----

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**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**WASHINGTON,      D.C. 20549**

**FORM      10-Q**

**x      **
**QUARTERLY      REPORT PURSUANT TO SECTION 13 OR 15(d) OF **

**THE      SECURITIES EXCHANGE ACT OF 1934**

**For      the quarterly period ended September 30, 2008 **

**OR**

**o      **
**TRANSITION      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIES      EXCHANGE ACT OF 1934**

**Commission      File Number**

**001-33709**

**CHINA      ARCHITECTURAL ENGINEERING, INC.**

*(Exact      name of small business issuer as specified in its charter)*

| **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)*                     |

**0086-756-8538908**

*(Registrant’s      telephone number, including area code)*

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

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**CHINA      ARCHITECTURAL ENGINEERING, INC. **

**FORM      10-Q QUARTERLY REPORT**

**TABLE      OF CONTENTS**

|                                          | **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 |

----

**PART      I - FINANCIAL INFORMATION**

**ITEM      1.**
**FINANCIAL      STATEMENTS**

----

**CHINA      ARCHITECTURAL ENGINEERING, INC.**

**UNAUDITED      CONSOLIDATED BALANCE SHEETS**

**AS      OF SEPTEMBER 30, 2008 AND DECEMBER 31, 2007**

**(STATED      IN US DOLLARS)**

|                                                          |   | **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 |   |

----

**CHINA      ARCHITECTURAL ENGINEERING, INC.**

**UNAUDITED      CONSOLIDATED BALANCE SHEETS (Continued)**

**AS      OF SEPTEMBER 30, 2008 AND DECEMBER 31, 2007**

**(STATED      IN US DOLLARS)**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | **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 |   |

----

**CHINA      ARCHITECTURAL ENGINEERING, INC.**

**UNAUDITED      INTERIM CONSOLIDATED STATEMENTS OF INCOME**

**FOR      THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2008 AND      2007**

**(STATED      IN US DOLLARS)**

|                                                        |   | **Three Months Ended****September 30,** |        | **Nine Months Ended****September 30,** |   |
|-------------------------------------------------------------|--------|--------------------------------------------------------|-------------|-------------------------------------------------------|--------|
|                                                        |   | **2008**                                               |        | **2007**                                              |   | **2008** |   | **2007** |   |
|                                                        |   |                                                   |        |                                                  |   |   |   |   |   |
| Contract                revenues earned                     |   | $                                                      | 55,978,184  |                                                  | $      | 27,077,867 |   | $ | 122,707,679 |   | $ | 60,961,604 |   |
| Cost                of contract revenues earned             |   |                                                   | (38,595,231 | )                                                     |   | (20,532,767 | ) |   | (83,537,317 | ) |   | (44,026,537 | ) |
|                                                        |   |                                                   |        |                                                  |   |   |   |   |   |   |   |   |   |
| Gross                profit                                 |   | $                                                      | 17,382,953  |                                                  | $      | 6,545,100 |   | $ | 39,170,362 |   | $ | 16,935,067 |   |
|                                                        |   |                                                   |        |                                                  |   |   |   |   |   |   |   |   |   |
| Selling,                general and administrative expenses |   |                                                   | (6,273,059  | )                                                     |   | (1,875,284 | ) |   | (13,877,990 | ) |   | (4,439,355 | ) |
|                                                        |   |                                                   |        |                                                  |   |   |   |   |   |   |   |   |   |
| Income                from operations                       |   | $                                                      | 11,109,894  |                                                  | $      | 4,669,816 |   | $ | 25,292,372 |   | $ | 12,495,712 |   |
|                                                        |   |                                                   |        |                                                  |   |   |   |   |   |   |   |   |   |
| Interest                income                              |   |                                                   | 3,622       |                                                  |   | 10,971 |   |   | 45,827 |   |   | 14,608 |   |
| Interest                expense                             |   |                                                   | (1,356,085  | )                                                     |   | (764,747 | ) |   | (2,888,111 | ) |   | (1,341,206 | ) |
| Other                income                                 |   |                                                   | 177,114     |                                                  |   | - |   |   | 342,075 |   |   | - |   |
|                                                        |   |                                                   |        |                                                  |   |   |   |   |   |   |   |   |   |
| Income                before taxation                       |   | $                                                      | 9,934,545   |                                                  | $      | 3,916,040 |   | $ | 22,792,163 |   | $ | 11,169,114 |   |
|                                                        |   |                                                   |        |                                                  |   |   |   |   |   |   |   |   |   |
| Income                tax                                   |   |                                                   | (30,945     | )                                                     |   | (784,744 | ) |   | (147,925 | ) |   | (2,049,422 | ) |
| Equity                loss and minority interests           |   |                                                   | 5,924       |                                                  |   | 1,087 |   |   | 16,787 |   |   | (13,190 | ) |
|                                                        |   |                                                   |        |                                                  |   |   |   |   |   |   |   |   |   |
| Net                income                                   |   | $                                                      | 9,909,524   |                                                  | $      | 3,132,383 |   | $ | 22,661,025 |   | $ | 9,106,502 |   |
|                                                        |   |                                                   |        |                                                  |   |   |   |   |   |   |   |   |   |
| 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 |   |

----

**CHINA      ARCHITECTURAL ENGINEERING, INC.**

**UNAUDITED      INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR      THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2008 AND 2007**

**(STATED      IN US DOLLARS)**

|                                                                                              |   | **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 |   |

----

**CHINA      ARCHITECTURAL ENGINEERING, INC.**

**UNAUDITED      CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

**FOR      THE PERIOD FROM JANUARY 1, 2008 TO SEPTEMBER 30, 2008**

**(**
**STATED      IN US DOLLARS)**

|                                                                                                                   |   | **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 |   |

----

**CHINA      ARCHITECTURAL ENGINEERING, INC.**

**NOTES      TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS**

**(Stated      in US Dollars)**

| **1.** | **ORGANIZATION                AND PRINCIPAL ACTIVITIES** |
|--------|----------------------------------------------------------|

*2(b)*
*Consolidation*

| **2.** | **SUMMARY                OF SIGNIFICANT ACCOUNTING                POLICIES** |
|--------|------------------------------------------------------------------------------|

|  | *(a)* | *Method                of accounting* |
|--|-------|---------------------------------------|

|  | *(b)* | *Consolidation* |
|--|-------|-----------------|

----

**CHINA      ARCHITECTURAL ENGINEERING, INC.**

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

**(Stated      in US Dollars)**

| **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                                                   |   |

|  | *(c)* | *Use                of estimates* |
|--|-------|-----------------------------------|

|  | *(d)* | *Plant                and equipment* |
|--|-------|--------------------------------------|

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

----

**CHINA      ARCHITECTURAL ENGINEERING, INC.**

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

**(Stated      in US Dollars)**

|  | *(e)* | *Accounting                for the impairment of long-lived                assets* |
|--|-------|------------------------------------------------------------------------------------|

|  | *(f)* | *Goodwill                and Intangible Assets* |
|--|-------|-------------------------------------------------|

|  | *(g)* | *Inventories* |
|--|-------|---------------|

|  | *(h)* | *Contracts                receivable* |
|--|-------|---------------------------------------|

|  | *(i)* | *Cash                and cash equivalents* |
|--|-------|--------------------------------------------|

|  | *(j)* | *Restricted                cash* |
|--|-------|----------------------------------|

----

**CHINA      ARCHITECTURAL ENGINEERING, INC.**

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

**(Stated      in US Dollars)**

|   | *(k)* | *Earnings                per share* |
|--------|-------|-------------------------------------|

|                                                                     |   | **Three                Months Ended****September                30,** |       | **Nine                Months Ended****September                30,** |   |
|--------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------|--------|
|                                                                     |   | **2008**                                                              |       | **2007**                                                             |   | **2008** |   | **2007** |   |
| Net                Income                                                |   | $                                                                     | 9,909,524  |                                                                 | $      | 3,132,383 |   | $ | 22,661,025 |   | $ | 9,106,502 |   |
| Add:                Interest expenses less income taxes                  |   |                                                                  | 282,876    |                                                                 |   | - |   |   | 770,564 |   |   | - |   |
| Adjusted                income                                           |   |                                                                  | 10,192,400 |                                                                 |   | 3,132,383 |   |   | 23,431,589 |   |   | 9,106,502 |   |
| Basic                Weighted Average Shares Outstanding                 |   |                                                                  | 51,891,657 |                                                                 |   | 50,000,000 |   |   | 51,829,156 |   |   | 50,000,000 |   |
| Dilutive                Shares:                                          |   |                                                                  |       |                                                                 |   |   |   |   |   |   |   |   |   |
| - Addition                to Common Stock from Conversion of Bonds  |   |                                                                  | 2,857,143  |                                                                 |   | - |   |   | 2,857,143 |   |   | - |   |
| - Addition                to Common Stock from Exercise of Warrants |   |                                                                  | 904,737    |                                                                 |   | 925,991 |   |   | 868,688 |   |   | 632,657 |   |
| **Diluted                Weighted Average Outstanding Shares:**          |   |                                                                  | 55,653,537 |                                                                 |   | 50,925,991 |   |   | 55,554,987 |   |   | 50,632,657 |   |
| Earnings                Per Share                                        |   |                                                                  |       |                                                                 |   |   |   |   |   |   |   |   |   |
| - Basic                                                             |   | $                                                                     | 0.19       |                                                                 | $      | 0.06 |   | $ | 0.44 |   | $ | 0.18 |   |
| - Diluted                                                           |   | $                                                                     | 0.18       |                                                                 | $      | 0.06 |   | $ | 0.42 |   | $ | 0.18 |   |

----

**CHINA      ARCHITECTURAL ENGINEERING, INC.**

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

**(Stated      in US Dollars)**

|   | *(l)* | *Revenue                and cost recognition* |
|--------|-------|-----------------------------------------------|

|   | a. | Earned                Revenue is the amount of gross profit earned on a contract for a                period                plus the costs incurred on the contract during the                period. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | Cost                of Earned Revenue is the cost incurred during the period, excluding                the                cost of materials not unique to a contract that have not been used                for the                contract. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c. | Gross                Profit earned on a contract is computed by multiplying the total                estimated                gross profit on the contract by the percentage of completion. The                excess                of that amount over the amount of gross profit reported in prior                periods                is the earned gross profit that should be recognized in the income                statement for the current period. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | *(m)* | *Income                taxes* |
|--|-------|-------------------------------|

*Statement      of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.      *
*FIN      48, Accounting for Uncertainty in Tax Positions.*

----

**CHINA      ARCHITECTURAL ENGINEERING, INC.**

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

**(Stated      in US Dollars)**

|  | · | Zhuhai                King Glass Engineering Co., Limited (“Zhuhai KGE”) and Zhuhai King General                Glass Engineering Technology Co., Limited (“Zhuhai KGGET”) are located in                Zhuhai and were subject to the PRC corporation income tax rate of                33%                prior to January 1, 2008. However, in accordance with the relevant                tax                laws and regulations of the PRC, the Zhuhai local corporation income                tax                rate was 15% prior to January 1, 2008. Zhuhai KGGET is presently                dormant,                and from the time that it has its first profitable tax year, it is                exempt                from corporate income tax for its first two years and is then entitled                to                a 50% tax reduction for the succeeding three years. Zhuhai KGGET                has                enjoyed this tax incentive in the previous years. On March 16, 2007,                the                National People’s Congress of China enacted a new PRC Enterprise Income                Tax Law, under which foreign invested enterprises and domestic companies                will be subject to enterprise income tax at a uniform rate of 25%.                The new                law became effective on January 1, 2008. During the transition period,                the                tax rate will be gradually increased starting in 2008 and be equal                to the                new tax rate in 2012. Zhuhai KGE is subject to an 18% tax rate during                the                first half year of 2008 and anticipates that as a result of the new                EIT                law, its income tax provision will increase, which could adversely                affect                Zhuhai KGE’s financial condition and results of operations. |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | China                Architectural Engineering (Shenzhen) Co., Ltd. is located in Shenzhen                and                is subject to an 18% income tax rate that will be gradually increased                to                the uniform rate of 25% by 2012 as according to the new EIT                law. |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Full                Art International Limited, King General Engineering (HK) Limited,                and KGE                Building System Limited are subject to a Hong Kong profits tax rate                of                16.5%. |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Techwell                Engineering Limited is subject to a Hong Kong profits tax rate of                16.5%.                Techwell International Limited is a Macau registered company and                therefore                is subject to Macau profits tax rate of 12%. Techwell Building System                (Shenzhen) Co. Limited is located in Shenzhen and is subject to PRC                corporate income tax rate of 18% in 2008. |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | KGE                Australia Pty Limited is subject to a corporate income tax rate of                30%. |
|--|--------|-----------------------------------------------------------------------------------------------------------|

|   | · | The                Company is subject to United States Tax according to Internal Revenue                Code                Sections 951 and 957. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The                Company, after a reverse-merger on October 17, 2006, revived to be                an                active business enterprise because of the operations with subsidiaries                in                the PRC and Hong Kong. Based on the consolidated net income for the                year                ended December 31, 2007, the Company shall be taxed at the 35% tax                rate. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Techwell                Engineering Limited has established a branch in Dubai, which has                zero                corporate income tax rate. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**CHINA      ARCHITECTURAL ENGINEERING, INC.**

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

**(Stated      in US Dollars)**

|  | *(n)* | *Advertising* |
|--|-------|---------------|

|  | (o) | *Research                and development* |
|--|-----|-------------------------------------------|

|  | *(p)* | *Retirement                benefits* |
|--|-------|--------------------------------------|

|  | *(q)* | *Foreign                currency translation* |
|--|-------|-----------------------------------------------|

|                                                     |   | **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** |   | **September                30,****2007** |   |
|----------------------------------------------------------|--------|------------------------------------------|--------|-----------------------------------------|--------|------------------------------------------|--------|
| Period                end HKD : US$ exchange rate        |   |                                     | 7.7701 |                                    |   | 7.8049                                   |   |   | 7.7760 |   |
| Average                quarterly HKD : US$ exchange rate |   |                                     | 7.8001 |                                    |   | 7.8026                                   |   |   | 7.8080 |   |

|                                                     |   | **September                30,****2008** |   | **December                31,****2007** |   | **September                30,****2007** |   |
|----------------------------------------------------------|--------|------------------------------------------|--------|-----------------------------------------|--------|------------------------------------------|--------|
| Period                end AED : US$ exchange rate        |   |                                     | 3.6750 |                                    |   | -                                        |   |   | - |   |
| Average                quarterly AED : US$ exchange rate |   |                                     | 3.6743 |                                    |   | -                                        |   |   | - |   |

----

**CHINA      ARCHITECTURAL ENGINEERING, INC.**

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

**(Stated      in US Dollars)**

|  | *(r)* | *Statutory                reserves* |
|--|-------|-------------------------------------|

|  | *(s)* | *Comprehensive                income* |
|--|-------|---------------------------------------|

|  | *(t)* | *Recent                accounting pronouncements* |
|--|-------|---------------------------------------------------|

*Business      Combinations*

*Noncontrolling      Interests in Consolidated Financial Statements − an amendment of ARB No.      51*

*Determination      of the Useful Life of Intangible Assets *
*Business      Combinations*

----

**CHINA      ARCHITECTURAL ENGINEERING, INC.**

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

**(Stated      in US Dollars)**

*Transition      Guidance for Conforming Changes to EITF Issue No. 98-5, Accounting for      Convertible Securities with Beneficial Conversion Features or Contingently      Adjustable Conversion Ratios*
*Accounting      for Convertible Securities with Beneficial Conversion Features or Contingently      Adjustable Conversion Ratios*

| **3.** | **CONTRACT                RECEIVABLES** |
|--------|-----------------------------------------|

|                                                     |   | **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 |   |
|                                             |   |                                 |    |                                |   |   |   |

| **4.** | **INVENTORIES** |
|--------|-----------------|

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

----

**CHINA      ARCHITECTURAL ENGINEERING, INC.**

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

**(Stated      in US Dollars)**

| **5.** | **PLANT                  AND EQUIPMENT** |
|--------|------------------------------------------|

|                                                          |   | **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 |   |

| **6.** | **INTANGIBLE                ASSETS** |
|--------|--------------------------------------|

|                                              |   | **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 |   |

----

**CHINA      ARCHITECTURAL ENGINEERING, INC.**

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

**(Stated      in US Dollars)**

| **7.** | **LOANS** |
|--------|-----------|

|  | **A.** | **SHORT-TERM                BANK LOANS** |
|--|--------|------------------------------------------|

|                                                                                                                                              |   | **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 |   |

|   | **B.** | **LONG-TERM                BANK LOANS** |
|--------|--------|-----------------------------------------|

|                                                                                                                                                  |   | **September 30, ****2008** |      | **December 31, ****2007** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|-----------|-------------------------------------|--------|
|                                                                                                                                                  |   |                                 |      |                                |   |
| Bank                of East Asia Ltd., line of credit, at 5.832% per annum, subject to                variation every 6 months, due October 25, 2011  |   | $                                    | 151,310   |                                | $      | 169,518 |   |
|                                                                                                                                                  |   |                                 |      |                                |   |   |   |
| Non-current                portion of auto capital lease obligations (hire purchase) due November                9,                2012               |   |                                 | 211,643   |                                |   | 274,363 |   |
|                                                                                                                                                  |   |                                 |      |                                |   |   |   |
| Non-current                portion of installment loan from Dah Sing Bank at an interest rate                at 3.5%                due July 28, 2015 |   |                                 | 231,164   |                                |   | - |   |
|                                                                                                                                                  |   |                                 |      |                                |   |   |   |
| Non-current                installment loan from Dah Sing Bank at an interest rate at 4.0% due                October 25, 2025                        |   |                                 | 1,130,084 |                                |   | - |   |
|                                                                                                                                                  |   | $                                    | 1,724,202 |                                | $      | 443,881 |   |

----

**CHINA      ARCHITECTURAL ENGINEERING, INC.**

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

**(Stated      in US Dollars)**

| **8.** | **CONVERTIBLE                BONDS AND BOND WARRANTS** |
|--------|--------------------------------------------------------|

|  | **A.** | **$10,000,000                Variable Rate Convertible Bonds due in                2012** |
|--|--------|-------------------------------------------------------------------------------------------|

|   | · | *Interest                Rate.*                The Bonds bear interest from April 12, 2007 at the rate of 6% per                annum                for the first year after April 12, 2007 and 3% per annum thereafter,                of                the principal amount of the Bonds. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | *Conversion.*                Each Bond is convertible at the option of the holder at any time                after                April 12, 2008 up to March 28, 2012, into shares of the Company’s common                stock at an initial conversion price equal to the price per share                at which                shares are sold in the Company’s initial public offering of common stock                on the NYSE Alternext U.S. (formerly the American Stock Exchange                or AMEX)                with minimum gross proceeds of $2,000,000. Based on the initial public                offering completed on October 3, 2007 the initial conversion was                set at                $3.50 per share resulting initial conversion shares of 2,857,143.                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. If for the period of 20 consecutive trading days                immediately prior to April 12, 2009 or February 18, 2012, the conversion                price for the Bonds is higher than the average closing price for                the                shares, then the conversion price will be reset to such average closing                price; provided that, the conversion price will not be reset lower                than                70% of the then existing conversion price. In addition, the Amended                and                Restated Trust Deed provides that the conversion price of the Bonds                cannot                be adjusted to lower than $0.25 per share of common stock (as adjusted                for                stock splits, stock dividends, spin-offs, rights offerings,                recapitalizations and similar                events). |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | *Mandatory                Redemptions.*In                addition, at any time after April 12, 2010, holders of the Bonds                can                require the                Company                to                redeem the Bonds at 126.51% of the principal amount. The Company                is                required to redeem any outstanding Bonds at 150.87% of its principal                amount on April 4, 2012. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**CHINA        ARCHITECTURAL ENGINEERING, INC.**

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

**(Stated        in US Dollars)**

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

----

**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**

|  | · | *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. |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**CHINA        ARCHITECTURAL ENGINEERING, INC.**

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

**(Stated        in US Dollars)**

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

|                                                                              |   | **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** |
|--------|-----------------------------------------------|

|     |   | **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 |   |

| **10.** | **INCOME                  TAXES** |
|---------|-----------------------------------|

|                                                                          |   | **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 |   |

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**CHINA        ARCHITECTURAL ENGINEERING, INC.**

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

**(Stated        in US Dollars)**

| **11.** | **COMMITMENTS** |
|---------|-----------------|

| 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** |
|---------|---------------------------------------------------|

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**CHINA        ARCHITECTURAL ENGINEERING, INC.**

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

**(Stated        in US Dollars)**

| **13.** | **OTHER                  EVENTS** |
|---------|-----------------------------------|

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**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        **

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**Results        of Operations**

|                                                          |        | **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 |   |

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**Three        Months Ended September 30, 2008 and 2007**

**Nine        Months Ended September 30, 2008 and 2007**

----

**Liquidity        and Capital Resources**

----

----

**Contractual        Obligations**

|                                              |   | **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**

**Critical        Accounting Policies and Estimates**

**Recent        Accounting Pronouncements**

**ITEM        3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET        RISK**

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**ITEM        4.  CONTROLS AND PROCEDURES**

**Evaluation        of Disclosure Controls and Procedures**

**Changes        in internal control over financial reporting**

**PART        II-OTHER INFORMATION**

**ITEM        1.**
**LEGAL        PROCEEDINGS**

**ITEM        1A. **
**RISK        FACTORS**

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

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

**ITEM        3.**
**DEFAULTS        UPON SENIOR SECURITIES**

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

**ITEM        5.**
**OTHER        INFORMATION**

**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.*         |

----

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**SIGNATURES**

|                               | **CHINA                  ARCHITECTURAL ENGINEERING, INC.**(Registrant)               |
|------------------------------------|--------------------------------------------------------------------------------------|
|                               |                                                                                 |   |
| November                  13, 2008 | By:                                                                        | /s/ Luo                  Ken Yi |
|                               | Luo                  Ken Yi                                                          |
|                               | Chief Executive Officer and Chairman of the Board |

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