China Expert Technology (CXTI) 10QSB/A 2005 Q3 Quarterly report (small business) (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 1

TO

FORM 10-QSB

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

For the transition period from ____ to ____.

CHINA EXPERT TECHNOLOGY, INC.

(Name of small business in its charter)

Nevada	000-30644	98-0348086
(State of Incorporation)	(Commission File No.)	(IRS Employer Identification No.)

Room 2703-04, Great Eagle Centre

23 Harbour Road

Wanchai, Hong Kong

(Address of principal executive offices)

852-2802-1555

(Registrant’s telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNo o

Applicable only to issuers involved in bankruptcy proceedings during the past five years.

Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes xNo o

Check whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

Applicable only to corporate issuers

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.  At November 23, 2005, 25,902,996 shares were outstanding.

Transitional Small Business Disclosure Format (Check one):  Yes o No x

PART 1 - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS AND EXHIBITS

(a) The unaudited financial statements of registrant for the nine months ended September 30, 2005, follow.  The financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim period presented.

CHINA EXPERT TECHNOLOGY, INC.

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

CONTENTS

	Pages
Condensed consolidated balance sheets	3
Condensed consolidated statements of income	4
Condensed consolidated statements of cash flows	5
Notes to condensed consolidated financial statements	6 - 10

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CHINA EXPERT TECHNOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2005		December 31, 2004
	2005 (Unaudited)		2004
	USD		USD
ASSETS
Current assets
Cash and cash equivalents		5,780,920		3,265,318
Accounts receivable		3,491,361		4,438,331
Co Cost & estimated earnings in excess of billings on uncompleted contracts		11,263,660		–
Amount due from a director		360		360
Amount due from a former officer		1,766,737		2,022,525
Loan to a director		–		3,031,479
Prepayments, deposits and other receivables		3,380,396		3,871,440
Total current assets		25,683,434		16,629,453
Property and equipment, net		31,536		21,131
Intangible assets, net		–		289,203
Prepaid consultancy fees		1,687,500		2,062,500
Deferred tax assets		–		271,758
		27,402,470		19,274,045
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		907,512		975,118
Accrued expenses		120,603		248,556
Amount due to a director		160,459		160,459
Amount due to a former officer		2,689,210		2,137,881
Amount due to shareholders		4,201		730
Income taxes payable		856,775		2,148,319
PRC business tax payable		1,039,185		957,804
Total current liabilities		5,777,945		6,628,867
Stockholders’ equity
Common stock, par value USD0.001, authorized
200,000,000 shares; issued and outstanding
September 30, 2005: 23,593,727 shares;
December 31, 2004:24,414,679 shares		23,593		24,414
Additional paid-in capital		8,078,566		7,454,167
Accumulated other comprehensive income		422,424		–
Retained earnings		13,099,942		5,166,597
Total stockholders’ equity		21,624,525		12,645,178
Total liabilities and stockholders’ equity		27,402,470		19,274,045

See the accompanying notes to condensed consolidated financial statements.

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CHINA EXPERT TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	Three months ended September 30,						Nine months ended September 30,
	2005			2004			2005			2004
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
	USD			USD			USD			USD
Revenue		9,029,867			7,409,365			26,039,463			15,976,322
Cost of revenue		(4,942,107	)		(4,359,545	)		(14,285,693	)		(9,397,897	)
Gross profit		4,087,760			3,049,820			11,753,770			6,578,425
Other income		6,142			10,454			15,977			47,978
General and administrative expenses		(1,194,261	)		(340,202	)		(1,780,911	)		(949,660	)
Intangible assets amortization		(96,401	)		(96,401	)		(289,203	)		(289,203	)
Depreciation of property and equipment		(4,340	)		(14,117	)		(14,144	)		(42,656	)
Other expenses		–			–			(6,221	)		(22,065	)
Income before income taxes		2,798,900			2,609,554			9,679,268			5,322,819
Income tax expense		(335,216	)		(451,669	)		(1,745,923	)		(1,123,812	)
Net income		2,463,684			2,157,885			7,933,345			4,199,007
Foreign currency translation adjustment		422,424			–			422,424			–
Comprehensive income		2,886,108			2,157,885			8,355,769			4,199,007
Net income per share - basic and diluted		0.104			0.090			0.329			0.179
Weighted average common stock Outstanding - basic and diluted		23,593,727			23,863,474			24,141,028			23,444,458

See the accompanying notes to condensed consolidated financial statements.

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CHINA EXPERT TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine months ended September 30,
	2005			2004
	(Unaudited)			(Unaudited)
	USD			USD
Cash flows from operating activities:
Net income		7,933,345			4,199,007
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Intangible assets amortization		289,203			289,203
Amortization of prepaid consultancy fees		375,000			450,000
Depreciation of property and equipment		14,144			42,656
Consultancy services expenses compensated by common stock		623,578			–
Decrease in deferred tax assets		271,758			150,000
Other expenses		–			22,065
Changes in operating assets and liabilities:
Decrease in accounts receivable		946,970			–
Increase in costs and estimated earnings in excess of billings on uncompleted contracts		(11,263,660	)		(74,213	)
Decrease (increase) in prepayments, deposits and other receivables		491,044			(4,535,975	)
Decrease in accounts payable		(67,606	)		(9,686	)
Decrease in deposits received		–			(93,141	)
Decrease in accrued expenses		(127,953	)		(101,870	)
Increase in amount due to shareholders		3,471			–
Increase in PRC business tax payable		81,381			691,626
(Decrease) increase in income taxes payable		(1,291,544	)		973,813
Net cash provided by (used in) operating activities		(1,720,869	)		2,003,485
Cash flows from investing activities:
Purchase of property and equipment		(24,549	)		(4,782	)
Repayment from a director		3,031,479			–
Net cash provided by (used in) investing activities		3,006,930			(4,782	)
Cash flows from financing activities:
Decrease in amount due from a former officer		807,117			–
Repayment from officers		–			94,787
Net cash provided by financing activities		807,117			94,787
Effect of exchange rate changes		422,424			–
Net increase in cash and cash equivalents		2,515,602			2,093,490
Cash and cash equivalents, beginning of period		3,265,318			47,223
Cash and cash equivalents, end of period		5,780,920			2,140,713
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest paid		–			–
Income taxes paid		3,037,504			–
Supplemental disclosure of significant non-cash transactions:
Issuance of common stock in connection with consulting services		623,578			–
See the accompanying notes to condensed consolidated financial statements.

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CHINA EXPERT TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements of China Expert Technology, Inc (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America for interim consolidated financial information.  Accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements.

In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the operating results for the three months and nine months ended September 30, 2005 have been made.  It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual audited financial statements for the year ended December 31, 2004.  The Company follows the same accounting policies in preparation of interim reports.

Results for the interim periods presented are not necessarily indicative of the results that might be expected for the entire fiscal year.

2. DESCRIPTION OF BUSINESS

The Company continues to be engaged in the provision of system integration services, consultancy services and agency services.  All the Company’s revenues for the quarter periods presented in the condensed consolidated financial statements and two years prior to this quarter are derived from two governmental organizations in Fujian Province of the People’s Republic of China (the “PRC”).

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant inter-company balances and transactions are eliminated in consolidation.

Use of estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant estimates required to be made by management include the recoverability of long lived assets and recognition of revenue under long term contracts.  Actual results could differ from those estimates.

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Prepaid expenses

Prepaid expenses represent the aggregate fair value of the Company’s common stock issued in return for the consultancy works provided by certain consultants to the Company.  The fair value is determined by reference to the average price of the Company’s common stock as quoted on the Over the Counter Bulletin Board (“OTCBB”) at the date of issuance.  The prepaid expenses are amortized on a straight-line basis over the terms of the consulting agreements of five years.

Revenue recognition

Revenue from fixed price long-term contracts is recognized on the percentage of completion method for individual contracts. Revenues are recognized in the ratio that costs incurred bear to total estimated contract costs. The use of the percentage of completion method of revenue recognition requires estimates of percentage of project completion. Changes in job performance, estimated profitability and final contract settlements may result in revisions to costs and income in the year in which the revisions are determined.  Provisions for any estimated losses on uncompleted contracts are made in the year in which such losses are determinable.  In instances when the work performed on fixed price agreements is of relatively short duration, the completed contract method of accounting, whereby revenue is recognized when the work is completed, is used.

Cost of revenue

Cost of revenue comprises labor and other cost of personnel directly engaged in providing the services, subcontracting and attributable overhead costs. Cost of revenue does not include any allocation of depreciation or amortization expense.

Foreign Currency Translation

The Group uses China Renminbi (“RMB”) as a functional currency.  Transactions denominated in currencies other than RMB are translated into RMB at the applicable rates of exchange prevailing at the dates of the transactions.  Monetary assets and liabilities denominated in other currencies are translated into RMB at rates of exchange prevailing at the balance sheet date.  Exchange gains or losses arising from changes in exchange rates subsequent to the transactions dates for monetary assets and liabilities denominated in other currencies are included in the determination of net income for the respective period.

For financial reporting purposes, RMB has been translated into United States dollars (“USD”) as the reporting currency.  Assets and liabilities are translated at the exchange rate in effect at period end.  Income statement accounts are translated at the average rate of exchange prevailing during the period.  Translation adjustments arising from the use of different exchange rate from period to period are included as a component of stockholders’ equity as “Accumulated other comprehensive income”.  Gains and losses resulting from foreign currency transactions are included in other comprehensive income/(loss).

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During the nine months period ended 30 September 2005, foreign currency translation adjustment amounted to US$422,424 was recognized as other comprehensive income.

Recently issued accounting pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment", which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation", SFAS No. 123(R) supersedes APB Opinion No.25, “Accounting for Stock Issued to Employees and amends SFAS No.95, “Statement of Cash Flows”.  Generally, the approach in SFAS No.123(R) is similar to the approach described in SFAS No. 123.  However, SFAS No.123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.  Pro forma disclosure is no longer an alternative.  SFAS No. 123 (R) was to be effective from the beginning of the first interim or annual reporting period after June 15, 2005.  In April 2005, the Securities and Exchange Commission delayed the implementation of SFAS 123(R).   As a result, SFAS 123(R) will be effective for small business issuers from the beginning of the first annual reporting period after December 15, 2005, which is the fiscal year ending December 31, 2006 for the Company.  The Company is currently assessing the impact of this statement on the Company’s consolidated financial statements.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, which would be our second quarter of fiscal 2006. The adoption of SFAS No. 153 is not expected to have a material effect on our consolidated financial position or results of operations.

In May 2005, the Financial Accounting Standards Board (“FASB”) SFAS No. 154, Accounting Changes and Error Corrections (“SFAS No. 154”), which replaces Accounting Principles Board Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principles. It requires retrospective application to prior periods’ financial statements of changes in accounting principles, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.  The impact on the Company’s operations will depend on future accounting pronouncements or changes in accounting principles.

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4. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

	September 30,		December 31,
	2005		2004
	USD		USD
	(Unaudited)
Prepaid sub-contracting cost		3,310,974		3,827,136
Rental and other deposits		69,422		44,304
		3,380,396		3,871,440

5. RELATED PARTY TRANSACTIONS

As of September 30, 2005, amount due from Mr. Lai Man Yuk, a former officer and currently a beneficial owner of the Company, represents mainly temporary cash advances to Mr. Lai by a subsidiary.  Amounts due to Mr. Lai represent cash advances from him to the Company and subsidiaries.  These balances are interest free, unsecured and without fixed term of repayment. Details of the balances with Mr. Lai are as follows:

	September 30,		December 31,
	2005		2004
	USD		USD
	(Unaudited)
Amount due from Mr. Lai to:
China Expert (Shenzhen) Company Limited		1,766,737		2,022,525
Amount due to Mr. Lai by:
the Company		1,977		–
China Data Holdings Limited		448,866		–
China Expert Network Company Limited		2,190,096		2,133,691
Hong Zhong Holdings Limited		48,271		4,190
Total		2,689,210		2,137,881

In 2004, a rental agreement was signed between Mr. Lai and the Company for leasing of the office premises at Shenzhen at a monthly rent of RMB91,677 (equivalent to USD11,117), which was determined by both parties with reference to the market rental.  The operating lease arrangements with expiry date in December 2005 are cancelable and rentals are paid on a monthly basis.  During the period ended September 30, 2005 and 2004, the Company paid rental fee amounting to USD100,053 and USD100,053 respectively, to Mr. Lai.

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A loan to a director, Mr. Kung Sze Chau, which was interest bearing at 5.22% per annum, unsecured and due by January 14, 2005 was repaid during the period.

Other balances with directors and shareholders are interest-free and unsecured with no fixed terms of repayment.

6. COST AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS

	September 30,			December 31,
	2005			2004
	USD			USD
	(Unaudited)
Costs and estimated earnings to date		61,866,302			33,168,093
Less: Billings		(50,602,642	)		(33,168,093	)
		11,263,660			–

7. COMMITMENTS AND CONTINGENCIES

The Company is obligated under operating leases requiring minimum rentals as follows:

	USD
Three months ending December 31, 2005		26,515
Years ending December 31
2006		106,060
2007		29,166
Total minimum lease payments		161,741

There are no other material commitments and contingencies.

8. STOCKHOLDERS’ EQUITY

In July 2005, the Company issued 1,056,911 shares of common stock as compensation for consultancy services.  This resulted in the recognition of consulting expenses included in general and administrative expenses of $623,578 for the nine months ended September 30, 2005.  

In addition, the Company cancelled 1,877,863 shares of common stock.

9. SUBSEQUENT EVENTS

On October 31, 2005, the Company completed the closing under the Securities Purchase Agreement (the “Agreement”), dated October 21, 2005, with Alpha Capital AG, DKR Soundshore Oasis Holding Fund Ltd., Ellis International Ltd, Inc., Platinum Partners Advisors, and Platinum Long Term Growth (the “Purchasers”). The Securities Purchase Agreement was filed as an exhibit to the Company’s Current Report on Form 8-K, dated October 21, 2005.

As a result of the closing, the Company became obligated on $6,000,000 in face amount of 7% Secured Convertible Debenture (the “Debentures”). The Debentures are due and payable in full one year from the date of issuance, and require quarterly payment of interest payable in cash or stock (subject to certain conditions at the option of the Company). At any time from the date of issuance until the maturity date of the Debentures, Purchasers have the right to convert the full face amount of the Debentures to common stock of the Company at a price equal to 75% of the average of the volume weighted average prices of the Company’s common stock for the 5 consecutive trading days immediately prior to the date of conversion. In no event will the conversion price be greater than $1.80 per share.

On November 6, 2005, the Company received a conversion notice from a Purchaser converting $60,000 of principal amount of the Debentures and accrued interest into 115,128 shares of common stock. On November 7, 2005, the Company received conversion notices from certain Purchasers converting $1,521,561 of principal amount of the Debentures and accrued interest into 2,194,141 shares of common stock. These conversions have been approved by the Board.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this report, including statements in the following discussion, which are not statements of historical fact are what is known as “forward looking statements”, which are basically statements about the future.  For that reason, these statements involve risk and uncertainty since no one can accurately predict the future. Words such as "plans," "intends," "will," "hopes," "seeks," "anticipates," "expects," and the like, often identify such forward-looking statements, but are not the only indication that a statement is a forward-looking statement. Such forward-looking statements include statements concerning our plans and objectives with respect to the present and future operations of the Company, and statements which express or imply that such present and future operations will or may produce revenues, income or profits. Numerous factors and future events could cause the Company to change such plans and objectives, or fail to successfully implement such plans or achieve such objectives, or cause such present and future operations to fail to produce revenues, income or profits. Therefore, the reader is advised that the following discussion should be considered in light of the discussion of risks and other factors contained in this report on Form 10-QSB and in the Company’s other filings with the Securities and Exchange Commission. No statements contained in the following discussion should be construed as a guarantee or assurance of future performance or future results.

Overview

The Company has been awarded three contracts during 2005, including Jinjiang (2^nd and 3^rd Phrase), and Dehua (2^nd Phrase).  During the quarter, we continued to carry on work on all of these projects, and all of our revenue during the quarter, which totaled $9,029,867, is attributable to our work on these projects.  

For the nine months ended 30 September 2005, the Company’s revenues totaled $26,039,463, representing an increase of approximately 63% as compared to that in the corresponding period of 2004.

We are continuing to use our best efforts to promote our e-government services and to expand and improve our relationships with various counties and provinces in the PRC.  During the third quarter we signed a contract with the Electric Administration Management Company Limited of Huian County and a contract with the Nan’an City People’s Municipality of Fujian Province.

The ongoing projects are as follows:

Project	Tentative Commencement Date	Target Completion Date	Contract value	Outstanding contract value
Jinjiang (2nd Phase)	May 2005	August 2006	10 Million	5 Million
Jinjiang (3rd Phase)	May 2005	August 2006	13 Million	8.6Million
Dehua (1st Phase)	April 2004	August 2006	18 Million	0.35 Million
Dehua (2nd Phase)	January 2005	November 2005	12 Million	2.2 Million
Nan’an	August 2005	March 2007	14.5 Million	14.5 Million
Huian	January 2006	July 2008	17 Million	17 Million

Results of Operations

The Company’s financial statements are stated in U.S. Dollars and are prepared in accordance with generally accepted accounting principles in the United States of America.

The following table sets forth, for the periods indicated, certain operating information expressed in dollar amounts and as a percentage of revenue:

	Three months ended September 30						Nine months ended September 30
	2005			2004			2005			2004
Revenues		100	%		100	%		100	%		100	%
Cost of Revenues		54.73			58.84			54.86			58.82
Gross Profit		45.27			41.16			45.14			41.18
Other Income		0.07			0.14			0.06			0.30
General and administrative expenses		13.23			4.59			6.84			5.94
Income before income tax		31.00			35.22			37.17			33.32
Income tax expenses		3.71			6.10			6.70			7.03
Net Income		27.28			29.12			30.47			26.28
Net Income Per Share	$	0.104		$	0.090		$	0.329		$	0.179

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Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004

REVENUES.  Revenues were $9,029,867 in the three months ended September 30, 2005, as compared to $7,409,365 in the three months ended September 30, 2004. The increase in revenues in the three-month period is attributable to increased contract revenue from the Company’s Jinjiang (2nd and 3rd Phrase) and Dehua (1st and 2nd Phrase) e-government projects.

COST OF REVENUES.  Cost of revenues were $4,942,107 in the three months ended September 30, 2005, compared to $4,359,545 in the three months ended September 30, 2004 as a result of increased costs associated with higher revenues. As a percentage of revenues, cost of revenues were 54.73% in the three months ended September 30, 2005 compared to 58.84% in the three months ended September 30, 2004. This decrease in costs of revenue as a percentage of revenues was attributed to the fact that different margins were achieved during different stages of the two projects and the profit margin achieved in the three months ended September 30, 2005 was higher than those in the three months ended September 30, 2004. Projects in 2005 have a higher level of margin due to economies of scale and better cost control over project costs. Gross profit was $4,087,760 in the three months ended September 30, 2005, compared to $3,049,820 in the three months ended September 30, 2004. As a percentage of revenues, gross profit increased to 45.27% in the three months ended September 30, 2005 from 41.16% in the three months ended September 30, 2004.

OTHER INCOME.  Other income was $6,142 in the three months ended September 30, 2005 compared to $10,454 in the three months ended September 30, 2004.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were $1,194,261 in the three months ended September 30, 2005, compared to $340,202 in the three months ended September 30, 2004.   As a percentage of revenues, general and administrative expenses increased from 4.59% in the three months ended September 30, 2004 to 13.23% in the three months ended September 30, 2005.   This increase in general and administrative expenses was largely due to a commission of $623,578 paid to an independent consultant for the sourcing of an e-Government contract with Huian County in the Fujian Province of China.

INCOME BEFORE INCOME TAX AND INCOME TAX EXPENSES.  Income before income tax was $2,798,900 in the three months ended September 30, 2005, compared to $2,609,554 in the three months ended September 30, 2004.   This increase was attributable to the increase in the level of work under the Jinjiang (2nd and 3rd Phase) and Dehua (1st and 2nd Phase) projects.  As a percentage of revenue, income before income tax decreased from 35.22% for the three months ended September 30, 2004, to 31.00% for the three months ended September 30, 2005.  This decrease in income before income tax as a percentage of revenue is primarily due to the increase in general and administrative expenses.

Income tax expenses were $335,216 in the three months ended September 30, 2005 compared to $451,669 in the three months ended September 30, 2004.  This decrease is attributable to the overprovision of income tax in the first two quarters.

NET INCOME. Net income was $2,463,684 in the three months ended September 30, 2005, compared to $2,157,885 in the three months ended September 30, 2004. As a percentage of revenue, net income was 27.28% in the three months ended September 30, 2005 compared to 29.12% in the three months ended September 30, 2004.  The increase in net income is primarily attributable to the fact that the Company was able to increase revenues from the on-going contracts.

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Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004

REVENUES.  Revenues were $26,039,463 in the nine months ended September 30, 2005, as compared to $15,976,322 in the nine months ended September 30, 2004. The substantially increase in revenues in the nine-month period is attributable to the completion of the Jinjiang (1st Phase) e-government project in January 2005 and the commencement of the Jinjiang (2nd and 3rd Phase) and Dehua (1st and 2nd Phase) projects.  All of the Company’s total revenue is generated from the Jinjiang and Dehua e-government projects.

COST OF REVENUES.  Cost of revenues were $14,285,693 in the nine months ended September 30, 2005, compared to $9,397,897 in the nine months ended September 30, 2004 as a result of increased costs associated with the substantially increased revenues.  As a percentage of revenues, cost of revenues were 54.86% in the nine months ended September 30, 2005 compared to 58.82% in the nine months ended September 30, 2004.  This decrease in costs of revenue as a percentage of revenues was attributed to the fact that different margins were achieved during different stages of the two projects and the profit margin achieved in the nine months ended September 30, 2005 was higher than those in the nine months ended September 30, 2004. Projects in 2005 have a highly level of margin due to economies of scale and better cost control over project costs. Gross profit was $11,753,770 in the nine months ended September 30, 2005, compared to $6,578,425 in the nine months ended September 30, 2004.  As a percentage of revenues, gross profit increased to 45.14% in the nine months ended September 30, 2005 from 41.18% in the nine months ended September 30, 2004.

OTHER INCOME.  Other income was $15,977 in the nine months ended September 30, 2005 compared to $47,978 in the nine months ended September 30, 2004.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were $1,780,911 in the nine months ended September 30, 2005, compared to $949,660 in the nine months ended September 30, 2004.  As a percentage of revenues, general and administrative expenses have increased from 5.94% in the nine months ended September 30, 2004 to 6.84% in the nine months ended September 30, 2005.  The increase in general and administrative expenses was primarily due to the commission paid to independent consultant for sourcing of new project.

INCOME BEFORE INCOME TAX AND INCOME TAX EXPENSES.  Income before income tax was $9,679,268 in the nine months ended September 30, 2005, compared to $5,322,819 in the nine months ended September 30, 2004.  This increase was attributable to the revenue generated from Jinjiang (1st Phase) and the increase in the level of work under Jinjiang (2nd and 3rd Phase) and Dehua (1st and 2nd Phase) projects.  As a percentage of revenue, income before income tax increased from 33.32% for the nine months ended September 30, 2004, to 37.17% for the nine months ended September 30, 2005.  This increase in income before income tax as a percentage of revenue is primarily attributable the fact that the Company was able to substantially increase revenues and profit margin.

Income tax expenses were $1,745,923 in the nine months ended September 30, 2005 compared to $1,123,812 in the nine months ended September 30, 2004.  This increase is attributable to an increase in the PRC enterprise income tax as a result of a substantial increase in the Company’s revenue recognition.

NET INCOME. Net income was $7,933,345 in the nine months ended September 30, 2005, compared to $4,199,007 in the nine months ended September 30, 2004.  As a percentage of revenue, net income was 30.47% in the nine months ended September 30, 2005 compared to 26.28% in the nine months ended September 30, 2004.  This increase in net income as a percentage of revenue is primarily attributable to the fact that the Company was able to increase revenues and profit margins from the on-going contracts.

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Liquidity and Capital Resources

As of September 30, 2005, the Company had $5,780,920 of cash and cash equivalents on hand as compared to $3,265,318 as of December 31, 2004, representing an increase of $2,515,602 during the nine-month period.  As of September 30, 2004, the Company had $2,140,713 of cash and cash equivalents on hand.

The Company anticipates, based on internal forecasts relating to our projects, that existing cash and funds generated from the existing projects will be sufficient to meet working capital and capital expenditure requirements for all our existing projects for the remainder of 2005.  However, in the event that the Company signs up new contracts during 2005, it is likely that it will be required to seek additional financing (See “Overview”).  

The Company believes its operations have not been and, in the foreseeable future, will not be materially adversely affected by inflation or changing prices.

On October 31, 2005, the Company completed the closing under the Securities Purchase Agreement (the “Agreement”), dated October 21, 2005, with Alpha Capital AG, DKR Soundshore Oasis Holding Fund Ltd., Ellis International Ltd. Inc., Platinum Partners Advisors, and Platinum Long Term Growth (the “Purchasers”). The Securities Purchase Agreement was filed as an exhibit to the Company’s Current Report on Form 8-K, dated October 21, 2005.

As a result of the closing, the Company became obligated on $6,000,000 in face amount of 7% Secured Convertible Debenture (the “Debentures”). The Debentures are due and payable in full one year from the date of issuance, and require quarterly payment of interest payable in cash or stock (subject to certain conditions at the option of the Company. At any time from the date of issuance until the maturity date of the Debentures, Purchasers have the right to convert the full face amount of the Debentures to common stock of the Company at a price equal to 75% of the average of the volume weighted average prices of the Company’s common stock for the 5 consecutive trading days immediately prior to the date of conversion. In no event will the conversion price be greater than $1.80 per share.

On November 6, 2005, the Company received a conversion notice from a Purchase converting $60,000 of principal amount of the Debentures and accrued interest into 115,128 shares of common stock. On November 7, 2005, the Company received conversion notices from certain Purchasers converting $1,521,561 of principal amount of the Debentures and accrued interest into 2,194,141 shares of common stock. These conversions have been approved by the Board.

Effect of Fluctuation in Foreign Exchange Rates

Our operating subsidiary is located in China.  The subsidiary purchases all materials and renders services in China, and receives payments from customers in China using Chinese Renminbi as the functional currency.  Based on Chinese government regulation, all foreign currencies under the category of current accounts are allowed to be freely exchanged with hard currencies.  During the past years of operation, there were no significant changes in the exchange rates.  However, the Chinese Government has announced a revaluation of the Renminbi by 2% and adopted a new currencies policy in July 2005.  In the third quarter of 2005, we recognized foreign currency translation gain of $422,424 as a result of the appreciation of Renminbi.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

This discussion and analysis of our financial condition and results of operations are based on our financial statements that have been prepared under accounting principles generally accepted in the United States of America.  We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America.  Associated with this, we believe the following are our most critical accounting policies in that they are the most important to the portrayal of our financial condition and results and require our management’s most difficult, subjective or complex judgments.  Actual results could materially differ from those estimates.  We have disclosed all significant accounting policies in the notes to the financial statements included in this Form 10-QSB.  The financial statements and the related notes thereto should be read in conjunction with the following discussion of our critical accounting policies.  Our critical accounting policies are:

Revenue recognition

We recognize revenue from fixed price long-term contracts on a percentage of completion method for individual contracts.  Revenues are recognized in a ratio of what costs incurred bear to the total estimated contract costs.  The use of the percentage of completion method of revenue recognition requires estimates of percentage of project completion.  Changes in job performance, estimated profitability and final contract settlements may result in revisions to costs and income in the year in which the revisions are determined.  Provisions for any estimated losses on uncompleted contracts are made in the period in which such losses are determinable.  In circumstances where the work performed on fixed price agreements is of relatively short duration, the completed contract method of accounting is used in which revenue is recognized when the work is completed.

Intangible Assets

We account for our intangible assets in accordance with SFAS No.142, “Goodwill and Other Intangible Assets”.  Intangible assets with an indefinite life are not amortized. Intangible assets with a definite life are amortized on a straight-line basis over their estimated useful lives.  Indefinite lived assets will be tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate that the carrying amount may be impaired.  Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable.  An impairment loss would be recognized when the carrying amount of the intangible asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset.  The amount of the impairment loss to be recorded is calculated by the excess of the asset’s carrying value over its fair value.  Fair value is generally determined using a discounted cash flow analysis.

Allowance for Doubtful Accounts

We regularly monitor and assess our risk of not collecting amounts owed to us by our customers.

This evaluation is based upon a variety of factors including: an analysis of amounts current and past due along with relevant history and facts particular to the customer.  Based upon the results of this analysis, we record an allowance for uncollectible accounts for this risk.  This analysis requires us to make significant estimates, and changes in facts and circumstances could result in material changes in the allowance for doubtful accounts.

Impairment on Tangible Assets

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  In performing the review for recoverability, we estimate the future cash flows expected to result from the use of the asset and its eventual disposition.  If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized.  Otherwise, an impairment loss is not recognized.  Measurement of an impairment loss for long-lived assets would be based on the fair value of the asset.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment", which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation", SFAS No. 123(R) supersedes APB Opinion No.25, “Accounting for Stock Issued to Employees and amends SFAS No.95, “Statement of Cash Flows”.  Generally, the approach in SFAS No.123(R) is similar to the approach described in SFAS No. 123.  However, SFAS No.123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.  Pro forma disclosure is no longer an alternative.  SFAS No. 123 (R) was to be effective from the beginning of the first interim or annual reporting period after June 15, 2005.  In April 2005, the Securities and Exchange Commission delayed the implementation of SFAS 123(R).   As a result, SFAS 123(R) will be effective for small business issuers from the beginning of the first annual reporting period after December 15, 2005, which is the fiscal year ending December 31, 2006 for the Company.  The Company is currently assessing the impact of this statement on the Company’s consolidated financial statements.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, which would be our second quarter of fiscal 2006. The adoption of SFAS No. 153 is not expected to have a material effect on our consolidated financial position or results of operations.

In May 2005, the Financial Accounting Standards Board (“FASB”) SFAS No. 154, Accounting Changes and Error Corrections (“SFAS No. 154”), which replaces Accounting Principles Board Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principles. It requires retrospective application to prior periods’ financial statements of changes in accounting principles, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.  The impact on the Company’s operations will depend on future accounting pronouncements or changes in accounting principles.

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ITEM 3. CONTROLS AND PROCEDURES

(A) Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Principal Executive Officer and Principal Financial Officer of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. The Company’s disclosure controls and procedures are designed to provide a reasonable level of assurance of achieving the Company’s disclosure controls and procedures are, in fact, effective at this reasonable assurance level as of the period covered. In addition, the Company reviewed its internal controls, and there have been no significant changes in its internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation or from the end of the reporting period to the date of this Form 10-QSB.

(B) Changes in Internal Controls Over Financial Reporting

In connection with the evaluation of the Company’s internal controls during the Company’s third fiscal quarter ended September 30, 2005, the Company’s Principal Executive Officer and Principal Financial Officer have determined that there are no changes to the Company’s internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

The following exhibits are filed herewith:

31.1 Certification pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.

31.2 Certification pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.

32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

CHINA EXPERT TECHNOLOGY, INC.

/s/ Zhu Xiaoxin

By: Zhu Xiaoxin

Chief Executive Officer, President and Director

Date:  December 1, 2005

/s/ Huang Tao

By: Huang Tao

Chairman and Director

Date:  December 1, 2005

/s/ Chiang Min Liang

By: Chiang Min Liang

Chief Financial Officer

Date:  December 1, 2005

/s/ Kung Sze Chau

By: Kung Sze Chau

Director

Date:  December 1, 2005

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