of common stock underlying the Bonds and the Bond Warrants with the SEC on or prior to October 15, 2008 and will keep the registration effective until 30 days after the Bond Warrants terminate. The Company completed the listing and registration of the shares of common stock underlying the Bonds and the Bond Warrants by October 15, 2008.

On April, 15, 2008, the Company also entered into a registration rights agreement with the Subscribers pursuant to which it agreed to register the Bonds, the Bond Warrants, and the shares of common stock underlying the Bonds and Bond Warrants (the “Registrable Securities”). The Company filed with the SEC a registration statement on Form S-1 to register the Registrable Securities (the “Registration Statement”) which was declared effective by the SEC on October 3, 2008. In addition, the Company agreed to list all the Registrable Securities covered by the Registration Statement on each securities exchange on which similar securities issued by the Company are then listed.

Pursuant to the terms of the Subscription Agreement, the Company has appointed a director designated by CITIC Capital Finance Limited to the Company’s Board of Directors.

Because of the fact that the $20,000,000 Convertible Bonds contain three separate securities and yet merged into one package, the bond security must identify its constituents and establish the individual value as determined by the Company as follows:

(1)			Bond Discount		$	500,000
(2)			Warrants		$	1,413,503

The above items A and B are to be amortized to interest expense over the term of the bonds by the effective interest method as disclosed in the table below.

The Convertible Bonds Payable, net consists of the following: -

	September 30, 2008			December 31, 2007

Convertible Bonds Payable	$	28,000,000		$	10,000,000
Less: Interest discount – Warrants		(3,159,903	)		(4,036,170	)
Less: Interest discount – Beneficial conversion feature		(1,737,143	)		(4,342,857	)
Less: Bond discount		(740,000	)		(300,000	)
Accretion of interest discount and accrual of interest payable		1,862,868			2,144,768

Net	$	24,225,822		$	3,465,741

CHINA ARCHITECTURAL ENGINEERING, INC.

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont’d)

(Stated in US Dollars)

9.	CONTRACT REVENUES EARNED

The contract revenues earned for the periods ended September 30, 2008 and 2007 consist of the following:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Billed	$	24,675,970	$	18,852,741	$	71,930,700	$	32,404,207
Unbilled		31,302,213		8,225,126		50,776,978		28,557,397

		55,978,183		27,077,867		122,707,678		60,961,604

The unbilled contract revenue earned represents those revenues that should be recognized according to the percentage of completion method for accounting for construction contract because the Company is entitled to receive payment from the customers for the amount of work that has been rendered to and completed for that customer according to the terms and progress being made as stipulated under that contract between the Company and that customer. As an industrial practice, there are certain procedures that need to be performed, such as project account finalization, by both the customer and the Company before the final billing is issued; however this does not affect the Company’s recognition of revenue and respective cost according to the terms of the contract with the consistent application of the percentage-of-completion method.

10.

INCOME TAXES

The following table accounts for the differences between the actual tax provision and the amounts obtained by applying the relevant applicable corporation income tax rate to income before tax for the periods ended September 30, 2008 and 2007:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2008		2007			2008			2007

Income before tax	$	9,934,545	$	3,916,040		$	22,792,163		$	11,169,114

Taxes at the applicable income tax rates	$	19,629	$	1,292,293		$	1,273,344		$	3,435,911

Miscellaneous non taxable income and non-deductible expenses		11,316		(507,549	)		(1,125,419	)		(1,386,489	)

Current income tax expense	$	30,945	$	784,744		$	147,925		$	2,049,422

CHINA ARCHITECTURAL ENGINEERING, INC.

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont’d)

(Stated in US Dollars)

Effective January 1, 2008, the PRC government implemented a new 25% tax rate across the board for all enterprises, regardless of whether they are a domestic or foreign enterprise, without any tax preferences which is defined as "two-year exemption followed by three-year half exemption" enjoyed by tax payers. As a result of the new tax law, a standard 15% tax preference terminated as of December 31, 2007. The PRC government has established a set of transition rules to allow enterprises using tax preferences before January 1, 2008 to continue using the tax preferences on a transitional basis until the new tax rates are fully implemented over a five-year period. The Company’s subsidiaries in Zhuhai and Shenzhen are now subject to a PRC tax rate of 18% starting from January 1, 2008.

11.

COMMITMENTS

The Company leases certain administrative and production facilities from third parties. Accordingly, for the nine-month periods ended September 30, 2008 and 2007, the Company incurred rental expenses of $856,780 and $461,576, respectively.

The Company has commitments with respect to non-cancelable operating leases for these offices, as follows:

For the year ended December 31,
2008		745,721
2009		1,726,867
2010		914,699
2011		805,816
2012 or after		1,297,499
	$	5,490,602

12.

RELATED PARTIES TRANSACTIONS

The amount due to shareholder at September 30, 2008 was $1,435,411 and the amount due to the shareholder at December 31, 2007 was $1,334,856.

During the nine-month period ended September 30, 2008, the Company purchased construction materials amounting to $5.0 million from Guangdong Canbo Electrical Co., Ltd. (Canbo), a subsidiary of the Company’s major shareholder, KGE Group Limited. Canbo is a preferred supplier of the Company as it is able to procure materials at favorable price levels due to its purchased quantities. More important, application of certain of the Company’s patented technology is preferably routed through Canbo to prevent undesired distribution of this technology. The Company at times provides advance payment to Canbo in order to obtain a more favorable pricing. As of September 30, 2008, the Company’s advance to Canbo was $2.8 million. The Company has obtained external bank credit for purchases through Canbo. As of September 30, 2008, the Company used $7.1 million of credit through such bank acceptance notes.

The transactions with related parties during the periods were carried out in the ordinary course of business and on normal commercial terms.

CHINA ARCHITECTURAL ENGINEERING, INC.

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont’d)

(Stated in US Dollars)

13.

OTHER EVENTS

Upon the closing of the initial public offering in October 2007, the Company sold to WestPark Capital, Inc., as underwriter, warrants to purchase up to 73,700 shares of its common stock. The warrants are exercisable at a per share price of $4.20 and will expire if unexercised after five years from the date of issuance. On October 31, 2007, the Company also issued 50,000 warrants to Investor Relations International exercisable at a per share price $3.50 for a period of four years from the date of issuance. On May 8, 2008, the Company issued another 50,000 warrants to Investor Relations International exercisable at a per share price $3.50 for a period of four years from the date of issuance.

As of September 30, 2008, WestPark Capital, Inc. has not exercised its warrants. On June 11, 2008, Investor Relations International exercised its warrants issued on October 31, 2007 and received 32,030 shares in accordance with the cashless settlement terms in the warrant agreement. The Company recognized the cost of these warrants as determined by the Black-Scholes Model at a value of $67,647 and $76,297 for the warrants issued to WestPark and Investor Relations International, respectively, for the nine months ended September 30, 2008. These expenses have been recorded and included in the accompanying Statements of Income for the nine-month period ended September 30, 2008.

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

Forward-Looking Statements

The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this quarterly report and the audited consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our annual report on Form 10-K for the year ended December 31, 2007.

This quarterly report contains forward-looking statements that involve substantial risks and uncertainties. The words “anticipated,” “believe,” “expect, “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may,” and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect our management’s current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, general economic and business conditions, changes in foreign, political, social, and economic conditions, regulatory initiatives and compliance with governmental regulations, the ability to achieve further market penetration and additional customers, and various other matters, many of which are beyond our control. Actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated should one or more of these risks or uncertainties occur or if any of the risks or uncertainties described elsewhere in this report or in the “Risk Factors” section of our 2007 annual report occur. Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements and there can be no assurance of the actual results or developments.

Overview

We specialize in high-end curtain wall systems (including glass, stone and metal curtain walls), roofing systems, steel construction systems, eco-friendly energy saving buildings and conservation systems and related products, for public works and commercial real estate projects. We have completed over one hundred projects throughout China, Hong Kong, Macau, Australia, Southeast Asia, including the National Grand Theater in Beijing, the Meridian Gate Exhibition Hall of the Palace Museum in Beijing’s Forbidden City (winner of the 2005 UNESCO Jury Commendation for Innovation of Asia Pacific Heritage Award), the Beijing Botanical Garden Conservatory (winner of the Zhan Tian You award in 2003), the Shenzhen Airport Terminal Building, the Shanghai South Railway Station and the Vietnam National Conference Center.

Results of Operations

The following table sets forth our statements of operations for the three months and nine months ended September 30, 2008 and 2007 in U.S. dollars (unaudited):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	*(in thousands, except for share and per share amounts)*

Contract revenues earned	$	55,978		$	27,078		$	122,708		$	60,962

Cost of contract revenues earned		(38,595	)		(20,533	)		(83,538	)		(44,027	)

Gross profit	$	17,383		$	6,545		$	39,170		$	16,935

Selling, general and administrative expenses		(6,238	)		(1,875	)		(13,828	)		(4,439	)

Income from operations	$	11,145		$	4,670		$	25,342		$	12,496

Interest income		4			11			46			15

Interest expenses		(1,356	)		(765	)		(2,888	)		(1,341	)

Other income		142			-			292			-

Income before taxes	$	9,935		$	3,916		$	22,792		$	11,170

Income tax		(31	)		(785	)		(148	)		(2,050	)

Minority interests		6			1			17			(13	)

Net income	$	9,910		$	3,132		$	22,661		$	9,107

Earnings per share:
Basic	$	0.19		$	0.06		$	0.44		$	0.18
Diluted	$	0.18		$	0.06		$	0.42		$	0.18

Weighted average shares outstanding:
Basic		51,891,657			50,000,000			51,829,156			50,000,000
Diluted		55,653,537			50,925,991			55,554,987			50,632,657

Three Months Ended September 30, 2008 and 2007

Contract revenues earned for the three months ended September 30, 2008 were $56.0 million, an increase of $28.9 million, or 107%, from the contract revenues earned of $27.1 million for the comparable period in 2007. The primary reason for the increase in contract revenues earned was due to new large overseas projects outside of China, especially in the Middle East for the three months ended September 30, 2008.

Cost of contract revenues earned for the three months ended September 30, 2008 was $38.6 million, an increase of $18.1 million, or 88%, from $20.5 million for the comparable period in 2007. Cost of contract revenues earned consists of the raw materials, labor and other operating costs related to manufacturing. The increase in costs of contract revenues earned was primarily due to the increase in contract revenue and increase in the cost of raw materials and other costs for the three months ended September 30, 2008.

Gross profit for the three months ended September 30, 2008 was $17.4 million, an increase of $10.9 million, or 168%, from $6.5 million for the comparable period of 2007. Our gross margin for the three months ended September 30, 2008 was 31% as compared with 24% for the three months ended September 30, 2007. The increase in gross margin was primarily a result of higher margins obtained from overseas projects, which was partially offset by higher raw materials and labor costs in the quarter as well as appreciation of RMB during 2008 as compared to 2007.

Selling, general and administrative expenses were approximately $6.2 million for the three months ended September 30, 2008, an increase of approximately $4.3 million, or 226%, from $1.9 million for the comparable period in 2007. The increase was due to the growth in staff, office rental and other start-up costs associated with the expansion of our overseas operations during the three months ended September 30, 2008. Techwell Engineering Limited (“Techwell”), which was acquired by the Company in the fourth quarter of 2007, contributed approximately half to the increase in the expenses. Among the selling, general and administrative expenses, payroll and social securities was the single largest expenditure of the group, which accounted for approximately 37% of the expenses. Other major expenses included office administrative expenses (23%) and rental expenses (8%).

Interest expenses were approximately $1.4 million for the three months ended September 30, 2008, an increase of approximately $0.6 million, from approximately $0.8 million for the comparable period in 2007. The increase was mainly due to cash interest expense and non-cash amortization expense associated with the $20 million convertible bonds and warrants issued in April 2008.

Income tax was approximately $31,000 for the three months ended September 30, 2008 at an effective tax rate of 0.3%, compared with $785,000 taxes for the same period of 2007 at an effective tax rate of 20.0%. The primary reason for the decrease was due to zero corporate income tax rate associated with revenues from the Dubai project, our largest ongoing project during the third quarter of 2008.

Net income for the three months ended September 30, 2008 was $9.9 million, an increase of $6.8 million, or 219%, from $3.1 million for the comparable period in 2007.

Nine Months Ended September 30, 2008 and 2007

Contract revenues earned for the nine months ended September 30, 2008 were $122.7 million, an increase of $61.7 million, or 101%, from the contract revenues earned of $61.0 million for the comparable period in 2007. The primary reason for the increase in contract revenues earned was due to new large overseas projects outside of China, especially in the Middle East for the nine months ended September 30, 2008.

Cost of contract revenues earned for the nine months ended September 30, 2008 was $83.5 million, an increase of $39.5 million, or 90%, from $44.0 million for the comparable period in 2007. Cost of contract revenues earned consists of the raw materials, labor and other operating costs related to manufacturing. The increase in costs of contract revenues earned was primarily due to the increase in contract revenue and increase in the cost of raw materials and other costs for the nine months ended September 30, 2008.

Gross profit for the nine months ended September 30, 2008 was $39.2 million, an increase of $22.3 million, or 130%, from $16.9 million for the comparable period of 2007. Our gross margin for the nine months ended September 30, 2008 was 32% as compared with 28% for the nine months ended September 30, 2007. The increase in gross margin was primarily a result of The increase in gross margin was primarily a result of higher margins obtained from overseas projects, which was partially offset by higher raw materials and labor costs as well as appreciation of RMB in the first three quarters of 2008.

Selling, general and administrative expenses were approximately $13.8 million for the nine months ended September 30, 2008, an increase of approximately $9.4 million, or 214%, from $4.4 million for the comparable period in 2007. The increase was due to the growth in staff, office rental and other start-up costs associated with the expansion of our overseas operations during the nine months ended September 30, 2008. Techwell, which was acquired by the Company in the fourth quarter of 2007, contributed approximately half to the increase in the expenses. Among the selling, general and administrative expenses, payroll and social securities was the single largest expenditure of the group, which accounted for approximately 41% of the expenses. Other major expenses included office administrative expenses (24%) and rental expenses (8%).

Interest expenses were approximately $2.9 million for the nine months ended September 30, 2008, an increase of approximately $1.6 million, from approximately $1.3 million for the comparable period in 2007. The increase was mainly due to cash interest expense and non-cash amortization expense associated with the $10 million convertible bonds and warrants issued in April 2007 and $20 million convertible bonds and warrants issued in April 2008.

Income tax was approximately $0.1 million for the nine months ended September 30, 2008 at an effective tax rate of 0.6%, compared with $2.1 million taxes for the same period of 2007 at an effective tax rate of 18%. The primary reason for the decrease was due to the zero corporate income tax rate associated with revenues from the Dubai project, our largest ongoing project during the first three quarters of 2008.

Net income for the nine months ended September 30, 2008 was $22.7 million, an increase of $13.6 million, or 149%, from $9.1 million for the comparable period in 2007.

Liquidity and Capital Resources

At September 30, 2008, we had cash and cash equivalents of $6.5 million and restricted cash of $11.1 million. Prior to October 17, 2006, we have historically financed our business operations through short-term bank loans, cash provided by operations, and credit provided by suppliers. More recently, we have raised capital through debt and equity offerings, as well as bonding facilities.

On April 15, 2008, we completed a financing transaction pursuant to which we issued Convertible Bonds due in 2011 in the principal amount of $20.0 million (the “2008 Bonds”). The 2008 Bonds bear cash interest at the rate of 12% per annum. Interest is payable semi-annually in arrears on April 15 and October 15 of each year (each an “Interest Payment Date”) commencing October 15, 2008. On any Interest Payment Date on or after April 15, 2010, the holders of the 2008 Bonds can require us to redeem the 2008 Bonds at 116.61% of the principal amount. We are required to redeem any outstanding 2008 Bonds at 116.61% of its principal amount on April 15, 2011. If we are required to repurchase all or a portion of the 2008 Bonds and do not have sufficient cash to make the repurchase, we may be required to obtain third party financing to do so, and there can be no assurances that we will be able to secure financing in a timely manner and on favorable terms, which could have a material adverse effect on our financial performance, results of operations and stock price. We also issued 300,000 warrants in connection with the 2008 Bonds on April 15, 2008 to purchase an aggregate of 300,000 shares of our common stock, subject to adjustments for stock splits or reorganizations as set forth in the warrant instrument.

In October 2006, we opened a line of credit facility with the Zhuhai branch of Bank of East Asia for up to a maximum of RMB20,000,000. The credit facility does not require renewal until October 2011. In order to facilitate the extension of the credit facility, we agreed to deposit the equivalent amount in HKD on fixed deposit terms into the Hong Kong branch of Bank of East Asia. This facility is subject to a current interest rate of 5.832% and interest rate adjusts every 6 months. There was no outstanding balance as of September 30, 2008.

Our subsidiary, Zhuhai King Glass Engineering Co., Limited, borrowed from Bank of East Asia with a condominium as collateral. This facility, which is due October 25, 2011, is subject to a current interest rate of 5.832% and interest rate adjusts every 6 months. The amount outstanding as of September 30, 2008 was $151,310.

Full Art International Limited incurred an automobile hire purchase obligation due November 12, 2009 that had an outstanding amount of $282,191 as of September 30, 2008.

We also opened a line of credit and a trust receipts line with the Hong Kong Branch of Dah Sing Bank. The credit facilities are set to expire on November 28 and November 25, 2008, respectively, which had approximately $415,262 and $1,286,353, respectively, outstanding as of September 30, 2008.

On February 19, 2008, we and Techwell Engineering Limited were granted a bonding facility by the Hong Kong Branch of ABN AMRO Bank N.V. The facility amount was $10,000,000, at a tenor of up to one year with 2% flat interest rate on the issued amount of bonds such as bank guarantees, performance bonds, advanced payment bonds and standby letters of credit. ABN AMRO required guarantees as follows: (i) an irrevocable and unconditional guarantee executed by Zhuhai King Glass Engineering Co. Limited and (ii) share charge over the shares of us for a minimum value of $5,000,000 or equivalent, executed by KGE Group Limited. On May 2, 2008, the facility was increased to $12,000,000 with additional cash collateral of $2,000,000. This facility is now fully utilized.

On March 28, 2008, we, Full Art and Techwell Engineering Limited were granted a bonding facility by the Hong Kong Branch of HSBC. The facility amount was $10,000,000, at a tenor of up to one year with 1% flat interest rate on the issued amount of bonds such as bank guarantees, performance bonds, advanced payment bonds and standby letters of credit. HSBC required guarantees as follows: (i) an unlimited guarantee among the Company, Full Art International Limited and Techwell Engineering Limited; and (ii) an “all monies” securities deposits with 15% margin. On August 18, 2008, the facility was increased to $20,000,000 with additional cash collateral of $1,500,000. As of September 30, 2008, we have utilized $11.6 million of the facility.

On July 19, 2008, Zhuhai King Glass Engineering Co., Ltd., our wholly-owned subsidiary was granted a bank’s acceptance bill facility by the Shenzhen Branch of ABN AMRO Bank N.V. The facility amount is RMB70 million (US$10.2 million). ABN AMRO requires irrevocable and unconditional guarantee from us and cash collateral of 20% of bank’s acceptance bill issued. As of September 30, 2008, Zhuhai King Glass Engineering Co., Ltd. utilized RMB48.5 million (US$7.1 million) of the facility.

We also lease certain administrative and production facilities from third parties. Accordingly, for the nine months ended September 30, 2008 and 2007, we incurred rental expenses of $856,780 and $461,576, respectively.

Net cash used in operating activities for the nine months ended September 30, 2008 was approximately $25.8 million, as compared to $8.5 million used in the same period in 2007. The change is primarily due to a significant increase in the size of operations coupled with an increase in receivables with a relatively long collection period typical to the construction industry in China, but partially offset by an increase in payables for the nine months ended September 30, 2008.

Net cash used by investing activities was approximately $2.6 million for the nine months ended September 30, 2008 compared to approximately $0.6 million used for the nine months ended September 30, 2007. The change was mainly a result of an increase of fixed assets purchased during the nine months ended September 30, 2008.

Net cash provided by financing activities was $27.2 million for the nine months ended September 30, 2008 compared to $10.6 million provided for the nine months ended September 30, 2007. The increase was primarily due to the issuance of $20,000,000 convertible bonds in April 2008 and proceeds from short-term loans.

At September 30, 2008, we had no material commitments for capital expenditures other than for those expenditures incurred in the ordinary course of business. We intend to expend a significant amount of capital to purchase materials and serve as deposits for performance bonds for new projects that we have obtained. Additional capital for this objective may be required that is in excess of our liquidity, requiring us to raise additional capital through an equity offering or secured or unsecured debt financing. The availability of additional capital resources will depend on prevailing market conditions, interest rates, and our existing financial position and results of operations.

Contractual Obligations

The following table describes our contractual commitments and obligations as of September 30, 2008:

	Payments due by period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating Lease Obligations	$	5,490,602	$	745,721	$	2,641,566	$	1,611,632	$	491,683
Contingent Liabilities (1)	$	20,365,768	$	18,534,357	$	1,831,411	$	-	$	-
Long-term debt (2)	$	35,391,600	$	-	$	23,322,000	$	12,069,600	$	-

(1)

Includes the $3,500,000 standby guarantee expiring May 2, 2009, $2,121,322 performance bond expiring April 11, 2009 and $6,363,966 advanced payment bond expiring March 25, 2009, issued by ABN AMRO Bank N.V. Also includes $1,831,411 performance bond expiring December 31, 2009, $2,306,425 advanced payment bond expiring August 6, 2009 and $4,242,644 advanced payment bond expiring March 25, 2009, issued by HSBC.

(2)

Includes the $10 million convertible bond which is required to be redeemed at 150.87% at maturity at April 4, 2012, which may be converted into our common stocks after September 28, 2008, accordingly we may re-classify upon conversion. Also includes the $20 million convertible bond which is required to be redeemed at 116.61% at maturity at April 15, 2011, which may be converted into our common stocks after October 15, 2008, accordingly we may re-classify upon conversion.

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues, expenses and allocated charges during the reporting period. Actual results could differ from those estimates.

We describe our significant accounting policies in Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K as of and for the year ended December 31, 2007. We discuss our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K as of and for the year ended December 31, 2007. Other than as indicated in this quarterly report, there have been no material revisions to the critical accounting policies as filed in our Annual Report for the fiscal year ended December 31, 2007 on Form 10-K and Form 10-K/A, as filed with the SEC on March 31, 2008 and April 29, 2008, respectively.

Recent Accounting Pronouncements

See Note 2(t) of the accompanying unaudited interim consolidated financial statements included in this

Form 10-Q for a discussion of recent accounting pronouncements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

There have been no material changes in market risk from the information provided in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report for the fiscal year ended December 31, 2007 on Form 10-K and Form 10-K/A, as filed with the SEC on March 31, 2008 and April 29, 2008, respectively.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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 Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission'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, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this Quarterly Report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company 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 and which also are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting

Based on the evaluation of our management as required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act, we believe that there were no changes in our internal control over financial reporting that occurred during the third quarter of 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II-OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not applicable.

ITEM 1A. RISK FACTORS

Any investment in our common stock involves a high degree of risk. Investors should carefully consider the risks described below and all of the information contained in our public filings before deciding whether to purchase our common stock. Except as set forth below, there have been no material revisions to the “Risk Factors” as filed in our Annual Report on Form 10-K as of and for the year ended December 31, 2007.

Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, access to capital and cost of capital.

The capital and credit markets have been experiencing extreme volatility and disruption in recent months, including, among other things, extreme volatility in securities prices, severely diminished liquidity and credit availability, ratings downgrades of certain investments and declining valuations of others. Governments have taken unprecedented actions intended to address extreme market conditions that have included severely restricted credit and declines in real estate values. In some cases, the markets have exerted downward pressure on availability of liquidity and credit capacity for certain issuers. While currently these conditions have not impaired our ability to utilize our current credit facilities and finance our operations, there can be no assurance that there will not be a further deterioration in financial markets and confidence in major economies such that our ability to access credit markets and finance our operations might be impaired. Without sufficient liquidity, we may be forced to curtail our operations. Adverse market conditions may limit our ability to replace, in a timely manner, maturing liabilities and access the capital necessary to operate and grow our business. As such, we may be forced to delay raising capital or bear an unattractive cost of capital which could decrease our profitability and significantly reduce our financial flexibility. Demand for our services is cyclical and vulnerable to economic downturns. Although our total revenues continue to improve in the third quarter of 2008, the current tightening of credit in financial markets could adversely affect the ability of our customers to obtain financing for purchases of our services and could result in a decrease in or cancellation of orders for our services. We are unable to predict the duration and severity of the current disruption in financial markets and the global adverse economic conditions and the effect such events might have on our business. Our results of operations, financial condition, cash flows and capital position could be materially adversely affected by disruptions in the financial markets.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

31.1	Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CHINA ARCHITECTURAL ENGINEERING, INC. (Registrant)

November 13, 2008	By:	/s/ Luo Ken Yi
		Luo Ken Yi
		Chief Executive Officer and Chairman of the Board

Delaware (State or other jurisdiction of incorporation or organization)		51-05021250 (I.R.S. Employer Identification No.)

105 Baishi Road, Jiuzhou West Avenue, Zhuhai, People’s Republic of China (Address of principal executive offices)		519070 (Zip Code)

Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer x	Smaller reporting company ¨
		(Do not check if a smaller
		reporting company)

	September 30, 2008		December 31, 2007
ASSETS
*Current assets*
Cash and cash equivalents	$	6,537,961	$	4,040,168
Restricted cash		11,059,288		595,016
Contract receivables, net		81,305,443		13,047,559
Costs and earnings in excess of billings		31,363,456		57,488,693
Job disbursements advances		-		2,454,106
Tender and other site deposits		-		83,046
Other receivables		17,433,626		6,640,865
Inventories		1,518,622		528,743
Other current assets		4,080,681		109,533
Total current assets		153,299,077		84,987,729

*Non-current assets*
Plant and equipment, net		4,635,246		2,582,554
Intangible Assets		5,130		70,386
Organization cost		-		92,741
Goodwill		7,995,896		7,995,896
Other non-current asset		-		7,505

TOTAL ASSETS	$	165,935,349	$	95,736,811

LIABILITIES AND STOCKHOLDERS’ EQUITY
*Current liabilities*
Short-term bank loans	$	8,937,585	$	2,578,550
Accounts payable		29,767,102		18,737,771
Billings in excess of costs and earnings		7,407,281		757,079
Amount due to shareholder		1,435,411		1,334,856
Other payables		5,690,069		9,193,186
Income tax payable		2,716,823		2,673,643
Business and other taxes payable		3,628,565		3,538,336
Other Accrual		2,177,550		499,684
Total current liabilities		61,760,386		39,313,105

	September 30, 2008		December 31, 2007

*Non-current liabilities*
Long term bank loans	$	1,724,202	$	443,881
Convertible bond payable, net		24,225,822		3,465,741
Minority interest		10,541		49,482

TOTAL LIABILITIES	$	87,720,951	$	43,272,209

STOCKHOLDERS’ EQUITY
Preferred stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2008 and December 31, 2007; Common stock, $0.001 par value, 100,000,000 shares authorized, 52,456,874 and 51,783,416 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively	$	52,457	$	51,784
Additional paid in capital		23,036,592		23,665,558
Statutory reserves		3,040,595		3,040,595
Accumulated other comprehensive income		5,609,893		1,892,829
Retained earnings		46,474,861		23,813,836
		78,214,398		52,464,602
TOTAL LIABILITIES AND
STOCKHOLDERS’ EQUITY	$	165,935,349	$	95,736,811

	Nine Months Ended September 30,
	2008			2007
*Cash flows from operating activities*
Net income	$	22,661,025		$	9,106,502
Minority interest		(16,787	)		13,190
Depreciation and amortization expense		589,961			220,624
Amortization expense on convertible bond		682,261			479,965
Increase in restricted cash		(10,464,272	)		(6,627	)
Decrease in security deposit		-			(3,462,740	)
Increase in inventories		(989,879	)		(128,151	)
Increase in receivables		(54,359,406	)		(16,940,256	)
Decrease in other assets		100,246			-
Increase in payables		15,987,691			2,215,034
Net cash used in operating activities	$	(25,809,160	)	$	(8,502,459	)

*Cash flows from investing activities*
Purchases of plant and equipment		(2,577,397	)		(550,324	)
Net cash used in investing activities	$	(2,577,397	)	$	(550,324	)

*Cash flows from financing activities*
Proceeds from short-term loans	$	6,359,035			-
Proceeds from long-term loans		1,404,840			193,000
Repayments of long-term loans		(124,519	)		(35,285	)
Advance from shareholder		100,555			-
Repayments of amount due to shareholder		-			(1,735	)
Issuance of convertible bond and warrants		19,500,000			10,456,516
Net cash provided by financing activities	$	27,239,911		$	10,612,496

Net increase in cash and cash equivalents	$	(1,146,646	)	$	1,559,713
Effect of foreign currency translation on cash and cash equivalents		3,644,437			392,199

Cash and cash equivalents - beginning of period		4,040,168			2,115,966

Cash and cash equivalents - end of period	$	6,537,961		$	4,067,878

*Other supplementary information:*
Cash paid during the period for:
Interest paid	$	643,880		$	861,241
Income tax paid	$	203,682		$	2,049,422

		Page
PART I - FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS	1

	Unaudited Consolidated Balance Sheet as of September 30, 2008 and December 31, 2007	2

	Unaudited Interim Consolidated Statements of Income for the three and nine months ended September 30, 2008 and 2007	4

	Unaudited Interim Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007	5

	Unaudited Consolidated Statements of Stockholders’ Equity from January 1, 2008 to September 30, 2008	6

	Notes to the Unaudited Interim Consolidated Financial Statements	7

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION	25

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	30

ITEM 4.	CONTROLS AND PROCEDURES	31

PART II - OTHER INFORMATION		31

ITEM 1.	LEGAL PROCEEDINGS	31

ITEM 1A.	RISK FACTORS	31

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	32

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	32

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	32

ITEM 5.	OTHER INFORMATION	32

ITEM 6.	EXHIBITS	32

SIGNATURES		33

	Total Number of shares		Common stock		Additional paid in capital			Statutory reserves		Accumulated other comprehensive income		Retained earnings		Total

Balance, January 1, 2008		51,783,416	$	51,784	$	23,665,558		$	3,040,595	$	1,892,829	$	23,813,836	$	52,464,602
Net income													22,661,025		22,661,058
Foreign currency translation adjustment											3,717,064				3,717,064
Total comprehensive income															26,419,172
Adjustment of additional Paid-in Capital from warrants and beneficial conversion feature						(2,611,095	)								(2,611,095	)
Issuance of new shares		102,030		102		602,221									602,323
Conversion of convertible bonds		571,428		571		1,379,908									1,380,479
Balance, September 30, 2008		52,456,874	$	52,457	$	23,036,592		$	3,040,595	$	5,609,893	$	46,474,861	$	78,214,398

Name of Company	Place of Incorporation	Attributable Equity interest %
Full Art International Limited	Hong Kong	100
Zhuhai King Glass Engineering Co., Ltd.	PRC	100
Zhuhai King General Glass Engineering Technology Co., Ltd.	PRC	100
King General Engineering (HK) Limited	Hong Kong	100
KGE Building System Limited	Hong Kong	100
KGE Australia Pty Limited	Australia	55
Zhuhai Xiangzhou District Career Training School	PRC	72
Techwell Engineering Limited	Hong Kong	100
Techwell International Limited	Macau	100
Techwell Building System (Shenzhen) Co., Ltd.	PRC	100
CAE Building Systems, Inc.	USA	100
China Architectural Engineering (Shenzhen) Co., Ltd.	PRC	100
Techwell International (SEA) Pte Ltd.	Singapore	100

Building			20 years
Machinery and equipment			5 - 10 years
Furniture and office equipment			5 years
Motor vehicle			5 years

	September 30, 2008		December 31, 2007		September 30, 2007
Period end RMB : US$ exchange rate		6.8551		7.3141		7.5176
Average quarterly RMB : US$ exchange rate		6.8529		7.6172		7.5691

	September 30, 2008			December 31, 2007

Contract receivables	$	81,859,677		$	13,263,260
Less: Allowance for doubtful accounts		(554,235	)		(215,701	)


Net	$	81,305,442		$	13,047,559

Allowance for Doubtful Accounts	September 30, 2008		December 31, 2007

Beginning balance	$	215,701	$	417,648
Foreign exchange adjustments		14,339		-
Addition/(Written off)		324,195		(201,947	)


Ending balance	$	554,235	$	215,701

		September 30, 2008			December 31, 2007
Raw materials at sites		$	1,518,622		$	528,743

	September 30, 2008		December 31, 2007
At cost
Motor vehicle	$	1,545,107	$	1,223,692
Machinery and equipment		3,209,633		3,383,123
Furniture, software and office equipment		2,023,917		625,102
Building		1,131,686		290,652
Leasehold improvement		379,025		189,403
	$	8,289,369	$	5,711,972

Less: Accumulated depreciation
Motor vehicle	$	723,085	$	593,141
Machinery and equipment		1,918,924		2,227,231
Furniture, software and office equipment		825,809		269,695
Building		20,933		9,810
Leasehold improvement		165,373		29,541
	$	3,654,123	$	3,129,418

	$	4,635,246	$	2,582,554

	September 30, 2008		December 31, 2007
At cost
Intangible Assets	$	104,204	$	104,204
Less: Accumulated amortization		99,074		33,818


	$	5,130	$	70,386

	September 30, 2008		December 31, 2007
Bank of East Asia Ltd., line of credit, at 5.508% per annum, subject to variation every 6 months	$	-	$	546,889

Dah Sing Bank, 6.25% per annum, line of credit, due November 28, 2008		415,262		257,926

Dah Sing Bank, 5.75% per annum, trust receipts, due November 25, 2008		1,286,353		1,773,735

Current portion of installment loan from Dah Sing Bank at interest rate at 3.5% due July 28, 2015		35,109		-

Current portion of installment loan from Dah Sing Bank at interest rate at 4.0% due October 25, 2025		49,112		- -

Current portion of automobile capital lease obligation (hire purchase) due November 9, 2012		70,548		-

ABN AMRO Bank N.V., non-interest bearing bills payable		7,081,201		-
	$	8,937,585	$	2,578,550